Earnings call as theatre? It’s not often drama permeates the typically drab financial reporting season, but that’s precisely what happened Thursday as analysts hammered executives at Starwood Hotels & Resorts Worldwide for their reluctance to reinvest in the company through share repurchases for the second consecutive quarter.
CEO Frits van Paasschen and CFO Vasant Prabhu obviously saw the onslaught coming. Their prepared remarks featured considerably more rationale regarding their capital allocation strategies than in calls past.
“We know that many of you would like us to step up our stock buybacks, adopt a less opportunistic and more programmatic approach. You would like to see us borrow more at current rates and reset our capital structure. We want to assure you that your views have been heard by Frits and I, as well as our board,” Prabhu said.
The duo stressed the $190 million returned to shareholders during the quarter through regular and special dividends. They spoke of flexibility and long-term growth.
But investors, and the analysts who represented them, weren’t buying it.
Of the 14 analysts who spoke during the question-and-answer portion of the call, seven asked about capital allocation in one form or another.
Carlos Santarelli, research analyst at Deutsche Bank AG, kicked things off:
“So guys, I obviously respect your views on the buyback and clearly that the capital return story has been present in different forms. But Frits, I believe, in your prepared remarks, you did highlight how Starwood is trying to focus on the long term and long-term trends as they relate to the growth potentials for your brands. … One of the major controversies right now, and potentially one of the reasons for the underperformances as some investors would call out, is the clarity of the buyback story relative to some of your peers. Do you feel at any point where you start to look at the (return on investment) implied by maybe more aggressive buyback as a way of manifesting that long-term view in the near term and buying more of a company that you're bullish on, longer term?”
Van Paasschen and Prabhu played along—for a while. In response to Santarelli’s question, the CEO deflected and said the company’s exposure in volatile emerging markets was more to blame for the 35.1% decrease in net income per share during the quarter than was executives’ reluctance to pull the trigger on a buyback.
“I don't think that our buyback strategy in fact got suddenly less clear in the first quarter after a great performance of our stock over the course of 2013,” Van Paasschen told Santarelli.
“I don't mean to be snarky in that answer,” he then qualified.
Prabhu at one point stressed the buyback lever as a viable and likely option—and one of three avenues for capital allocation. The other two, regular and special dividends, delivered approximately $190 million back to shareholders in the quarter and would deliver a further $750 million by year’s end, he said.
But as the questions mounted, the executives’ responses gradually became more terse, more pointed. They circumvented the issue by repeatedly reiterating the importance of flexibility in capital allocation.
Share repurchases would come, they said, but they would come at the right time.
“As the world zigs and zags, we believe, we will come into some opportunities or potentially could, based on what's happened historically where our stock may trade at more of a discount to its intrinsic value. So that's something that we're going to continue to work on,” van Paasschen said.
What he and Prabhu failed to acknowledge is how that diligent, deliberate strategy was perceived in the investment community.
JP Morgan analyst Joseph Greff summed up the sentiment (read: frustration) succinctly:
“Frits, you said twice that you believe that your share price underperformance is a function of geography in emerging markets. I would say it's the lack of capital return in the form of buyback that's caused underperformance relative to other stocks, and we're hearing it from investors.
“You guys should hear that and be appreciative of that.”
I’m sure they got the message by the time the 60-minute call had concluded. As I mentioned above, they probably recognized investors’ ire well before the call began.
During a quarter in which Starwood’s same-store hotel revenue per available room increased 6.3% and management and franchise fees increase 14.3%, stock performance tracked in the opposite direction. The company’s stock price closed Thursday at $76.18 per share and is down 4.1% year to date. By comparison, the R.W. Baird/STR Hotel Stock Index was up 3.6% during the same timeframe.
Odds are, executives use at least some portion of their $600 million in stock buyback authorization during the second quarter. If not, we’re in for one of the more interesting earnings calls this year.
Now on to the usual goodies …
What’s making me happy this week?
Four Seasons Hotels & Resorts takes to the friendly skies. As reported in Bloomberg, the luxury hotel chain unveiled its Boeing 757 to transport guests on its around-the-world group trips. The sleek black aircraft is emblazoned with the Four Seasons name along the side and the company’s tree logo in white on the tail.
The plane will take to the skies in February, starting with a nine-destination, 24-day trip that begins in Los Angeles and includes stops in Bora Bora, Thailand, India and Turkey as it makes its way to London. Guests will stay at Four Seasons hotels at each stop, Bloomberg reports. The price is $119,000 per person for double occupancy and $130,000 to travel solo.
I’d be happy to offer the services of myself and my wife to report firsthand from that maiden voyage. You know where to find me, you lovely, intelligent people at Four Seasons.
Stat of the week
5.8%: Facebook’s share of the $120-billion global digital advertising market, which is up from 4.1% in 2012 but still a distant second behind Google, which grabbed 32%, according to a report in The Wall Street Journal.
Facebook rode its advertising ascension to a 72% increase in profit during the first quarter.
Quote of the week
“I think the perspective that anything that reflects on more healthy demand for travel and encouraging people to get out, just like discount airlines as well, is generally a good thing for travel, not the other way around.”
—Starwood Hotels & Resorts Worldwide’s President and CEO Frits van Paasschen’s thoughts on Airbnb during an earnings call with analysts.
Reader comment of the week
“Well said, Jan. Not a threat today, but wait until the next downturn when demand and supply are no longer in balance.”
—Reader “Bob Rauch” in response to a column from STR’s Jan Freitag highlighting some key developments in the ongoing emergence of peer-to-peer accommodations platform Airbnb.
Email Patrick Mayock or find him on Twitter.
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