Franchise Revenue Paces Choice Hotels' Third Quarter


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Global hotel operator Choice Hotels International (NYSE: CHH) reported third-quarter 2018 results on Thursday and supplemented accelerating sales with an earnings-outlook revision. Below, we’ll uncover the relevant details of the last three months after reviewing a capsule summary of headline metrics:

Choice Hotels: The raw numbers

Metric Q3 2018 Q3 2017 Growth (YOY)
Revenue $291.5 million $269.9 million 8%
Net income $79.9 million $57.2 million 39.7%
Diluted EPS $1.41 $1.01 39.6%

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

What happened with Choice Hotels this quarter?

  • Hotel franchising revenue increased by 9% year over year, to $135.4 million.
  • Marketing and reservation system revenue of $152.4 million improved by 7% against the third quarter of 2017.
  • Domestic systemwide RevPAR (revenue per available room) dipped by 1.4%, to $59.52, versus the comparable period. Management attributed the decline to hotel renovations in the Comfort brand, weather-related factors, and the timing of holidays.

A business man enters a hotel lobby to check in.

Image source: Getty Images.

  • Average daily rates (ADR) dropped 0.9% versus the prior-year quarter, and occupancy declined by 1.6 percentage points (both measures are used in determining RevPAR).
  • Operating margin rose 3.7 percentage points year over year, to 38.1%, primarily due to the leverage provided by a healthy top-line increase.
  • The company introduced “Clarion Pointe,” which management describes as a “midscale select-service brand extension” of its popular Clarion brand hotel chain.
  • The company reported that over 1,000 Comfort brand hotels are either undergoing lobby and room renovations or have completed the process, which is ahead of the scheduled pace.
  • Choice Hotels’ opening of 76 new domestic hotels during the third quarter exceeded the prior year tally by 27%.
  • Similarly, the organization’s domestic development and construction pipeline at the end of the quarter stood at 968 hotels, an increase of 29% over the prior-year’s quarter-end number.
  • Choice Hotels refinanced its senior unsecured credit facility with a new five-year facility, raising the total amount available for borrowing from $450 million to $600 million.
  • The company purchased $39 million of its own shares during the last three months, bringing its year-to-date total through Sept. 30 to $109 million.

Management’s perspective

Choice Hotel’s strategy of largely staying out of the owner/operator model and instead franchising brands across several tiers — from economy flags such as Econo Lodge to the upscale Cambria chain — appears to be paying dividends in the form of double-digit year-to-date revenue growth and enviable operating margin. CEO Patrick Pacious summarized management’s perspective in the company’s earnings release:

Our year-to-date development success and strong financial metrics prove our strategy is working, positioning us for further growth … As an asset-light franchisor, we excel at helping our owners run profitable hotels by providing them with best-in-class tools, including a proven and expanding brand portfolio, award-winning revenue-enhancing resources, and industry-leading technology systems. We are extremely pleased with the initial reception received by Clarion Pointe, and are optimistic that we’ll end the year on a high note with another successful quarter, taking us into 2019 with strong momentum.”

Looking forward

As it did last quarter, Choice Hotels raised its full-year expectation for adjusted EBITDA . Management tweaked the previous range of $333 million to $339 million to a new band of $335 million to $340 million. The company also bumped up its adjusted diluted 2018 EPS target of $3.71-$3.77 to an anticipated result of between $3.79 and $3.86.

For those like myself who prefer GAAP numbers, Choice looks to close out the year with between $210 million and $214 million in net income, which will translate into diluted EPS of $3.68 to $3.75.

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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 .

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

Referenced Symbols: CHH


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