Choice Hotels International, Inc. :CHH-US: Earnings Analysis: Q2, 2016 By the Numbers : August 4, 2016

Choice Hotels International, Inc. reports financial results for the quarter ended June 30, 2016.

We analyze the earnings along side the following peers of Choice Hotels International, Inc. – Starwood Hotels & Resorts Worldwide, Inc., Marriott International, Inc. Class A, Wyndham Worldwide Corporation, La Quinta Holdings, Inc. and Hilton Worldwide Holdings, Inc. (HOT-US, MAR-US, WYN-US, LQ-US and HLT-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 241.75 million, Net Earnings of USD 38.82 million.
  • Gross margins widened from 41.37% to 43.43% compared to the same period last year, operating (EBITDA) margins now 28.09% from 28.39%.
  • Year-on-year change in operating cash flow of 1.10% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth due to contribution of one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-06-30 2015-09-30 2015-12-31 2016-03-31 2016-06-30
Relevant Numbers (Quarterly)
Revenues (mil) 232.16 241.53 210.95 207.12 241.75
Revenue Growth (%YOY) 17.45 12.25 13.78 18.19 4.13
Earnings (mil) 35.57 41.14 29.01 19.47 38.82
Earnings Growth (%YOY) 1.76 5.29 15.57 -9.16 9.14
Net Margin (%) 15.32 17.03 13.75 9.4 16.06
EPS 0.62 0.72 0.51 0.35 0.68
Return on Equity (%) N/A N/A N/A N/A N/A
Return on Assets (%) 20.87 23.25 16.23 10.35 19.05

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Market Share Versus Profits

Revenues History
Earnings History

CHH-US‘s change in revenue this period compared to the same period last year of 4.13% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that CHH-US is holding onto its market share. Also, for comparison purposes, revenues changed by 16.72% and earnings by 99.42% compared to the immediate last period.

Revenues Growth Versus Earnings Growth


Earnings Growth Analysis

The company’s earnings growth has been influenced by the year-on-year improvement in gross margins from 41.37% to 43.43%. However the company’s overhead costs have prevented it from fully capitalizing on these gross margin improvements. In fact, the company’s operating margins (EBITDA margins) showed no improvement over the same period last year.

Gross Margin Versus EBITDA Margin


Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

CHH-US‘s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 44.52 days from 72.77 days for the same period last year.

Gross Margin Versus Working Capital Days


Cash Versus Earnings – Sustainable Performance?

CHH-US‘s change in operating cash flow of 1.10% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth


Margins

The company’s operating (EBIT) margins contracted from 27.10% to 26.86%. In spite of this, the company’s earnings rose. This was influenced primarily by one-time items, which improved pretax margins from 22.78% to 23.00%.

EBIT Margin Versus PreTax Margin
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for Choice Hotels International, Inc.


Company Profile

Choice Hotels International, Inc. franchises hotels. The company offers full service hotels in the economy, mid-scale and upscale segments. It franchises lodging properties under the brand names: Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel, Cambria Suites and Ascend Collection. The company operates through two segments: Franchising & SkyTouch Technology. The Franchising segment includes the company’s hotel franchising operations consisting of its eleven brands. The SkyTouch Technology is a division of the company that develops and markets cloud-based technology products to hoteliers not under franchise agreements with the Company. Choice Hotels International was founded in 1996 and is headquartered in Silver Spring, MD.

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