Hotels and resorts make most people think of going on a great vacation, yet for the companies that own and operate hotel properties, intense competition makes the industry a cutthroat business. Marriott (NASDAQ:MAR) has an impressive reputation among hotel companies for operational excellence, with an impressive management team and a business model that mostly involves managing and franchising its hotel locations rather than owning them outright. Coming into Wednesday's third-quarter financial report, Marriott investors had expected to see continued solid growth in revenue and earnings, and they hoped that initiatives like the hotel company's arrangement with online travel company TripAdvisor (NASDAQ:TRIP) would show signs of future success. The hotel management company gave its shareholders better results on the bottom line but less sales growth than they had expected. Let's take a closer look at how Marriott did during the quarter and whether it has what it takes to overcome some near-term headwinds.
Marriott proves it has staying power
Marriott's third-quarter results were mixed in the eyes of many who follow the stock. Revenue climbed 3.4% to $3.58 billion, which was quite a bit short of the $3.65 billion in sales that most investors had wanted to see. On the bottom line, though, Marriott made up for its revenue shortfall with strong earnings growth, as net income climbed 9% to $210 million, working out to diluted earnings of $0.78 per share, $0.04 above the consensus estimate among investors.
Looking more closely at Marriott's financial metrics, the hotelier achieved several favorable results. Revenue per available room rose more than 4% on a currency-neutral basis, with average daily rate increases accounting for most of the RevPAR gains even though the company suffered unfavorable shifts of holidays resulting from the calendar, which hurt its group business. Occupancy rates rose to nearly 78%, which helped the company maintain pricing discipline and avoid less profitable business opportunities in favor of more lucrative ones. Worldwide, Marriott enjoyed better growth in RevPAR internationally than in its domestic market, with North American comparable RevPAR rising 4.2% in constant-currency terms compared to 6.2% growth in comps internationally. Marriott cited an earlier start to the Ramadan holiday period and strong European demand for its international outperformance.
Marriott has also been aggressive in growing its portfolio of managed properties, adding 68 properties that included more than 10,000 rooms during the third quarter. All in all, Marriott claims almost 4,400 total properties and timeshare resorts offering a total of three-quarters of a million rooms, and its development pipeline current includes almost 1,600 properties that together could bring its room total above the 1 million mark.
CEO Arne Sorenson was pleased with Marriott's results, noting that "our asset-light business model continues to deliver significant profit growth with modest capital requirements, yielding outstanding return to shareholders." Sorenson also pointed to the health of Marriott's pipeline, which includes new brands that could help drive future growth as well.
How will 2016 look for Marriott?
Marriott also gave future guidance that made next year look even more favorable. The company believes that constant-dollar RevPAR will climb between 4% and 6% worldwide next year, with group bookings for full-service hotels in North America up 7% and about three-quarters of its anticipated group business volume already booked. Room growth will rise to an 8% pace next year, as Marriott expects to benefit from acquisitions as well as having properties under construction come online.
For the fourth quarter, though, Marriott investors weren't entirely comfortable with the company's immediate guidance. Earnings expectations of $0.74 to $0.78 per share would be lower than the current $0.80 consensus forecast, and Marriott reined in its earlier growth projections for the Asia Pacific and Middle East and Africa regions. Moreover, Marriott thinks that North American RevPAR could come in toward the lower end of its 5% to 7% growth range.
Still, in the long run, Marriott is pursuing long-term growth in many ways. The partnership with TripAdvisor will give the online travel website operator's customers book travel directly at any of Marriott's hotel locations in 80 different countries, but it also gives Marriott the ability to control the way in which rates and inventory for various hotels are offered to TripAdvisor clients. That flexibility is appealing to hotel operators like Marriott, with some advantages over the way that TripAdvisor's competitors often work with Marriott's peers.
Marriott investors seemed more worried about the hotel company's near-term results than its long-term future, sending the stock down 3% in the first hour of after-market trading following the announcement. Nevertheless, Marriott's long-term views look favorable, and the company's reputation should give it an advantage over other hotel operators that it can use to generate new opportunities down the road.