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Leading hotelier, Starwood Hotels & Resorts Worldwide Inc. posted better than expected first-quarter 2014 results. The company’s first quarter 2014 adjusted earnings from continuing operations of 63 cents per share beat the Zacks Consensus Estimate of 56 cents by 12.5%, which we believe was due to a decline in cost and expenses.

Also, earnings were higher than management’s expected range of 53 cents to 56 cents. However, earnings declined 17.0% year over year, owing to lower revenues.

Revenues decreased 5.3% year over year to $1.46 billion in the quarter mostly due to a decrease in vacation ownership and residential sales and services revenues. Revenues from residential sales mainly dropped due to the sale of The St. Regis Bal Harbour residential project in Jan 2014.

However, the top-line comfortably beat the Zacks Consensus Estimate of $1.45 billion by nearly 0.8%, possibly due to higher revenue per available room (RevPar) in North America and China.

Inside the Headline Numbers

Starwood earns a major portion of its revenues 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 declined 4.0% year over year to $364.0 million. However, worldwide RevPAR for Starwood’s same-store owned hotels grew 4.7% in constant dollars, led by 5.5% and 4.0% RevPAR growth in North America and overseas, respectively.

Management and Franchise Revenues

Management fees, franchise fees and other income increased 14.3% year over year to $248.0 million in the first quarter. Worldwide system-wide RevPAR for same-store hotels increased 6.3% year over year with strong RevPAR growth in North America.

North America proved to be the strongest region that benefited from economic recovery with higher occupancy and room rates.  The company witnessed RevPAR growth of 6.1% in North America, up 70 basis points (bps) year over year and 100 bps sequentially.

System-wide RevPAR grew 5.4% internationally. Starwood’s Asia business is divided into two parts — Greater China and Rest of Asia. RevPAR growth in Greater China was 11.9%, the highest among all the regions driven by outperformance at its properties in mainland China and Sheraton Macao.

Starwood’s luxury business performed well during the quarter gaining from higher demand worldwide. Among the company’s luxury brands, St. Regis/Luxury Collection recorded the highest RevPAR growth of 8.1%.

Vacation Ownership and Residential Sales and Services

Total revenue from vacation ownership and residential sales and services decreased 43.7% year over year to $174.0 million due to an 88.6% fall in residential revenues and a 10.2% decline in vacation ownership revenues.

Other Revenues

Revenues from managed and franchised properties went up 6.0% year over year to $672.0 million in the reported quarter.


Worldwide same-store company-operated gross operating profit margin was up 150 bps during the quarter, aided by higher margins in North America and international markets.

Update on Hotels

During the quarter, Starwood entered into 28 hotel management and franchise agreements that span nearly 6,000 rooms. These consist of 5 brand-conversions and 23 new constructions projects. Apart from this, Starwood opened 10 new hotels and resorts in the quarter.

On the other hand, the company divested 5 properties. During the quarter, the company completed the sale of its St. Regis Bal Harbour property. At quarter-end, nearly 450 hotels, consisting of almost 105,000 rooms, constituted the company’s development pipeline.


For second-quarter 2014, earnings are expected to be approximately 72 cents to 76 cents per share. The Zacks Consensus Estimate for the second quarter is 75 cents.

Starwood expects worldwide same-store company-operated RevPAR growth to be within 5.0%–7.0% (in constant dollars). RevPAR growth at same-store company-owned hotels worldwide is expected to be 4.0% to 6.0%. Management fees, franchise fees and other income are expected to be up 8.0%–10.0% in the second quarter.

For full-year 2014, the company expects adjusted earnings per share in the range of $2.76–$2.83. The Zacks Consensus Estimate for full-year 2014 is $2.78.

RevPAR growth is expected to be 5%–7% at worldwide same-store company-operated hotels. RevPAR growth at same-store owned hotels is likely to be 4%–6% in constant dollars. Worldwide same-store owned hotels’ margin is expected to go up 75 bps–125 bps.

Our Take

It seems that Starwood is poised to benefit from the economic revival and a steady rise in the demand for hotels. Additionally, the hotelier’s strong developmental pipeline, significant international exposure, asset disposition strategy and shift to a fee-based business model are expected to bode well for future growth. However, we remain concerned about the company’s declining residential business, which could continue to hurt the top line in the near term.

Wyndham Worldwide Corp. (WYN - Free Report) also posted strong first-quarter 2014 results with earnings and revenue beating the Zacks Consensus Estimate. Another major lodging company Marriott International, Inc. (MAR - Free Report) is slated to report first quarter 2014 earnings on Apr 29, 2014.

Starwood presently has a Zacks Rank #4 (Sell). A company that is currently performing well in the hotel industry is Choice Hotels International Inc. (CHH - Free Report) , carrying a Zacks Rank #2 (Buy).

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