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Financial Analysis of Marantz

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Netra Shetty
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Financial Analysis of Marantz - February 12th, 2011

Marantz is a company that develops and sells upper-mid range to high-end audio products.[1]
The first Marantz audio product was designed and built by Saul B. Marantz in his home in Kew Gardens, New York.[2] The company had a major influence in the development of high fidelity audio systems, and reached the high point of their success in the mid to late 1970s.
During the 1980s, while owned by Philips,[3][4] a pioneer in compact disc technology, Marantz built some very well-received CD players, but other products in the line were not as successful as in the past. As of the early 1990s, Marantz has focused on higher end components. In 2001, Marantz Japan acquired the brand from Philips and owned all overseas sales subsidiaries.
Marriott International Inc. (NYSE:MAR) is one of the leading worldwide operators and franchiser of hotels and related lodging facilities.

Marriott pioneered the concept of establishing a global brand name for a hotel company when it entered China in 1991, a concept which is gaining momentum now. In fact, Marriott’s competitors have now become more proactive in promoting this concept and companies, such as Starwood and Hyatt, are leading the way. Starwood introduced a brand, which does not provide the full array of services of a hotel (limited service brand) whereas Hyatt acquired AmeriSuites and subsequently re-branded it to Hyatt.

In 2009, Marriott earned 9.93% of its revenue in the form of management and franchisee fee, which provides the company with a stable and predictable stream of revenue, and shields it from any temporary downturn in the industry.[1] Hotel companies are highly dependent on the number of customers a hotel attracts. Thus, in case the number of travelers coming to a particular region declines, the revenues from the hotel in that region will also decline. However, if the company owns the brand and the hotel is run by a third-party, the company is ensured a fixed amount regardless of the number of customers staying at the hotel.

Business Overview

Contents
1 Business Overview
1.1 Business & Financial Metrics
1.1.1 2010 Third Quarter Overview
1.1.2 2010 Second Quarter Overview
1.1.3 2010 First Quarter Overview
1.1.4 2009 Overview
1.2 Business Segments
2 Trends and Forces
2.1 There is lower supply of available rooms while demand is increasing
2.2 Internet reservation websites pose a never-ending threat against hotels
2.3 Global expansion may result in unwanted bureaucracy or segmentation that reduces productivity
2.4 The U.S and other countries are showing signs of recovery from recession
3 Competition
4 References
Marriott International, Inc. (Marriott) is a worldwide operator and franchiser of hotels and related lodging facilities. At the end of 2009, the company had more than 3,420 hotels spread across 68 countries.[2] Marriott generates 87 percent of its earnings from hotel operations and 13% from timeshares.[2] The company has over 86 percent of its properties based in the U.S[2]. Moreover, Marriott operates 13 reservation centers, 8 of which are located in the United States, and has a distinct multi-brand, multi-channel central reservation system, which enables a customer to choose the rooms as per his/her preference.[3] For example, the system will enable the customer to find and book the cheapest room available in all the Marriott hotels in a city.

Several companies in this industry, including Marriott, are increasing their presence in developing countries, such as China and India, apart from registering moderate expansion in the fragmented U.S and European markets. The expansions being undertaken by players such as Marriott are being driven by the growth in international tourism in these countries.

Internet reservation channels are gaining prominence over the traditional modes. Customers are willing to pay a premium to make reservations through the Internet as it does not require their physical presence at the time of the booking. This has emerged as a threat for companies in this industry as these Internet reservation channels charge a higher commission from hotels and also demand lower room rates. However, Marriott has developed an online multi-channel central reservation system to counter this threat and has met with considerable success.

Marriott is increasingly relying on management and franchisee fee as a source of income because this provides the company with stable revenues, which are not affected by any increase/decrease in the number of customers. However, as these franchisees are run by third parties, their objectives may be different from that of Marriott. For example, Marriott may be focused on establishing a brand by providing a consistent level of services to their customers, while the franchisee may just focus on maximizing revenues.

Business & Financial Metrics
2010 Third Quarter Overview
For the third quarter, Marriott continued to show signs of recovery from the 2008 Financial Crisis]. Specifically, net income totaled $83 million, a 57 percent increase compared to third quarter 2009 net income.[4] However, this is lower than the analyst forecasted earnings by 4.30%, pointing that Marriott and the industry are not able to capitalize on the improvement in the economy as well as they expected.[5] The company totaled $2.6 billion in the 2010 third quarter compared to approximately $2.5 billion for the third quarter of 2009.[4]


A large percentage of the earnings growth came from Marriott's international hotels. While revenue per available room at North American hotels rose 7.2 percent, and average daily rates rose nearly 2 percent, International systemwide hotels showed REVPAR up 12 percent in the quarter. Asia Pacific region has REVPAR up over 20 percent.[4] Worldwide, REVPAR increased 8.2% since year ago 3rd quarter. About 2000 of the 5000 rooms opened during the third quarter were opened in international markets.[4]

For the fourth quarter, the company assumes comparable systemwide REVPAR on a constant dollar basis will increase 6 to 8 percent in North America, 7 to 9 percent outside North America and 6 to 8 percent worldwide.[4] The company expects to open about 30,000 rooms in 2010.[4]

2010 Second Quarter Overview
For the second quarter, Marriott began to show signs of full recovery from the 2008 Financial Crisis. Revenue from its franchise fees increased by 13% to $287 million due to strong Revenue Per Available Room (RevPAR).[6] RevPAR increased 7.9% in North America, while the rest of the world's RevPAR rose 9.9%.[6]

Following Marriott's forecast in increased demand, 6,568 rooms opened during just the second quarter.[6] This is an addition of 46 new properties to its worldwide lodging portfolio.[6] 14 older properties, encompassing 2,311 rooms, exited the Marriott system during this quarter.[6] Currently, the company encompassed 3,489 properties for a total of approximately 607,000 rooms.[6]

Marriott's net income for this quarter went up from last year's $37 million to $119 million.[6] Revenue went up by a dollar-value equivalent amount from $2,562 million to $2,771 million.[6] Expenses stayed around the same - with a 3.32% increase to $2,545 million since last year's second quarter.[6] This illustrates that the increase in Marriott's ADR was well received by the economy while costs remained similar - converting incremental revenue directly into operating profit.[6]

2010 First Quarter Overview
For the first quarter, Marriott's net income decreased by 5% to $83 million compared to first quarter 2009. Despite an increase in business demand since 2009 fourth quarter, demand still remains lower than 2009 first quarter levels.[7] However, Marriott expects improved results as the industry progresses out of recessionary levels. [7]

Marriott revenues totaled to $2.6 billion in the first quarter, a slight increase since the first quarter of 2009. Base management and franchise fees rose 1% to 216 million reflecting fees from new hotels.[7] The timeshare segment, which 13% of 2009 revenues, increased contract sales by 10% and provided a hedge against further recessionary plummets.[7]

Marriott has resumed construction of many of its properties initially postponed until market outlook turned positive. Thus, Marriott expects the second quarter and the rest of the year to be a period of full-blown recovery from the recession to pre-recessionary levels.[7]

2009 Overview
Marriott has 3,420 hotels across the globe.[2] The table above shows a continuous increase in the occupancy rates and revenue per average room during the last three years.

In 2009, the company posted revenues of $10.91 billion and a net loss of $353 million as compared to a revenue of $12.88 billion and a positive net income of $347 million in the previous year.[8] This large dip in revenues in one year is credited to the 2009 recession. Both domestic and international demand for hotels reduced drastically as more families pursued 'stay-cations.'

While the company was able to remain profitable through the first half of 2009, net income fell by over 56% when adjusted for restructuring and other costs, to $84 million.[9] This was reflected by a 17.5% decline in revenue from $6.132 billion to $5.057 billion, which was caused by declines in all of Marriott's business segments, but most notably the company's international operations and timeshare sales. The weak global economy has negatively impacted luxury travel, resulting in a 37% and 23% decline in international and timeshare sales, respectively.[9] Still, only the timeshare segment, which lost $35 million, had operation losses for 2Q09.[9] Moreover, RevPAR, Occupancy Rates, and Average Daily Rates decline across all five regions to $100.67, 66.9%, and $150.59, respectively.[9]

In the third quarter of 2009, Marriott reported a net loss of $466 million, which marks a significant drop in profitability, as compared to both the first half of 2009 as well as 3Q08 (for which net income was $94 million).[10] The timeshare segment had a particularly weak quarter, as revenue for this segment fell by over 33% to $254 million.[10] In response to the difficulties facing this segment, Marriott recognized a $614 million impairment charge (pretax) related to the reduced prices and promotions that Marriott is offering in both the United States and internationally in order to attract demand for these properties.[10] However, as reflected by 20.6% and 22.3% declines in RevPar and 5.3% and 5.8% declines in occupancy for North America and the International market, respectively, reduced demand affected most aspects of Marriott's operations, both by product and geographically.[10] Further, although the company had Operating Cash Flow of $597 million, the company's current cash debt coverage ratio was .238 for 3Q09, which suggests that cash flow from operations may be insufficient to meet Marriott's current liabilities, and that the company could face liquidity issues. However, were this to be a problem, the company's Current Ratio of 1.89 indicates that it a more than adequate amount of current assets to meet these liabilities.[10]

Marriott ended 2009 with $3.4 billion in revenues in comparison to the $3.8 billion in revenues for 2008. For the full year of 2009, Marriott had a net income of $335 million[11] and a revenue of $10.93 billion. Both of these are big drops from 2008's values of $543 million and $12.94 billion respectively due to the slowdown in usage in the 2009 financial crisis.[11] Revenue Per Available Room (RevPAR) also decreased 20% in 2009.[11] Marriott expects a 5%-10% decline in RevPAR for the first quarter of 2010, and down 2% for the full year 2010.[12] However, Marriott continued to expand by building 242 new hotels across the world in anticipation of a resume in room usage levels.

Business Segments


Segment Revenue in 2009[13]
MAR Revenue Segments[13] 2010 (in millions of $)[13] 2009 (in millions of $)[13]
North American Full Service 4,848 5,631
North American Limited Service 1,986 2,233
International 1,145 1,544
Luxury 1,413 1,659
Timeshare 1,439 1,750
Other 77 62
Total 10,908 12,879
Marriott’s operations are grouped into five distinct business segments – North American Full-Service Lodging, North American Limited-Service Lodging, International Lodging, Luxury Lodging, and Timeshare. The lodging business involves developing, operating and franchising hotels and corporate housing properties under 20 brand names overall. Marriott also develops, operates and markets timeshare ownership properties under four separate brand names.[2]

A large part of their total revenues come from North American Full-Service Lodging Segment (44.4% of total revenues in 2009), which comprises owned hotels, resorts, conference centers and club-sports.[13] The company operates this business segment under four brand names: Marriott, JW Marriott, Renaissance, and Renaissance ClubSport.[2]

Trends and Forces

There is lower supply of available rooms while demand is increasing
The number of available room nights in 2009 increased 3.2%, reflecting construction and redevelopment projects already financed before the financial crisis.[14] For 2010, S&P sees room night supply increasing a smaller 2.3%.[14] The room occupancy rate fell 8.6% in 2009, with occupancy of 55.1%, indicative of severe, near depressionary levels.[14]

Since the recession, new orders for rooms have come to a standstill, thus reducing the available number of rooms present for an ever-increasing global travel and hotel population. For 2010, the smaller increase in supply and higher demand should lead to a rise in occupancy to approximately 55.5% to 56.0%.[14] Higher occupancy rate is typically followed by increased daily rates. This increase in occupancy rate may continue beyond the first year since hotels are delaying or have delayed construction orders for more rooms until market has shown stability.

Internet reservation websites pose a never-ending threat against hotels
In general, the hotel industry faces a threat from Internet reservation channels, which represent a growing share of hotel room bookings. These intermediate channels charge higher commissions and demand lower room rates from hotels, which puts tremendous pressure on the revenues as well as margins of hotels. Marriott has built its own central reservation system to counter this threat from third parties. Marriott is the leader with respect to its online reservation usage in the industry, with 75% of all Marriott room reservations booked online on Marriott's website. [15]

Global expansion may result in unwanted bureaucracy or segmentation that reduces productivity
The growth of Marriott's operations outside of the United States also makes them susceptible to the risks of doing business internationally due to geopolitical factors and region-specific economic recessions. Certain areas such as China and India are booming, which could substantially increase profits due to region-specific economic booms. However, concentrated recessions could lower revenues, increase costs, reduce profits or otherwise halt business. Marriott currently operates or franchise hotels and resorts in 67 countries outside the U.S, representing 16% of 2009 revenues.[16] The company expects that the international share of its total revenues will increase in future years. As a result, they are increasingly exposed to higher risk.[16]

The U.S and other countries are showing signs of recovery from recession
Consistently almost for the past year, the U.S GDP has shown signs of recovery, with each quarter being better than the previous quarter and the year before. More importantly, personal income has also consistently increased for almost a year. Since decrease in personal disposable income brought forth the reduction in demand for hospitality and transportation industries, increasing incomes put upward pressure on demand for hotels and transport. The Hotel Industry Leading Indicator, an indicator that predicts hotel demand, was down by 15.7% during the recession, but has increased at an annual rate of 8.8% and 10% in April and May of 2010.[17] This could breathe new life into hotels across the U.S.A and around the world as demand may resume pre-recessionary levels. Marriott reduced their average daily rate per night by 11.7% due to the recession, but may increase prices as the country exits the recession.[18] Increased prices may bring Marriott more profits.

Competition

The industry is highly fragmented and no player commands more than 20 percent of the market share. Competition in the industry is generally based on the quality of rooms, restaurants, meeting facilities and services, attractiveness of locations, availability of a global distribution system, price and other factors. Although Marriott’s global presence across 68 countries enables it to offer services to a large number of customers, it lags behind its competitors who are present in 80-100 countries.


Starwood Hotels: Starwood Hotels owns and operates luxury hotels, retreats, and residences across the world. Approximately half of Starwood's hotels are outside of North America, with 397 in Europe, Africa, the Middle East, and Asia and new Starwood hotels are being built in developing countries like China. The company manages franchises that operate under its various brand names - St. Regis, The Luxury Collection, W, Westin, Le Méridien, Sheraton, Four Points, Aloft, and Element.[19]

Choice Hotels International (CHH): CHH is a worldwide franchisor of hotels and the nation’s first hotel chain. The company franchises over 5,400 hotels under the Comfort Inn, Comfort Suites, Cambria Suites, Sleep Inn, Mainstay Suites, Quality Inn, Clarion, EconoLodge, Rodeway Inn, and Suburban Extended Stay brands throughout the US and more than 40 countries and territories. Choice generates a majority of its revenue from royalty fees, which are based as a percentage of gross room revenue of its franchised hotels.[20]

Hilton Hotels: Hilton is one of the leading hotel and leisure companies in the world. It is primarily involved in the management and development of hotels across the globe. Initially Hilton focused on acquiring and owning more real estate. However, it has recently changed its growth strategy, and it now focuses on spreading its operations through franchisees. This enables the company to earn revenues in the form of franchisee fee without incurring any additional costs to purchase real estate and construct hotels.[21]

InterContinental Hotels: IHG is the largest hotel company by number of rooms, with 590,361 rooms in over 100 countries around the world. It operates a diverse portfolio of brands across multiple economic segments, including Intercontinental Hotels and Resorts, Crowne Plaza Hotels and Resorts, Holiday Inn, and Holiday Inn Express. IHG makes most of its money by franchising hotels. Out of the nearly 4,000 hotels bearing IHG brands, it owns only 18.[22]

Orient-Express Hotels (OEH): Orient-Express Hotels (NYSE: OEH) is a hotel and leisure group, which is focused on the luxury market. The company owns and operates luxury hotels, restaurants, tourist trains, and river cruises in over 25 countries. OEH's hotels, many operated only seasonally, target luxury travelers.[23]

One major trend in the industry is the increasing competition in the area of increasing branded offerings. Marriott was one of the pioneers in promoting the concept of foreign brand awareness in the industry; however, its competitors have begun doing so more pro-actively. Starwood Hotels & Resorts (HOT)'s planned limited service brand, named “Project XYZ” and Hyatt Hotels Corporation (H)’s purchase of AmeriSuites brand and subsequent re-branding to Hyatt Place are steps in this direction.
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