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HGVC at Sea World
Hilton Grand Vacations (HGV) had their 2Q 2019 earnings call with stock analysts this morning. It was very interesting. They failed to meet earnings/revenue forecasts and lowered their guidance for the rest of the year. The stock dropped 14% today. They now expect full year 2019 Contract Sales to be anywhere from flat to down 3% from 2018. They attributed the weakness in sales to two main factors:
1. A reduction in the average transaction price
2. Additional pressure due to a decline in closure rate
They further said both factors were driven by limited available sales inventory in key locations, and they expect those headwinds to continue for the rest of 2019 until more inventory becomes available in 2020 and beyond.
Here are some details on that:
One of the analysts asked if, given the difficulty they are having with sales volatility from quarter-to-quarter (because of them being limited to selling deeded weeks at specific resorts), would they consider shifting to a pure points-based business model like Marriott went to. Here was CEO Mark Wang's response:
"We do realize the benefits of a trust product. It does have benefits on reducing some of the variability, and so we're exploring it. Not only a trust product - for certain markets - but also other prepaid vacation forms. We want to figure out how to capture even more buyers to bring into our system.
I would say though, even if we do introduce an additional product form, there's no current plans for a full discontinuation of what we're currently doing. We don't think a trust product would serve us well in markets like Hawaii and New York with their premium prices; and especially with the Japanese, because they want the certainty that a lot of times you don't get out of a trust product - meaning you don't have a home resort window for reservations.
But, we're looking at it. We think it could be done on a regional basis and could reduce some of the variability in the business. But we also have to be cognizant that we have a robust fee-for-service business, and its really difficult to have a trust product with multiple fee-for-service partners like we have now. We have a half dozen fee-for-service partners, and I just don't know how you negotiate whose product goes into the trust first, whereas now we can sell multiple fee-for-service projects simultaneously."
1. A reduction in the average transaction price
2. Additional pressure due to a decline in closure rate
They further said both factors were driven by limited available sales inventory in key locations, and they expect those headwinds to continue for the rest of 2019 until more inventory becomes available in 2020 and beyond.
Here are some details on that:
- Their Hawaii sales offices are suffering due to lower average transaction prices since they currently lack the "optimal mix of new and upgradeable inventory." They only sold $9 million of Ocean Tower inventory in 2Q 2019 compared to $57 million in 2Q 2018, due to the essential sell-out of Phase I of that project.
- The lack of proper Hawaii inventory particularly hurt their sales in the Japan sales centers. Even though the Hawaii inventory they did have was the wrong mix, they thought they could steer prospects into the Hawaii inventory they did have, but the prospects wound up buying into the Las Vegas product instead. That significantly reduced the average selling price for these transactions.
- They experienced lower close rates in their Las Vegas and Orlando sales centers due to a lack of desirable upgrade inventory.
- They also saw a reduced closing percentage in the US mainland. They saw a younger demographic prospect coming in as Hilton widens the customer mix in their HHonors program and in their hotel target marketing. This resulted in a higher ratio of prospects with under $100K family income versus over $100K, and historically for that younger under $100K customer segment, they close a lower percentage and have lower transaction prices.
- A significant level of new inventory will be coming online in 2020 and 2021 which should allow growth to return in 2020. In 2020, they expect to add sales of 1) Phase II of Ocean Tower, 2) Maui, 3) Waikiki Sequel, 4) Los Cabos. In 2021 they expect to add Okinawa.
- This new sales inventory will give them more entry level and upgrade inventory versus their current inventory mix, which is skewed towards "mid-tier inventory." They think this will help them match inventory to their prospects better.
- Los Cabos renovation/conversion has just started. Plan to have that finished later this year and sales in first half of 2020.
- They announced a new fee-for-service HGV project in the Smoky Mountains of Tennessee. They did not name an exact location, but I'm assuming it might be in the Gatlinburg/Pigeon Forge area.
- In locations with new available inventory, sales were up - South Carolina was up 8% and sales of The Central in NYC have been strong, up 30%.
- The Chicago and Charleston locations are new and small, so won't have a material impact on sales growth in 2019. Chicago is currently only 16 units and they just started selling Charleston inventory out of the Washington, DC sales center.
- In 2018 they committed a large investment to inventory spend and they said they have a lot of inventory coming on line. As a result, they have no inclination to purchase any inventory in 2019, 2020, and 2021 beyond what they have already committed to. If any comes in 2021, it will be in the back half of that year.
One of the analysts asked if, given the difficulty they are having with sales volatility from quarter-to-quarter (because of them being limited to selling deeded weeks at specific resorts), would they consider shifting to a pure points-based business model like Marriott went to. Here was CEO Mark Wang's response:
"We do realize the benefits of a trust product. It does have benefits on reducing some of the variability, and so we're exploring it. Not only a trust product - for certain markets - but also other prepaid vacation forms. We want to figure out how to capture even more buyers to bring into our system.
I would say though, even if we do introduce an additional product form, there's no current plans for a full discontinuation of what we're currently doing. We don't think a trust product would serve us well in markets like Hawaii and New York with their premium prices; and especially with the Japanese, because they want the certainty that a lot of times you don't get out of a trust product - meaning you don't have a home resort window for reservations.
But, we're looking at it. We think it could be done on a regional basis and could reduce some of the variability in the business. But we also have to be cognizant that we have a robust fee-for-service business, and its really difficult to have a trust product with multiple fee-for-service partners like we have now. We have a half dozen fee-for-service partners, and I just don't know how you negotiate whose product goes into the trust first, whereas now we can sell multiple fee-for-service projects simultaneously."
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