Red Roof Q2
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Red Roof Q2
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(FOOL CONFERENCE CALL
SYNOPSIS)* By Debora Tidwell (MF Debit)
Red Roof Inns <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RRI)") else Response.Write("(NYSE: RRI)") end if %> UNION CITY, Ca., August 2, 1996/FOOLWIRE/ --- Red Roof Inns released Q2 1996 results yesterday morning.** Revenue for the quarter increased 9% and their pro forma earnings per share improved 18%. Revenues were $83.8 million. Year-to-date 1996 revenues were $151.9 million, a 10% increase over last year. The pro forma net income for the quarter was $11.4 million compared to $9.7 million for 1995. They earned $0.40 per share versus $0.34 per share in 1995. Pro forma income for the first 6 months of 1996 was $11.1 million compared to $8.6 million in 1995, a nearly 30% improvement. And earnings per share for the first 6 months were $0.39 versus $0.30 in 1995, a 30% improvement.
Marketing and corporate expenses were $1.2 million higher than the 1995 quarter primarily because of plant increases and staffing related to the company's growth. Their operating income was $29 million for the quarter compared to $26.6 million a year ago. $38.6 million of operating income year-to-date compared to $35.6 million a year ago. Operating income margin of 34.6% is in line with their expectation for the quarter and is equal to the margin for Q2 1995. They utilize an income tax rate of approximately 40.4%
For their base inns their average daily rate for the quarter was up $2.54 or 5.9% over last year. For the year-to-date, average daily rate was up $2.02 or 4.9% versus last year. Occupancy for the quarter was 80%, 2.2% below last year. For the year-to-date, occupancy was 75.6%, 1.1% below last year. Their revenue per available room for the quarter was up 3.1% or $1.10 over last year. For the year-to-date revenue per availabe room was up 3.3% or $1.05 over last year. What they have done is aggressively pushed their rate and, in the process of doing that, traded off some occupancy in Q2. July is a key month due to the seasonality of their business and they are happy to report that the revenue per available room was up strongly during the month of July over last year.
DEVELOPMENT PROGRAMS
They opened 3 new properties during the quarter giving them a total of 237 inns open at the end of the quarter compared to 222 inns at the end of Q2 last year. Continuing the positive momentum, their development program is on track to add 18-20 new inns by year end and their franchising program will officially be kicked off next week. They currently have 26, 740 rooms compared to 24,847 rooms a year ago. Their pipeline is strong. There are currently 9 inns under construction, 3 acquisitions under contract, and 9 sites under contract. The 21 properties acquired or constructed in 1994 and 1995 are performing in line with expectations and show steady improvement.
The franchising program is progressing ahead of schedule. They will file the Uniform Franchise Offering circular on Monday and officially launch the franchise sales effort the following day. Franchising will provide significant benefits to Red Roof. It will assist in achieving the company's annual goal of 20% earnings growth by generating fee income, providing greater earnings stability and adding a third leg to their growth program to augment the corporate conversion and new construction actvity. Franchising will help achieve national distribution of the Red Roof brand with minimal capital by leveraging the brand rather than the balance sheet. In addition, franchising will enable Red Roof to capitalize on the growing importance of chain afficiation and the consolidation taking place within the lodging industry. For example, in 1995 nearly 1700 newly constructed hotels opened throughout the hotel industry, of which almost 90% were franchised. A Red Roof Inn franchise will compare very favorably with that of other economy chains. Their brand achieves one of the highest profit margins in the industry and a strong customer loyalty. The open territories in their system allow numerous attractive development opportunities for their franchisees. They will provide the most significant development, operational, reservation, and marketing support in the economy segment. Red Roof Inns will be the only company to offer franchisees a guest satisfaction incentive program whereby franchisees can lower their fees 0.05% by maintaining consistently high guest satisfaction ratings. They have identified well capitalized multi-unit owner operators who meet their criteria as additional franchisees in an effort to develop a program with a small number of high quality participants. Even though they have not started a formal marketing program, they have received a number of unsolicited inquiries from interested parties.
They are in a strong cash position and they have sufficient funding capacity under their $150 million bank facility to support their growth plans through at least 1997.
CASH, DEBT, PROPERTY AND EQUIPMENT
Looking at the property and equipment account, they saw an increase of just under $27 million for the quarter and this is primarily related to their development program and capital expenditures. They expect capital spending will accelerate over the course of this year in accordance with their development plan. Total assets amounted to $800 million at the end of Q2 versus $755 million at year end. Their total debt at quarter end was $430 millio versus $557 million at year end. That is about a $118 million increase due to the IPO proceeds paying down debt and scheduled amortizations.
At quarter end they had $12 million outstanding under the $150 million bank revolving credit and as of today there is nothing outstanding under that facility. They have no significant near term debt maturities. Their weighted average cost of debt 9.8%. Approximately 94% of their debt is fixed rate.
Shareholders equity amounted to $312 million versus $153 million at year end. In terms of cash flow, the net cash provided by operations was about $16.5 million for the quarter versus $11.6 million for Q2 1995. They still expect cash provided by operations to be in the $60-65 million range for the full year.
In late May, their management team met with Standard & Poor's and Moody's. In early July they were notified that both credit rating agencies had upgraded Red Roof's ratings on its $200 million of 9-5/8% senior unsecured notes. S&P raised its corporate credit rating to BB- from B+ and the rating on the senior notes to B from B-. Moody's upgraded its corporate credit rating to BA3 from B1 and the rating on the notes to B2 from B3. Both agencies indicated that the upgrades reflect the strengthening of the company's operating results and debt protection measures and the expectation that the strong profit margin would provide a cushion during an industry downturn.
They feel that they are well-positioned to seek another upgrade in early 1997 once they have reported their 1996 results and have continued to demonstrate that they are successfully executing their strategies.
REVENUE ENHANCEMENT PROGRAMS
On the revenue enhancement side, they are making excellent strides in implementing a fully automated revenue management system. They have implemented a manual yield management program in many of their inns to increase length of stay and effectively utilize overbooking to maximize occupancies.
In May, they contracted with a company that provides automated yield management systems for the hotel and airline industries to develop and implement a fully automated system by mid-1997. This system has the potential to increase revenues 2-4%. Like most of their industry peers, they have been increasing room rates to maximize earnings. At the same time they have maintained occupancy and revenue per available room premiums versus their peers and continue to enjoy the highest operating profit margin in the industry. While they have been willing to sacrifice occupancy for rate in the short run, they continue to focus on maintaining their historically high occupancy rate and are exploring various ways to insure their continued leadership position.
In June, they initiated a customer satisfaction tracking system which provides specific feedback to each manager at each inn. They are also using their inns in Columbus Ohio as a test market for various property renewal concepts. Their revenue management system will allow them to more effectively manage occupancy and, company-wide, they continue to focus on delivering service beyond the expectations of their guests.
INDUSTRY CONDITIONS AND OUTLOOK
The board of directors has authorized an open market share repurchase of up to 500,000 common shares. The shares will be used to fulfill the company's share requirements for its employee stock purchase plan and their stock option plan. They believe that their shares are significantly undervalued at the current market price. Therefore, a repurchase program represents an excellent investment and demonstrates their confidence in the future of Red Roof Inns.
Looking out to the full year, they are still comfortable with their average annual earnings growth target of 20%. About 40% of their earnings are generated during Q3 and they have gotten off to a good start in July with substantial revenue gains. The favorable industry conditions they saw in 1995 in the economy segment, where demand increased faster than the supply of hotel rooms continues. For the second quarter of 1996, economy segment supply was up 1.8%, demand was up 2.5%. For the 6 months ended June 30th, economy segment supply was up 1.7% and demand was up 2.6%. There is no overbuilding in the economy segment.
They are committed to growing their exceptionally strong brand and they remain very excited about their progress. They are pleased with their strong earnings growth and remain on target to achieve their goal of 20% earnings growth for the year. Additionally, their development program is on track and their franchising program will be officially kicked off next week. They felt it was appropriate to say that they are disappointed and frustrated with the stock price performance. They are committed to being the price value leader in economy lodging and are firmly convinced that their strategies are the right ones to build shareholder value.
**Note: The numbers the company presented were pro forma numbers (apples to apples numbers so that you can properly compare Q2 1996 with Q2 1995). The statements are adjusted pro forma to give effect of the initial public offering of 10 million shares as if that offering had occured on January 1, 1995, and the application of the proceeds to reduce their indebtedness and related interest expense. The Q2 1995 pro forma excludes a non-recurring charge of $2.8 million related to a change in management. The year-to-date 1996 pro forma is adjusted to eliminate a non-recurring charge of $450,000 related to SFAS 121 to recognize impairment of long-lived assets. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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