Shares of La Quinta Holdings (LQ) dropped sharply upon the surprise announcement on Thursday, September 17th, after the close of trading, of the the resignation of its CEO, Wayne Goldberg. The stated reason for the resignation was “mutual agreement.” Mr. Goldberg had been CEO at La Quinta for about 15 years.
A Big (Bad) Day at La Quinta
In a second announcement the same afternoon, La Quinta provided modestly lower guidance (than previous) for RevPAR (revenue per available room) and for full year adjusted EBITDA. RevPAR guidance was lowered about 1.0% from an expected increase of 4.5% to 5.5% to the range of 3.5% to 4.5%.
The reaction in the share pricing of La Quinta on Thursday was immediate and severe. After closing at $18.97 per share Wednesday afternoon, the opening price Thursday morning was $15.93 per share, or some 16% lower than the day before. Based on about 131 million shares outstanding, the drop amounted to about $400 million in lost market capitalization.
The board of directors named Mr. Keith Cline, the company’s CFO, as Interim President and CEO. Mr. Kline was also elected to the board of directors.
To round out the day of announcements, the board of La Quinta also announced an acceleration of a previously announced share repurchase program, and that the one-time charge that would be taken upon Mr. Goldberg’s departure was $11 million.
The original program called for $200 million of repurchases upon reaching certain debt reduction ratios. The Thursday announcement called for an immediate program of $100 million of repurchases. This program is to be financed with $70 million of existing cash and borrowing of the remainder.
The $11 million charge for Mr. Goldberg consisted of three years of salary continuation, certain insurance coverage, and acceleration of certain stock awards.
The Next Announcements
On Friday, beginning at 12:25 pm (est), the potential class action law suits started coming. Three law firms had announced that they had initiated investigations on behalf of certain purchasers of La Quinta shares. See here, here, and here.
No one knows what the results of these investigations will be, but as with most such actions, they will likely be settled at some expense to La Quinta (and its shareholders).
So Why Did the Share Price Fall So Much?
There were a lot of moving parts with La Quinta’s announcements on Thursday. I looked at the share price of La Quinta for the last year or so. It began a slide in about mid-June, when the shares peaked at close to $25 per share, that continued up until closing on Thursday just prior to La Quinta’s announcements.
La Quinta had recently announced its second quarter earnings. An investor presentation was given on August 5, 2015, that was fairly positive overall. Accomplishments in the latest twelve months ending June 30, 2015 included:
Grew existing franchise base by 6% with minimal capital investment
Entered into discussions to sell 24 of our owned hotels, which sale would improve operating metrics and accelerate debt reduction
Executed on commitment to balance sheet de-levering strategy by paying down $349 million of long term debt; $330 million of which represented discretionary payments, since the IPO
7.2% RevPAR growth with a pro forma Adjusted EBITDA increase of 8.6%
Improved net debt / pro forma adjusted EBITDA by over one turn to 4.3x
The guidance of this presentation was quite positive.
Was the market singling La Quinta out with this summer price reduction? I looked at a few of its competitors and found that La Quinta was not alone in its treatment by the market.
Looking at the comparative chart above, it is pretty clear that a number of motel properties were in somewhat of a free fall in the months leading to last Thursday. La Quinta certainly was not alone. The pre-Thursday decline could be argued to be attached to market sentiment for the segment.
What about the announcement of the share repurchase program? Other than it being followed by an immediate 15%-16% price decline, which certainly would make the shares more attractive for purchase.
Share repurchase programs are generally viewed as favorable by the markets, or at least they are tolerated. Many public companies repurchase their shares over time and the amounts are in the hundreds of billions collectively.
Chances are, the announced share repurchase plan was not the cause of the share price decline at La Quinta.
One Analyst’s Speculation
Owners of La Quinta Holdings were on the receiving end of not one but two (likely related) doses of bad news on Friday, which sent LQ shares down a stunning 15%.
First, the hotel company lowered its full-year EBITDA guidance from a range of between $398 million and $404 million to a range of between $393 million and $400 million. [i.e., not much]
The bulk of the sharp setback LQ shares suffered on Friday, however, stemmed from the fact that CEO Wayne Goldberg was stepping down immediately. His exit seemed amicable, though the true cause was unclear. Either way, given Goldberg’s history of success at the helm, his absence is largely viewed as a negative.
I’m writing this over the weekend, so I have no information about how La Quinta’s stock price will react on Monday. But I bet that the board of directors there is reeling.
At some point, the story of why Mr. Goldberg “resigned” may be told. However, now, all we know is that he is gone. The market reacted quickly and decisively with a 15% share price reduction. Is he a $400 million man? Likely not. Markets can overreact and recover.
However, regardless of the ultimate cause for the decline in La Quinta’s shares, new management will have its hands full in dealing with trends currently in place, not to mention the potential lawsuits.
Friday was a bad day at the office for La Quinta.
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