EXTENDED STAY AMERICA fell short of its earnings per share goal for the second quarter of 2019. However, the company said it is taking steps to improve returns by the end of the year or early 2020, and it saw a 3.8 percent increase in total revenue over second quarter 2018.
ESA’s quarterly earnings of $0.32 per share missed the Zacks Consensus Estimate of $0.33 per share, according to NASDAQ.com. Last year the company earned $0.35 per share in the second quarter. Its shares have lost about 3.2 percent since the beginning of the year, compared an 13.5 percent increase in the S&P 500.
The company’s President and CEO Jonathan Halkyard said during its earnings call that ESA’s shares are significantly undervalued under current prices.
“We have asked our boards to increase the company’s remaining authorization to more than $260 million, which they have approved,” Halkyard said. “With the review concluded, we expect to return a significant amount of capital to shareholders in the second half of 2019 and in 2020.”
ESA’s total revenue for the quarter stood at $323.7 million and system-wide RevPAR increased 0.1 percent with a 1.5 percent RevPAR index gain. The company’s adjusted EBITDA stood at $153.6 million.
The key to ESA’s recovery on the stock market depends on its earnings outlook, according to NASDAQ.com. The company’s outlook was mixed prior to the second quarter earnings release.
“While the magnitude and direction of estimate revisions could change following the company’s just-released earnings report, the current status translates into a Zacks Rank #3 (Hold) for the stock. So, the shares are expected to perform in line with the market in the near future,” NASDAQ.com said. “It will be interesting to see how estimates for the coming quarters and current fiscal year change in the days ahead. The current consensus EPS estimate is $0.38 on $336.74 million in revenues for the coming quarter and $1.08 on $1.22 billion in revenues for the current fiscal year.”
Halkyard said the company’s growth rate is on target with 18 percent increase in its pipeline in the second quarter to 8,700 rooms, approximately 13 percent of existing supply. ESA also opened its first franchise conversion hotel, part of its ESA 2.0 strategy launched in 2016.
“After extensive exploration of a variety of possible transformative transactions to which our boards of directors have been, and remain, open, our boards have concluded that the terms currently available for such transactions do not presently provide a superior alternative to the opportunity presented by the aggressive pursuit of our ESA 2.0 strategy, including steps to accelerate the franchising portion of that strategy,” he said.
ESA’s franchise pipeline expanded 21 percent to 52 hotels in the second quarter.
In the earnings call, Halkyard addressed several other initiatives the company has under way, such as new network technology and broadband capabilities at all company-owned hotels to provide faster Internet speeds and the completion of Phase 1 of a CRM system that has collected data over the past five years on guest behavior.
“As we gain insight from this data, we are developing more personalized and targeted offers and expect to implement updates to our loyalty program, tweaks to direct marketing and improvements in our mobile app,” he said.
Halkyard went on to talk about how ESA is likely to continue doing well if a predicted economic downturn does occur in the next two years. The downturn, if it happens, would be relatively mild compared to the Great Recession of last decade, he said, with RevPAR declines of up to 5 percent rather than the 20 percent drops seen during the recession. Also, supply growth has been slower in the economy chain scale than elsewhere, leading to less pression on RevPAR.
“Third, unlike the rest of the lodging industry, which focuses on nightly transient business, we have three very different customer segments to draw on, including the same transient guests but also extended-stay demand from business clients ranging from one week to two months as well as longer-staying guests who have a more similar profile to apartment guests,” Halkyard said. “If one of these three areas struggles, we believe we can make up a portion of that business among our other two segments.”
The fact that ESA’s prices are typically 10 to 15 percent lower than other segments could lead to an increase in business as travelers pursue cheaper options.
“We believe we could navigate any normal recession without changing our long-term plans or reducing capital returns to shareholders.”