Earnings Update: Lost Luxury Edition

Starwood Hotels and Pool Corp. downshift.


The good life takes another hit today, as swimming pools and travel plans face cooling profits because of worried consumers. In today's earnings, two names, hotelier Starwood Hotels and pool supplier Pool Corp., are cutting their outlooks.

Starwood Hotels warned profits will fall in both 2008 and 2009 because of travel spending slumps in the face of the global financial crisis. The chain, which runs the tony W, St. Regis, and Le Meridien brands, plus the Sheraton and Westin names, has been trimming expenses and shutting sales centers.

Goldman Sachs's Steven Kent says in a note that he's bearish on hotels because estimates are going lower and we're just starting to see travel cutbacks, including reductions in high-style hotel events. (Call that the AIG Effect. Starwood owns the California resort where the insurer's execs spent $440,000 after being bailed out by an $85 billion government loan.)

From his note:

[C]onsumers are going to be cured of their "affluenza" by cutting back on expensive high-end vacations and revert to "staycations" and "daycations"; and...the industry will be hit with increasing supply at the same time demand is falling.... [T]he negative operating leverage and inability to cut costs quickly suggest margins are going to be under pressure for some time.

Kent is reviewing his price target of $20 and recommends selling the shares.

Meanwhile, down south, fast-growing swimming pool supplier Pool Corp. is facing a world where builders, homeowners and investors look scared to dip a toe in. The company managed to grow earnings 1 percent in the third quarter but expects a fourth-quarter loss and is tightening the credit it extends to customers.

Wedbush Morgan analyst Joan Storms writes:

Recent negative housing data seems to indicate we have not yet seen the bottom of the real estate market. We also believe that any improvement in the housing market may take awhile to filter down to pool construction, especially given the tightening in the credit markets.

Robert W. Baird's David Manthey sees a bottom coming:

Given headwinds from new pool construction, home equity trends, and a recessionary backdrop we remain fundamentally cautious. That said, we believe new residential construction is waning in importance and the stock could trough soon.

Until late September, shares of the Covington, La.-based company were holding up well compared with the rest of the market. But they have since been falling precipitously, losing almost a third of their value.

Here's the problem: Both Starwood and Pool have been hotly traded names over the last few years, and both have solid businesses when consumers are happy and credit is easy. How they'll fare now that both spending and lending are tight remains to be seen.