RoyalCaribbean Cruises reported stronger-than-anticipated third-quarter results last week and raised its adjusted earnings guidance to approximately $4.80 per share, mostly driven by strong momentum in theCaribbean. The company also announced a $500 million share buyback program, as well as a one-time,non-cash writedown of $399.3 million associated with its Pullmantur brand, which has suffered because of weakness in Latin America.
Aside from the one-time charge, the company had a very strong quarter, reporting adjusted net income of $628.1 million, or$2.84per share, compared to $492.9 million, or$2.20per share, in the third quarter of 2014.
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"We forecast over the course of a year rather than quarter by quarter," said CFO Jason Liberty in a call with The Motley Fool. "Really what caused it [the company's strong results] this time was better-than-expected pricing for the Caribbean and Europe based on historical patterns."
The company also cited the growth of its Asia-Pacific region, includingQuantum of the Seassailing inChina, as well as Anthem of the Seas joining the fleet, adding to capacity, and driving on-board revenue.
Liberty also said that the margin of expectations for delivering a quarter perceived as good versus a bad one can be quite small. "It might be $20 million off of a couple billion dollars in revenue," he explained.
Quantum of the Seas offerssimulated skydiving and an observation capsule providing water views from 300 feet. Source: RoyalCaribbean
Why a writedown?The company has been well aware of the weakness in the markets served by itsPullmantur brand, and actually took an impairment on it back in 2012, as well. "We've been seeing red flags on Pullmantur," said Liberty. "We've tried numerous actions. We've tried to right it."
The CFO explained that the market simply could not support the brand at a level that justified the value the company had been placing on it, which led to the writedown. "We made the decision that we needed to rightsize the brand rather than growing the brand."
Why buy back shares now?Liberty said the company believes its shares are undervalued because of the expected impact of its Double-Double program."We see this as an opportunity to buy," he said. "If you believe in the Double-Double and where this company is going then these are low prices."
Double-Double is an initiative led by CEO Richard Fain todoublethe company's 2014 earnings per share by 2017, and increase return on invested capital todoubledigits. It was launched in July 2015.
The industry is strong nowRoyal Caribbean's strong report comes three weeks after rivalCarnival Cruise also reported a good third quarter. Carnival noted in its 10-Q that "fleetwide booking volumes for the first half of 2016 are running nearly 20% higher than the prior year relative to a capacity increase of less than 3%."
Carnival has a positive outlook for the rest of the year, as well, and it plans to keep up the pressure on its competitors by stepping up capital investments.
Both Carnival and Royal Caribbean expect growth to come from China, and CCL announced plans to launch a domestic Chinese cruise brand earlier this month. The joint venture, a partnership betweenCarnival Corporation andChina State Shipbuilding Corporation, will be "aimed at accelerating the development and growth of the overall cruise industry inChina, which is expected to eventually become the largest cruise market in the world."
It's aggressive and it's workingDouble-Double is no small amount of growth to deliver, but Fain believes the company is on track to hit the target. "As we turn the corner into 2016, we have our sights firmly set on our 2017Double-Doubletargets," he said. "Next year represents a positive step on that journey."
This quarter is a positive step in that direction, and it appears that, aside from the company's ongoing issues with itsPullmantur brand, that it's well on the way to delivering. Certainly market conditions, and the ongoing development of China, will play a major role in that, but currently, the company appears on course.
The article Royal Caribbean Cruises Ltd Earnings: Sales Strong as Company Sees Weakness in Latin America, Strength Elsewhere originally appeared on Fool.com.
Daniel Kline has no position in any stocks mentioned. He would like to take a cruise, but his wife does not want to. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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