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Four Seasons Fans Want More

Second-quarter net income rose 23%, but earnings per share missed estimates.
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Updated from 10:41 a.m. EDT

Investors offered a chilly response to

Four Seasons'


second-quarter results.

Fundamentals such as unit revenue were strong at the company's hotels, which continue to benefit from robust luxury travel demand. But that strength failed to translate into the kind of earnings Wall Street expected.

The Toronto-based company cited weakness in the U.S. dollar for some of the shortfall. With many of its hotels located outside the U.S., Four Seasons must convert large chunks of revenue into the U.S. currency. At the same time, it must pay a majority of its corporate expenses in the Canadian dollar, which strengthened against the U.S. dollar over the past year.

Also to blame was a $1.2 million decline in the fees Four Seasons receives from residential properties, as three projects boosted results a year ago.

Lodging investors, who have grown accustomed to higher guidance from hotel companies, also may have been disappointed when Four Seasons left its forecast essentially unchanged.

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Shares plummeted $5.25, or 7.8%, to $61.73 by midafternoon Thursday. On Wednesday, the stock had rallied 4.6% in anticipation of the earnings release. Several analysts characterized the stock's recent valuation as rich, leaving little room for error in the earnings report.

Net income rose 23% to $15.8 million from $12.8 million a year before. On a per-share basis, earnings totaled 42 cents, falling short of the 48-cent average analyst estimate from Thomson First Call. In the second quarter of 2004, the company earned 34 cents a share.

Revenue rose to $74.5 million from $71.4 million in the second quarter of 2004, but failed to hit the analyst consensus of $75.2 million.

"Luxury travel demand trends continue the strength shown over the past few quarters in virtually all of our markets," said Douglas Ludwig, Four Seasons' CFO. "The luxury segment continues to lead the industry in occupancy and room rate improvements. Some of this improvement in hotel operating fundamentals may not be apparent in our management operations earnings due to the further weakening of the U.S. dollar, which has negatively affected the pace of improvement in these earnings when expressed in U.S. dollars."

Ludwig said the near-term outlook for room rates and demand was "encouraging" but added that recent terrorist activities in London would cause negative unit revenue growth at its hotels there during the third quarter.

Travel demand and higher rates boosted revenue per available room, a key lodging industry metric known as revpar, by 12.8% at the company's worldwide core hotels, meeting the company's expectations for better-than-12% growth. In the U.S., revpar increased 13.6%.

Four Seasons said demand was strong and room rates were higher in most of its markets. In the U.S., the exception was Houston, where rates came under pressure from increased supply of hotel rooms.

The revpar improvements trickled down to operating profits, boosting the worldwide gross operating margin by 2.7 percentage points to 33.1%, despite rising labor and energy costs. In the U.S., the margin improved by 2.9 percentage points to 30.7%.

Looking ahead, Four Seasons expects third-quarter worldwide revpar growth of roughly 10%. For the full year, it expects revpar to increase about 11%, marking a slight downward adjustment from its previous guidance for growth of more than 11%.

Four Seasons maintained its forecast that gross operating margin will increase by more than 2.2 percentage points for the full year. If not for London bookings suffering from the recent bombings and subsequent attempt, Four Seasons likely would have lifted its margin outlook, Ludwig said during a conference call.