• Marriott says worst of decline is (probably) over

The rate of decline in revpar will most likely bottom during the second quarter, according to Marriott International.

But with revpar in North America forecast to decline between 22% and 25% during the period, the decline in future quarters beyond that may still be painful.

During a conference call with analysts, Arne Sorenson, now promoted to the role of chief operating officer from CFO, said that although demand may have bottomed out, he continued to worry about pricing.

Visibility has improved since the last quarter, added Sorenson, but it remained little more than between 30 and 90 days in which there was confidence in predicting demand.

The company remains cautious about any forecasting, calling the numbers it has put out for the current year "assumptions used internally for modelling the business", rather than the usual forecasts.

Carl Berquist, now CFO, said on the conference call: "The level of uncertainty simply remains too high for us to have much confidence in predicting results."

These working assumptions have North American revpar down between 17% and 20% with international down between 13% and 16% on a constant dollar basis.

The one upside is that Marriott still expects to open 30,000 rooms in the year. And for 2010, while the pipeline is shrinking, it will still be more than half the level of 2009 with fall outs from new development being replaced to an extent with conversion opportunities.

In his prepared remarks, Berquist said that owners are struggling to raise debt for full-service hotels and no new-build full service rooms were added to Marriott's pipeline in the first quarter.

The limited service pipeline also declined. The decline in pipeline is also a result of some owners speculating that construction costs, down about 10% already, will decline further. Projects are thus being delayed to take advantage of any cost saving opportunities.

The Marriott pipeline now stands at 115,000, down from 125,000 last quarter. Berquist said 8,800 rooms were opened in the quarter and the company "cancelled a few development projects".

The company trumpeted its ability to cut costs, pointing to a 16% reduction in central overheads compared to the same quarter a year ago. These were $136m for the quarter. For the full year, central costs (general and administrative) are expected to be down 20%.

Berquist said new business initiatives have been postponed and spending for lodging development had been "dramatically" reduced thanks to reorganised corporate departments.

Many of the changes Marriott had implemented were sustainable when trading improved, said Berquist. And Sorenson said that, for the quarter, house profit margins declined only 340 basis points despite an 18% drop in worldwide revpar on a constant dollar basis.

As well as central costs, spending on investment has been slashed as well. For this year it is expected to be 50% of the level of 2008, falling to between $350m and $400m.

Debt is also being reduced. During the quarter it was down $150m and for the full year it is hope to reduce it by between $600m and $650m.

The debt reduction will help shore up its credit rating. In April, Standard & Poor's cut the rating to BBB-, the lowest investment grade.

Sorenson said that the cost cutting has encouraged interest from owners and would-be franchisees to Marriott brands. In addition, Sorenson said the company has relaxed some brand standard for hotels and capex guidelines for renovations.

Also benefiting owners and franchisees is the activity on driving top line sales. Berquist said Marriott expects to roll out three times the normal number of marketing programmes this year and cut the time from concept to roll-out by two-thirds.

Costs at unit level were trimmed by reviving purchasing specifications, shortening restaurant menus and hours, and reducing food waste. At some hotels, floors have been shut. Many employees are now working in multiple departments and sometimes multiple hotels.

While costs are being cut, rates are beginning to suffer. "We are already seeing significant competitor discounting of room rates for corporate business in many markets," said Berquist. "Marriott will not lead the market down on rate but we also do not intend to lose share by failing to respond."

Marriott's results were well received by the stock market, with investors pushing up the share price by more than 12% on the day.

The net loss for the 12 weeks to March 27 in the first quarter was $23m which compares to last year's profit of $122m for the same quarter. Revpar was down 17.3% across the worldwide system on a constant dollar basis.

 

HA Perspective: Marriott, often cited as the bellwether for US hotel sector, delivered results which, while bad, were better than expected. But this was by no means a declaration that the recession is over.

The steepness of the drop has improved but the industry is still dropping. And nobody is yet sure when the bottom will finally be hit. Consensus seems to be that it will take more than 12 months before profit growth returns. This supports Marriott's aggressive approach to cost cutting.

The difficulty will come, however, once the turn is reached. The company will face a lumpy recovery as it has to rebuild its development teams and other departments savaged in the cuts.

It will also have to toughen up on brand standards, increasing its operating costs and the costs for owners and franchisees.

Weighing the short-term need to keep earnings as stable as possibly against maintaining long-term growth goals is a challenge.

The company launched a whirlwind visit to the UK at the end of April, announcing the launch of the Residence Inn brand in Europe. Bill Marriott was present at the official opening for the new look Courtyard brand at Gatwick and for a new core brand at Twickenham Stadium in West London.

This shows the company is well aware of the need to keep up the impression of growth, even while it cuts back on its capacity to deliver it.

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