Carnival Beats on Q1 Earnings, Revs - Analyst Blog

Miami-based cruise company Carnival Corp. CCL reported better-than-expected fiscal first-quarter 2014 results for both top and bottom line. The company posted adjusted earnings of zero cents per share, which compared favorably with the Zacks Consensus Estimate as well as management's guidance of a loss of 8 cents.

 

However, quarterly earnings compared unfavorably with the year-ago quarter's earnings of 8 cents per share. Higher operating costs were responsible for the year-over-year decline in earnings.

 

Shares of Carnival declined around 3% in the pre-market session, indicating investors' bearish stance on the results. The price reaction during the trading session will give a better idea about whether the cruise company has been able to meet expectations.  

 

Total revenue in the quarter marginally declined 0.2% year over year to $3.59 billion. However, revenues surpassed the Zacks Consensus Estimate of $3.56 billion by a meager 0.6%. Revenues in the quarter were affected by a drop in cruise sales, partly offset by increased onboard spending. 

 

Net revenue yields (in constant currency) declined 2.1% year over year in the first quarter. Gross revenue yields (in current dollars) also dropped 1.9%. 

 

Segment Revenues

 

Carnival earns revenues from its Passenger Tickets business, Onboard and Other as well as Tour and Other segments.

 

Passenger Tickets: Passenger Tickets revenues in the quarter dropped 0.5% year over year to $2.7 billion.

 

Onboard and Other: Onboard and Other revenues were $850.0 million, up 0.7% year over year.

 

Tour and Other: The revenues declined 11.1% year over year to $8.0 million.

 

Income & Expenses

 

Operating income was $72 million in the reported quarter, down 50.3% year over year as a result of higher operating costs and expenses.

 

Net cruise costs (in constant dollar) per available lower berth day (ALBD) (fuel and impairments excluded), increased 3.3% due to the increase in advertising expenditure. However, costs improved from the company's guidance of 4.5% to 5.5%.

 

Carnival's ships have been facing one accident after another, significantly affecting its performance. In order to recover, the company has undertaken a series of initiatives. Although these initiatives have pressured the company's profit, raising its costs at the current level, these are expected to prove beneficial in the long term.

 

Fuel price was $654 per metric ton in the quarter, down 3.4% year over year, while fuel consumption declined 4.8% year over year. 

 

Second-Quarter Fiscal 2014 Guidance

 

The company expects net revenue yield (in constant dollar) to decline in the range of 3% to 4% in second-quarter fiscal 2014. Net cruise costs per ALBD (in constant dollar), excluding fuel, are projected to increase 2.5−3.5%, resulting from increased selling and administrative costs.    

 

Based on higher costs and lower revenue yields, the company expects its bottom line to be in the range of a loss of 2 cents to earnings of 2 cents per share in the second quarter which is lower than the company's year-ago earnings of 7 cents per share.

 

Full-Year Fiscal 2014 Guidance

 

For the full year of fiscal 2014, Carnival expects its earnings to be within $1.50–$1.70. Earnings in fiscal 2013 were $1.58 per share.

 

Although the company's revenue yield is expected to be down in the upcoming quarter, it will improve in the second half of 2014 driven by better booking environment and higher ticket pricing. Net revenue yields (in constant dollar) were guided to fall marginally in fiscal 2014.

 

Carnival also expects net cruise costs, excluding fuel per ALBD (on a constant dollar), to increase in fiscal 2014 as compared with the year-ago levels.

 

Our Take

 

We believe Carnival's turnaround remains on track. The company's several brand-building efforts and other marketing promotions are expected to be beneficial. Carnival recently entered into a partnership with Dr. Seuss Enterprises to provide a variety of exciting and immersive dining and entertainment experiences on its fleet of 24 "Fun Ships” as part of its brand-building efforts.

 

Reduction in fuel consumption is another bright spot in Carnival's report card. However, higher operating costs remain a major headwind for the Zacks Rank #2 (Buy) company.

 

Other better-ranked stocks in the leisure and recreational industry include Live Nation Entertainment, Inc. LYV, Royal Caribbean Cruises Ltd. RCL and SFX Entertainment Inc. SFXE. All these firms also carry a Zacks Rank #2.