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Royal Caribbean Cruises Ltd.’s (RCL - Analyst Report) adjusted third-quarter 2013 earnings of $1.71 per share beat the Zacks Consensus Estimate of $1.64 by 4.3% as well as the year-ago level of $1.68 by 1.8%. It was also above management’s guidance range of $1.60–$1.70. Earnings in the quarter received a boost from the company’s higher top line.

Total revenue in the quarter increased 3.8% year over year to $2.31 billion ahead of the Zacks Consensus Estimate of $2.28 billion by 1.3%. Increased onboard and other revenues and solid close-in demand in Europe and Asia backed the top-line growth.

Quarter Highlights

On a constant currency basis, net yields increased 2.6% year over year. Yields in the quarter was driven by increased onboard spending, higher ticket revenue gain, especially in Europe, and solid close-in business in China offsetting the adverse impact of unscheduled drydock of Celebrity Millennium cruise.

With the improvement in the company’s U.S. business, onboard and other revenues increased 8.2% year over year to $639.7 million. Royal Caribbean’s series of revitalization initiatives also aided onboard revenues to grow further. In the third quarter, onboard revenue yields were up 7.0%.

However, the company’s occupancy rate remained flat year over year at 107.3% in the third quarter. Royal Caribbean is witnessing higher booking trend across the U.S., Australia, Alaska and Europe. Even if the rising geo-political concern between Japan and China continues to affect the company’s itineraries as well as demand profile in the Chinese region, the demand is higher in Asia. The company is facing strict competitive pricing environment in the Caribbean for the past few quarters.

Net cruise costs (NCC), excluding fuel, increased 3.9% on a constant currency basis, which was higher than the year-ago level of 2.0% but lower than the company’s guidance of 4%. The rise in the cost was mostly due to the adverse impact of Millennium drydock. Excluding the impact, NCC was up 2.8% during the quarter.

Total cruise operating expenses increased 5.1% year over year to $1.42 billion mainly due to a 7.2% rise in onboard and other expenses, 7.6% increase in other operating costs, 7% increment in food expenses and 6.1% surge in payroll and related costs.

Guidance

Fourth-Quarter 2013

For the fourth quarter of 2013, Royal Caribbean expects its earnings to range between 15 cents and 20 cents per share. With the rise in bookings in almost all itineraries, net yields are expected to increase 2%–3% on a constant currency basis in the fourth quarter.

Excluding fuel expenses, NCC is also estimated to increase 1%–2% in constant currency. Royal Caribbean is expected to incur higher costs in the third quarter due to its restructuring activities. Fuel costs are estimated to be $230 million per metric ton.

Full-Year 2013 Outlook Increased

Royal Caribbean has raised its adjusted earnings per share guidance for 2013 based on improved booking trends, higher yield outlook and costs saving efforts. Management expects earnings per share in the range of $2.30–$2.35, up from the previous estimate of $2.20–$2.30.

At constant currency, net revenue yield is expected to increase 3%, up from the previously guided range of 2%–3%. The company’s initiatives such as revitalizing program, marketing efforts and improved guest services are expected to drive yield. Ticket revenue yield is expected to increase 2% while onboard revenue yield will be 7% in 2013.

The company has retained its cost outlook. In constant currency, NCC excluding fuel costs is projected to increase 1%–2%. Royal Caribbean continues to gain from its cost saving efforts.

The company has reduced its fuel expenses guidance to $920 million per metric ton from $923 million, owing to the company’s energy saving measures.

Full-Year 2014

Following the implementation of the profitability improvement program, the company expects its earnings to be $3.06 per share in 2014. Gaining from strong booking pattern, the company’s yield is expected to be high while cost is expected to be low in 2014 thanks to costs saving efforts.  

Royal Caribbean expects the yield to be strong for Asia in 2014 despite the geo-political concerns in China. Yields are expected to be high in Europe and Alaska. However, yields in the Caribbean region will be flat to down in 2014.

Our Take

Given the company’s relatively stabilized booking patterns, cost containment efforts and fuel conservation initiatives, we remain optimistic on the world’s second-largest cruise operator. An increased guidance for 2013 is also positive for the stock.

However, sluggish recovery in debt-ridden Europe and the China-Japan conflict will likely hamper some of the itineraries of the company in the near term.

Royal Caribbean holds a Zacks Rank #3 (Hold). Other stocks in the leisure and recreational services sector that are performing well include SeaWorld Entertainment, Inc. (SEAS - Snapshot Report), Cedar Fair, L.P. (FUN - Snapshot Report) and Carmike Cinemas Inc. (CKEC - Snapshot Report). While SeaWorld Entertainment and Cedar Fair carry a Zacks Rank #1 (Strong Buy), Carmike Cinemas holds a Zacks Rank #2 (Buy).

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