Hilton's big beat reflects no cracks in demand; new brand coming

Editor's note: Story updated after earnings call

McLEAN, VIRGINIA -- Reflecting the ongoing recovery in travel and tourism, Hilton reported better-than-expected earnings for 1Q23 on Wednesday and as a result raised its full-year Adjusted EBITDA guidance. "We are not seeing any cracks in demand patterns," Hilton CEO Chris Nassetta stated, adding that he does expect a slow down in the third or fourth quarter of 2023. But we do expect things to slow down.

Nassetta also revealed during the earnings conference call that within 30 to 60 days Hilton will launch a lower end, midscale extended-stay brand. It will be a new-build, very efficient to build model with what he said will have "great margins." He said it will be a "megabrand" opportunity for 2025-2026 and is being developed in response to the accelerated mobility of consumers, many working remotely or with more flexibility. He called it 60% efficiency apartment, 40% hotel with an average length of stay of 20 to 30 days. "We could do hundreds of these over time," Nassetta added.

Speaking more generally about the macroeconomic environment, Nassetta said he is confident The Federal Reserve "will land the plane reasonably well" and any potential recession should be mild. But in the near-term, industry momentum should continue to build in the second quarter and likely into the third quarter, he added. "I feel like there is enough momentum in our business and the economy more broadly. Net, net, we feel better," Nassetta said.

When asked about the impact of the banking crisis on growth, Nassetta said it is still too early to tell for sure but expects banks to "pull in their horns" with less credit being available. He pointed to regional banks, which tend to finance limited-service projects, as a potential short-term pain point. "The Fed is managing through this reasonably well and is committed to making sure there are no runs on regional banks," he said. "For a period, less credit will be available, but our share [of development] tends to grow when times are tougher for financing... The question is moving projects to under construction, and that will get more challenging."

First quarter 2023 earnings basics:

* 30% RevPAR growth versus guidance of 23%-27% (Asia Pacific +91.2% y/y vs. the U.S. at +21.4% y/y) 

* Adjusted EPS of $1.24 vs. $1.13 for the Street

* Adjusted EBITDA $641 million vs. $610 for the Street

* Total fees $653 million (+26% vs. 4Q19)

* Diluted EPS was $0.77 ($1.24 adjusted for special items)

* Net income was $209 million

* Approved 24,900 new rooms for development (428,100-room pipeline as of March 31)

* More than 300 Spark-branded hotels are now in various stages of the pipeline

* Added 9,200 rooms (5,300 net additional rooms) and net unit growth guidance is unchanged

* Construction started on more than 19,000 rooms

* Repurchased 3.2 million shares of common stock, bringing total capital return, including dividends, to $487 million for the quarter and more than $602 million year to date through April

* Full year 2023 RevPAR is expected to increase between 8%-11% vs. 2022

* Full year net income is projected to be between $1,331 million and $1,385 million

* Full year Adjusted EBITDA is projected to be between $2,875 million and $2,950 million

* Full year 2023 capital return is projected to be between $1.8 billion and $2.2 billion

R.W. Baird analyst Michael Bellisario suggested the upside drivers were better RevPAR growth and total fees.

Bellisario also commented on how the Adjusted EBITDA guidance for 2023 is increasing $50-$75 million (+2% vs. prior), which is more than the $31 million beat in 1Q23 vs. the high end. Also, 2Q23 guidance is ahead of Baird/Street (+2% at the midpoint), which is driven by Hilton's 10%-12% RevPAR growth forecast compared to Baird’s 6.5% estimate.