UPDATE: Marriott Post 4Q Loss; Timeshare Operations Become Focus
February 12 2009 - 1:41PM
Dow Jones News
Marriott International Inc. (MAR) swung to a fourth-quarter loss
on restructuring charges as the company projected continued
weakness in 2009, including first-quarter results below analysts'
expectations.
Overall, the report offered little surprise as the hospitality
industry grapples with one of the most severe economic downturns in
decades. Wall Street analysts, however, took great note of
continued weakness in Marriott's timeshare business, which has
become a growing source of vulnerability for major hotel
chains.
"Timeshare guidance was significantly worse than what people
expected," said Patrick Scholes, a lodging analyst at FBR Capital
Markets. He noted that Marriott cut its projection for timeshare
income for 2009 to $45 million from between $215 million to $265
million forecasted in October.
Scholes attributed weakness in the timeshare segment, accounting
for less than 20% of Marriott's business, as driving most of the
company's earnings miss.
Large hospitality companies such as Marriott, Wyndham Worldwide
Corp. (WYN) and Starwood Hotels and Resorts Worldwide (HOT) 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.
Marriott reported a fourth-quarter net loss of 10 million, or 3
cents a share, compared with year-earlier net income of $176
million, or 46 cents a share. Excluding restructuring charges and
other items, earnings fell to 34 cents.
Revenue fell 7.5% to $3.78 billion even with the latest quarter
including an extra week than a year earlier. Analysts surveyed by
Thomson Reuters were expecting earnings, excluding items, of 39
cents a share, on revenue of $3.86 billion. Marriott's latest
forecast - from October - was for earnings of 44 cents to 50
cents.
Marriott's shares recently traded up 3.2% to $15.63 in recent
trading.
Marriott Chief Financial Officer Arne Sorenson said during a
conference call that the company reduced costs in the timeshare
business by about $65 million to $75 million. In addition, the
company financed approximately 70% of its timeshare contracts
compared to 80% in the prior year quarter.
Marriott ended all financing incentives and was financing only
about half of new timeshare contracts. "We are optimistic that
we'll complete note sales in 2009, but pricing is likely to remain
unfavorable so no note sale gain is assumed in our 2009 outlook,"
Sorenson said.
The company said delinquencies for U.S.-financed loans rose to
7.9% as of the end of December from 6.7% at the end of 2007.
"The company is reacting very aggressively [by]...shrinking that
business and focusing on maintaining cash flow," said John Arabia,
an analyst at Green Street Advisors.
Arabia noted there has been an outcry from analysts that
Marriott exit timeshares, given steep profit declines. "It's an
ill-informed and knee-jerk reaction," he said, adding that he
expects timeshares will be profitable in the long term.
For the first quarter of 2009, Marriott sees earnings of 13
cents to 15 cents a share on a 17% drop in revenue per available
room at company-operated hotels in North America. Analysts surveyed
by Thomson Reuters projected earnings of 22 cents.
For the year, earnings are seen at between 86 cents and $1.04 a
share on double-digit percentage revpar declines in North America,
though Marriott admitted it "cannot forecast results with any
certainty." Analysts expected earnings of $1.10 a share.
Marriott also expects to slash capital spending by more than
one-third from 2008's $950 million.
The hotel sector continues to be hammered by steep cuts in
airline capacity, a pullback in consumer spending and waning
corporate travel. Analysts have warned in the past that the hotel
industry might not recover until 2011. Marriott's dour results come
on the heels of weak reports and outlooks from rivals such as
Starwood and Choice Hotels International Inc. (CHH).
Marriott was one of the few major hotel companies to leave its
fourth-quarter earnings forecast unchanged since its third-quarter
report, despite business conditions subsequently taking a turn for
the worse.
Its view had assumed worldwide revenue per available room
falling 1% to 3%, including a 3% to 5% drop in North America. The
results ended up being down 8.4% and 8.3%, respectively.
The bottom line was weighed down by the timeshare segment, which
swung to a $2 million loss as revenue slumped 28% amid continued
consumer skittishness about buying real estate.
The woes come as Fitch Ratings said last week that monthly
defaults on timeshare loans hit an all-time high in December.
Marriott, Starwood and other big hospitality companies consistently
reaped large profits in the past by financing timeshare purchases
amid strong consumer demand. But the lockdown in credit markets and
pullback in consumer spending prompted developers to scale back
plans for new projects.
-By A.D. Pruitt, Dow Jones Newswires; 201-938-2269;
angela.pruitt@dowjones.com