Royal Caribbean Ups View Despite Earnings Miss - Analyst Blog

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Royal Caribbean Cruises Ltd. ( RCL ) posted dismal first quarter 2014 results with earnings and revenue missing the Zacks Consensus Estimate and also declining year over year. However, the company provided a positive outlook for 2014 owing to strong booking trends and promotional activities. It seems that the solid outlook made up for the weak performance, thereby resulting in a meager decline of 0.38% in share price.

Adjusted earnings of 21 cents per share missed the Zacks Consensus Estimate of 27 cents by 22.2% and went down 40.0% year over year. The significant downside reflects cancellation or shortening of six voyages during the first quarter, which is known to be the strongest for cruise companies. This company's cruises faced disruptions due to a collision that spilled residual fuel oil in the Gulf of Galveston, shutting the Houston Ship Channel. In one other incident, one of the company's cruises had to return early to New Jersey as passengers fell ill onboard.

Earnings were toward the lower end of management's expectation of 20 cents to 30 cents per share. The company had already indicated during its fourth quarter conference call that it would be difficult to compare the results of first quarter 2014 with the year-ago quarter, which saw the highest yields in more than a decade. The negative publicity and its effects on Caribbean sailings were felt only after the first quarter of 2013. Meanwhile, these voyage disruptions acted as an extra headwind.

Adjusted earnings exclude some charges and costs tied to the sale of its Pullmantur cruise line's non-core businesses.

Total revenue in the quarter decreased 1.3% year over year to $1.89 billion and also missed Zacks Consensus Estimate of $1.90 billion by 0.73% owing to a decline in net yields.

Quarter Highlights

On a constant currency basis, net yields decreased 0.3% year over year due to lower passenger ticket revenue as a result of lower boarding. Caribbean yields were down slightly while yields in other itineraries were modestly up.

Passenger ticket revenues were down 3.3% year over year to $1.35 billion but were in-line with management's expectation. Onboard and other revenues increased 4.2% year over year to $539.0 million due to a 3.4% increase in Onboard yields. This reflects onboard revenue management initiatives as well as benefits availed from fleet upgrades.

The company's occupancy rate inched down 40 basis points year over year to 104.5% in the reported quarter. Net cruise costs (NCC), excluding fuel, increased 1.3% on a constant currency basis, which was lower than 1.8% increase in the last quarter and the company's expectation of approximately 2.0% increase.

Total cruise operating expenses increased approximately 1.7% year over year to $1.30 billion mainly due to 1.3% rise in onboard and other expenses, 5.6% increase in other operating costs and 1.2% rise in food expenses.

Booking Environment

Booking volumes during the first quarter increased 16.0%. Over the past 8 weeks, it was up more than 20.0%, much higher than typical post-Wave periods.

Robust Bookings to Drive 2014, Outlook Up

The company raised its earnings guidance for 2014 and expects it in the range of $3.25 to $3.45 per share compared to the previous expectation of $3.20 to $3.40 per share. This comes in the wake of a strong booking environment. The Zacks Consensus Estimate of $3.33 per share lies within management's new guidance.

Despite pressures in Caribbean sailings, the company has a positive outlook for the coming quarters on solid demand for European and Chinese sailings. It expects double digit yield improvements for both these itineraries in 2014.

On a constant-currency basis, the company expects net yields to increase in the range of 2.0% to 3.0% in 2014. Despite inflationary pressure, rising insurance costs and continued investments in product and marketing; net cruise costs, excluding fuel, are expected to be flat to slightly down in 2014.

Second Quarter 2014 Guidance

The company expects earnings per share in the range of 45 cents to 55 cents per share in second quarter 2014, much higher than 23 cents per share reported in the year-ago quarter.

The company expects net yields on a constant currency basis to increase in the range of 1.5% to 2.5% in the second quarter of 2014. However, on a constant-currency basis, the company expects net yields to decline in the range of 2.0% to 3.0% in 2014.

Our Take

The cruise industry has just started recovering from negative publicity after a series of mishaps, including virus outbreaks and engine fires. However, this quarter again turned out to be difficult for this cruise operator after the cancellation and shortening of several voyages. Also, we cannot ignore the fact that year-over-year comparisons were tough.

On the other hand, Miami-based cruise company Carnival Corp. ( CCL ) reported better-than-expected first-quarter 2014 results recently, beating the estimate on both counts.

Going forward, the company is expected to deliver strong results driven by strong booking trends experienced by the company. Also, efforts to tackle the volatility in fuel prices and profitability initiatives like divestment of Pullmantur non-core businesses should bode well for this Zacks Rank #2 (Buy) company, going forward.

Some other stocks worth considering in the leisure and recreational services sector include Live Nation Entertainment, Inc. ( LYV ) and SeaWorld Entertainment, Inc. ( SEAS ). Both these stocks carry a Zacks Rank #2.



CARNIVAL CORP (CCL): Free Stock Analysis Report

LIVE NATION ENT (LYV): Free Stock Analysis Report

ROYAL CARIBBEAN (RCL): Free Stock Analysis Report

SEAWORLD ENTERT (SEAS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: CCL , LYV , RCL , SEAS

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