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MAR AT A GLANCE

P/E ► -21.2   EV/EBITDA ► -44.2   ROA ► -3.8% LOW ROE ► -38.6% AVG Debt to Equity ► 7.39 HIGH Current Ratio ► 1.19 AVG Interest Coverage Ratio ► -3.26 LOW

 

 

 

 

 

 

Marriott International Inc. (NYSE:MAR) is one of the leading worldwide operators and franchiser of hotels and related lodging facilities.

Marriott pioneered the concept of establishing a global brand name for a hotel company when it entered China in 1991, a concept which is gaining momentum now. In fact, Marriott’s competitors have now become more proactive in promoting this concept and companies, such as Starwood and Hyatt, are leading the way. Starwood introduced a brand, which does not provide the full array of services of a hotel (limited service brand) whereas Hyatt acquired AmeriSuites and subsequently re-branded it to Hyatt.

Marriott earns 25 percent of its revenue in the form of management and franchisee fee, which provides the company with a stable and predictable stream of revenue, and shields it from any temporary downturn in the industry. Hotel companies are highly dependent on the number of customers a hotel attracts. Thus, in case the number of travelers coming to a particular region declines, the revenues from the hotel in that region will also decline. However, if the company owns the brand and the hotel is run by a third-party, the company is ensured a fixed amount regardless of the number of customers staying at the hotel.

In general, the hotel industry faces a threat from Internet reservation channels, which represent a growing share of hotel room bookings. These intermediate channels charge higher commissions and demand lower room rates from hotels, which puts tremendous pressure on the revenues as well as margins of hotels. Marriott has built its own central reservation system to counter this threat from third parties. Marriott is the leader in online hotel room sales with 25 percent of its revenues being generated through this system.

Business Overview

Marriott International, Inc. (Marriott) is a worldwide operator and franchiser of hotels and related lodging facilities. At the end of 2006, the company had more than 2,800 hotels spread across 68 countries. Marriott generates 75 percent of its earnings from hotel operations and the rest from timeshares. The company has over 85 percent of its properties based in the U.S. Moreover, Marriott operates 13 reservation centers, 8 of which are located in the United States, and has a distinct multi-brand, multi-channel central reservation system, which enables a customer to choose the rooms as per his/her preference.^[1] For example, the system will enable the customer to find and book the cheapest room available in all the Marriott hotels in a city.

Several companies in this industry, including Marriott, are increasing their presence in developing countries, such as China and India, apart from registering moderate expansion in the fragmented U.S and European markets. The expansions being undertaken by players such as Marriott are being driven by the growth in international tourism in these countries.

Internet reservation channels are gaining prominence over the traditional modes. Customers are willing to pay a premium to make reservations through the Internet as it does not require their physical presence at the time of the booking. This has emerged as a threat for companies in this industry as these Internet reservation channels charge a higher commission from hotels and also demand lower room rates. However, Marriott has developed an online multi-channel central reservation system to counter this threat and has met with considerable success.

Marriott is increasingly relying on management and franchisee fee as a source of income because this provides the company with stable revenues, which are not affected by any increase/decrease in the number of customers. However, as these franchisees are run by third parties, their objectives may be different from that of Marriott. For example, Marriott may be focused on establishing a brand by providing a consistent level of services to their customers, while the franchisee may just focus on maximizing revenues.

Business & Financial Metrics

RevPAR (revenue divided by average number of rooms occupied in a year – revenue per average room), occupancy rates (percentage of total rooms occupied) and average daily rates (the average rate charged by a hotel for one room for one day) are the major revenue drivers for the industry.

Increase in the number of hotels owned or franchised by a company as well as the number of rooms available for rent provides an indication of how the company is expanding its capacity to cater to the growing number of travelers. Occupancy rates and revenues per available room on the other hand indicate how efficiently a company is using its available resources (i.e. hotels and rooms).

The following table shows Marriott’s past performance relative to the above-mentioned revenue drivers.

Marriott has 2,832 hotels across the globe. The table above shows a continuous increase in the occupancy rates and revenue per average room during the last three years.

In 2008, the company posted revenues of $12.879 billion and a net income of $362 million as compared to a revenue of $12.99 billion and net income of $696 million in the previous year.^[5] The company's revenue grew at a compounded annual growth rate (CAGR) of 6.5% from 1999 to 2008.^[5]

While the company was able to remain profitable through the first half of 2009, net income did fall by over 56% when adjusted for restructuring and other costs, to $84 million.^[6] This was reflected by a 17.5% decline in revenue from $6.132 billion to $5.057 billion, which was caused by declines in all of Marriott's business segments, but most notably the company's international operations and timeshare sales. The weak global economy has negatively impacted luxury travel, resulting in a 37% and 23% decline in international and timeshare sales, respectively.^[6] Still, only the timeshare segment, which lost $35 million, had operation losses for 2Q09.^[6] Moreover, RevPAR, Occupancy Rates, and Average Daily Rates decline across all five regions to $100.67, 66.9%, and $150.59, respectively.^[6]

In the third quarter of 2009, Marriott reported a net loss of $466 million, which marks a significant drop in profitability, as compared to both the first half of 2009 as well as 3Q08 (for which net income was $94 million).^[7] The timeshare segment had a particularly weak quarter, as revenue for this segment fell by over 33% to $254 million.^[7] In response to the difficulties facing this segment, Marriott recognized a $614 million impairment charge (pretax) related to the reduced prices and promotions that Marriott is offering in both the United States and internationally in order to attract demand for these properties.^[7] However, as reflected by 20.6% and 22.3% declines in RevPar and 5.3% and 5.8% declines in occupancy for North America and the International market, respectively, reduced demand affected most aspects of Marriott's operations, both by product and geographically.^[7] Further, although the company had Operating Cash Flow of $597 million, the company's current cash debt coverage ratio was .238 for 3Q09, which suggests that cash flow from operations may be insufficient to meet Marriott's current liabilities, and that the company could face liquidity issues. However, were this to be a problem, the company's Current Ratio of 1.89 indicates that it a more than adequate amount of current assets to meet these liabilities.^[7]

Business Segments

Marriott’s operations are grouped into five distinct business segments – North American Full-Service Lodging, North American Limited-Service Lodging, International Lodging, Luxury Lodging, and Timeshare. The lodging business involves developing, operating and franchising hotels and corporate housing properties under 20 brand names overall. Marriott also develops, operates and markets timeshare ownership properties under four separate brand names.^[8]

A large part of their total revenues come from North American Full-Service Lodging Segment (44% of total revenues in 2008), which comprises owned hotels, resorts, conference centers and club-sports. The company operates this business segment under four brand names: Marriott, JW Marriott, Renaissance, and Renaissance ClubSport.^[8]

Trends and Forces

Customers for the hotel industry include tourists as well as business travelers. Tourists may be further categorized into low-medium income groups and high-income groups as the income of a person will determine the kind of hotel he/she chooses. For example, people with high income are more likely to stay in an upscale luxury hotel, which a person with a low-medium income may not be able to afford. Marriott’s business model caters to all segments of the population serving people from the low-medium income group to leisure and upscale travelers.

The demand from low-medium income customer is primarily affected by an increase in airfares. These customers generally have a fixed budget when they plan their vacations. Thus, if they are forced to spend more on airfare, their ability to spend on a hotel room, resort or other services declines. On the other hand, an economic slowdown would have a more significant impact on the volume of business travel as compared to the impact of increase in airfares.

In addition to these factors, certain events, such as acts of terrorism, wars, and outbreaks of contagious diseases have a severe impact on the demand from all customer segments as individuals are never willing to expose themselves to any event that will threaten their personal safety. Thus, when there are events such as 9/11, the invasion of Afghanistan, the outbreak of Severe Acute Respiratory Syndrome (SARS), or the tsunami in the Indian Ocean, people either stop traveling to those respective countries or choose alternative destinations for travel, which has a negative impact on the hotel and tourism industry in the affected area.

Competition

Marriott’s competitors include Starwood Hotels, Choice Hotels International (CHH), Trump Entertainment Resorts, Hilton Hotels, InterContinental Hotels, The ACCOR Group and Orient-Express Hotels (OEH). The industry is highly fragmented and no player commands more than 20 percent of the market share. Marriott enjoys a 9 percent share in the U.S. and 1 percent at the international level.

Competition in the industry is generally based on the quality of rooms, restaurants, meeting facilities and services, attractiveness of locations, availability of a global distribution system, price and other factors.

Although Marriott’s global presence across 68 countries enables it to offer services to a large number of customers, it lags behind its competitors who are present in 80-100 countries.

The following table compares Marriott’s performance to its competitors in 2006.

Marriott’s occupancy rate of 74.4 percent (percentage of total rooms occupied) is one of the highest in the industry, which also indicates that the company is more efficient in selling its rooms as compared to its competitors. Further, although both Hilton and Marriott have approximately the same number of hotels and rooms, Marriott charges a higher average daily rate as compared to Hilton, which enables it to earn higher revenue per room available.

One major trend in the industry is the increasing competition in the area of increasing branded offerings. Marriott was one of the pioneers in promoting the concept of foreign brand awareness in the industry; however, its competitors have begun doing so more pro-actively. Starwood’s planned limited service brand, named “Project XYZ” and Hyatt Corporation’s purchase of AmeriSuites brand and subsequent re-branding to Hyatt Place are steps in this direction.

References

1. ↑ MAR 2008 10-K, pg. 13
2. ↑ ^{2.0 2.1} MAR 2007 10-K pg. 4  
3. ↑ ^{3.0 3.1} MAR 2008 10-K pg. 24  
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5} MAR 2008 10-K pg. 47  
5. ↑ ^{5.0 5.1} MAR 2008 10-K, Item 6, pg. 23
6. ↑ ^{6.0 6.1 6.2 6.3} MAR 2009 2Q09 8-K
7. ↑ ^{7.0 7.1 7.2 7.3 7.4} MAR 2009 3Q09 10-Q
8. ↑ ^{8.0 8.1} MAR 2008 10-K, Item 1

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