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Choice Hotels Firms Up Its Pipeline as Room Revenue Dips

International lodging franchisor Choice Hotels International (NYSE: CHH) delivered inconclusive first-quarter results to investors on May 9. The hospitality giant continued to add new rooms to inventory and its development pipeline at a brisk clip, and first-quarter results exceeded management's adjusted earnings-per-share projections. Yet average room revenue decreased slightly against the first quarter of 2018, and management dialed back its expectations for this important metric for the remainder of the year. As I sift through merits and demerits of the last three months, note that all comparative numbers below refer to the prior-year quarter.

Choice Hotels: The raw numbers

Metric Q1 2019 Q1 2018 Growth (YOY)
Revenue $218.3 million $209.4 million 4.3%
Net income $30.1 million $25.1 million 39.7%
Diluted EPS $0.54 $0.44 25%

Data source: Choice Hotels International. EPS = earnings per share. YOY = year over year.

What happened with Choice Hotels this quarter?

  • Domestic RevPAR (revenue per available room) slipped by 0.7%. Management attributed the decline to its ongoing systemwide upgrade of the Comfort brand, as more rooms ended up under renovation during the quarter than were previously forecast. Management also blamed the government shutdown and tougher comparisons to the first quarter of 2018, in which hurricane recovery activity boosted hotel stays.
  • The company expanded its domestic room base by 1.8% and its international room base by 5.2%.
  • Choice Hotels' domestic development pipeline increased 7% to 976 hotels, while its international pipeline roughly tripled to 128 hotels.

Image source: Getty Images.

  • During the quarter, the company booked an impairment charge of $10.4 million related to a subsidiary unit that provides software-as-a -ervice (SaaS) technology to European vacation rental management companies.
  • According to management, the $2.5 billion upgrade of the Comfort brand is bearing fruit: Comfort hotels that have completed renovations are seeing an uptick of 1% in RevPAR and a doubling in business travel revenue within the first quarter following the property refresh.
  • Choice Hotels continued its expansion into the midscale segment by awarding six franchise agreements for its new Clarion Pointe brand, bringing the number of hotels under this flag to 27 units.
  • The total number of rooms in Choice Hotels' upscale segment (under the Cambria and Ascend brands) expanded by 12%.
  • Excluding the $10.4 million impairment charge, operating margin improved by 330 basis points as selling, general, and administrative (SG&A) expenses and marketing and reservation system expenses held steady even while revenue rose.
  • The organization repurchased $32 million worth of its common stock during the quarter.

Management's perspective

In the company's earnings press release, CEO Patrick Pacious underscored Choice Hotels' push to extend beyond the economy lodging segment:

Choice Hotel's proven business model continues to deliver strong financial performance to our franchisees and shareholders. Our brands continue to appeal to a wide range of guests for both leisure and business travel. In addition, our strategic investments in our midscale, upscale and extended-stay brands position us to continue to strengthen our appeal to leisure travelers and accelerate our growth in the business travel segment.

Looking forward

Choice Hotels revised its full-year GAAP earnings to a range of $186 million to $196 million, against a previous expectation of $193 million to $201 million. This revision partially reflects the company's writedown of its SaaS technology unit in the first quarter. Diluted EPS is projected to fall between $3.31 and $3.49, versus a band of $3.44 to $3.58 issued last quarter.

Full-year adjusted EBITDA is still projected to hit approximately $359 million at the midpoint of the provided guidance range. Management now expects adjusted EPS of $4.12 versus previous guidance of $4.07 (both numbers are from the midpoint of their respective ranges). Given static adjusted earnings, the difference in EPS targets can be attributed solely to share-repurchase activity.

For the second quarter, Choice Hotels expects adjusted EPS of between $1.11 and $1.15. Significantly, domestic RevPAR is slated to range from a decrease of 1% to an increase of 1%. Following the softer RevPAR expansion in the first quarter, Choice Hotels has trimmed its 2019 domestic RevPAR forecast to 0% to 1% growth, from previous guidance of 0.5% to 2% growth.

Investors appear to be focused on this near-term headwind despite the benefits of room growth and brand diversification over a wider time horizon: To date, shares are down roughly 2% since the May 9 earnings release.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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