UPDATE: Starwood Results Signal More Timeshare Woe For Hotels
January 29 2009 - 1:45PM
Dow Jones News
Starwood Hotels & Resorts Worldwide Inc.'s fourth-quarter
earnings Thursday underscore the growing vulnerability of the
timeshare business for U.S. hotels.
Starwood (HOT) reported that net income tumbled 46% amid $133
million in restructuring charges and write-downs of timeshare
projects and North American hotels as growth slowed worldwide.
Meanwhile, the company lowered its 2009 outlook and forecast
first-quarter earnings below analysts' expectations.
Although Starwood's results were very weak, they came in better
than expected given that the company executed heavy cost-cutting
measures, particularly in its timeshare segment, analysts
noted.
"It's not a surprise. Consumer [demand] for timeshares has been
declining," said Smedes Rose, an analyst at Keefe, Bruyette &
Woods. He anticipated that other hotel companies including Marriott
International Inc. (MAR) could look to scale back their timeshare
business as well.
Indeed, the big hospitality companies such as Marriott Wyndham
Worldwide (WYN) and Starwood have consistently reaped big profits
by financing timeshare purchases amid strong consumer demand. With
the lockdown in credit markets and concerns that consumers are
shunning big-ticket purchases, many developers have already scaled
back expansion plans in vacation ownership.
Starwood said total vacation ownership revenue decreased 48.3%
to $134 million when compared to 2007. In addition, the company
noted it didn't sell any vacation ownership receivables during the
fourth quarter and didn't expect any gains from securitizations in
2009.
As such, Starwood said it cut its overhead to match reduced
revenue expectations by closing five sales centers and terminating
over 500 employees in the fourth quarter in vacation ownership.
Over the last year, the company said it has closed nine sales and
three call centers, and laid off about 900 employees.
The "timeshare ... business is very front-loaded in terms of
costs," said Rose. He noted that once development reaches a certain
threshold a company could start to recognize revenue that can have
an impact on earnings-per- share accounting.
He said one positive development was Starwood's recognition
during the earnings call that the declines in timeshare contract
sales had stabilized.
Hoteliers have been reducing their workforce, freezing wages and
lowering or pulling guidance to combat what is expected to be a
difficult year after the sector was hammered in 2008 amid steep
cuts in airline capacity, a pullback in consumer spending and
waning corporate travel.
Chief Executive Frits van Paasschen said Thursday that
"extensive cost cutting" at the property level will help offset
some of the margin erosion that results from declining revenue per
available room. He added 2009 capital spending will tumble to $150
million from last year's $817 million as "the outlook for 2009
remains challenging, we are prepared for the worst."
"Urgent and dramatic cost savings measures ... will be the theme
this earnings season" for hotels, said Patrick Scholes, a lodging
analyst at FBR Capital Markets, adding that Starwood cut corporate
expensesmore significantly than expected.
Starwood now sees first-quarter earnings excluding items of
$1.10, down from October's weak view of $1.55, amid an anticipated
12% drop in revenue per available room. First-quarter earnings are
seen at 2 cents to 7 cents a share, with revenue per available room
falling 17%. Analysts surveyed by Thomson Reuters were projecting a
13-cent profit.
Meanwhile, the operator of hotels under the W Hotels, Westin,
St. Regis and Sheraton brands reported fourth-quarter net income of
$79 million, or 43 cents a share, compared with $146 million, or 74
cents a share, a year earlier.
Excluding items including the restructuring costs and
write-downs, earnings fell to 49 cents from 79 cents, yet that was
still above October weak forecast of 36 cents to 42 cents.
Revenue dropped 17% to $1.33 billion. Analysts expected $1.4
billion.
Revenue per available room in hotels owned for at least a year
decreased 20%, well below Starwood's forecast for a 4% to 6%
drop.
Meanwhile, the downturn has hurt credit ratings for the lodging
industry, with several hoteliers including Starwood being lowered
to junk. Starwood's stock has lost half its value the past four
months and closed Wednesday at $17.41.
Shares of Starwood were recently 75 cents lower, or 4.3%, at
$16.66.
-By A.D. Pruitt, Dow Jones Newswires, 201-938-2269,
angela.pruitt@dowjones.com
(Shirleen Dorman contributed to this report)
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