Despite the most disruptive hurricane to impact the business to date, Royal Caribbean (NYSE:RCL) is sailing into a record 2019 year. The cruise ship giant recently announced third-quarter earnings results that extended its streak of beating management's growth and profitability targets thanks to strong demand across all of its geographic selling regions.
In a conference call with analysts following the report, CEO Richard Fain and his team broke down the results while explaining why investors should expect to see expense growth accelerate into 2020. I followed up with CFO Jason Liberty on those sales and profit points, and below are some highlights from those chats.
An amazing year
2019 has been an unusual year with an unusual spate of such challenges. I would include things like the collapse of the drydock at Freeport which has never happened before. The impact of Hurricane Dorian, which is the largest impact from any hurricane in our company's history, [and] the abrupt change in the government policy toward Cuba, etc., etc. The result of all these impacts has been to change what would have been an amazingly successful year into simply a very successful year.
The consumer discretionary stock's net yield growth landed at 6.4% this quarter, which matched the outlook that management issued back in July. Yet that result includes the voyage disruption caused by Hurricane Dorian's closing of several ports for over a week.
Stripping out that extreme situation leaves net revenue yields again outpacing guidance and stopping well ahead of the gains that peers like Carnival (NYSE:CCL) have seen. Royal Caribbean's success reflects demand strength across key regions including China, Alaska, Europe, and the Caribbean, Liberty said.
Costs are rising
We expect net cruise costs excluding fuel to be up approximately 11%. The increase in guidance is driven by the reduction in capacity and relief efforts from the hurricane, together with a further increase in technology and product development investments.
Hurricane delays pushed many costs out of Q3, and so investors should brace for cost yields to shoot up to 14% in the current quarter. Royal Caribbean will get a bit less profitable on an operating basis this year as net revenue yields rise about 8% and costs expand by 11%.
Management says they're getting lots of value from these investments, which include ship remodels and on-board technology upgrades. The spending is helping improve the customer experience, and that success shows up in higher cruise prices and rising cruiser satisfaction.
Doubling down on experiences
One of the more interesting things we recently announced was our second Perfect Day destination.
Royal Caribbean is plowing ahead with plans to increase ship capacity by about 5% in 2020, but management has also found another attractive avenue for capital investment that has a high return for shareholders. It's obvious now after a few months of operation that the company's private resort in the Bahamas is lifting pricing and demand for cruises that visit the destination. As a result, executives are eager to build on that success with a new similar port, this time in the South Pacific.
These experience-based products should help Royal Caribbean continue to stand out from rivals in 2020. On that point, while executives said investors will have to wait until January for the official 2020 forecast, they see a few reasons for optimism. Booking trends are strong both in terms of pricing and volume. Vacationers are also making their commitments further ahead of time, which indicates strengthening consumer confidence. "All of that bodes well for an attractive 2020," Fain said.