Marriott CEO: Don’t Worry About Our Soft Third Quarter

Like many of its hotel peers, Marriott International saw a relatively softer third quarter in terms of its domestic revenue per available room (RevPAR), but CEO Arne Sorenson isn’t letting the “sobering” third quarter numbers distract him or his team from the bigger tasks at hand — continuing the success of Marriott’s integration of Starwood Hotels & Resorts.

Nor will Marriott view the softer performance as an indication that more challenging times lie ahead for the overall economy.

During a third quarter earnings call with analysts, Sorenson attributed the softer September U.S. RevPAR performance — up only 0.6 percent in North America — to calendar shifts in the Jewish holidays and tough hurricane markets in Houston and Florida, but said that early indications of business in October were “reassuring.”

He added, “We do think September was more an industry story than it was a Marriott story. In fact, when we look at our RevPAR index for the month of September, we held our own, which was very gratifying. And so, stay tuned. Let’s watch it. We’re a bit more cautious simply because September happened but we’re not particularly fearful.”

A Cautious Outlook

In his prepared remarks, Sorenson addressed the possibility of an economic downturn — something that has no doubt loomed over much of the industry given the stock market’s recent tumbles in the last month.

“We do not see an economic downturn on the horizon, but given recent stock market volatility, there is clearly uncertainty about the direction of the U.S. economy,” he said.

But if indeed a recession does occur, Sorenson said that the company’s ability to continue its number of hotels and rooms during the most recent downturn indicates that Marriott might be able to weather any challenges.

“Regardless of the economy’s performance, given long construction cycles, our strong unit growth should continue for some time,” he said. “In fact, looking back at the last downturn, our gross room additions totaled 6 percent in 2008 and 7 percent in 2009. Our unit growth bottomed at 3 percent in 2012 but was back to 5 percent just two years later.”

The bulk of Marriott’s third quarter earnings call, however, concerned the company’s ongoing integration of Starwood Hotels & Resorts, which it purchased for more than $13 billion in 2016. What follows are some highlights related to the merging of both companies.

Integration Pains Are Real

Sorenson addressed the very real integration challenges that Marriott faced when bringing together all three of its loyalty programs back in August, as well as lingering concerns that some Starwood Preferred Guest (SPG) members have had with regard to the merger.

“While we have solved the most significant problems, we are still addressing issues for some customers,” he said. “For those loyalty members who were affected, we appreciate your patience.”

Those members now total 120 million, and Sorenson noted that since the programs were combined, Marriott has seen more loyalty bookings, more redemptions for luxury hotel stays, and more direct bookings.

Making sure that all of those loyalty program members are happy — especially the SPG elites — is something “we will continue to be watching like a hawk,” Sorenson noted.

Direct Bookings Are Up

Marriott Chief Financial Officer Leeny Oberg noted that online travel agency share of room nights has remained flat worldwide, but has actually declined in North America.

Sorenson later noted that approximately 30 percent of Marriott’s business is via direct bookings, and that Marriott’s contract with Expedia expires on November 18.

A New Reservations System Is on the Way

Sorenson also revealed additional details about the new reservations system, ERS, that he previewed at the Skift Global Forum in September. The new system, which is modeled after an attribute-based booking system, has the potential to help Marriott boost direct bookings.

“Our new enhanced reservation system, which we call ERS, has been rolled out to over 500 hotels. ERS allows guests to select rooms based on a greater variety of room characteristics such as bed type, view, high or low floor, corridor room, balcony and so on, with more photography and hotel descriptions allowing greater customer choice and more effective marketing.”

More M&A Could Be on the Way

When asked if Marriott would consider more acquisitions, Sorenson said, “Yes, no, we will continue to look at whatever is available in the M&A side. Obviously, it’s hard to predict whether anything would have been, and we do have our hands full, in many respects. But we believe that as an industry, we love, and we believe we are just getting started.”

Sheraton Is Improving

He also noted that the troubled Sheraton brand, which Marriott inherited in its purchase of Starwood, has seen improvement.

“The brand is about fair share for the first time in memory as far as I know,” Sorenson said. “We’ve moved it a few full points since the deal was done. Guest satisfaction figures have moved globally, we think, by about three points, maybe three to four points. And that is, as far as guest data is concerned, a massive shift positive.”

He later added, “We’re not done with that.”

Labor Issues Are Being Resolved

In his prepared remarks, Sorenson also addressed the strikes taking place at 21 of its hotels in six different cities in the U.S., which involved more than 7,700 employees, saying “we are making progress.”

The strikes, which were organized by labor union Unite Here, began in late September. Striking members are asking for better pay, increased security measures, and a voice in determining the degree of automation that enters into the hotel industry.

“We have already reached tentative agreement on national issues, and we have reached a number of local settlements. Just this weekend, we welcomed our associates back to work after contract settlements in Oakland and Detroit.”

He added, “We don’t expect the strikes to have a material impact on our earnings in the fourth quarter.”

The Third Quarter by the Numbers

Marriott’s earnings were relatively softer for the third quarter, but more or less in line with analyst expectations.

Net income in the quarter was $483 million, which was flat compared to the same period last year. Adjusted net income was $598 million, a 51 percent increase over the previous year, and excluded costs related to Marriott’s integration of Starwood Hotels & Resorts, cost reimbursement revenue, and reimbursed expenses.

Revenue per available room (RevPAR), a popular hotel industry metric, was softer. Globally, Marriott saw a 1.9 percent RevPAR. North American RevPAR was 0.6 percent, while international RevPAR was 5.4 percent.

Looking ahead to the fourth quarter, Marriott has revised its RevPAR outlook down to 1 percent from 1.5 to 2 percent, but its expectations for international RevPAR in the fourth quarter remain unchanged at 5 to 6 percent.