Marriott on Friday divulged the financial impact of the massive data security breach it disclosed in late November, as well as the cost of major labor strikes that took place at a number of its hotels throughout the U.S.
The data breach, which exposed the personal information of up to 500 million individuals, cost the company, pre-tax, a total of $28 million, but those expenses were offset by insurance recoveries of approximately $25 million and did not impacted adjusted earnings, Marriott Chief Financial Officer Lenny Oberg noted during an earnings call with investors.
The security incident originated with Starwood Hotels & Resorts as far back as 2014. Marriott bought Starwood for $13.3 billion in 2016 and did not discover the breach until 2018. In January, Marriott said fewer than 383 million customer records and 25.55 million passport numbers were stolen in the attack on Starwood’s reservations system.
Marriott CEO Arne Sorenson opened his remarks on the call, noting, “We do not believe there has been any material RevPAR (revenue per available room) impact from this incident.” Sorenson later noted that Marriott “did not see any move by customers in response to” the security incident announcement on November 30, meaning that the breach didn’t necessarily change consumer behavior in terms of staying with Marriott.
Oberg noted in her prepared remarks that the data breach did impact Marriott’s share repurchase activity, however. “Our recent share repurchases have been modestly lower than we expected as we suspended share repurchases for a time while we worked through the data security incident and the loyalty accounting matter.”
The company also disclosed the $7 million in incentive fee loss associated with the debilitating labor strikes that began in September and ended in December. The strikes took place at 21 Marriott properties in six major cities in the U.S. — Boston, Honolulu, and San Francisco included — with the majority of the affected properties being legacy Starwood hotels. The strikes, which were organized by labor union Unite Here, pertained to worker concerns about wages and job security and involved nearly 8,000 employees nationwide.
In terms of RevPAR [revenue per available room], the strikes decreased the company’s RevPAR index by 0.5 points, which Sorenson described as a “pretty significant kind of impact.” Sorenson also said there was some “lingering impact” of the strikes, especially in Hawaii, during January 2019, attributable to bookings related to future stays. He did later say, however, that “our share was up meaningfully across the combined Marriott and Starwood portfolio,” despite the “loss of share in Q4.”
Despite the challenges associated with the data breach and the labor strikes, Sorenson said the company remained upbeat or even “optimistic” about future growth, even following a relatively soft third quarter in 2018
“Obviously, the quarter was noisy with the strikes and with the cyber event, and to continue the growth through that is something we’re pretty grateful for,” he said.
Net system growth, or net unit growth, referring to the total number of hotels being added to Marriott’s system minus those being removed, was one primary growth metric that analysts, including David Katz of Jeffries, were paying close attention to during the earnings call.
Marriott saw slightly more than 100 hotels leave its system in 2018, and grew its overall rooms distribution by nearly 5 percent net. Katz described the numbers as “healthy” in an investors’ note. Heading into 2019, Marriott expects to see net system growth of roughly 5.5 percent.
Another important metric for growth of a hotel company like Marriott — RevPAR — continued to be relatively weak for Marriott in the fourth quarter. Systemwide RevPAR grew 1.3 percent worldwide, but RevPAR in North America was only 0.2 percent, and 4 percent outside of North America. In the previous third quarter of 2018, North American RevPAR was 0.6 percent.
For the full year 2018, RevPAR grew 2.6 percent worldwide, 5.5 percent outside of North America and 1.5 percent in North America.
Sorenson noted that, for January, in North America, RevPAR increased 50 basis points, “despite the government shutdown and some lingering impact from the strikes, particularly in Hawaii.” Heading into 2019, the company expects full year 2019 North America systemwide RevPAR to range from 1 to 3 percent growth, down from a previous estimated range of 2 to 3 percent.
Loyalty & Direct Bookings
In addition to facing challenges related to the data breach and labor strikes, Marriott also saw a number of integration problems related to the merging of its three loyalty programs into one, now called Marriott Bonvoy. The programs merged in August 2018, and frustrated a number of members, including loyal Starwood Preferred Guest (SPG) members.
“And so, when we see redemption behavior, when we see engagement behavior with those customers,” Sorenson said, referring to former SPG members, “they continue to see the strength of this portfolio. And again, for those that are frustrated, we’re going to work through this and make sure we do well by them. But we’re still quite optimistic that this is going to work the way we planned it.”
Marriott Bonvoy members, of which there are now 125 million, making Marriott Bonvoy the largest hotel loyalty program by membership numbers in the world, are driving approximately 50 percent of all room nights, Sorenson said, and last year, the company saw an 8 percent increase in total redemption behavior. The number of room-nights sold to members rose 6 percent in 2018.
The loyalty program remains one of Marriott’s primary strategies for driving more direct business to its hotels, and on Oscars Sunday, the company officially debuted a new global ad campaign touting the new program — especially its name — despite the fact that early “chatter” regarding the new name wasn’t always so positive.
When asked about the new ad push and program name, Sorenson said, “While there will always be some folks who say, ‘Why did you pick that name?,’ I think generally, the response so far has been quite positive, albeit I think a big part of that is just we’re glad we’re finally at one program and we’re really looking forward to using them.”
He also confirmed Marriott “will spend a significant amount of money promoting the program, getting it out there, making sure people know what it is called and know the value that’s associated with it.”
The company didn’t mention anything related to its ongoing contract negotiations with online travel agency Expedia, but Sorenson said, in his prepared remarks, that Marriott’s “direct digital room nights worldwide increased 11 percent, reaching 28 percent of all bookings while OTA [online travel agency] share of bookings remained flat.”
What’s Happening With Sheraton?
The troubled Sheraton chain, for which Marriott announced a new brand repositioning plan and new brand standards in June 2018, remains a key focus for Marriott. Sorenson said approximately 75 percent of all Sheraton rooms and public spaces “are on track to meet standards.” As the company continues to improve the brand’s quality worldwide, Marriott “will ramp up the sort of PR [public relations] relaunch of the brand.”
Continued Integration Issues?
Last year, during two different hotel real estate investment trusts’ second quarter earnings calls, executives from Pebblebrook Hotel Trust and Diamondrock Hospitality Company noted major integration issues associated with transitioning to a new salesforce system.
When asked if Marriott was still dealing with unhappy or frustrated hotel owners, Sorenson said, “I think generally, our community would say that we have steadily been delivering cost synergies to them” especially as it relates to costs related to the new loyalty program.
Sorenson also noted that Marriott’s new attribute-based reservations platform, called ERS, or Enhanced Reservation System, has now been implemented at 800 hotels by the end of 2018 and is expected to be in more than 2,000 hotels by the end of this year.
“ERS,” Sorenson explained, “allows guests to select rooms based on a variety of room characteristics such as bed type, view, high or low floor and so on, with more photographs and hotel descriptions.”
Fourth Quarter Earnings by the Numbers
Marriott shares were trading down following the announcement of the company’s fourth quarter and full year earnings for 2018, which missed estimates for revenues.
Net income for the fourth quarter was $317 million, compared to $114 million in the fourth quarter of 2017. Revenue grew to $5.29 billion from $5.25 billion but analysts generally expected revenue to rise to at least $5.48 billion.