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Royal Caribbean Underperforms in 2Q

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Royal Caribbean Cruises Ltd. (RCL - Free Report) has reported second-quarter 2012 adjusted earnings of 3 cents per share, which fell short of the Zacks Consensus Estimate of 4 cents. On a GAAP basis, the company reported a loss of 2 cents per share in contrast to earnings of 43 cents in the year-earlier quarter.

Quarter Highlights

Total revenue in the quarter increased 3.0% year over year to $1,821.0 million which lagged the Zacks Consensus Estimate of $1,838.0 million.
Net yield upped 4.5% year over year on a constant currency basis (1.8% on a reported basis). The rise in yield was driven by a 3.0% improvement in net ticket revenue and a 3.8% increase in on-board revenue. The occupancy rate inched up to 104.1% from 103.7% in the prior-year quarter.

Total cruise operating expenses rose 9.3% year over year to $1,296.0 million. NCC excluding fuel increased 8.3% on constant-currency basis (5.8% on reported basis).


At quarter end, the company had total assets worth $19.7 billion versus $19.8 billion at the end of fourth quarter 2011.  At the end of the quarter, total long-term debt was $7.1 billion versus $7.9 billion in the year-ago quarter.


For the third quarter, Royal Caribbean expects the bottom line to range between $1.40 and $1.50. Net revenue yield is expected to decrease 1–2% at constant currency. Excluding fuel expenses, net cruise costs are estimated to increase 3% at constant currency in the upcoming quarter. Fuel costs are expected to be $213 million.

For full-year 2012, management slashed its earnings per share guidance to the range of $1.70—$1.80 from the range of $1.80—$2.10.  Net revenue yield is expected to increase 2% to 3% at constant currency (previous range was 2–5%). Net cruise cost excluding fuel is projected to increase 4% at constant currency (earlier 5%). Fuel expenses are expected to be $899 million per metric ton.

Our Take

We are a bit doubtful about the sector’s performance over the near term as the joint effect of Royal Caribbean’s close competitor Carnival Corp.’s (CCL - Free Report) ship grounding in January and economic turmoil in Europe continue to nag. While management commented that passengers, especially who are not first-time cruisers, have almost recovered from the grounding tragedy in Italy in January this year, the slump in bookings in the peak booking season along with a faltering market sentiment will actually mar Royal’s performance this year.  The upheaval is reflected by the company’s reduced earnings as well as yield guidance.  

However, as these threats are short term in nature, we remain positive on the stock of the world’s second-largest cruise operator over the long term based on a host of factors including relatively stabilized booking patterns, cost containment efforts, fuel conservation initiatives and the slowdown in industry capacity at the current level.

Royal Caribbean currently retains the Zacks #3 Rank, which translates into a short-term Hold rating.

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