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HOT's 2Q09 results analysis

Starwood Hotels reported a tough 2Q09 with revenues (excl other revenues from franchised and managed properties which are reimbursements of costs incurred on behalf of managed hotel properties and franchisees) declining 31.5% (y-o-y) to $707 mn in 2Q09 from $1,032 mn in 2Q08. Steep declines in ADR and occupancy are pushing down the REVPAR at owned hotels, resulting in 36.5% (y-o-y) decline in revenues from owned, leased and consolidated joint venture hotels to $394 mn in 2Q09 from $620 mn in 2Q08. REVPAR for comparable owned hotels worldwide declined 32.6% (y-o-y) with hotels in North America witnessing a decline of 31.4% and international hotels recording 34.8% decline. Starwood's management and franchise fees declined 14.2% (y-o-y) to $187 mn in 2Q09 from $218 mn in 2Q08 as the revenues at the managed and franchised hotels plunge due to double digit decline in REVPAR at the managed and franchised hotels. REVPAR for the comparable systemwide hotels, which include worldwide owned, managed and franchised hotels, declined 25.9% with sharp declines recorded across all geographies. Further, the revenues from vacation ownership declined 35.1 %( y-o-y) to $126 mn in 2Q09 from $194 mn in 2Q08.

Sharp decline in revenues are outpacing decline in costs resulting in squeeze in margins. Gross margin of the owned hotels declined to 16.5% in 2Q09 from 26.8% in 2Q08. In spite of substantial cut in SG&A expenses, which dropped 30.4% (y-o-y), the Company's operating margin contracted significantly to 8.3% in 2Q09 from 12.7% in 2Q08. Consequently, the decline in operating income was much steeper and the operating income declined 49.7% (y-o-y) to $100 mn in 2Q09 from $199 mn in 2Q08.

 However, the bottom line was inflated due to inclusion of special items which included $120 mn benefit for a tax incentive program in Italy, partially offset by net impairment charges (after tax) of $26 mn and restructuring charges (after tax) of $4 mn. Excluding these special items, the net profit declined 58.1% (y-o-y) to $44 mn in 2Q09 from $105 mn in 2Q08. EPS (excluding special items) was $0.24 in 2Q09, against $0.56 in 2Q09.

Comparison of the actual with our estimates

Starwood performed much worse than we expected with the actual revenues (excl other revenues from franchised and managed properties) in 2Q09 about 9.6% lower than our estimates. Further, owing to compression in margins, the operating income was 25.1% lower at $100 mn against our estimates of $134 mn. Excluding the special items totaling $90 mn, the net income was 21% lower at $44 mn against our estimates of $56 mn. EPS (excl special items) was $0.24 against our estimates of $0.31.

For 3Q09, the company is expecting much lower EBITDA and EPS than our estimates. The Company expects EBITDA within the range of $165-$175 mn and EPS within the range of $0.06-$0.10 for 3Q09 against our estimate of $199 mn of EBITDA and EPS of $0.27.

However, the Company's full year 2009 guidance for EBITDA of $750 mn is in line with our estimates of $744 mn.

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