Hyatt (H) Rides On Acquisition & Expansion Amid Competition

Hyatt Hotels Corporation’s (NYSE:H) differentiated brand portfolio, strong expansion plans and acquisition strategies are encouraging. However, substantial international presence makes the company vulnerable to macroeconomic conditions and negative currency translation.

Recently, Hyatt reported better-than-expected results for the fourth quarter of 2017, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. In the last reported quarter, Hyatt’s aggressive expansion strategies in both domestic and international markets were well reflected in the top-line picture, whereas comparable owned and leased margin contraction affected the bottom line.

Expansion & Other Initiatives to Drive Sales

Apart from owning widely recognized, industry-leading brands, an essential aspect of Hyatt’s riveting growth potential is its continual expansion of both full-service and select-service hotels. The continual expansion helps the company gain greater market share, aiding the top line.

The company is trying to expand its presence worldwide and has expansion plans in Asia-Pacific, Europe, Africa, Middle East and Latin America. In fact, for 2018, the company expects to grow units, on a net rooms basis, by roughly 6-6.5%, reflecting 60 new hotel openings.

Hyatt strongly believes that the opportunity for properties that offer a select offering of services at a lower price than full-service hotels is particularly compelling in certain markets, including India, China and the Middle East. This is because there is a large and growing middle-class population in these markets along with significant number of local business travelers.

In order to raise occupancy by enhancing guest experience, Hyatt is also devising newer ways like innovation of food and beverage at its hotels worldwide, and creation of profitable and popular venues that build demand for hotels.

To this end, in first-quarter 2017, the company launched a new loyalty program, World of Hyatt, replacing its Gold Passport loyalty program. As of Dec 31, 2017, the loyalty program had over 10 million active members. During 2017, approximately 30% of total systemwide room nights were favored by the program.

Meanwhile, the Hyatt Credit Card, a co-branded Visa credit card between Hyatt and Chase Card Services, continues to show strong growth in card member acquisitions and member engagement.

Acquisitions & Divestitures as Growth Strategies

Hyatt is strongly invested in the strategies related to various acquisitions and divestitures that can drive growth for the company. In January 2017, the company acquired Miraval Group, which extended the Hyatt brand beyond traditional hotel stays into a wellness category that resonates well with high-end travelers.

Additionally, Hyatt is also focusing on the sale of assets. On Nov 9, 2017, Hyatt sold its 550-rommed Hyatt Regency Monterey Hotel and Spa for approximately $60 million. This resulted in a pre-tax gain of approximately $17 million. Notably, this property sale was one of the six asset sales planned by the company.

These strategies are in line with Hyatt’s efforts to strengthen its financial flexibility and focus more on core operation. The sale of assets is helping the company grow through management and licensing arrangements, instead of direct ownership of selective assets. Notably, a higher concentration of franchise fees reduces earnings volatility and provides a more stable growth profile. Additionally, asset sales are helping Hyatt in terms of strengthening its liquidity. This also allows the company to protect its current liabilities with a combination of cash and liquid assets.

Concern of Considerable International Exposure

Hyatt has considerable international presence, which makes it vulnerable to economic conditions in the region.Since the company’s operations outside the United States represent approximately 20% of net revenues in 2017, the costs of complying with laws, regulations and policies (including taxation policies) of foreign governments relating to investments and operations, may affect the company’s profitability. Also, volatility in exchange rates is likely to hurt results as it has been doing over the past few quarters. Notably, the company has been witnessing a decline in international inbound travel, given a stronger dollar.

Competition Remains a Challenge

The hotel industry is highly competitive, as major hospitality chains with well-established and recognized brands are continuously expanding their global presence. Hyatt is continuously facing intense competition from both large hotel chains like Marriott (NASDAQ:MAR) and Hilton (NYSE:H) , and smaller independent local hospitality providers.

Increasingly, the company also faces competition from new channels of distribution in the travel industry. Additional sources of competition include large companies that offer online travel services as part of their business model such as Alibaba (NYSE:BABA) , search engines such as Google (NASDAQ:GOOGL) and peer-to-peer inventory sources that allow travelers to book stays on websites, facilitating short-term rental homes and apartments from owners, thereby providing an alternative to hotel rooms, such as Airbnb and HomeAway.

Unless Hyatt counters these competitions with appropriate strategies, it may pose a concern to the company’s future profitability.

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