Earnings Preview: More Rough Seas Expected for Royal Caribbean

Royal Caribbean Cruises (RCL), already on the defensive over its decision to drop anchor in Haiti days after a devastating earthquake, could take more lumps after it reports its fourth-quarter and year-end figures Thursday.The parent company of Royal Caribbean International and Celebrity Cruises is expected to post a weak quarter, and company executives had already warned that the recession continues to take a bite out of its revenues, despite its cost-cutting efforts and aggressive marketing of cruise cabins.

Update On 'Wave Season'

Management is also expected to give update on the "wave season," the winter period when most Americans make their cruise reservations for the year. While bookings are expected to rise, so are deals. As a result, profits could take a hit, even as traffic figures hold up.

While analysts still consider Royal Caribbean to be one of the strongest players in the cruise market, there are concerns that it has too many cruise cabins to fill in a market where demand has gone soft, and it continues to add more. Observers fear all that capacity will force the cruise line to keep discounting to fill cabins and squeeze its profits.

The company's stock has rebounded strongly -- too strongly for some analysts, who fear it may have tapped out its near-term potential. It has gone from a 52-week low of $5.40 set in early 2009 to a high of $27.62 on Jan. 19. But the stock took a tumble Jan. 22 when it was downgraded from "outperform" to "neutral" by Wedbush Morgan Securities, which reaffirmed a target price of $24. A majority of analysts still rate Royal Caribbean a buy, with price targets as high as $30 per share.

Expected To 'Give Back' Gains

During the company's earnings call in November, Chairman Richard Fain said that the cruise company expected to "give back" some of its gains during the fourth quarter, which traditionally is slow period for cruise lines. Fain added the company has not seen evidence of an economic rebound in its bookings, and its home market of Florida, which makes up a large share of its short-cruise traffic, remains in the grips of recession.

Company executives acknowledged holiday cruises required more discounting that usual to fill cabins, which brings down the yields, or revenues per cabin. CFO Brian Rice said the company expects the yields to be down 7% to 8% for the fourth quarter and some 14% for the year. That's better than in past quarters -- yields for the third quarter were down 16.5% -- but below the company's expectations, according to Rice. He noted even the Christmas cruises were not getting the premium prices they normally commanded.

During the same call, the cruise executives said they expected revenue increases to begin in the first quarter of 2010 and for the rest of the year, with yields turning positive in the first quarter. But they warned the fourth quarter is traditionally weak and this year could be worse than anticipated. They forecast a loss of five cents per share in the fourth quarter and full-year earnings of 70 cents per share, down 74% from $2.68 in 2008. For their part, analysts are forecasting a loss of six cents per share for the quarter, compared to one cent a year ago.

Oasis Of The Seas Status Report

And the analysts will be looking for some updates on the new Oasis of the Seas, the world's largest cruise ship. Royal Caribbean first sailed the 2,700-cabin floating resort in December; a sister ship of equal size, the Allure of the Seas, is under construction.

Both ships were ordered long before the recession hit, but if Royal Caribbean was concerned about difficulties filling the existing cabins, it can only be even more concerned about adding that much capacity while yields are still down. Some early reports on wave season say competition for passengers will be tough and cruise companies are offering plenty of deals. So unless Royal Caribbean reports an unusually strong showing early on during wave season, it may fall short of its own modest predictions for the first quarter.
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