Royal Caribbean CEO explains why cruises are so popular

By Tomi Kilgore

Royal still sees strong cruise demand despite record pricing, and will pay its first dividend since March 2020

Royal Caribbean Group reported Thursday second-quarter profit that beat expectations and raised its full-year outlook, as demand for cruises remained strong into next year and as onboard spending increased.

The company (RCL) also said it would starting paying a dividend again, for the first time since March 2020, at the start of the COVID-19 pandemic.

"The demand and pricing environment remained very strong since the last earnings call. Booking volumes were higher than the corresponding period in 2023 and at record pricing levels," the cruise operator said in a statement.

"Consumer spending onboard, as well as pre-cruise purchases, continue to significantly exceed 2023 levels driven by greater participation at higher prices," the company added.

And Chief Executive Jason Liberty provided an upbeat outlook for the company and the cruise industry, saying on the post-earnings call with analysts that cruise purchase intent continues to strengthen, as cruise prices remain "an attractive value proposition."

He said he believes there is "a 20% value gap" between cruises and land-based vacations, which is likely shielding the company from the "noise" being heard from land-based operators.

"We continue to see a very positive sentiment from our customers bolstered by a resilient economy, low unemployment, stabilizing inflation and record high household net worth," Liberty said, according to an AlphaSense transcript. "Consumer preference continues to shift towards spend on experiences with particularly prioritizing towards travel."

He added that consumers have 10% more vacation days than they did in 2019, and they are using half of that increase on travel.

"In fact, our research suggests that consumers are spending more on travel than any other leisure category and that they intend to increase their travel spend in the next 12 months," Liberty said.

He said the longer-term cruise outlook remains bullish, based on demographics.

Liberty noted that the number of baby boomers reaching retirement age are expected to grow 30% to 73 million by 2030, and they are expected to spend more time traveling.

But it's not just retirees, as Liberty said research shows that younger generations - millennials and younger - plan to spend more of their increased time off on travel than any other leisure category.

"This attractive traveler continues to gain share within our customer base at a faster pace than any other generation," Liberty said. "And today, one of every two customers is a millennial or younger."

Despite all the bullishness, the stock dropped 7.6% to close Thursday at $152.02. The stock has now corrected 11.7% since closing at a record $172.08 on July 16.

"Arbitrarily high expectations offset what is otherwise a very strong quarter and outlook, and is the only concern we have around the stock," wrote Mizuho analyst Ben Chaiken in a note to clients. "With recent pullback the risk/reward begins to look even more favorable."

Chaiken reiterated his outperform rating on the stock while raising his price target to $195 from $168. The new target implies about 28% upside from Thursday's close.

The stock bounced 2% in Friday's premarket.

If there was a downside to Royal's earnings report, passenger cruise days rose less than expected and occupancy came up a bit shy of forecasts, while costs were expected to increase.

Meanwhile, net income for the quarter to June 30 jumped to $854 million, or $3.11 a share, from $459 million, or $1.70 a share, in the same period a year ago.

Excluding nonrecurring items, adjusted earnings per share of $3.21 beat the FactSet consensus of $2.76.

Total revenue grew 16.7% to $4.11 billion, above the FactSet consensus of $4.05 billion, as passenger-ticket revenue rose 18.1% to $2.89 billion and onboard and other revenue climbed 13.3% to $1.22 billion.

Passenger cruise days were up 7.6% to 13.23 million, but was below the FactSet consensus of 13.38 million, while occupancy improved to 108.2% from 105% but came up shy of expectations of 108.3%.

Regarding the dividend, the company said it would pay shareholders of record on Sept. 20 a dividend of 40 cents a share on Oct. 11.

At Thursday's close, the annual dividend rate of $1.60 a share implies a dividend yield of 1.05%, compared with the implied yield for the S&P 500 index SPX of 1.37%.

The company's rival public cruise operators, Carnival Corp. (CCL), Norwegian Cruise Line Holdings Ltd. (NCLH) and Viking Holdings Ltd. (VIK), currently don't pay a dividend.

Looking ahead, the company expects adjusted EPS of $4.90 to $5.00, which is above the current FactSet consensus of $4.77.

For 2024, the company raised its adjusted EPS guidance range to $11.35 to $11.45 from $10.70 to $10.90.

The outlook for net yields was raised to between 10.4% and 10.9% from 9% to 10%.

On the cost side, the expected year-over-year growth in net cruise costs per available passenger cruise days was raised to approximately 4% from approximately 3.7%.

The stock has rallied 17.4% year to date through Thursday, while the S&P 500 has gained 13.2%.

-Tomi Kilgore

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07-26-24 0743ET

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