HotStats: Q3 Profit Narrowing a Symptom of Global Revenue Slowdown

INTERNATIONAL REPORT—The third quarter wrapped in September and presented two different portraits of the United States and Europe in relation to hotel performance, according to data from HotStats.

And with most of the large hotel companies having now reported earnings, now is a good time to see how they stood up to the aggregate numbers.

In the U.S., the numbers were positive. RevPAR was up 0.7% in the period over the same time frame last year, boosted by a 0.7% increase in room rate off flattish occupancy growth. The narrow RevPAR gain, meanwhile, was abet by higher gains in F&B, which led to total revenue shooting up 2.1% over Q3 last year.

The strong increase in TRevPAR didn’t flow through to the bottom line with the same vigor, as GOPPAR increased only 0.6% over the same period last year. The reason for the smallish growth was a jump in expenses that ate into revenue gains. This included a 3.7% year-over-year (YOY) increase in hotel labor costs on a per-available-room basis, and considerable increases along undistributed expenses that resulted in a 3.7% jump in total overhead costs on a PAR basis.

New York was stung on the revenue and cost side in the third quarter. RevPAR was down 1.3% YOY while GOPPAR decreased 4.9%, as total labor costs as a percentage of revenue jumped 1.8% and 4.2% on a per-available-room basis.

While rooms revenue tracked at a higher YOY pace in Europe in the third quarter, profit actually declined, illustrating how strong revenue doesn’t always equate to bottom-line success.

RevPAR was up 1.1% in Q3 over the same period last year, as average room rate grew 0.9% against a 0.1-percentage-point uptick in occupancy. Total revenue in Europe’s hotels, however, grew at a lower rate, up 0.7% in the quarter over the same period last year. Part of that weakening was due to a downturn in beverage sales, which decreased 2.3% in the third quarter versus Q3 2018, along with a 3.3% YOY drop in conference and banqueting revenue on a PAR basis.

On top of some unsteady revenue, expenses took a further chunk out of revenues, evidenced by 2% YOY jump in total overheads on a PAR basis and a higher 2.5% YOY increase in hotel labor costs on a PAR basis.

It all culminated in a 1% decrease in GOPPAR over the same period last year, indicative of a small uptick in revenue whittled down by cost, resulting in overall profit drop.

London, meanwhile, had a generous 3.7% RevPAR bump in Q3, which corresponded with a 2.1% increase in profit.

The data for the most part aligns with Q3 reporting by the majority of the publicly traded hotel companies. Consider Marriott International, which saw its worldwide comparable systemwide constant dollar RevPAR increase 1.5%. In Europe, its RevPAR was 2.1% in Q3 2019 over Q3 2018 and up 1.3% in North America.

And while its revenue was up YOY, its profit was not. Marriott reported net income of $387 million in the third quarter, compared to 2018 third quarter reported net income of $503 million—a 23% drop.

Marriott’s total expenses for the third quarter were 5% higher than the same period prior. The sizeable leap in expenses made worse by the fact that they exceeded the YOY rise in RevPAR by 350 basis points. This lopsidedness naturally is a profit killer and proof of how Marriott’s Q3 net income dipped so much.

For Hilton, systemwide RevPAR increased 0.4% in Q3 versus the same period last year, another example of slowing industry-wide RevPAR growth trends—as R.W. Baird wrote in a recent note, “the bottom line’s decreasing reliance on robust RevPAR growth.”

According to HotStats, if the third quarter showed anything, it’s this: RevPAR is contracting and expenses are rising, which is a recipe for profit deterioration over time. The issue at hand is that operating expenses are not receding and some, such as payroll, are increasing on a quarterly basis.