Carnival Corp. (CCL 58.73, -4.80, -7.56%), the world's largest cruise ship
operator, is trading sharply lower today (-8%) after it reported Q2 (May)
earnings this morning and provided Q3 (Aug) guidance. Carnival’s eponymous line
is likely familiar to you, but you may not realize the extent of the company’s operations.
Their 10-brand portfolio includes nine
of the world's largest cruise lines.
With operations in North America, Europe, Australia, and Asia, its portfolio features Carnival Cruise Line, Holland America Line, Princess Cruises, Seabourn, AIDA Cruises (Germany), Costa Cruises, Cunard, P&O Cruises (Australia), and P&O Cruises (UK), as well as Fathom, the company's immersion and enrichment experience brand. Together, its cruise lines operated 103 ships with 234,000 lower berths visiting over 700 ports around the world as of the end of 2017, with 18 new ships scheduled to be delivered between 2018 and 2022; two of these successfully completed inaugural voyages in spring of this year. CCL also operates Holland America Princess Alaska Tours, a tour company offering experiences in Alaska and the Canadian Yukon.
The multi-night global cruise industry has grown significantly but still remains a relatively small part of the wider global vacation industry, which includes a large variety of land-based vacation alternatives around the world. CCL believes the cost of a cruise vacation represents an exceptional value in comparison to land-based vacations. Cruising delivers many relatively unique benefits; cruises provide transportation to various destinations while providing accommodations, diverse dining choices, and a selection of daily entertainment options for one all-inclusive, competitive price. With cruising, travel becomes not just a step taken to access vacation destinations, but an integral and pleasurable element of vacation experiences themselves.
Cruising appeals to a broad range of ages and income levels and provides something for every generation to enjoy, from kids' clubs to an array of onboard entertainment, ranging from spa and wellness treatments to live theatrical spectacles, designed to appeal to teens and adults. While baby boomers make up a large proportion of cruisers, CCL has made a strong effort to attract younger guests. With a population of over 80 million, the millennial generation has surpassed the baby boomers and now represents the largest generation size in history. Millennial vacationers are typically interested in being able to share their adventures in relaxation and exploration with friends and family via social media. Also, millennials typically prefer more affordable vacations without sacrificing accommodations or experiences. In response, CCL has worked in recent years on enhancing its ships' internet connectivity to provide infrastructure that supports millennial vacationing preferences.
Turning to the company’s MayQ results, non-GAAP EPS grew 31% year/year to $0.68, a good bit ahead of prior guidance of $0.56-0.60. Revenue rose 10.4% year/year to $4.36 bln, which was also above market expectations. In terms of guidance, CCL expects Q3 (Aug) non-GAAP EPS of just $2.25-2.29, which is a good bit below market expectations. The mid-point is below the $2.29 earned in the prior year period.
Gross revenue yields (revenue per available lower berth day, or "ALBD") in MayQ increased 8.8%. In constant currency, net revenue yields increased 4.8%, exceeding March guidance of up 2.5-3.5%. Gross cruise costs including fuel per ALBD increased 8.2%. Highlights from MayQ include the delivery of Carnival Cruise Line's 26th ship in its fleet, Carnival Horizon, in March 2018. Additionally, in April 2018, Seabourn took delivery of Seabourn Ovation, the fifth all-suite ship in its ultra-luxury fleet.
As a result of strong guest response to sailings to Cuba, Carnival Cruise Line received approval for more than 20 additional calls, bringing the total calls to Cuba in 2019 to 40, departing from home-ports in Miami, Fort Lauderdale, Charleston, and Tampa. Also during the quarter, Carnival Cruise Line unveiled the largest and most technologically advanced operations center in the cruise industry. Finally, as previously announced, CCL increased its quarterly dividend from $0.45 to $0.50 and replenished its share repurchase program to $1 bln.
Looking ahead, CCL says cumulative advanced bookings for the next three quarters are in line with the prior year at higher prices. Since March, booking volumes for the next three quarters have been running slightly ahead of prior year at prices that are in line with the prior year.
In sum, the AugQ EPS guidance seems to be the main reason why the stock is down so sharply today. The company does not provide much color in the press release, although a webcast call was scheduled for 10am ET. However, higher fuel costs and FX have been headwinds for CCL. With that said, investors should be aware that CCL tends to be conservative with guidance; today's MayQ results provide a good example of this practice in action. Also, their bookings guidance at higher prices was good to hear. However, the stock has been trending lower since its $72.70 high in late January; this morning saw the stock trading as low as $56.95. So the sentiment around the stock has not been favorable. Shares of cruise line peers Norwegian (NCLH) and Royal Caribbean (RCL) followed Carnival lower during the morning session.
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