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RCL Beats Earnings in 2Q, Revs Lag

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Royal Caribbean Cruises Ltd.’s (RCL - Free Report) adjusted second-quarter 2013 earnings of 23 cents per share surpassed the Zacks Consensus Estimate of 10 cents as well as the year-ago level of 3 cents.

Earnings in the quarter were also significantly higher than the management’s guidance range of 10 cents -15 cents per share. The company’s efficient cost controlling measures and year-over-year improvement in revenue drove the earnings during the quarter. 

Quarter Highlights

Total revenue in the quarter increased 3.4% year over year to $1.88 billion, but fell short of the Zacks Consensus Estimate of $1.89 billion by 0.6%. Higher net yields and increased Onboard and other revenues backed the year-over-year rise in top line during the quarter.

Net yields increased 2.8% year over year on a constant-currency basis. Higher onboard spending and better pricing drove the net yields during the quarter.

With the revival of the North American business, the company’s onboard and other revenues increased 5.6% year over year to $516.1 million. Royal Caribbean has taken a series of revitalization initiatives to improve its onboard revenues which has already started to pay off.

However, the company’s occupancy rate decreased 110 basis points (bps) to 103.0% in the second quarter. In the first half of 2013, Royal Caribbean faced bad publicity following the fire at its Grandeur of the Seas ship in May 2013. This incident has also led to a decline in the company’s booking pattern.

Net cruise costs (NCC), excluding fuel increased 2.3% on a constant-currency basis which was much lower than the year-ago level of 8.3% and the company’s guidance of 3%. Royal Caribbean’s initiatives to boost profit and cost effective efforts have helped reduce the cruise costs offsetting the adverse impact of the Grandeur fire. NCC, excluding fuel cost and impact of Grandeur fire, was 1.5% during the quarter.

Total cruise operating expenses increased 2.1% year over year to $1.32 billion mainly due to a 7.4% rise in onboard and other expenses and 3% increase in food expenses, offset by 2.3% decline in fuel costs.


Third-Quarter 2013

For the third quarter of 2013, Royal Caribbean expects its earnings to range between $1.60 and $1.70 per share (including the Grandeur fire effect). With the rise in onboard revenues, net yields are expected to increase 1%–2% in constant-currency basis in the third quarter. Ticket yields are projected to be flat to up 1.5%.

Excluding fuel expenses, NCC is also estimated to increase 4% in constant currency. Royal Caribbean is expected to incur higher costs in the third quarter due to its marketing activities and culinary improvement program. Fuel costs are estimated to be $219 million per metric ton.

Full-Year 2013 Outlook Lowered

Royal Caribbean has reduced its earnings per share guidance for 2013 on a reported basis. Management expects earnings in the range of $2.20–$2.30, down from the previous estimate of $2.30–$2.50.

The company has initiated a new profitability program for boosting its margin and return on invested capital. For this reason, Royal Caribbean is expected to face a one-time cost which in turn will adversely impact earnings. 

At constant currency, net revenue yield is expected to increase 2%–3% down from 2%–4%. The company is facing strict competitive pricing environment in the Caribbean for the past few quarters. Moreover, the geo-political conflict between Japan and China regarding the disputed islands in East China Sea will affect the company’s itineraries and yields. Considering these factors, the company has also reduced its ticket revenues guidance by 90 bps for the second half of 2013.

Royal Caribbean expects the yield to be low for Asia in 2013 due to geopolitical concerns in the region. Yields are expected to be high in Europe and South America. In 2013, net ticket yields will be up in mid-single digits in Europe. Royal Caribbean expects its booking pattern and pricing to improve as the year progresses and to be strong in the first quarter of 2014. The U.S. market is showing healthy signs in terms of bookings.

In constant currency, NCC excluding fuel costs is projected to increase 1%–2%, down from 2%–3%. Royal Caribbean continues to gain from its cost saving efforts.

The company has reduced its fuel expenses guidance to $923 million per metric ton down from $928 million, owing to the company’s energy saving measures.

Following the implementation of the company’s profitability improvement program, the company’s yield is expected to be high and cost to be flat in 2014. 

Our Take

Although this Zacks Rank #4 (Sell) company has succeeded to record higher earnings growth with its cost containment efforts, it will take time to completely recover from the effect of the Grandeur fire accident. Moreover, higher costs due to deployment changes and several marketing activities remain major causes of concern. In addition to these, China-Japan conflict continues to bother the company.

Another cruise operator, Carnival Corporation (CCL - Free Report) is recovering at a modest pace from the Costa disaster last January; as it faces one accident after another. Even if Carnival’s second-quarter fiscal 2013 earnings were ahead of the Zacks Consensus Estimate it was below the year-ago quarter’s earnings. Lower revenues combined with higher cruise costs were responsible for the year-over-year decline in earnings.

Some other stocks in the entertainment industry that are expected to perform well include Cedar Fair, L.P. (FUN - Free Report) and Ambassadors Group Inc. . While Cedar Fair carries a Zacks Rank #1 (Strong Buy), Ambassadors holds Zacks Rank #2 (Buy).

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