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Marriott (MAR) reports its second quarter earnings results on Tuesday before markets open. A host of other gaming, lodging, and leisure companies will also report earnings this week.
David Katz, Jefferies managing director, joins Market Catalysts to discuss the upcoming earnings and to explain why expanding room count may be a more important metric than daily rates.
To watch more expert insights and analysis on the latest market action, check out more Market Catalysts.
00:00 Julie Hyman
Investors have a busy week of hospitality and leisure earnings ahead, starting with Marriott on Tuesday. Results will give Wall Street insight into discretionary demand and the spending habits of the average consumer. Here to discuss is David Katz, Jeffries’s managing director. David, good to see you. So we’ve already heard from a handful of hotel chains. We’re going to hear from more, as well as get more into casinos and gaming, uh, this week. But I’m curious what your impressions have been so far from what we’ve heard and how that sort of informs what we might still end up hearing.
00:49 David Katz
Yeah. So look, I think getting ready for Marriott, one of the perspectives that we bring to it having seen a number of the hotel companies is, uh, that, you know, the volumes and pricing environment is really inconsistent. There are challenges within inbound international travel, uh, particularly from Canada. Um, you know, we’ve seen certain segments of business travel, uh, been strong versus weak. We’ve seen low-end revpars, uh, be persistently low. But fortunately, when we look at companies like Marriott, because of the business model and their ability to continue growing, uh, their units or their nug, uh, they’re able to continue growing their base of the core business, and they also get growth, as we know, from ancillary business. They’re co-branded credit cards and other royalties that they derive. They’re actually even growing faster, Julie, than, uh, the core business at this point. And so, you know, we’re very focused on those business models, uh, and their ability to keep growing, even in a, a really herky-jerky, uh, earnings environment that we’ve been experiencing.
02:45 Julie Hyman
Well, it’s interesting because I’ve, you’re not the only one I’ve talked, I’ve heard talk about this net unit growth theme this earnings season. Um, is, is that just going to, is it, is the answer volume in a lower revpar environment?
03:15 David Katz
Uh, ever since 2019, right, if you look back at historical revpar, particularly in the United States, it’s been relatively anemic. It’s been a low single-digit number, uh, notwithstanding the COVID recovery in that period. But from a like-for-like basis, revpar has really not been a driver of these businesses for, for quite some time, right? We’re, we’re in year six of this. What’s been driving those businesses is nug and their ability to grow their system size. Now, some of that has changed, and that provokes an interesting debate because, you know, the new build of hotels has slowed, and more of what they’re getting are conversions, either from independent hotels or other brands switching into theirs, right? And then more recently, we’ve seen these affiliation deals. Like for example, Marriott has a Bonvoy deal with MGM for the Las Vegas Strip, where it’s not the same economic intensity as a traditional deal, but it’s more rooms in the system, and it’s incremental fees, and so that growth continues, uh, and it begets the ancillary growth that I described earlier.
05:01 Julie Hyman
Interesting. So you want sort of more well-grounded different sources of revenue. Unless people’s eyes glaze over again, just as a reminder, nug equals net unit growth, revpar, revenue per available room. Um, on an anecdotal basis, it doesn’t feel like increases in hotel rates, room rates have been slowing down, just as a consumer, right? Um, but, but, you know, sort of, um, situate that for us, contextualize that for us. What rates have been doing?
05:57 David Katz
Yeah. And, Julie, I’m, I’m guessing that the, the finer places that you choose to stay, uh, you know, are probably still able to raise their rates because, uh, if the market will bear it, they’ll keep doing it, right?
06:24 Julie Hyman
So it’s my, I, I need to refuse to pay it, I guess is the answer.
06:42 David Katz
Uh, you, you, you need to choose to stay somewhere else or, or choose an alternative vacation. Uh, but when you look across the different segments, right, the economy and the limited service segments, uh, have been negative for, for quite some time. Uh, other companies in our coverage, for example, Wyndham choice, that’s where they primarily operate, and it’s been holding those stocks and their valuations back just a little bit. Uh, the luxury end of things is still getting some, some rate growth. The higher end resorts for a while paused and are now back getting some rate growth, and one of the important drivers we should touch on, you know, is group business, right, where conventions are a function of the business economy, and they are still producing, you know, reasonably good growth, although we heard some commentary about maybe some slowdown in the back half of this year. But so far they’ve been operating well. The most important thing, Julie, to remember is that revpar lasts for a day, and nug, you know, could last a lifetime.
08:16 Julie Hyman
Right, makes sense. Um, and just quickly before I leave you, I do want to ask you a question about the sports betting stocks ahead of football and all of our winter sports. Is now the time to get in on those, on those stocks?
08:45 David Katz
Uh, there is absolutely a seasonal focus from Wall Street on sports betting. Uh, these companies will often spend a fair amount of promoting and marketing in most of 3Q until the football season starts. Uh, historically, football has been roughly 40% of sports betting volumes here in the US. And so we do expect there’s going to be, you know, an increasing interest in sports betting stocks as we go forward. I do want to point out we’re spending a ton of time working on the prediction markets, right? And their legality and what they mean, uh, for their presence within, you know, the sports betting market over time. But, but I, I’m glad you brought them up because they are going to become a much more focused subgroup of our coverage as we get into the ensuing weeks.
09:58 Julie Hyman
Well, good. We’ll have to catch up with you again on that and on that prediction markets, which I agree are pretty fascinating. But, David, we got to leave it there for now. Thank you so much. Appreciate it.
10:12 David Katz
Thank you.
