Analysis CHH
Choice's hotels are busier. Why is its profit forecast falling?
Higher marketing and reservation costs are widening the gap between Choice's reported profit and its adjusted results.
Research by Ticker Byline shows that Choice's expected annual shortfall on reimbursable activities has grown by $35.1 million since August. These activities include marketing, reservations and other services for franchised and managed hotels.
In its earlier forecast, Choice expected $695.6 million of expenses against $595.7 million of related revenue, leaving a $99.9 million pre-tax deficit. The new forecast puts expenses at $734.2 million and revenue at $599.2 million. The gap is now $135 million.
Why the two profit forecasts diverge
Choice expects these programs to break even over time, but spending and collections can fall in different periods. The current shortfall reduces reported profit. Choice removes both the associated revenue and expenses when calculating adjusted results.
That helps explain why the company cut its 2026 net-income forecast to $178 million to $185 million from August's $230 million to $241 million, while slightly raising the midpoint of its adjusted-profit outlook. Adjusted net income is now forecast at $315 million to $322 million, compared with $312 million to $323 million.
Other charges also weigh on the reported outlook. Choice incurred about $24 million to end an arrangement involving an option to buy a European hotel business using a lease-based model. It also recorded a $6 million noncash impairment on two owned hotels.
Hotel demand is improving
U.S. revenue per available room rose 3.8% in the third quarter, combining a 1% increase in room rates with higher occupancy. This measure captures both how full hotels are and what they charge.
The franchisor now expects full-year U.S. growth of 1.5% to 2.5% on that measure, up from zero to 1.25%. Its U.S. room count was roughly unchanged from a year earlier, so the improvement reflects stronger activity across the existing network.
Quarterly adjusted net income rose to $105 million from $98 million. Reported net income fell to $58 million from $180 million, a comparison also distorted by a $100 million gain in last year's quarter from taking full ownership of Choice Hotels Canada.
The cash figures show another cost of growth
Operating cash flow for the first nine months fell to $122 million from $185 million. Choice paid more to attract and retain franchise agreements, alongside the termination payment and higher reimbursable expenses. Tax and working-capital movements also affected the result.
Choice completed its roughly $130 million purchase of RV subscription platform Harvest Hosts on October 1. It also sold two owned hotels after quarter-end while keeping their franchise agreements. The Choice Hotels company profile tracks those transactions, cash and debt, and the changing forecasts.