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Cruise vacation company Royal Caribbean (NYSE:RCL) reported Q2 CY2024 results exceeding Wall Street analysts' expectations, with revenue up 16.7% year on year to $4.11 billion. It made a non-GAAP profit of $3.21 per share, improving from its profit of $1.74 per share in the same quarter last year.
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Royal Caribbean (RCL) Q2 CY2024 Highlights:
- Revenue: $4.11 billion vs analyst estimates of $4.05 billion (1.6% beat)
- EPS (non-GAAP): $3.21 vs analyst estimates of $2.75 (16.6% beat)
- EPS (non-GAAP) Guidance for Q3 CY2024 is $4.95 at the midpoint, above analyst estimates of $4.77
- Gross Margin (GAAP): 60.2%, up from 46.4% in the same quarter last year
- Free Cash Flow was -$567 million, down from $1.09 billion in the previous quarter
- Passenger Cruise Days: 13.23 million, up 933,158 year on year
- Market Capitalization: $42.34 billion
Established in 1968, Royal Caribbean Cruises (NYSE:RCL) is a global cruise vacation company renowned for its innovative and exciting cruise experiences.
Hotels, Resorts and Cruise LinesHotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.
Sales GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Regrettably, Royal Caribbean's sales grew at a weak 8.1% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new property or emerging trend. Royal Caribbean's annualized revenue growth of 80.9% over the last two years is above its five-year trend, suggesting its demand recently accelerated. Note that COVID hurt Royal Caribbean's business in 2020 and part of 2021, and it bounced back in a big way thereafter.
We can better understand the company's revenue dynamics by analyzing its number of passenger cruise days, which reached 13.23 million in the latest quarter. Over the last two years, Royal Caribbean's passenger cruise days averaged 135% year-on-year growth. Because this number is higher than its revenue growth during the same period, we can see the company's monetization has fallen.
This quarter, Royal Caribbean reported robust year-on-year revenue growth of 16.7%, and its $4.11 billion of revenue exceeded Wall Street's estimates by 1.6%. Looking ahead, Wall Street expects sales to grow 11.7% over the next 12 months, a deceleration from this quarter.
Cash Is King If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Royal Caribbean has shown poor cash profitability over the last two years, putting it in a pinch as it gave the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin averaged 4.5%, lousy for a consumer discretionary business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Royal Caribbean to make cash investments in working capital (i.e., stocking inventories) and capital expenditures (i.e., building new facilities).
Royal Caribbean burned through $567 million of cash in Q2, equivalent to a negative 13.8% margin. The company's quarterly cash flow turned negative after being positive in the same quarter last year, but we wouldn't put too much weight on it because working capital and capital expenditure needs can be seasonal, causing quarter-to-quarter swings. Long-term trends carry greater meaning.
Key Takeaways from Royal Caribbean's Q2 Results We were impressed by Royal Caribbean's optimistic earnings forecast for next quarter, which blew past analysts' expectations. We were also excited its EPS outperformed Wall Street's estimates. On the other hand, its number of passenger cruise days unfortunately missed, but it made up for the lower volume with better-than-anticipated pricing, as indicated by its revenue beat. Overall, we think this was a strong quarter that should satisfy shareholders. The market was likely expecting more, however, and the stock traded down 1.3% to $162.55 immediately following the results.
