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Hilton CEO Chris Nassetta has been pretty adamant over the years that homesharing is not a business his 100-year-old hotel company wants to pursue.
But would news that a major competitor like Marriott has decided to take the plunge full steam ahead into homesharing change his view? Not a chance, Nassetta said on an earnings call on Wednesday.
When asked if Hilton would launch a homesharing business like Marriott did earlier in the week, Nassetta echoed his remarks from previous earnings calls, saying, “I think the short answer is at the moment, that’s not something that we’re pursuing. The longer answer is, which is consistent with my prior commentary, is we fundamentally think that homesharing is a different business.”
He elaborated, “What we think we’re in the business of is providing high-quality, consistent, branded experiences. That means taking products at all these various price points that have exactly the functionality that customers want, the amenities they want. We wrap it in incredible service. We also connect it all by loyalty. And as a result, we get a big premium because of the consistent high-quality nature of all these price points.
“Our belief,” he continued, “is that homesharing is just something different. It’s not that it’s a bad business. We just think it’s a different staycation, a higher beta experience, and not the premium value proposition.”
Nassetta had reason to feel confident about Hilton’s existing business model after a relatively strong first quarter for 2019.
Although net income for the quarter was down 2 percent to $159 million compared to the same period last year, the company had diluted earnings per share of 54 cents in the first quarter, demonstrating an increase of 6 percent. Global revenue per available room (RevPAR) for the first quarter was almost at the midpoint of the company’s expectations, up 1.8 percent from the first quarter of 2018.
Shares of Hilton stock were trading up 7 percent after the company hosted a conference call to discuss the quarterly earnings.
During the call, Hilton Chief Financial Officer Kevin Jacobs emphasized that Hilton’s business model, especially its strong fee business from hotel owners and its net unit growth, demonstrate the “resiliency of our model” that should be able to weather any future economic challenges.
Jacobs did, however, add, that should a downturn occur, the company anticipates “flat to slightly positive growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and positive growth in free cash flow in an environment where RevPAR were to decline 5 percent to 6 percent.”
Nassetta reaffirmed the company’s overall commitment to building a “network effect” and used the term repeatedly to describe the company’s core strategy.
“Overall, we’re very pleased with the first-quarter results and feel good about our momentum for the balance of the year,” Nassetta said in his prepared remarks. “Our story is simple. Our resilient business model, growing market share, capital-light development strategy should lead to significant free cash flow generation and strong shareholder returns.”
Analysts agreed with Nassetta’s view, for the most part.
David Katz, equity analyst with Jeffries, wrote in an investors’ note: “Hilton’s healthy beat and raise 1Q19 should translate to a positive reaction in shares and should also mitigate concerns about the duration of the current cycle. We expect the Street to focus on the enduring positives of the operating model, which is modest RevPAR growth, mid-single-digit unit growth, consistent earnings growth, and healthy capital returns. We continue to view the clearly compelling merits in view of the valuation and latter stage of the cycle.”
“Positively, earnings exceeded expectations and the high end of guidance once again, but RevPAR growth of 1.8 percent was below the midpoint of the company’s 1Q19 guidance range, which likely reflects weaker-than-expected performance (but largely known) across the board in March,” Michael Bellisario, a senior research analyst with Baird wrote.
While referring to that “network effect” during the conference call, Nassetta said it was driven primarily by the company’s investments in loyalty, technology, and marketing.
What’s Included in the Three Pillars of Hilton’s Strategy — And What’s Not
Those three areas of investment that Nassetta referred to are core to the company’s strategy.
When it comes to loyalty, Nassetta said there are now close to 90 million Hilton Honors members today and that the company eventually hopes occupancy from loyalty members will “be the vast majority of our occupancy” from approximately more than 60 percent today to 70 to 80 percent “over the next five years.”
As for technology, he said Hilton’s investments in its mobile app, the Connected Room concept, Digital Key, and the ability to choose your own room represent the depth to which the company is focusing on technology.
And when it comes to marketing, Hilton isn’t just spending more on it to drive more market share; it’s doing it to be more profitable and drive more direct business, whether it’s through campaigns like “Expect Better. Expect Hilton” with Anna Kendrick, which emphasizes the benefits of booking direct as a Hilton Honors member.