Royal Caribbean Cruises (RCL 2.27%) posted record revenue, yields, and earnings in the second quarter, the company reported at the end of July. Citing "strong and accelerated demand," a confident CEO Jason Liberty and his management team also raised full-year earnings expectations by 33%. Here's why I'm bullish on this cruise line stock.
Demand and onboard spending remain strong
Thanks in part to a historic 2023 booking season, Royal Caribbean had already raised its earnings expectations by 40% earlier this year -- doubling its revenue yield guidance. In reference to the prior guidance hike, Liberty boasted that "it got even better since then" during the Q2 earnings call late last month.
Second-quarter revenue reached a new record of $3.5 billion and net income finished at $458.8 million. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) landed at an all-time high of $1.2 billion.
True to its name, Royal Caribbean has observed "standout" performance in the Caribbean this year, with last quarter being no exception. However, Liberty also highlighted "the strength and quality of cruising demand for European itineraries." Demand for summer European cruises accelerated in Q2, outperforming yield expectations for the quarter.
In another company record, Royal Caribbean provided 1.9 million vacations to its guests, hitting all-time high yields that were 12.9% above 2019 levels. Strong demand, higher ticket prices, and heightened onboard passenger revenue contributed to the better-than-expected performance. As Liberty explained, guests spent 25% more money on experiences and twice as much on goods as they did in 2019.
Cost outlook is relatively good
Despite an encouraging increase in onboard guest expenditure, the amount passengers spent on experiences aboard Royal Caribbean cruises "remains lower than the long-term trend line," according to Liberty. He emphasized the resultant comeback opportunity and how Royal Caribbean's vacation offerings appropriately address a growing travel market.
With the exception of fuel, third-quarter net cruise costs are anticipated to rise by 11.2% above 2019 levels. For the full year, Liberty and team expect a 7% increase in net cruise costs compared to 2019. Costs are projected to normalize in the second half of the year, and the fourth quarter should provide the best comparison due to increased dry-dock days during that time in 2019.
In the wake of the pandemic, costs such as labor, marketing, port, and freight have all risen substantially for cruise carriers. When asked why expenses were only expected to increase 7% for the full year, CFO Naftali Holtz explained how Royal Caribbean's management of expenses and focus on margin expansion was to thank for the modest estimate.
According to Holtz, "Our cost outlook reflects the continued benefit from all the actions we have taken over the last several years to support enhanced margins." Royal Caribbean's operational and commercial teams have dedicated their efforts to "driving strong top-line growth and maintaining focus on operating expenses to expand margins."
What the future looks like
As for 2024 cost expectations, Holtz noted how aside from the opening of Hideaway Beach, an adults-only beach on Royal Caribbean's private island named Perfect Day at CocoCay, "it should be a normal year."
Thanks to impressive performance so far in 2023 and high expectations for the remainder of the year, Royal Caribbean increased its full-year earnings guidance by another 33%. The company now anticipates double-digit yield growth for the year and a growth rate in the low teens in quarters three and four.
Forecasting continued "strength in Caribbean itineraries and accelerating demand for Europe itineraries," Holtz estimates net yields to extend 13.5% to 14% above 2019 levels in Q3. For the year, he expects to see 11.5% to 12% growth in net yields, the result of robust onboard revenue and higher prices.
Encouraged by a "very healthy demand environment," Liberty noted Royal Caribbean's consumer sentiment "remains strong." With the majority of Royal Caribbean's bookings now for 2024 sailings, interest in both North American and European markets appears buoyant with no signs of sinking.
