Hilton Worldwide Holdings Inc. (HLT Quick QuoteHLT - Free Report) is likely to benefit from strong leisure demand, loyalty program and expansion efforts. This and the emphasis on conversion deals bode well. However, macroeconomic uncertainty and constrained RevPAR in China is a concern.

Let’s delve deeper.

Growth Catalysts

Hilton is benefiting from strong leisure transient trends and steady recovery in business transient and group travel. During the first quarter of 2023, system-wide comparable revenue per available room (RevPAR) increased 30% year over year (on a currency-neutral basis), owing to an increase in occupancy and average daily rate. Also, RevPAR was up 8% from 2019 levels. The upside was primarily backed by strong leisure transient trends and improving business activity. The company witnessed solid RevPAR gains in Europe, the Middle East and Africa region owing to strong leisure demand and a recovery in international inbound travel. Hilton anticipates system-wide 2023 RevPAR to increase between 8% and 11% on a year-over-year basis.

One of the largest loyalty programs, Hilton Honors, created a precious asset for the company. Innovations like the Hilton Honors app continue to drive the program’s growth. As of Mar 31, 2023, the loyalty program had more than 158 million members, reflecting a rise of 19% year over year. During the quarter, the company stated that Honors members accounted for 62% of the occupancy, up 200 basis points year over year. The company focuses on opportunities to engage its Honors members through enhanced partnerships and points redemption offerings. The company’s collaboration with Peloton makes it an initiative placed in the right direction.

Hilton continues to drive unit growth to maintain its position as the fastest-growing global hospitality company. During first-quarter 2023, Hilton opened 64 new hotels and achieved net unit growth of nearly 5,300 rooms. During the quarter, the company unveiled its 100th Tapestry Collection by Hilton and announced the opening of its 500th hotel in China. It also reported solid expansion of Hilton Garden Inn with 14 new signings across six countries and announced the opening of the Canopy Toronto Yorkville. As of Mar 31, 2023, Hilton's development pipeline comprised 2,930 hotels, with nearly 428,100 rooms across 116 countries and territories, including 30 countries and territories where it currently has no running hotels. For 2023, the company expects net unit growth in the range of 5-5.5%.

Increased focus on hotel conversion opportunities bode well. The company signed conversion deals with Curio and Tapestry, covering destinations like the Galapagos Islands, San Sebastian, Spain, Maui and Sonoma County, CA.  In first-quarter 2023, conversion signings were up 24% on a year-over-year basis. The upside was backed by the rollout of its new brand launch, Spark by Hilton. The company reported strong interest from developers concerning premium economy conversion brand. With more than 300 deals in hand (in various stages of negotiation), the company is optimistic in this regard and anticipates hotel openings in the later part of 2023. The company expects positive development trends to continue on the back of new development and conversion opportunities.

Concerns

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Shares of Hilton have gained 5% in the past year compared with the industry’s 6% rise. The downside was primarily driven by challenging macroeconomic factors including inflation, supply chain disruptions and instability in banking system.

Although the company reported recovery in China region owing to the lifting of COVID restrictions, RevPAR in China is still below pre-pandemic levels. During the first quarter of 2023, RevPAR in China was down 5% from 2019 levels. The company also reported a slower pick up on the development side. Although most properties have lifted or eased restrictions, uncertainty related to pandemic-induced implications is a concern. Moving ahead, the company anticipates complete recovery in China to take time.

Zacks Rank & Key Picks

Hilton currently carries a Zacks Rank #3 (Hold).

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