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Starwood reported 2Q09 Adjusted EPS of $0.22 and EBITDA of 200MM, beating the quarter by 5 cents on EPS and EBITDA by 4MM (vs. consensus) and 10MM (5%) on our numbers.  The theme of weak top line saved by deep cost cuts continues.


Of course, next quarter’s guidance cut was deep:

  • EBITDA guidance of $165MM to $175MM was 11% below our number and 20% below the street
  • EPS guidance of $0.06 to $0.10 - even if we take the top end, it’s still 35% below our number and 57% below street estimates
  • As we wrote about in the preview, FX is less bad so next quarter’s RevPAR guidance is better by 1% on a constant dollar basis but looks 4% better sequentially (only down 20-22% vs this quarter’s guidance of being down 24-26%)

2Q09 Review:

  • RevPAR was disappointing, especially given the weakening of the dollar which should have helped the worldwide (WW) stats
    • RevPAR on owned hotels came in 2.4% below the low end of guidance
    • WW system-wide RevPAR came declined 27.7% vs guidance of down 24-26%
    • Starwood experienced higher attrition in the system than we expected, and only added 200 net rooms to the system this quarter
      • HOT added 2100 less room than we estimated, but still had healthy y-o-y growth of 4.9% in management and franchised rooms (12.2k rooms)
      • Owned, leased and consolidated JV expenses declined 2.5% more than we expected, producing an 11MM benefit to expenses, offsetting the disappointing revenue results
      • Overall operating cash flow came in 8MM stronger than we expected due to better cost controls on the owned/leased/JV and VOI side
      • Fee income of $187MM was $7MM better than our number
        • The beat was solely attributed to higher “other management & franchise fee revenue”
        • The amortization gain was $20MM
        • Bliss and “other” was also a little better
        • Probably higher affinity fees as well
        • VOI sales were 8MM below our estimate, however, expenses were also 8MM lower, hence net came spot in line

 Full year guidance was in line with our numbers, which were below the street:

  • SS Company Operated WW RevPAR -20% (vs -18% prior guidance) and RevPAR on branded SS owned hotels WW down 25% (vs - 21% previously)
  • $750MM of EBITDA vs. our estimate of $746MM and street at $791MM
  • EPS guidance was $0.65 spot in line with our number which was 18% below the street
  • Management and franchise revenues projected to decline 15% vs. previous guidance of -10%
  • VOI and residential down $10MM more than original guidance, however, adjusted for the note sale FCF from timeshare was raised to $150MM from $25MM
  • SG&A projected to come in $10MM lower than prior guidance of $70MM, we were actually modeling SG&A declines of $100MM
  • Guidance on tax rate, D&A, and capex was unchanged

Other tidbits:

  • The extension of the AMEX co-branded card is interesting.  As we wrote about in our Marriott note on 7/21/2009, “LOOKING UNDER THE HOOD OF THE MARRIOTT MARGIN CAR”, affinity fees flow right to the bottom line. We’re curious where Starwood includes these fees.  The $250MM in cash received from American Express seems unusual.  Is this an advance?  If so will there be some negative amortization to offset affinity fees (aka the gain amortization on mgmt contracts that HOT like to recognize as fee income)?
  • What are the “special items”
    • Like Marriott, HOT took an impairment on its retained interest in one of its timeshare securitization deals.  We’d like a little more information.  As we wrote about, these may not be one time.  We also would like to know whether HOT retained any equity interests in past deals.  MAR has historically had the highest quality deals so they did not – but we’d like to confirm this for HOT as well.
    • How will the step up in Italian tax rates effect HOT’s future profit margins, we assume that this “tax incentive program” wasn’t simply a gift from the government.