Royal Caribbean: Second Quarter Beats Expectations

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Royal Caribbean’s adjusted second-quarter EPS rose six-fold to $0.66, easily ahead of guidance of $0.45 to $0.55, our estimate of $0.58, and consensus of $0.51, with upside largely stemming from lower-than-expected net cruise costs, due to a shift in timing to the latter half of the year, a larger-than-expected contribution from the company’s investment in TUI Cruises (~$0.06), and slightly better-than-expected net yields resulting from strong close-in pricing on itineraries in Europe and Asia. Reported EPS of $0.62 included $0.04 of expenses related to restructuring and other initiatives.

Constant-currency net yields rose 2.6%, slightly ahead of guidance of 1.5% to 2.5%, as double-digit ticket yield improvements in Europe and Asia more than offset lower yields in the Caribbean, the latter reflective of a booking environment that has remained highly promotional (with the most pricing pressure on 7-night or shorter itineraries). Onboard revenue yields rose 3% on a constant-currency basis, reflecting higher occupancies, the continued benefit of fleet upgrades, and healthy sales of beverage packages and internet services. Constant-currency net cruise costs (excluding fuel) decreased 4.7%, better than guidance for a 2% to 3% decline, largely due to a shift in the timing of expenses into the second half of the year.

Since Royal’s late-April earnings call, bookings are significantly higher than the yearago period with a continued expansion of the booking window. Load factors and APDs for the remainder of 2014 are ahead of last year, with continued double-digit net yields in Europe and China expected to more than offset continued negative trends in the Caribbean. While still early, 2015 looks encouraging, with both load factors and APDs up versus the same time last year. Given relatively healthy overall trends, Royal Caribbean reiterated full-year net yield expectations of 2% to 3% but raised EPS guidance to $3.40 to $3.50, versus prior guidance of $3.25 to $3.45, our estimate of $3.33, and consensus of $3.41, with the increase largely driven by the flow-through of $0.09 of second-quarter EPS upside versus the midpoint of prior guidance (after excluding the $0.07 shift in the timing of expenses to the second half of the year).

Management continues to expect constantcurrency net cruise costs excluding fuel to be flat to slightly down for the year. For the third quarter, constant-currency net yields are expected to rise 4% (in line with consensus), reflecting healthy yield improvements in Europe (44% of capacity), Alaska (10% of capacity), and China (7% of capacity) more than offsetting lower yields in the Caribbean (28% of capacity). Net cruise costs excluding fuel are expected to be flat to up 1% on a constant-currency basis, yielding third-quarter EPS of approximately $2.20, comparing favorably to our and consensus expectations of $2.12.

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