Starwood Beats but Guides Lower

Starwood Hotels and Resorts Worldwide, Inc.'s (HOT) second quarter earnings of $0.22 per share, were seven cents ahead of the Zacks Consensus Estimate, driven by the cost reduction initiatives implemented by the company. However, revenues were down in the quarter and the company’s guidance is below our consensus estimate.

EPS from continuing operations was $0.22, excluding special items, compared to $0.56 in the year-ago period. Income from continuing operations, excluding special items, was $41 million, versus $107 million in the prior-year period. Adjusted EBITDA was $200 million, versus $299 million the year-ago period.

The lower results stemmed from significant deterioration in revenue per available room (RevPAR). Worldwide system-wide same-store RevPAR was down 27.7% in the quarter compared to the year-ago period. System-wide same-store RevPAR in North America was down 25.4% year-over-year. Management and franchise revenues were down 18.0% year-over-year.

Margins were also restricted as a result of this revenue decline though the cost-cutting measures provided some relief. Worldwide comparable company-operated gross operating profit margins declined around 530 basis points. International gross operating profit margins for comparable company-operated properties decreased about 400 basis points, and North American comparable company-operated gross operating profit margins declined approximately 680 basis points.

Worldwide RevPAR for Starwood branded Same-Store Owned Hotels decreased 35.5% from the prior-year period. RevPAR for Starwood-branded same-store owned hotels in North America decreased 34.4% year-over-year.

We also expect Starwood to reduce its outstanding debt by year-end. At the end of the second quarter of 2009, the company’s total debt was $$3.752 billion, or net debt of $3.626 billion. Assuming the close of the sale of W San Francisco and the receipt of an IRS tax refund of over $200 million, the company estimated its gross debt will reduce to $3.2 billion and net debt to $3.0 billion by year-end 2009. The completion of sale of W San Francisco was already announced by the company last Thursday, July 30, 2009. The sale was made for $90 million.

Guides Low

The company expects RevPAR at same-store company operated hotels worldwide to be down 20% - 22% in the third quarter, while RevPAR at branded same-store owned hotels worldwide is expected to decline 24% - 26%. With these projections, management expects to post earnings of $0.06 - $0.10 per share in the third quarter.

For the full year, the company expects RevPAR at same-store company-operated hotels worldwide to decline 20%. RevPAR is expected to decline 25% at branded same-store owned hotels worldwide during 2009. Management expects to report earnings of approximately $0.65 per share for fiscal 2009 with these expectations.

Industry fundamentals have continued to deteriorate, with year-to-date weekly RevPAR down nearly 20% versus the year-ago period. The fact that declines in room rates comprise a larger portion of the weekly RevPAR declines throughout the industry is troubling, in our opinion.

We believe that the accelerating decline in average daily rate (ADR) will likely increase both the severity and length of the downturn in the lodging industry. Starwood’s rival company, Marriott International (MAR) also posted significant decline in RevPAR. Hence, we expect the shares of HOT and MAR to see more pressure in the coming months and continue with our Sell recommendations on both of these shares.

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