• Marriott relies on overseas hotels

A mixed year for Marriott International's shares continued last week as they dropped by 8% following the group's second-quarter results announcement.

The company lowered its full-year forecast as president and COO, Arne Sorenson told analysts on a conference call: "You will not see us or hear us on the aircraft carrier deck claiming victory yet".

The group lowered the top end of its 2011 EPS outlook by 2 cents to a range of $1.35 to $1.43 per share. The group had previously forecast EPS in the range of $1.35 to $1.45 per share on a 6% to 8% increase in revpar worldwide.

The company said it expected third quarter 2011 revpar to increase 6% to 8%, excluding the Middle East and Japan. Including those markets, revpar may be about 100 basis points lower than the range.

Sorenson sought to reassure investors, commenting: "While uncertainty is still very much in the picture given recent mixed economic news and ongoing world events, I remain very bullish about the long-term prospects for the lodging industry in general and for Marriott in particular. With strong demand and a prospect for low-supply growth, we are marching steadily towards a return to peak 2007 revpar."

However, he added: "Returns to 2007 peak profitability per room for our owners and for Marriott will take a bit longer."

The company had previously warned that trading issues for its US properties were having an impact on the group, and saw its most-recent figures bolstered by its overseas hotels, which pushed net profits up 13%. Revenues were up by 7.2% to $2.97bn, with worldwide revpar rising by 6.8% and international revpar up by 7.3%. Excluding the Middle East and Japan, international revpar increased over 12%.

Looking to the third quarter, Carl Berquist, CFO, said that international revpar growth, "even excluding the Middle East", was likely to slow "a bit" in the third quarter from the second quarter pace. Revpar growth in Europe was expected to moderate in the second half due to the timing of this year's trade fairs in Germany, as well as tougher comparables.

For the full year, the group forecast that international revpar would increase 7% to 9%, excluding the Middle East and Japan, higher than last quarter's guidance due to the strong first half performance. With more leisure expected in the third quarter than the less price-sensitive business customer, the group expected North American revpar growth up 5% to 7%, with the fourth quarter to be "modestly" stronger and therefore on a full year basis, expecting 6% to 8% revpar growth.

Looking at the group's domestic market, Sorenson's comments that it was "a year or 18 months or two years" for the US to be back at peak revpar indicated that forecasting was still a matter of looking at the crystal ball. The group has suffered particularly at its Washington DC hotels, where budget issues and a shorter-than-usual congressional calendar was holding the group back, which is likely to continue to the next US election. Even with revpar recovering, profitability will not immediately follow. Marriott is instead looking at its international business to maintain profits, which it has done despite the Arab spring and the natural disaster in Japan.

The company is relying on supply to remain limited in the US, while it pushes expansion overseas in search of profits. At the end of the second quarter Marriott's pipeline was over 100,000 rooms, including nearly 44,000 rooms outside North America.

Sorenson remained confident that, despite a move into a more leisure-oriented quarter, the business market would hold up. He said: "We are reading the same newspapers that you all are reading. And if some of these newspapers lead to slower GDP growth than any of us anticipated, that will have an impact ultimately on business travel. But we're not seeing that show up in our business today."

 

HA Perspective: The Marriott figures had a mixed reception on Wall Street with some disappointment that there was not stronger growth. One reason for this is that Marriott's group business lagged.

Morgan Stanley pointed out that Marriott's group business revpar was up 2% against the competitive set's average rise of 8%. Sorenson said Marriott was bigger than its principal competitors and had longer lead times and thus rate changes in particular had longer to feed through for business booked two or three years ago. This helped keep revpar from dropping too much during the recession but it obviously limits the upside available now.

There was also an interesting answer from Sorenson regarding the Marriott core brand's relative under performance compared to rivals. He said that as it was bigger it was in more suburban and secondary locations than rivals and this had held it back. He wasn't clear on how quickly these weaker locations would recover or whether they might stay weaker relative to the stronger, gateway locations. What he was clear on was that Marriott is taking increasing market share across the business.

For the business in general, Marriott estimates it could be as long as two years before peak revpar levels in North America are regained and perhaps another two years after that until peak profitability.

In the meantime, Marriott is relying on growth in the system. And here it looks weaker than some rivals in a few critical geographies, notably China, India and Brazil.

But Marriott has been taking its time to get its offer right. Sorenson pointed to how brands have recently been tailored for India, China, Brazil and Spain.

And to date, net rooms growth is far from a disappointment, averaging 4.5% over the last 10 years. Even in the US where there is little net supply growth, new hotels are being added to the Marriott system.

It might be taking a little longer to start motoring again, but don't bet against the Marriott juggernaut just yet.

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