Choice Hotels International Inc. (CHH) filed Quarterly Report for the period ended 2009-09-30.
Choice Hotels Int'l. is one of the largest hotel franchise companies in the world with hotels inns all-suite hotels and resorts open and under development in countries across the globe under the brand names Comfort Quality Clarion Sleep Inn Rodeway Inn Econo Lodge and MainStay Suites. Choice Hotels International Inc. has a market cap of $1.9 billion; its shares were traded at around $31.59 with a P/E ratio of 18.7 and P/S ratio of 2.9. The dividend yield of Choice Hotels International Inc. stocks is 2.4%.
Highlight of Business Operations:
The Company’s outstanding unvested restricted stock awards contain rights to non-forfeitable dividends and as a result, the Company applied this guidance in the first quarter of 2009. The two-class method of calculating earnings per share is more dilutive to both basic and diluted shares outstanding than the previously utilized treasury stock method. The Company has retrospectively adjusted its basic and diluted shares outstanding for the three and nine months ended September 30, 2008. As a result, basic and diluted earnings per share for the nine months ended September 30, 2008 were revised from $1.31 to $1.30 and $1.30 to $1.29 per share, respectively. Basic earnings per share for the three months ended September 30, 2008 has been revised from $0.58 to $0.57 per share and diluted earnings per share for the three months ended September 30, 2008 remained unchanged. Additionally, basic and diluted earnings per share for the year ended December 31, 2008 were reduced from $1.62 to $1.61 and $1.60 to $1.59 per share, respectively. See Note 12 “Earnings Per Share” of the accompanying consolidated financial statements for additional information.
Maximizing Financial Returns and Creating Value for Shareholders. Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. We believe our strong and predictable cash flows create a strong financial position that provides us a competitive advantage. Currently, our business does not require significant capital to operate and grow; therefore, we can maintain a capital structure that generates high financial returns and use our excess cash flow to provide returns to our shareholders. Historically, we have returned value to our shareholders in two primary ways: share repurchases and dividends. In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders. During the nine months ended September 30, 2009, the Company repurchased 2.1 million shares of its common stock under the share repurchase program at a total cost of $55.3 million. Since the program’s inception through September 30, 2009, we have repurchased 42.8 million shares (including 33.0 million prior to the two-for-one stock split effected in October 2005) of common stock at a total cost of $1.0 billion. Considering the effect of the two-for-one stock split, the Company has repurchased 75.8 million shares at an average price of $13.26 per share. At September 30, 2009, the Company had remaining authorization to purchase up to 3.9 million shares under the current stock repurchase authorization. Upon completion of the current authorization, our board of directors will evaluate the propriety of additional share repurchases. During the nine months ended September 30, 2009, we paid cash dividends totaling approximately $33.3 million and we presently expect to continue to pay dividends in the future, subject to future business performance, economic conditions and changes in income tax regulations. Based on our present dividend rate and outstanding share count, aggregate annual dividends for 2009 would be approximately $44.3 million.
Results of Operation: Royalty fees, operating income, net income and diluted earnings per share (“EPS”) represent key measurements of these value drivers. In the three months ended September 30, 2009, royalty fees revenue totaled $66.4 million, a 13% decrease from the same period in 2008. Operating income totaled $48.1 million for the three months ended September 30, 2009, a $13.7 million or 22% decline from the same period in 2008. Net income decreased $3.1 million or 9% from the same period of the prior year to $32.8
million. Diluted earnings per share for the quarter ended September 30, 2009 were $0.55 compared to $0.57 for the three months ended September 30, 2008. These measurements will continue to be a key management focus in 2009 and beyond.
The Company recorded net income of $32.8 million for the three months ended September 30, 2009, a $3.1 million, or 9% decline from the $35.9 million for the quarter ended September 30, 2008. The decrease in net income for the three months ended September 30, 2009, is primarily attributable to a $13.7 million or 22% decline in operating income partially offset by lower effective borrowing rates and the appreciation in the fair value of investments held in the Company’s non-qualified employee benefit plans compared to the prior year. Operating income declined $13.7 million as the Company’s franchising revenues (total revenues excluding marketing and reservations revenues and hotel operations) declined $14.5 million or 16%. The decline in franchising revenues was primarily due to a 15.9% decline in RevPAR and fewer initial and relicensing fee contracts executed compared to the prior year. The decline in franchising revenues was partially offset by a $1.1 million or 4% decline in SG&A costs from the same period of the prior year. SG&A expenses for the three months ended September 30, 2009 included charges totaling $1.5 million resulting from employee termination benefits compared to $0.5 million during the same period of the prior year.
Domestic royalty fees for the three months ended September 30, 2009 decreased $8.8 million to $60.7 million from $69.5 million in the three months ended September 30, 2008, a decrease of 13%. The decline in royalties is attributable to a combination of factors including a 15.9% decline in RevPAR, offset by a 4.8% increase in the number of domestic franchised hotel rooms and an increase in the effective royalty rate of the domestic system from 4.19% to 4.23%. System-wide RevPAR declined due to a 720 basis point decline in occupancy and a 5.3% decline in average daily rates.
CHH is in the portfolios of Ron Baron of Baron Funds, Chuck Akre of Akre Capital Management, LLC.
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