In a surprise announcement this morning, cruise line company Royal Caribbean (RCL 0.21%) -- which had been expected to report its Q2 2022 earnings next week -- reported this week instead. What's more, the news was relatively benign, with both revenue and earnings coming in better than expected.
Investors are cheering Royal Caribbean stock (now up 5.8% as of 12:12 p.m. ET) in response, and not only Royal Caribbean. Peer cruisers Norwegian Cruise Line Holdings (NCLH 2.42%) and even Carnival (CCL 1.91%) are sailing higher as well, up 2.5% and 0.6%, respectively.
Royal Caribbean reported sales of $2.18 billion in its fiscal second quarter, about $70 million more than analysts had predicted. The company didn't earn a profit -- and wasn't expected to -- but it did lose only $2.05 per share, which was again less than expected. Management characterized these results as "meaningfully ahead of the company's expectations driven by accelerating and strong close-in demand, further improvement in onboard revenue and better cost performance." It further noted that it was cash flow positive in the quarter.
That's the good news.
Now here's the bad.
Although operating cash flow was positive -- about $479 million -- all of that and more was eaten up by capital spending -- $955 million -- resulting in another free cash flow negative quarter for Royal Caribbean. This is 11th in a row, in a streak that stretches back to even before the pandemic started, in Q4 2019. So Royal Caribbean is still consuming cash, and its cash reserves continue to dwindle.
On top of that, while Royal Caribbean emphasized in its guidance the fact that it hopes to generate perhaps $3 billion in revenue in Q3, and earn a small "adjusted" profit of between $0.05 and $0.25 per share, this is a non-GAAP projection. When calculated according to generally accepted accounting principles (GAAP), Royal Caribbean confirmed that it will in fact not be profitable in Q3, blaming the rise in "fuel rates, interest rates and foreign exchange rates" for this failure.
If you recall, this was the same revelation that helped torpedo Carnival stock earlier this month, after it revealed that -- contrary to so many assumptions -- it would not meet expectations and return to profitability in Q3. Now Royal Caribbean is admitting it won't be profitable, either. For the time being, investors don't seem worried about that fact -- or perhaps they haven't noticed it -- and Royal Caribbean's stock price is holding up, but there's still one more shoe to drop here.
Last night after close of trading, Norwegian Cruise updated investors that instead of reporting earnings on Aug. 4, as had been expected, it will release its Q2 2022 results on Tuesday, Aug. 9. As with Royal Caribbean, and as with Carnival before it, analysts are still predicting Norwegian will (a) report a loss for Q2, but (b) promise a profit in Q3. Given that both cruise companies before it have already admitted that Q3 won't be the hoped-for turnaround quarter for cruise companies, chances are slim Norwegian will break the trend and say that it, unlike everyone else, will be profitable in Q3.
If I'm right about that, and we end up with tic-tac-toe, three-in-a-row cruise companies admitting they still can't turn a profit, I expect we'll see even more selling in the cruise sector going forward.