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Key Takeaways
- Adjusted EPS was -$5.02 vs. the -$4.99 analysts expected.
- Revenue missed analyst expectations.
- Negative free cash flow was lower than the level expected by analysts.
- Royal Caribbean extended the suspension of most of its cruise ships due to the ongoing COVID-19 pandemic.
What Happened
Royal Caribbean reported a fourth consecutive quarter of adjusted losses per share in Q4 FY 2020. The loss was slightly larger than analysts expected. Revenue missed analyst forecasts by a wide margin. Free cash flow, while negative for the fifth straight quarter, was slightly better than analysts expected.
The company extend its voluntary suspension of its cruise operations for most ships through to at least April 30, 2021. “The COVID-19 pandemic is having a painful and profound impact on our world and our business; unquestionably, this crisis is the most difficult in the Company’s history,” said Royal Caribbean in its earnings release.
(Below is Investopedia’s original earnings preview, published February 19, 2021.)
What to Look For
Royal Caribbean Group (RCL), one of the world’s largest cruise line operators, is selling assets to focus on core operations amid the COVID-19 pandemic. The company is selling its Azamara luxury cruise line for $201 million to private-equity firm Sycamore Partners. The cash raised by the sale also will help bolster the company’s finances during one of the most challenging periods for the global cruise line industry.
Investors will be watching to see if Royal Caribbean has been able to limit losses and slow the collapse in revenue when it reports earnings on February 22, 2021 for Q4 FY 2020. Analysts are expecting the cruise line operator to report its fourth consecutive quarter of adjusted losses per share as revenue continues to plunge.
Investors will also focus on the company’s free cash flow, a key metric representing the amount of cash available to a firm that it can use to repay creditors or pay dividends to shareholders. Analysts expect Royal Caribbean to report a fifth consecutive quarter of negative free cash flow in Q4.
Shares of Royal Caribbean have significantly lagged the broader market over the past year. The stock plunged further than the rest of the market during the pandemic-induced crash in early 2020, and it has failed to close the performance gap ever since. Royal Caribbean shares have provided a total return of -31.9% over the past 12 months, well below the S&P 500’s total return of 16.1%. The stock has been weighed down by the company’s deteriorating financial results, which have been hammered by the pandemic.
Source: TradingView.
The company posted an adjusted loss per share of $5.62 in Q3 FY 2020, marking the third consecutive quarter of adjusted losses. Royal Caribbean also posted negative revenue for the first time in at least 16 quarters. The company said that its revenue for the quarter included a $67.9 million charge to adjust for cancellation revenue that was incorrectly recognized during the first six months of the year. Royal Caribbean also noted that it resumed limited operations of some cruise ships during the quarter after suspending its global operations earlier in the year due to the pandemic. After the October 29 earnings report, Royal Caribbean shares staged a sharp advance to their highest level in nearly 9 months in early December. But since then, the shares have drifted down and sideways.
In Q2 FY 2020, the cruise line operator reported an adjusted loss per share of $6.13, its worse performance in at least 15 quarters. Revenue plunged 93.7%, the second consecutive quarter of declining revenue after years of steady revenue growth. In response to the pandemic, the company suspended global operations on March 13, 2020, leading to the cancellation of all the company’s cruise sailings during the quarter.
Analysts are forecasting continued losses and falling revenue in Q4 FY 2020. The company is expected to report an adjusted loss of $4.99 per share, which would mark the fourth consecutive quarter of adjusted losses. Revenue is expected to plunge 98.0%, which would be the fourth straight quarter of declines. For full-year FY 2020, analysts expect an adjusted loss per share of $18.22 as annual revenue falls 79.8%. It would be the first annual adjusted loss and annual revenue decline in at least five years.
| Royal Caribbean Key Metrics | |||
|---|---|---|---|
| Estimate for Q4 2020 (FY) | Q4 2019 (FY) | Q4 2018 (FY) | |
| Adjusted Earnings Per Share ($) | -4.99 | 1.42 | 1.53 |
| Revenue ($M) | 50.2 | 2,517.4 | 2,332.3 |
| Free Cash Flow ($M) | -1,278.7 | -73.5 | -418.7 |
Source: Visible Alpha
As mentioned above, investors will also be watching Royal Caribbean’s free cash flow, a profitability metric that excludes non-cash expenses and includes spending on plant and equipment as well as changes in working capital. It shows how much cash a firm has available to service its debt and make dividend payments to shareholders after accounting for cash outflows used to support operations and maintain capital assets. If free cash flow is negative, it means the firm has to raise additional funds through debt or new stock issuance in order to maintain its operations.
Royal Caribbean had a history of negative cash flow problems even before the global pandemic shattered cruise-line demand in 2020. In the 2018 and 2019 fiscal years, the company reported negative cash flow in four out of eight quarters. The worst quarter during that period was Q1 FY 2018, when it reported free cash flow of -$796.1 million.
But the company has seen its cash inflows dry up in fiscal 2020, causing free cash flow to turn deeply negative. Free cash flow was -$1.1 billion in Q1 FY 2020, then more than doubling to -$2.4 billion in the second quarter. It narrowed in Q3 FY 2020, but was still negative, at -$1.0 billion. On the positive side, the company says it expects cash flow from operations to sequentially improve as it gradually resumes cruise operations. However, analysts are currently expecting free cash flow of -$1.3 billion in Q4 FY 2020 and -$5.8 billion for full-year FY 2020, the worst annual performance in five years by far.
