Marriott Vacations Worldwide Investor Day Presentation-October 4

[Dean]

It's actually better than that. Last year VAC sold $990 MM of timeshare. They spent $513 MM on sales and marketing, and $260 MM buying the inventory.

So of a hypothetical $12 point purchase, $3.15 was the cost of the points, and $6.22 was the cost of sales/marketing. That leaves $2.63 in profit. So a resale of existing trust points is probably more profitable for VAC than selling new ones. The sales people don't feel that way, because on a resale $0 goes to them, but VAC shareholders shouldnt care - they get paid either way.

Of course, new point sales potentially allow for new developments (generating new high margin management fees) but upfront it doesn't matter.

There are admin costs on the resale side so with your numbers they are likely about break even assuming this covers all their costs, including interest and facilities, on the retail side. In reality every resale is a potential lost retail sale so they are in competition with their retail side. Obviously not everyone who buys resale would have bought resale without the resale option but a % of them would have. So I give it roughly a break even using these numbers though SOME of it is additive to retail and some isn't.

 

[bizaro86]

There are admin costs on the resale side so with your numbers they are likely about break even assuming this covers all their costs, including interest and facilities, on the retail side. In reality every resale is a potential lost retail sale so they are in competition with their retail side. Obviously not everyone who buys resale would have bought resale without the resale option but a % of them would have. So I give it roughly a break even using these numbers though SOME of it is additive to retail and some isn't.

Yeah, I think roughly break even with a retail sale is probably how they picked the junk fees.

I would comment that Wyndham charges $299 to transfer a points unit in Worldmark. I doubt Wyndham is doing that at a loss, and I doubt MVC's costs are any higher. I think 4 hours of employee time at a $50/hour all in cost is probably more than it takes.

 

[JIMinNC]

I think you are starting to see the impact of the $3 a point transfer fee to the Marriott profit mix.

Every DC transfer puts $3 a point into the Marriott profit bottom line. That's between 20 to 25 percent of the cost of a retail sale.

Consider - The rule of thumb for new time shares sales is that 50% of the retail price goes to sale/marketing. At circa $12 dollars a point (rack rate around $14, but there aren't any incentives included, which occurs in many sales), that means $6 to $7 dollars a point profit to Marriott. Which means 40 to 50% percent of the actualizable profit of a new sale is paid to Marriott for each transfer - with no overhead! (All the actual transfer overhead costs are covered by other fees.) Versus 0 dollars for a week transfer.

This has to have an effect on the bottom line, increasing the fee share of the profit and reducing the sales portion. . .

While the 50% sales/marketing figure is correct, as bizaro86 noted, I think your numbers are missing the remainder of the cost of sales - namely the cost of the underlying real estate/improvements/ etc. According to the 2018 VAC 10-K, here are the relevant comments of the Development Margin (essentially the gross margin for the Vacation Ownership sales business):

Sale of Vacation Ownership Products: $990 million
Cost of Vacation Ownership Products: $260 million
Marketing and Sales: $513 million

DEVELOPMENT MARGIN: $217 million (21.9%)

So based on this, if the average actual incentivized sales price per point is around $12.50/point, then the roughly 22% Development Margin comes out to $2.75/point, which is very close to the $3/point resale transfer fee.

Note: I apologize for the duplication, but I posted this before reading the earlier post from @bizaro86 about the same basic numbers. I decided not to delete since I had a couple additional stats in mine to support what bizaro86 posted, but if moderators want to eliminate, OK with me. Note to self, read ALL subsequent posts before posting!

 

[Ralph Sir Edward]

While the 50% sales/marketing figure is correct, as bizaro86 noted, I think your numbers are missing the remainder of the cost of sales - namely the cost of the underlying real estate/improvements/ etc. According to the 2018 VAC 10-K, here are the relevant comments of the Development Margin (essentially the gross margin for the Vacation Ownership sales business):

Sale of Vacation Ownership Products: $990 million
Cost of Vacation Ownership Products: $260 million
Marketing and Sales: $513 million

DEVELOPMENT MARGIN: $217 million (21.9%)

So based on this, if the average actual incentivized sales price per point is around $12.50/point, then the roughly 22% Development Margin comes out to $2.75/point, which is very close to the $3/point resale transfer fee.

Note: I apologize for the duplication, but I posted this before reading the earlier post from @bizaro86 about the same basic numbers. I decided not to delete since I had a couple additional stats in mine to support what bizaro86 posted, but if moderators want to eliminate, OK with me. Note to self, read ALL subsequent posts before posting!

I must politely point out that there are no addition costs for the underlying real estate. That was paid for by the initial sale. Nor are improvement costs involved. Those are covered by reserved and/or special assessments.

If the Trust wants to expand its real estate, it then needs to sell more point (retail) to pay for it.

 

[bizaro86]

I must politely point out that there are no addition costs for the underlying real estate. That was paid for by the initial sale. Nor are improvement costs involved. Those are covered by reserved and/or special assessments.

If the Trust wants to expand its real estate, it then needs to sell more point (retail) to pay for it.

That was what both Jim and I were saying. That because of the cost of the marketing and underlying real estate, MVC has gross margins of slightly under $3 per point on retail sales.

Since they charge $3 per point on transfers and the cost would be nominal, their gross margins are slightly under $3 per point there as well.

 

[JIMinNC]

I must politely point out that there are no addition costs for the underlying real estate. That was paid for by the initial sale. Nor are improvement costs involved. Those are covered by reserved and/or special assessments.

If the Trust wants to expand its real estate, it then needs to sell more point (retail) to pay for it.

Of course, the cost of the real estate (land) and the improvements (the buildings) are only relevant to the product actually sold by Marriott, and are irrelevant to the $3/point transfer fee. But that wasn't the point we were making.

My post was mainly in response to your statement above saying, "At circa $12 dollars a point (rack rate around $14, but there aren't any incentives included, which occurs in many sales), that means $6 to $7 dollars a point profit to Marriott."

The reality is that the "gross profit" on the new points sale is not $6-$7 per point, but is more in the $2.60/point to $2.75/point range. It seemed you calculated the $6-$7/point profit by using the roughly 50% marketing/sales cost, but to get true gross profit (or development margin, as they call it) you must consider not just the marketing/sales costs but must also factor in the cost of the product sold. When you do that, you get a real profit margin of about 22% (thus yielding a $2.60/point to $2.75/point profit margin), not 50%. So, based on those numbers, the $3/point transfer fee allows VAC to essentially earn about the same profit margin on a resale points package as they would if they had sold a new points package themselves.

 

[Ralph Sir Edward]

Of course, the cost of the real estate (land) and the improvements (the buildings) are only relevant to the product actually sold by Marriott, and are irrelevant to the $3/point transfer fee. But that wasn't the point we were making.

My post was mainly in response to your statement above saying, "At circa $12 dollars a point (rack rate around $14, but there aren't any incentives included, which occurs in many sales), that means $6 to $7 dollars a point profit to Marriott."

The reality is that the "gross profit" on the new points sale is not $6-$7 per point, but is more in the $2.60/point to $2.75/point range. It seemed you calculated the $6-$7/point profit by using the roughly 50% marketing/sales cost, but to get true gross profit (or development margin, as they call it) you must consider not just the marketing/sales costs but must also factor in the cost of the product sold. When you do that, you get a real profit margin of about 22% (thus yielding a $2.60/point to $2.75/point profit margin), not 50%. So, based on those numbers, the $3/point transfer fee allows VAC to essentially earn about the same profit margin on a resale points package as they would if they had sold a new points package themselves.

That actually supports my point. For a points purchase directly from Marriott, by your numbers (not arguing about them), Marriott makes $2.60 to $2.75 a point. On a resale of points, they make $3.00 a point. Both sales have all sorts of junk fees, separate from the $3 a point on resale. Those fees cover the administrative overhead of the purchase(s). The $3.00 fee is pure profit, without having to incur the variable overhead costs of selling. On the old weeks model, there is no equivalent of that $3.00 a point profit.

In theory, if Marriot wanted to stop growing. they could junk the entire sales model and live off of the turnover $3 a point fee. (Of course, they want to grow, so they aren't stopping the sales model.) They have made their new model such that they don't care whether you buy new or used, they make the same corporate profit off of the sale, either way. . .

 

[Dean]

That actually supports my point. For a points purchase directly from Marriott, by your numbers (not arguing about them), Marriott makes $2.60 to $2.75 a point. On a resale of points, they make $3.00 a point. Both sales have all sorts of junk fees, separate from the $3 a point on resale. Those fees cover the administrative overhead of the purchase(s). The $3.00 fee is pure profit, without having to incur the variable overhead costs of selling. On the old weeks model, there is no equivalent of that $3.00 a point profit.

In theory, if Marriot wanted to stop growing. they could junk the entire sales model and live off of the turnover $3 a point fee. (Of course, they want to grow, so they aren't stopping the sales model.) They have made their new model such that they don't care whether you buy new or used, they make the same corporate profit off of the sale, either way. . .

The points I made earlier are still valid. There are some underlying costs on the resale side and they go beyond just the cost to change the deed though we don't have as clear a picture of the actual costs. Plus they are actually increasing their costs on the retail side by carrying more inventory due to the fact that they would have lost some retail sales because of the resales.

 

[JIMinNC]

That actually supports my point. For a points purchase directly from Marriott, by your numbers (not arguing about them), Marriott makes $2.60 to $2.75 a point. On a resale of points, they make $3.00 a point. Both sales have all sorts of junk fees, separate from the $3 a point on resale. Those fees cover the administrative overhead of the purchase(s). The $3.00 fee is pure profit, without having to incur the variable overhead costs of selling. On the old weeks model, there is no equivalent of that $3.00 a point profit.

In theory, if Marriot wanted to stop growing. they could junk the entire sales model and live off of the turnover $3 a point fee. (Of course, they want to grow, so they aren't stopping the sales model.) They have made their new model such that they don't care whether you buy new or used, they make the same corporate profit off of the sale, either way. . .

I agree. That's essentially what @bizaro86 and I were saying. We were just pointing out that in your original post you stated that "40 to 50% percent of the actualizable profit of a new sale is paid to Marriott for each transfer - with no overhead!", when, in fact, it's actually much better than that for them -- more like the $3/point resale fee generates essentially 100% of the same profit generated by a "new" sale.