STAMFORD, Connecticut—Bruce Duncan didn’t waste any time addressing the elephant in the boardroom.
The chairman of Starwood Hotels & Resorts Worldwide’s board kicked off the company’s first-quarter earnings call Wednesday by commenting on the company’s exploration of strategic and financial alternatives to increase shareholder value, which was announced earlier in the day.
In its entirety, Duncan said:
“Our board has always been focused on maximum, long-term shareholder value and continuously considers potential value creating ideas and opportunities. As we promised when Adam (Aron) was named CEO on an interim basis, we are taking aggressive steps to accelerate Starwood’s growth, improve performance and sharpen our focus on operational excellence. You will hear more about that from Adam and (CFO Tom Mangas) on today’s call. This is clearly a time of enormous opportunity and change in our industry. And accordingly, the board has decided to thoroughly explore the full range of strategic and financial alternatives available to Starwood in order to capitalize on our industry-leading global platform and best-in-class, premium brands.
“Let me be clear: No option is off the table. As of timing, we will take the time we need to carefully review our alternatives and achieve the best results for our shareholders, business partners and associates. I hope you can appreciate that we are not going to say anything more about the process at this time.”
That didn’t stop analysts from asking a number of questions:
Q: Is it harder to find a permanent CEO when the company might be sold?
Duncan: “Certain people you won’t be able to attract given what’s going on,” he said, adding there still remains a number of qualified internal and external candidates.
Earlier in his prepared remarks, Duncan said:
“Regarding permanent CEO succession, a thorough search process, including external and internal candidates, is proceeding on a parallel track. And our team is working with (executive search firm) Korn Ferry to complete the search in a timely manner. We are also continuing to execute on our asset-light strategy and the other initiatives we will discuss later on this call.”
Q: How are you convincing new owners to sign on amid the strategic review?
Adam Aron, CEO on an interim basis: “We have some very strong brands. No matter how the future of this company unfolds, our brands will endure; our brands will be potent; our brands can only be stronger than they are today. Those are the messages we are carrying out to the hotel ownership and development community. We’re also going to get much more aggressive with our communications with owners, with our flexibility in dealing with owners, with being responsive to owners.”
Q: Are you still considering adding another brand to better serve the midscale space?
Aron: “We are looking at other brands for the company,” he said, adding Four Points by Sheraton, Aloft and Element remain the focus for select-service growth.
Unlike competitor Hilton Worldwide Holdings, whose executives prefer a homegrown approach to brands, Aron said Starwood’s team realizes the benefits of acquiring an established flag.
“It’s significantly ahead of starting a new brand from scratch,” Aron said of acquisition over a new brand launch.
Aron closed his response to the question more definitively: “We’re nowhere in a position close to want to be able to publically announce that we will do anything other than go forward with Four Points, Aloft and Element.”
Aron’s four-pronged approach
Aron isn’t just keeping the seat warm while the board finds a permanent replacement. He’s employing a four-pronged approach to right the struggling Starwood ship.
“We are well aware that we need to act boldly and intelligently and in some cases differently than before in order to advance the pace of making real progress for our company,” he said.
1. Accelerating growth
First and foremost, he’s focused on accelerating growth.
During the first quarter, Starwood added 20 new hotels to its system, which is double the 10 added during the prior-year quarter. The company also signed 33 hotels, which is up from 28 signed during the first quarter of 2014 and represents the most new deals signed in any first quarter since 2008, Aron said.
As an example of the company’s fast-paced growth, Aron pointed to the fast-tracking of its Tribute Portfolio soft brand, which was mired in analysis paralysis before the new CEO took the helm.
The company might put its own balance to use in the process of accelerating growth.
“If there is an opportunity to package with some owner/developers in multiple hotel assets in select service, that’s an appeal to us,” Aron said.
2. Sharpen brand offerings
Second on the list is a sharpened focus on the existing brand offerings, Aron said.
“That focus will start with Sheraton, our largest and one of our most important brands,” he said, adding the brand accounts for 40% of Starwood’s global rooms footprint and some $9 billion in sales annually.
While some “terrific” properties count among the brand’s 430 hotels, Sheraton has fallen on hard times. Starwood’s management team hopes to breathe new life into the brand with a 10-point, comprehensive plan that will be unveiled during the NYU International Hospitality Industry Investment Conference the first week of June.
“Sheraton needs to be significantly reinvigorated with a boost that can only come from top-notch marketing,” Aron said. Design and guest service are part of that plan, he added.
Once Sheraton is back on the right track, executives will give the same amount of attention to the company’s nine other brands, including its three select-service players: Four Points by Sheraton, Aloft and Element.
With only 300 of those branded properties open globally, Aron realizes Starwood is behind the select-service 8 ball. Hilton Worldwide Holdings’ Hampton Inn brand, for instance, has more than 2,000 hotels open.
3. Continue asset disposition
The third prong is to continue delivering on Starwood’s previously announced goal of disposing of $3 billion worth of assets by year-end 2016. The company set a goal of $800 million in dispositions during 2015 to help get there.
“The transaction market remains strong. … We’re confident we’ll hit both targets,” Aron said.
Starwood hit a snag in this process in 2014 as executives unsuccessfully tried to spin off a cluster of assets into a real estate investment trust. They’re back on track, Aron said, and expect to announce a number of key dispositions soon. That $800-million target will be sprinkled throughout all of 2015 as opposed to being back ended, he added.
4. Cut costs, drive efficiency
Last but not least, Aron and his team are placing a far greater emphasis on operational efficiencies than the previous regime.
“To show that we are serious about getting leaner, my first decision in cost cutting was to cancel the lease in Starwood’s G4 private aircraft,” he said.
The run-rate SG&A savings from cost reductions are expected to be approximately $25 million on an annual basis. Executives also are freeing up between $50 million and $60 million in low-impact initiatives to focus on higher priority spending that more directly stimulates revenue growth, Aron said.