Starwood's (NYS: HOT) lower-than-expected returns troubled investors recently, when the hotelier posted low REVPAR in its European properties. With a high debt-to-revenue ratio, and a fourth-quarter profit that dropped 51% due to impairment charges, it would be easy to be bearish on Starwood.
Here's why that would be a mistake.
The industry is recovering
Host Hotels (NYS: HST) CEO Ed Walter recently told USA Today that financial services firms are still generating business for luxury hotels, using them as a place to wine and dine clients. "We're continuing to see corporate business coming back at Marriotts, Westins and Sheratons, as well as our Four Seasons and Ritz-Carltons," he says. "As I've talked to (hotel general managers) and brand partners, while I'm sure there is an occasional company still concerned about going to a luxury hotel for an event, it seems the fear of landing on the front page for doing that has largely dissipated."
Financial services aren't the only companies coming back. Business travelers are dipping their toes back into the hotel pools, in large numbers, although not for large stays; most of them stay less than a week.
Marriott International (NYS: MAR) , which recently spun off its timeshare business, showed increases in revenue and net income, once adjusting for the lost profit of the ownership component. Hyatt Hotels (NYS: H) has done well off a tax credit, which bumped the company's fourth-quarter income to $52 million from $6 million this time last year.
Expanding while others sleep
When other hoteliers slowed down opening new properties during the recession, Starwood powered on ahead. By purchasing and converting existing properties to the Starwood brands, and opening new hotels in emerging markets, the company added 389 hotels in the past five years. Twelve more hotel deals have been signed, and two-thirds of those will be new build projects in emerging markets. Emerging markets were 61% of new rooms in 2011.
Last week, Starwood opened the first of three St. Regis hotels in the Middle East this year. The Aloft brand made its debut in Latin America with two new hotels, and the company will be adding two established Blue Mountain Australian hotels to the Luxury Collection brand.
In 2010 and 2011, Starwood opened more hotels in the Asia-Pacific region than Marriott, Hilton, and Hyatt combined. While it may have looked foolish to power on so strongly in a down economy, that investment is already paying off, and will continue to do so as those short-term business travelers begin staying over weekends for personal use.
Rebranding the global megatraveler
Starwood also recently overhauled its Starwood Preferred Guest loyalty program, in a move which, if successful, will force other hotels to adapt. Some of the new benefits for elite members include guest-determined check-in and check-out (no more waiting until 3 pm if your flight arrives at 6 am), confirmable suite upgrades, and lifetime memberships.
Although Starwood is ambitiously promoting the program, several hundred locations have opted out of a recent bonus awards points promo. A manager at one of the hotels opting out, however, said the decision was made by headquarters. It's a mixed message, and one Starwood would do well to correct before the program officially kicks off on March 1. When I called to book a stay recently, a customer service representative admitted, "They were so quick to roll out the program that some of the details got lost."
It's a detail the hotelier needs to correct, and fast. If executed well, the new loyalty program will elevate the profile of Starwood's properties across brands. If executed poorly, it'll just be another program that people will join during a stay, and promptly forget.
The Foolish bottom of line
While other hotel chains were being understandably cautious during the decline, Starwood was redesigning the guest experience in a way that other hotels will be forced to follow, converting existing, successful properties to the Starwood brand, and tackling emerging markets head on. I predict that this brand will outperform the market over the next five years, and I'm so confident I've given it a thumbs-up in Caps. Add these companies to My Watchlist to keep an eye on the global hotel industry.
Think I'm wrong about Starwood? Let me know below.
At the time thisarticle was published Molly McCluskey owns shares of Starwood, which sadly, she was unable to buy with loyalty points. Follow her on Twitter @MollyEMcCluskey. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.