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Travel + Leisure (NYSE:TNL) Misses Q4 Sales Targets


Full Report / February 21, 2024

Hospitality company Travel + Leisure (NYSE:TNL) missed analysts' expectations in Q4 FY2023, with revenue up 4% year on year to $935 million. It made a non-GAAP profit of $1.98 per share, improving from its profit of $1.30 per share in the same quarter last year.

Travel + Leisure (TNL) Q4 FY2023 Highlights:

  • Revenue: $935 million vs analyst estimates of $944 million (1% miss)
  • EPS (non-GAAP): $1.98 vs analyst estimates of $1.37 (44.1% beat)
  • Free Cash Flow of $298 million, up from $74 million in the previous quarter
  • Gross Margin (GAAP): 53.6%, up from 49.2% in the same quarter last year
  • Tours: 172,000
  • Market Capitalization: $2.99 billion

Formerly known as Wyndham Destinations, Travel + Leisure (NYSE:TNL) is a global vacation company that provides travelers with vacation ownership, exchange, and travel services.

The company's expansive portfolio includes its flagship vacation ownership business, operating under brands such as Club Wyndham, WorldMark by Wyndham, and Margaritaville Vacation Club. These brands offer a network of resort properties in desirable destinations across the United States, the Caribbean, and the Pacific.

Travel + Leisure's timeshare vacation ownership model allows customers to own or have rights to use a property for a specified period each year. In addition, the company’s vacation exchange network, RCI, allows timeshare owners to swap their owned weeks or points for stays at other properties within its global network, offering flexibility and variety in vacation planning.

Travel + Leisure has also expanded into travel services and membership programs through its acquisition of Travel + Leisure Group in 2021 (the company also inherited the acquiree's name). This division focuses on delivering travel services and products beyond the timeshare market by providing subscription travel clubs, online travel booking platforms, and branded consumer products, enhancing the company’s reach in the broader leisure travel market.

Hotels, Resorts and Cruise Lines

Hotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.

Travel + Leisure's competitors include Hilton Grand Vacations (NYSE:HGV), Marriot Vacations (NYSE:VAC), Bluegreen Vacations (NYSE:BXG), Interval Leisure Group (NASDAQ:IILG), and private companies Diamond Resorts and Anantara Vacation Club.

Sales Growth

A company's long-term performance can indicate its business quality. Any business can enjoy short-lived success, but best-in-class ones sustain growth over many years. Travel + Leisure's revenue was flat over the last five years.

Travel + Leisure Total Revenue

Within consumer discretionary, a long-term historical view may miss a company riding a successful new property or emerging trend. That's why we also follow short-term performance. Travel + Leisure's annualized revenue growth of 9.4% over the last two years is above its five-year trend, suggesting some bright spots. 

We can better understand the company's revenue dynamics by analyzing its number of tours, which reached 172,000 in the latest quarter. Over the last two years, Travel + Leisure's tours averaged 22.5% year-on-year growth. Because this number is higher than its revenue growth during the same period, we can assume prospective customers didn't make many purchases.

Travel + Leisure Tours

This quarter, Travel + Leisure's revenue grew 4% year on year to $935 million, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 4% over the next 12 months, a deceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Travel + Leisure has been a well-managed company over the last eight quarters. It's demonstrated it can be one of the more profitable businesses in the consumer discretionary sector, boasting an average operating margin of 18.7%.

This quarter, Travel + Leisure generated an operating profit margin of 20.4%, up 2.5 percentage points year on year.

Over the next 12 months, Wall Street expects Travel + Leisure to maintain its LTM operating margin of 19.2%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

Over the last five years, Travel + Leisure's EPS grew 22.4%, translating into a weak 4.1% compounded annual growth rate. This performance, however, is materially higher than its flat revenue over the same period. Let's dig into why.

Travel + Leisure's operating margin has expanded 3.8 percentage points over the last five years while its share count has shrunk 24.8%. Improving profitability and share buybacks are positive signs as they juice EPS growth relative to revenue growth.

In Q4, Travel + Leisure reported EPS at $1.98, up from $1.30 in the same quarter a year ago. This print beat analysts' estimates by 44.1%. Over the next 12 months, Wall Street expects Travel + Leisure to perform poorly. Analysts are projecting its LTM EPS of $5.74 to shrink by 6.8% to $5.35.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Over the last two years, Travel + Leisure has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 11.5%, slightly better than the broader consumer discretionary sector.

Travel + Leisure's free cash flow came in at $298 million in Q4, equivalent to a 31.9% margin and up 87.4% year on year. Over the next year, analysts' consensus estimates show they're expecting Travel + Leisure's LTM free cash flow margin of 12.1% to remain the same.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Travel + Leisure's five-year average return on invested capital was 11.5%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Travel + Leisure's ROIC averaged a 10.4 percentage point increase each year. This is a good sign, and if the company's returns keep rising, there's a chance it could evolve into an investable business.

Key Takeaways from Travel + Leisure's Q4 Results

We were impressed by how significantly Travel + Leisure blew past analysts' EPS expectations this quarter. That stood out as a positive in these results. On the other hand, its operating margin missed and its revenue fell short of Wall Street's estimates, driven by underperformance in both its Vacation Ownership and Travel and Membership segments. 

The company also recently announced the acquisition of Accor Vacation Club to build its presence in the Asia-Pacific region and repurchased $307 million of common stock during 2023 (at an average price of $39.11), equivalent to roughly 10% of its current market capitalization. 

Looking ahead, the company's full-year 2024 EBITDA guidance came ahead of analysts' estimates ($920 million vs estimates of $915 million). Overall, this quarter's results seemed decent, and we're glad the company is buying back its shares. The stock is flat after reporting and currently trades at $41.55 per share.

Is Now The Time?

Travel + Leisure may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Travel + Leisure, we'll be cheering from the sidelines. Its revenue has declined over the last five years, but at least growth is expected to increase in the short term. And while its rising ROIC shows management is finding profitable business opportunities, the downside is its projected EPS for the next year is lacking. On top of that, its EPS growth over the last five years has been disappointing.

Travel + Leisure's price-to-earnings ratio based on the next 12 months is 7.7x. While the price is reasonable and there are some things to like about Travel + Leisure, we think there are better opportunities elsewhere in the market right now.

Wall Street analysts covering the company had a one-year price target of $48.40 per share right before these results (compared to the current share price of $41.55).

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