Choice Hotels (NYSE:CHH) Misses Q1 Sales Targets
Hotel franchisor Choice Hotels (NYSE:CHH) fell short of analysts' expectations in Q1 CY2024, with revenue flat year on year at $331.9 million. It made a non-GAAP profit of $1.28 per share, improving from its profit of $1.12 per share in the same quarter last year.
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Choice Hotels (CHH) Q1 CY2024 Highlights:
- Revenue: $331.9 million vs analyst estimates of $343 million (3.2% miss)
- EPS (non-GAAP): $1.28 vs analyst estimates of $1.14 (12.7% beat)
- Gross Margin (GAAP): 94.2%, in line with the same quarter last year
- Free Cash Flow was -$31.04 million, down from $14.49 million in the previous quarter
- RevPAR: $45.24, down 5.9% year on year
- Market Capitalization: $6.07 billion
"Building on our record 2023 financial results, we drove first quarter performance to new levels, with adjusted EBITDA and EPS increasing by 17% and 14%, year-over-year, respectively," said Patrick Pacious, President and Chief Executive Officer.
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE:CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
Hotels, Resorts and Cruise Lines
Hotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.
Sales Growth
A company’s long-term performance can give signals about its business quality. Any business can put up a good quarter or two, but many enduring ones muster years of growth. Choice Hotels's annualized revenue growth rate of 8% over the last five years was weak for a consumer discretionary business.
Within consumer discretionary, a long-term historical view may miss a company riding a successful new property or emerging trend. That's why we also follow short-term performance. Choice Hotels's annualized revenue growth of 16.1% over the last two years is above its five-year trend, suggesting some bright spots.
We can better understand the company's revenue dynamics by analyzing its revenue per available room, which clocked in at $45.24 this quarter and is a key metric accounting for average daily rates and occupancy levels. Over the last two years, Choice Hotels's revenue per room averaged 7.3% year-on-year growth. Because this number is lower than its revenue growth, we can see its sales from other areas like restaurants, bars, and amenities outperformed its room bookings.
This quarter, Choice Hotels missed Wall Street's estimates and reported a rather uninspiring 0.3% year-on-year revenue decline, generating $331.9 million of revenue. Looking ahead, Wall Street expects sales to grow 4.6% over the next 12 months, an acceleration from this quarter.
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Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Over the last two years, Choice Hotels has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 12.9%, slightly better than the broader consumer discretionary sector.
Choice Hotels burned through $31.04 million of cash in Q1, equivalent to a negative 9.3% margin, reducing its cash burn by 312% year on year.
Key Takeaways from Choice Hotels's Q1 Results
It was good to see Choice Hotels beat analysts' EPS expectations this quarter. On the other hand, its revenue fell short of Wall Street's estimates as its domestic revenue per available room (RevPAR) decreased 5.9% year on year. Looking ahead, it lowered its full-year adjusted net income guidance, though its EPS outlook was unchanged because the decline in net income is projected to be offset by share repurchases. Lastly, the company announced it will re-open its Park Inn by Radisson brand in Q3 of this year. Overall, the results could have been better. The stock is flat after reporting and currently trades at $122.14 per share.
Choice Hotels may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
