Starwood Hotels & Resorts Worldwide Inc.'s fourth-quarter earnings Thursday underscore the growing vulnerability of the timeshare business for U.S. hotels.

Starwood (HOT) reported that net income tumbled 46% amid $133 million in restructuring charges and write-downs of timeshare projects and North American hotels as growth slowed worldwide. Meanwhile, the company lowered its 2009 outlook and forecast first-quarter earnings below analysts' expectations.

Although Starwood's results were very weak, they came in better than expected given that the company executed heavy cost-cutting measures, particularly in its timeshare segment, analysts noted.

"It's not a surprise. Consumer [demand] for timeshares has been declining," said Smedes Rose, an analyst at Keefe, Bruyette & Woods. He anticipated that other hotel companies including Marriott International Inc. (MAR) could look to scale back their timeshare business as well.

Indeed, the big hospitality companies such as Marriott Wyndham Worldwide (WYN) and Starwood have consistently reaped big profits by financing timeshare purchases amid strong consumer demand. With the lockdown in credit markets and concerns that consumers are shunning big-ticket purchases, many developers have already scaled back expansion plans in vacation ownership.

Starwood said total vacation ownership revenue decreased 48.3% to $134 million when compared to 2007. In addition, the company noted it didn't sell any vacation ownership receivables during the fourth quarter and didn't expect any gains from securitizations in 2009.

As such, Starwood said it cut its overhead to match reduced revenue expectations by closing five sales centers and terminating over 500 employees in the fourth quarter in vacation ownership. Over the last year, the company said it has closed nine sales and three call centers, and laid off about 900 employees.

The "timeshare ... business is very front-loaded in terms of costs," said Rose. He noted that once development reaches a certain threshold a company could start to recognize revenue that can have an impact on earnings-per- share accounting.

He said one positive development was Starwood's recognition during the earnings call that the declines in timeshare contract sales had stabilized.

Hoteliers have been reducing their workforce, freezing wages and lowering or pulling guidance to combat what is expected to be a difficult year after the sector was hammered in 2008 amid steep cuts in airline capacity, a pullback in consumer spending and waning corporate travel.

Chief Executive Frits van Paasschen said Thursday that "extensive cost cutting" at the property level will help offset some of the margin erosion that results from declining revenue per available room. He added 2009 capital spending will tumble to $150 million from last year's $817 million as "the outlook for 2009 remains challenging, we are prepared for the worst."

"Urgent and dramatic cost savings measures ... will be the theme this earnings season" for hotels, said Patrick Scholes, a lodging analyst at FBR Capital Markets, adding that Starwood cut corporate expensesmore significantly than expected.

Starwood now sees first-quarter earnings excluding items of $1.10, down from October's weak view of $1.55, amid an anticipated 12% drop in revenue per available room. First-quarter earnings are seen at 2 cents to 7 cents a share, with revenue per available room falling 17%. Analysts surveyed by Thomson Reuters were projecting a 13-cent profit.

Meanwhile, the operator of hotels under the W Hotels, Westin, St. Regis and Sheraton brands reported fourth-quarter net income of $79 million, or 43 cents a share, compared with $146 million, or 74 cents a share, a year earlier.

Excluding items including the restructuring costs and write-downs, earnings fell to 49 cents from 79 cents, yet that was still above October weak forecast of 36 cents to 42 cents.

Revenue dropped 17% to $1.33 billion. Analysts expected $1.4 billion.

Revenue per available room in hotels owned for at least a year decreased 20%, well below Starwood's forecast for a 4% to 6% drop.

Meanwhile, the downturn has hurt credit ratings for the lodging industry, with several hoteliers including Starwood being lowered to junk. Starwood's stock has lost half its value the past four months and closed Wednesday at $17.41.

Shares of Starwood were recently 75 cents lower, or 4.3%, at $16.66.

-By A.D. Pruitt, Dow Jones Newswires, 201-938-2269, angela.pruitt@dowjones.com

(Shirleen Dorman contributed to this report)

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