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Starwood Hotels & Resorts Worldwide Inc.’s (HOT - Analyst Report) second-quarter 2013 adjusted earnings from continuing operations of 79 cents per share, breezing past the Zacks Consensus Estimate of 73 cents by 8.2% and the year-ago level of 70 cents by 12.9%. Starwood’s margin expansion drove the earnings for the quarter.

Revenues decreased 3.5% year over year to $1.56 billion in the quarter as a result of lower revenues in Starwood’s owned, leased and consolidated joint venture hotels as well as vacation ownership and residential businesses. Quarterly revenue also failed to meet the Zacks Consensus Estimate of $1.59 billion by 1.5%.

However, with limited supply especially in North America and Europe, the company continues to gain in terms of occupancy, revenue per available room (RevPAR) and average daily rate (ADR). Occupancies in North America appear to be pretty steady at 76% in the second quarter. 

Inside the Headline Numbers

Starwood earns a major portion of its revenue from its hotel business. Apart from this, the company derives revenues from its vacation ownership business.

Hotel Business

Owned, Leased and Consolidated Joint Venture Hotels

Revenues at owned, leased and consolidated joint venture hotels dropped 7.5% year over year to $419.0 million, following the sale of assets. However, worldwide RevPAR for Starwood same-store owned hotels grew 4.4%, driven by a 9.8% RevPAR growth in North America.

Management and Franchise Revenues

Management fees, franchise fees and other income jumped 6.3% year over year to $236.0 million in the quarter under review. During the second quarter, system-wide RevPAR for same-store hotels increased 4.4% year over year all over the world while the same grew 3.3% internationally.

Region wise, RevPAR in Africa and the Middle East registered maximum growth of 7.5% during the quarter, gaining from the company’s solid business in the Middle East region. With the gradual economic recovery, RevPAR in North America increased 5.2%.

Starwood’s luxury business was also solid during the quarter gaining from higher demand worldwide. Among the company’s luxury brands, St. Regis/Luxury Collection recorded highest RevPAR growth of 8.7%.

Vacation Ownership and Residential Sales and Services

Total revenue from vacation ownership and residential sales and services dropped 24.4% to $239.0 million in the quarter as a result of a 52.3% decline in the residential revenues.

However, vacation ownership revenues were up 7.4% to $159 million led by higher revenue gains from the company’s resort business.

Margins

Worldwide same-store company-operated gross operating profit margin was up about 94 basis points (bps) during the quarter, driven by higher margin in North America. Starwood’s same-store company-operated gross operating profit margins in North America rose 123 bps with higher RevPAR and lower costs.

Update on Hotels

During the quarter, Starwood entered into 32 hotel management and franchise agreements that span over nearly 6,500 rooms. These consist of 9 brand-conversion and 23 new constructions projects. The company also opened 18 properties. On the other hand, only 2 properties exited from the company’s operation. At quarter-end, nearly 400 hotels, consisting of almost 100,000 rooms are in the company’s development pipeline

Shareholder Value Enhanced

Starwood bought back 140,000 shares worth $8 million in the quarter. At the end of the quarter, shares worth nearly $624 million remained under the existing share repurchase program.

Guidance

For third-quarter 2013, earnings are expected to be approximately 60 cents to 64 cents per share (including the Bal Harbor project). The company anticipates RevPAR growth of 5% to 6% in constant dollars at same-store company-operated hotels worldwide, while growth is expected to be 4% to 6% at branded same-store company-owned hotels worldwide. Management fees, franchise fees and other income are expected to be within 7.5% and 9.5% in the third quarter.

Starwood has raised its earnings guidance for 2013. The company now expects that its adjusted earnings per share will be between $2.81 and $2.88, up from the previous estimate of $2.75 – $2.83. Earnings in 2013 are expected to be affected by the company’s asset disposition.

Starwood has reduced the higher end of its RevPAR estimate. For same-store company-operated hotels worldwide, RevPAR growth (in constant dollars) is expected within 5% - 6% as compared with the previous estimate of 5% - 7%.

Starwood continues to expect that RevPAR growth at branded same-store company-owned hotels worldwide will be 4% - 6% in constant dollars.

Our Take

Starwood has gained from its worldwide exposure, asset sale and the revival of its North American business. This Zacks Rank #3 (Hold) company is a beneficiary of growing leisure as well as corporate travel. Higher earnings guidance amid a weak business environment reflects the company’s sound business model.

However, the decline in revenues for last two quarters concerns us. Owing to the volatile economy in China, the company’s business may suffer in the region.

Some other hoteliers who have a high growth prospect include Home Inns & Hotels Management Inc. , Orient-Express Hotels Ltd. and The Marcus Corporation (MCS - Snapshot Report). All these companies carry a Zacks Rank #2 (Buy).

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