Miami-based cruise company Carnival Corp. (CCL - Analyst Report) reported mixed fiscal first-quarter 2015 results, wherein earnings substantially beat the Zacks Consensus Estimate, while revenues missed.

The company’s adjusted earnings of 20 cents per share surpassed the Zacks Consensus Estimate of 9 cents as well as management’s guidance range of 17–11 cents. Further, quarterly earnings were significantly higher than the year-ago quarter’s breakeven result.

Better-than-expected revenues as well as higher-than-expected revenue yields drove the substantial rise in earnings.

Fourth-quarter earnings excluded net unrealized losses on fuel derivatives.

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Total revenue declined 1.5% year over year to $3.53 billion, due to lower passenger ticket revenues. Further, revenues missed the Zacks Consensus Estimate of $3.57 billion by 1.1%.
 
Net revenue yields (in constant currency) increased 2% year over year, better than the company's guidance of net revenue yield (in constant dollar) range of flat to up 1%. Gross revenue yields, however, decreased 3.1%, due to fluctuation in currency exchange rates.
 
Segment Revenues
 
Carnival earns revenues from its Passenger Tickets business, Onboard and Other as well as Tour and Other segments.
 
Passenger Tickets: Passenger Tickets revenues declined 3.5% year over year to $2.63 billion.
 
Onboard and Other: Onboard and Other revenues were $889 million, up 4.6% year over year.
 
Tour and Other: Revenues decreased 25% from the year-ago period to $10 million.
 
Income & Expenses
 
Operating income was $266 million, up substantially year over year as a result of higher revenues and lower operating costs.
 
Net cruise costs (in constant dollar) per available lower berth day (ALBD) (fuel and impairments excluded) increased 2.4%, primarily due to higher dry-dock costs and advertising expenses. The increase was, however, lower than the company’s guidance of 5.5% to 6.5%.Gross cruise costs, including fuel per ALBD in current dollars, decreased 9.6%, due to changes in fuel prices and currency exchange rates.

Fuel price was $406 per metric ton, down 38% year over year, while fuel consumption declined 3.7%.
 
Fiscal Second-Quarter 2015 Guidance

Second-quarter net revenue yields in constant dollar are expected to increase 2–3% from the prior year. Net cruise costs excluding fuel per ALBD are expected to grow in the range of 6.5% to 7.5% on a constant dollar basis as against the prior year. The increase will be driven by higher annual dry-dock costs primarily all of which will be incurred in the second quarter.

Current currency exchange rates and fuel prices, net of fuel derivatives, are likely to benefit second-quarter earnings by $74 million or 9 cents per share. Based on the above factors, the company expects adjusted earnings in the range of 11 to 15 cents.  

Fiscal 2015 Guidance

For fiscal 2015, net cruise costs per ALBD, excluding fuel, are expected to increase 2–3%, versus the prior guidance of about 3% rise.

Since December, headwinds in currency exchange rates (constant currency) have reduced fiscal 2015 earnings expectations by 28 cents per share. However, it has been significantly offset by the improvement in the company's operating performance, resulting in just a 5-cent reduction in the mid-point of the prior guidance.

Taking the aforementioned factors into consideration, the company lowered the higher end of its adjusted earnings guidance for 2015 and expects it in the range of $2.30 to $2.50 per share, versus the prior guidance of $2.30 to $2.60.

Based on the current booking trends, the company expects net revenue yields for 2015, on a constant dollar basis, to be up in the range of 3-4% from the prior year, better than the prior guidance of 2% increase.

Our Take
 
We believe that Carnival’s turnaround remains on track. Its several brand-building efforts and other marketing promotions are expected to be beneficial. Carnival recently partnered Dr. Seuss Enterprises to provide a variety of exciting and immersive dining and entertainment experiences on its fleet of 24 "Fun Ships” as part of its brand-building efforts.
 
Reduction in fuel consumption is another bright spot in Carnival’s report card. However, expectation of higher operating costs, due to the company’s investments in technology and advertising, remains a major headwind for the Zacks Rank #3 (Hold) company.

Some stocks in the leisure and recreational industry that can be considered include Vail Resorts Inc. (MTN - Snapshot Report), Live Nation Entertainment, Inc. (LYV - Snapshot Report) and The Marcus Corp. (MCS - Snapshot Report). While Vail Resorts and Live Nation Entertainment sport a Zacks Rank #1 (Strong Buy), Marcus Corp. carries a Zacks Rank #2 (Buy).