Starwood Hotels 3Q profit declines 64 percent

As Starwood Hotels & Resorts Worldwide Inc., owner of Sheraton, W and other brands, cut room rates in the third quarter to bring travelers back, its profit fell 64 percent, and it expects another tough year.

Shares fell $1.31, or 3.8 percent, to $32.90 in midday trading Thursday as investors worried about the company's fourth-quarter forecast, which fell below analysts' expectations, and its estimate for fiscal 2010 revenue per available room - a key indicator for hotel companies. Starwood said the indicator could fall another 5 percent from 2009 levels or be flat at best.

CEO Frits van Paasschen said business travelers are starting to return and even leisure travelers are venturing again. But he warned that doesn't mean profits will normalize yet.

"Companywide occupancies are starting to creep back," he told investors on a conference call. "We know rates will take longer to recover and they come back one or two quarters after occupancies begin to rise."

He also warned it wasn't clear this recovery would be like others. Group bookings look better for 2011 and later, but the pace for next year still lags this year's. The company declined to estimate its 2010 earnings.

In the third quarter, revenue per available room in hotels operated by Starwood open at least a year declined 20.3 percent worldwide, 21 percent outside the U.S. and just under 20 percent in the U.S. Total revenue dropped for the fourth straight quarter, slipping 32 percent to $1.22 billion.

The White Plains, N.Y.-based company, like other hotel operators, has been trimming its costs and slashing room rates to compete for a shrinking pool of business during the recession.

Van Paasschen said Starwood's most expensive hotels have been squeezed, but he remained upbeat that business would pick up when the economy recovers, especially given the company's expanding foreign base. It's expected that other areas of the world - particularly emerging markets like China - will see recovery first.

Having half its hotels are outside the U.S. will benefit Starwood as the dollar loses its luster. A strong U.S. dollar in the past year has weighed on foreign sales for American businesses because that revenue translates to fewer dollars when it is converted. But now the dollar is falling, which will help boost international revenue.

JPMorgan analyst Joseph Greff said the falling dollar should help boost revenue per available room in 2010. He said he expected the stock to fall Thursday on the outlook.

"The third quarter was better, which we view as less relevant," he wrote to clients. "It is all about the outlook."

Overall, the company's profit fell 64 percent in the third quarter. It earned $41 million, or 22 cents per share, for the three months that ended Sept. 30. That compares with $113 million, or 62 cents per share, a year earlier.

Excluding a one-time $44 million tax benefit related to selling some hotels and other items, Starwood earned 14 cents per share.

But the performance beat the estimates of analysts polled by Thomson Reuters, who forecast profit of 10 cents per share on revenue of $1.16 billion. Analysts' estimates generally exclude one-time items.

The company brought in less money from management fees, franchise fees and other income, and timeshares, which posted a 31.7 percent drop in revenue to $125 million.

For the fourth quarter, Starwood expects income from continuing operations of about $32 million to $39 million, or 17 cents to 21 cents per share. Analysts predict 21 cents per share.

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AP Business Writer Michelle Chapman contributed to this report from New York.