Investors were optimistic heading into Royal Caribbean's (RCL +0.88%) third-quarter earnings report that includes the seasonally strong summer months. The cruise giant's last few operating announcements were highlighted by surprisingly strong demand and rising ticket prices, which contrasted with the slowdown that has stalled Carnival's (CCL +2.43%) business in 2019.
On Wednesday, Royal Caribbean joined its main competitor in lowering its outlook for the year. However, nearly all of that downgrade can be pinned on one-time effects from Hurricane Dorian, which battered the Bahamas during the quarter. Ignoring those disruptions, the company sees a clear path toward record results this fiscal year and into early 2020.
Let's take a closer look.
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Surpassing expectations
Net revenue yields, a core industry growth metric, slowed significantly by falling to 6.4% compared to 10% in the fiscal second quarter. That result still far outpaced Carnival's slight decline in the latest quarter. It also reflected demand strength in places like the Caribbean and China, which had been weak markets for Carnival in its last report.
In contrast to its main cruise rival, Royal Caribbean is outperforming management's forecasts. "Excluding the hurricane impact," CEO Richard Fain said in a press release, "we are not only able to maintain our yield and earnings guidance, but to raise both slightly as a result of particularly strong performance in the U.S. and China."
Royal Caribbean had predicted back in July that growth would land at 6.5% and the company essentially met that target even though Hurricane Dorian impacted 16 sailings to become the most disruptive storm in the cruise giant's history.
Profits and cash
Cruise costs rose 11% to significantly outpace the growth in net revenue yields. That metric was pushed higher by about 1.5 percentage points due to hurricane expenses. After adjusting for that impact, costs would have come in better than expected.
Investors should still keep expectations low on this score, though, since Royal Caribbean projects much higher expenses in the fourth quarter and for the full year as the consumer discretionary company spends cash on growth initiatives like ship and terminal upgrades. Timing issues were a key reason why costs were so low this quarter, and those shifts will impact the fourth quarter, executives warned.
The long-term outlook
Royal Caribbean's updated outlook reflects the many reasons for optimism that Fain and his team have about the business' momentum today. Strong early booking trends into 2020 include higher passenger volumes at increased average prices. As a result, executives are expecting full-year growth to land at 8%, consistent with their late July prediction that didn't include hurricane impacts.
Looking further out, Royal Caribbean is set to benefit from a few major spending projects over the next year, such as the launch of new vessels, upgrades to the Cococay private resort, and the opening of another private resort in the South Pacific. This accelerated capital investment pace shows that management believes it can increase revenue through a combination of higher capacity and by raising passenger satisfaction by delivering unforgettable vacation experiences to its guests.
