Royal Caribbean Cruises Ltd. (RCL Quick QuoteRCL - Free Report) will likely benefit from strong bookings, digital initiatives and ship upgrades. This and the focus on enhanced destination offerings bode well. However, inflationary and supply chain challenges are a concern.

Factors Driving Growth

Shares of Royal Caribbean have surged 72.3% in the past six months compared with the industry’s 17% growth. The company has been benefiting from strong demand for its brands’ vacation experiences, strong close-in bookings (at higher prices) and the continued strength of onboard revenues.

During the first quarter of 2023, the company reported solid demand for Caribbean itineraries, paving the path for improvement in load factors. As of Mar 31, 2023, North America-based sailings portrayed robust booking trends, contributing nearly 76% to the company’s capacity. RCL registered better-than-expected load factors, owing to a rise in close-in bookings. It also stated that pricing (including and excluding FCCs) remains elevated from 2019 levels. Also, it reported strength in European bookings, outpacing the 2019 level. Also, it stated benefits, courtesy of shifting of consumer preferences from goods to entertainment and travel spending (24% higher than 2019 levels) enhanced destination offerings and global sourcing model.

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Given the full-fleet resumption and load factors at high prices (at approximately 102%), the company expects customer deposits to return to typical seasonality in the upcoming periods. In 2023, the company anticipates solid guest generation from the North America region.

Royal Caribbean continues using digital tools for marketing, product development and enhancing the consumer experience. The initiative is vital in enhancing customer preference, engagement, cruise frequency, guest experience and spending. The company introduced new technological capabilities under its Project Excalibur. It has also rolled out a smartphone app to increase convenience and better serve guests. Streaming WiFi, expanded onboard offerings, customized destination experiences and other ship upgrades are also paying off. The company emphasizes on enhancing its e-commerce and pre-cruise capabilities and optimizing distribution channels to boost guest repeat rates and spending.

The company focuses on new innovative ships and onboard experiences to differentiate its offering and deliver superior yields and margins. Moving into 2023, the company has three ships scheduled for delivery — Icon of the Seas, Celebrity Ascent and Silver Nova. The company stated that Icon will have eight distinct neighborhoods and that its stateroom configuration will enable load factors to be accretive to the overall portfolio. The company anticipates the ships to be significantly accretive to its key financial metrics.

For 2023, RCL expects depreciation and amortization expenses between $1,465 million and $1,475 million, down from the prior stated $1,470-$1,490 million. Net interest expenses (excluding loss on extinguishment of debt) are projected at $1,290-1,300 million, down from the earlier mentioned $1,310-1,350 million. Adjusted EBITDA is expected to surpass the 2019 reported levels. Adjusted earnings per share are anticipated to be $4.40-$4.80, up from the prior stated $3-$3.60.

Concerns

Royal Caribbean has been bearing the brunt of high expenses for quite some time. During the first quarter of 2023, total cruise operating expenses increased 51.3% year over year to $1,792.9 million. The company’s expenses in the quarter primarily stemmed from increases related to fuel and food costs.

The company expects net cruise costs (excluding fuel per APCD) for 2023 to increase 5.5-6.5%, up from the previous expectation of 4.8-5.8%, from 2019 levels. The company also expects fuel costs to increase and continue through 2025. This includes expected transitory costs related to health protocols and one-time lagging costs related to the fleet ramp-up. The company anticipates inflationary and supply chain challenges (mainly related to fuel and food costs) to persist for some time.

Zacks Rank & Key Picks

Royal Caribbean has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Consumer Discretionary sector are as follows:

Trip.com Group Limited (TCOM Quick QuoteTCOM - Free Report) flaunts a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 147.9%, on average. Shares of TCOM have increased 41.1% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Trip.com Group’s 2023 sales and EPS suggest an increase of 101.6% and 531%, respectively, from the year-ago period’s levels.

OneSpaWorld Holdings Limited (OSW Quick QuoteOSW - Free Report) carries a Zacks Rank #2 (Buy). OSW has a trailing four-quarter earnings surprise of 65.8%, on average. Shares of OSW have increased 67.9% in the past year.  

The Zacks Consensus Estimate for OSW’s 2023 sales and EPS indicates a rise of 33.9% and 89.3%, respectively, from the year-ago period’s levels.

Bluegreen Vacations Holding Corporation carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 24.7%, on average. Shares of BVH have increased 53.2% in the past year.

The Zacks Consensus Estimate for BVH’s 2023 sales and EPS indicates a rise of 3.6% and 17.6%, respectively, from the year-ago period’s levels.