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Extended Stay America Rides on Strong RevPAR Amid Competition

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Extended Stay America, Inc. (STAY - Free Report) has been focusing on core customers instead of fleeting guests to drive incremental revenue per available room (RevPAR). The company’s growth-instigating initiatives also include prudent cost control and unit growth. However, lack of exposure in international markets amid intense competitive scenario is a significant concern.

Nonetheless, Extended Stay America has a solid earnings surprise history. Notably, the bottom line surpassed the Zacks Consensus Estimate in 10 out of the preceding 12 quarters. In third-quarter 2018, the company’s earnings were 39 cents, beating the consensus mark by a penny. The reported figure also grew 11.4% year over year, backed by a decrease in effective tax rate, lower depreciation, and general and administrative expenses.

Top-Line Initiatives & RevPAR Growth Bode Well

In a bid to drive top-line growth, Extended Stay America is banking on numerous initiatives. The company is refocusing on core customers in lieu of concentrating on fleeting customers. Additionally, its initiatives toward controlling costs and decreasing capital requirement for fresh hotel builds are commendable.

Extended Stay America is banking on increasing unit growth as well. By 2021, the company’s portfolio will have 700 Extended Stay America branded properties, out of which nearly 70% will be owned or operated and 30 percent franchised. In September, it closed the deal to sell 32 hotels for $125 million. This brings the total number of franchised or managed hotels to 59 at the end of the third quarter. Meanwhile, during the third quarter, the company’s total pipeline grew by more than 50%.

Extended Stay America’s efforts to drive its ReVPAR by providing suitable services to value-conscious business travelers are encouraging. In 2017, its RevPAR increased 1.7% from the prior-year quarter on 1.1% growth in Average Daily Rate (ADR) and 40 basis points (bps) expansion in occupancy. The trend continued in first- and second-quarter 2018, with RevPAR witnessing comparable system-wide growth of 3.7% and 1.6%, respectively.

For the third quarter, comparable system-wide RevPAR increased 1.9% on a year-over-year basis. The uptick was the result of a 0.5% improvement in ADR and 110 bps rise in occupancy to 80.1%. Moreover, total company-owned RevPAR improved 2.7% and comparable company-owned RevPAR rose 2% to $57.15. For 2018, Extended Stay America anticipates comparable system-wide RevPAR growth of 1.75-2.25%.

Concerns

The hotel industry is highly competitive as major hospitality chains, with well-established and recognized brands, are consistently expanding their global presence. As a result, Extended Stay America is continuously facing intense competition from both large hotel chains like Marriott (MAR - Free Report) , Hyatt (H - Free Report) and Hilton (HLT - Free Report) , and smaller independent local hospitality providers.

Amid such stiff competition, Extended Stay America’s lack of exposure in international markets might limit its revenue growth potential. Furthermore, low corporate demand is likely to continue hurting the company’s performance.

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