RCL: Royal Caribbean

From William Trent, CFA of Stock Market Beat

Royal Caribbean Cruises (RCL) reported earnings:

Royal Caribbean Cruises Ltd. (NYSE: RCL; Oslo) today announced net income for the first quarter 2007 of $8.8 million, or $0.04 per share compared to earlier guidance of $0.03 to $0.08 per share. The company also reaffirmed its full year 2007 earnings per share guidance of $3.05 to $3.20.

Analysts were expecting the company to earn $0.06 on $1.18 billion in revenue. However, the company attributes the shortfall to the volatile sales pattern at a recently acquired subsidiary:

As the company had anticipated, the acquisition of Pullmantur and other timing changes caused significant changes in the seasonality of company earnings. These changes make comparisons between individual quarters less meaningful (especially for the first year of the acquisition) but have little impact on the profitability of the year as a whole. In particular, Pullmantur’s business is highly seasonal with very strong summer months but very weak winter months. In addition, the company is including Pullmantur results on a two month lag. Together, these changes significantly diminished the company’s reported earnings in the first quarter, and are expected to do so again in the second quarter, but are expected to commensurately improve earnings in the third and fourth quarters.

In other words: we promise we’ll make it up to you. Normally skeptical investors appear to be taking the promise in stride, as the stock is little changed on the day. This is somewhat surprising, as the company disclosed weakness going beyond the acquired company and straight to its core:

The demand environment, especially in the Caribbean, has been weaker than expected. At the same time, cost control has been good, offsetting the revenue decline.

First quarter 2007 Net Yields on a comparable basis (i.e. excluding Pullmantur) decreased 4.2%, which was below guidance of down 2% to 3%. Commenting on the revenue environment, Richard D. Fain, chairman and chief executive officer said, “After a strong Fall performance, close-in bookings in the first quarter required more aggressive price promotions than we experienced throughout the last year.”

We owned shares of RCL for several years but sold them back in August when we got especially worried about consumer spending.  So far that trade has been making us look silly, but comments like those above make us feel less embarrassed by it. To be sure, indicators such as customer deposits (which are typically nonrefundable) are strong. But the consumer spending outlook remains questionable, and even if customers don’t walk away from existing deposits there is still the potential for further slowdown.

http://stockmarketbeat.com/blog1/