Hilton Worldwide Holdings Inc.’s (HLT - Free Report) relentless expansion strategies, coupled with an asset-light business model and a strong loyalty program put the company on growth trajectory amid a competitive industry. In first-quarter 2018, Hilton reported better-than-expected earnings for the sixth straight quarter. The bottom line increased 44.7% on a year-over-year basis.
Improving economic indicators, along with elevated demand for leisure and business travel are also helping Hilton to gain traction. Driven by a robust brand image, Hilton’s shares have gained 34.8% in the past year, outperforming the industry’s rally of 24.8%.
Unit Expansion & Loyalty Program Continue to Drive Top Line
In a bid to maintain its position as the fastest-growing global hospitality company, Hilton is continuing to drive unit growth. In 2017, Hilton witnessed net unit growth of 18,400 rooms. Also, in the first quarter of 2018, the company achieved net unit growth of 7,100 rooms and witnessed a 7% increase from the prior-year quarter. For 2018, the company projects an approximate 6.5% net unit growth. It also continues to have more rooms under construction in Europe, the Middle East and Asia Pacific than any other hotel chain. The company expects greater international expansion in 2018.
Expanding its footprint, Hilton is continuously trying to meet the growing demand for hotels and drive its top line. Revenues in the first quarter increased 9.4% year over year driven by the rise in rate and occupancy, as well as robust demand at the company’s international hotels.
Meanwhile, Hilton has created one of the largest loyalty programs, Hilton Honors. With about 74 million members, this network has created an extremely valuable asset for the company. In 2017, the company added in excess of 11 million members to the program. Also, in the first quarter of 2018, more than 3 million members were added to Hilton Honors. The company continues to make multiple enhancements to its loyalty program in order to make it the most customer-centric program, driving incremental value for guests and the overall system, thereby driving revenues.
Capital-Light Business Model to Boost Shareholders’ Returns
Hilton has transformed into a capital-light operating business, backed by the spin-off of a portfolio of hotels and resorts, as well as its timeshare business. This asset-light model is expected to allow shareholders to receive high returns on invested capital. In fact, in the first quarter, the company repurchased 1.3 million shares of its common stock for roughly $110 million, at an average price per share of $84.01. The company aims to strengthen its shareholders’ value through regular dividend payment and buybacks, going forward. This reinstates our faith in the company’s strong fundamentals and cash-flow position.
Intense Competition Remains a Headwind
The hotel industry is highly competitive as major hospitality chains, along with their well-established and recognized brands are continuously expanding their global presence. Hilton is continuously facing intense competition from large hotel chains like Marriott (MAR - Free Report) and Hyatt (H - Free Report) , as well as smaller independent local hospitality providers.
Increasingly, the company also faces competition from new channels of distribution in the travel industry. Additional sources of competition include large companies that offer online travel services as part of their business model such as Alibaba (BABA - Free Report) , search engines such as Google, and peer-to-peer inventory sources such as Airbnb and HomeAway, allowing travelers to book stays on websites that facilitate the short-term rental homes and apartments from owners, thereby providing an alternative to hotel rooms.
Also, compared with other big hotel chains, Hilton is seen to have a lower mix of luxury and upper upscale rooms. An increasing supply of such upscale hotels may not have a rewarding impact on Hilton. Unless this Zacks Rank #3 (Hold) company develops its luxury portfolio alongside other rooms, it has a good chance of losing out on the emerging demand. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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