Five Takeaways From Choice Hotels’ Second Quarter Earnings Call

Choice Hotels hosted its second quarter 2017 earnings call for investors Wednesday and throughout the conversation, one thing was clear: The company was intent on assuring investors that they have a winning strategy for the business.

For the quarter ending June 30, the company reported a net income of $45 million, or 79 cents per diluted share, a 16 percent increase compared to $38.8 million or 68 cents per diluted share in the second quarter of 2016. Adjusted earnings before income taxes, depreciation, and amortization were $81.1 million, up 15 percent from last year’s $70.4 million in the second quarter.

Domestically, system-wide revenue per available room (RevPAR) was up 2 percent in the quarter compared to the same period last year. Occupancy was up 30 basis points, and average daily rates were up 1.5 percent compared to the second quarter in 2016.

The CEO Transition Will Be as Seamless as Can Be

Having just announced the company’s CEO succession plans last month, Choice executives wanted to use this call as an opportunity to demonstrate incoming CEO Pat Pacious’ skills and expertise as a leader, even though Pacious has been working alongside current CEO Stephen P. Joyce for the past decade.

Joyce opened the call and within minutes, he handed the presentation over to Pacious — a clear sign that the succession process will be a smooth and seamless one by January 1.

Direct Booking Pushes Are Working

Pacious noted that Choice Hotels’ continued focus on boosting its Choice Privileges loyalty program, and its push for more direct bookings, which officially launched last year, is working.

He said the company’s loyalty program now has more than 32 million members, and added 2.5 million this year alone. The Choice Privileges member rates for booking directly also deliver the “highest profitability to franchisees,” and that revenue from Choice’s proprietary channels made up 51.8 percent of all revenue in the second quarter, setting a new company record.

Choice Will Continue to Focus on Midscale and Upscale

The company isn’t losing focus on its sweet spot: midscale and upper midscale brands such as Comfort, Quality, and Sleep Inn. But, at the same time, it’s also looking to build up its portfolio of upscale brands like Cambria and the soft brand collection, the Ascend Collection.

Executives noted this was the final year for the rejuvenation of the Comfort brand, and that its development pipeline for Cambria was strong. The company also made a $64 million investment in growing the Cambria Hotels brand specifically during the first half of 2017. Pacious said he hopes the company can eventually have at least 75 to 100 Cambria properties within its portfolio.

Choice’s Ascend Collection, Pacious said, had more independent hotels than the “top three soft-brand collections combined” from its peers.

Pacious also said the company was focused on growing internationally.

Never Say Never About More M&A

While Pacious didn’t give a definitive answer regarding Choice’s plans with regard to future mergers and acquisitions plans, it should be noted that in the third quarter of 2016, CEO Joyce said it might be likely that Choice would think of acquiring an upper upscale brand going forward.

Pacious said: “We’ll continue to do those three things we mentioned: Expand the great business we have in midscale. Capitalize on the momentum we have in upscale. Look at international growth as a real opportunity for us. There’s not a significant shift in strategy. It’s the same strategy that Steve [Joyce] has led for the last 10 years and I’ve been working with him on. We like the growth prospects associated with that. [Any mergers or acquisitions we make have] to be accretive for shareholders and have to make sense for individual hotel owners and how we can help the improve their business.”

He also noted that, looking at Choice’s current brand portfolio, half were organically developed, and half were purchased.

Hotels Using Choice’s Revenue Management Tools, Services Are Seeing Bang for Their Buck

The company also said that, for its franchisees who are opting into its revenue management services and tools, the returns on that investment are well worth it.

For every dollar spent by a domestic hotel on Choice’s revenue management service, in which a Choice associate works one-on-one with a hotel, Pacious said those hotels tend to see a $7 or $8 return on investment. Pacious said that the 25 percent of Comfort-branded hotels using this service are seeing an incremental 6 percent increase in incremental RevPAR versus hotels that don’t use the service, and that the services will eventually be expanded to other hotels.

The company’s Smart Rate Tool, which is being used by more than 4,400 hotels, is delivering 2 to 4 percent incremental revenue lifts for the hotels that are using it, and is a mandated program for most of Choice’s hotels.