Choice Hotels (NYSE:CHH) Misses Q4 Revenue Estimates
Hotel franchisor Choice Hotels (NYSE:CHH) fell short of analysts' expectations in Q4 FY2023, with revenue flat year on year at $358.4 million. It made a non-GAAP profit of $1.44 per share, improving from its profit of $1.26 per share in the same quarter last year.
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Choice Hotels (CHH) Q4 FY2023 Highlights:
- Revenue: $358.4 million vs analyst estimates of $369.6 million (3% miss)
- EPS (non-GAAP): $1.44 vs analyst estimates of $1.35 (7.1% beat)
- Free Cash Flow of $14.49 million, down 83.1% from the previous quarter
- Gross Margin (GAAP): 95.1%, in line with the same quarter last year
- Market Capitalization: $5.80 billion
"2023 was a year of accelerating growth, in which we exceeded the top end of the company's full-year adjusted EBITDA and adjusted EPS guidance led by our successful strategy of adding hotels that generate higher royalties per unit. We significantly expanded our rewards program, increased our geographic reach, unlocked new value through our platform capabilities, and created step function growth through the rapid completion of the Radisson Americas' integration," 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. Even a bad business can shine for one or two quarters, but a top-tier one may grow for years. Choice Hotels's annualized revenue growth rate of 8.2% 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 20.2% 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 $48.36 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 11.8% 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 1% year-on-year revenue decline, generating $358.4 million of revenue. Looking ahead, Wall Street expects sales to grow 2.4% over the next 12 months, an acceleration from this quarter.
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Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Over the last two years, Choice Hotels has shown solid cash profitability, giving it the flexibility to reinvest or return capital to investors. The company's free cash flow margin has averaged 15.5%, above the broader consumer discretionary sector.
Choice Hotels's free cash flow came in at $14.49 million in Q4, equivalent to a 4% margin and down 81.4% year on year.
Key Takeaways from Choice Hotels's Q4 Results
It was good to see Choice Hotels beat analysts' EPS expectations this quarter. That stood out as a positive in these results and was partly due to the $85 million of annual synergies it generated through the integration of Radisson Hotels Americas. On the other hand, its revenue fell short of Wall Street's estimates and its full-year 2024 EPS guidance fell short. During the quarter, the company also offered to buy Wyndham Hotels & Resorts (NYSE:WH) for $49.50 in cash and 0.324 shares of CHH common stock per Wyndham share. Choice Hotels holds about 1.5 million WH shares and recently nominated a slate of independent directors for the company. Overall, this was a mediocre quarter for Choice Hotels. The stock is flat after reporting and currently trades at $116.5 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.
