The past year has been an exciting one for your company. After
many years of partnership with Manor Care Inc., Choice enjoyed a successful spinoff and
became an independent publicly traded company in November 1996.
Financial performance for the fiscal year 1997 was strong. We signed a total of 495 new
franchise agreements, up 14 percent from fiscal year 1996. All of our brands showed
healthy growth and, importantly, we made great strides in building for a successful
future. Our success, of course, is shared success. Thousands of franchisees around the
world - serving more than 90 million guests annually -- are the heart and soul of Choice.
In less than a year with the Company, I've personally had the opportunity to meet many
of them. You won't find a more dedicated and hard-working group of individuals anywhere.
You will meet some of them in this report and -- I hope -- many more in person as you
travel around the United States or in the 32 other countries where we operate.
The key to our continued success is helping our franchisees become more profitable so
that, in turn, we can deliver superior value to you, our stockholders.
Strong Financial Performance
In fiscal 1997, we achieved all of our goals for system growth, revenue and profits,
contracts executed, reservation calls and franchisee satisfaction.
Total system revenue is estimated to be $2.7 billion in fiscal 1997, an increase of
almost 13 percent over the prior year. Company revenues were up 14 percent to $429.9
million from $378.3 million in fiscal 1996.
Operating income was $97.9 million, up from $75.0 million reported in fiscal year 1996
before a non-recurring charge of $33.3 million in 1996 related to our spinoff from Manor
Care and a provision for the impairment of certain European assets.
Fiscal 1997 net income of $42.0 million, before a one-time charge of $1.1 million for
the early retirement of high cost debt payable to Manor Care, was up 46.9 percent over
fiscal year 1996 net income of $28.6 million before nonrecurring charges.
Earnings per share for fiscal 1997 were $0.65 after the one-time charge, up from $0.14
per share after all charges for fiscal year 1996.
Platform for Growth
The economics of franchising are extremely attractive and fairly simple. As a franchise
company, we grow our revenues and profits as our franchisees realize improved occupancies
and room rates and as the overall system grows.
The more our franchisees grow, the stronger the stream of royalties and reservations
and marketing fees. And the higher the royalties and fees, the more support we then can
give to our franchisees in the way of brand advertising, promotions and general business
development assistance. This support, in turn, drives franchisee demand for our brands,
and so on.
Another factor driving franchisee demand for Choice's brands is that we are
concentrated primarily in the limited-service, mid-price lodging segment which, according
to Smith Travel Research, is the most profitable in the industry and enjoying strong
Choice is strongly positioned with its mature brands (Quality, Econo Lodge and Rodeway
Inn), a powerful presence in new-construction brands (Comfort Inn, Comfort Suites and
Sleep Inn) and a highly promising extended-stay brand (MainStay Suites).
Choice also is capitalizing on the current popularity of upscale hotels -- thanks to
the strong economy -- with our Clarion brand.
This diversity of our portfolio is extremely attractive to franchisees who like to grow
their businesses by owning and operating several different franchises that appeal to
different customer segments. Our price-point segmentation also allows us to weather
economic cycles better as consumers choose more expensive hotels in good times and less
expensive hotels in a softer economy.
The MainStay Suites brand, launched in October 1996 and currently the only franchised
new-construction, mid-priced, extended-stay product in the marketplace, is worth special
note. The extended-stay segment is one of the hottest areas of our industry, and it is an
outgrowth of dramatic changes over the last several years in the ways Americans work.
Since the late 1980s and early 1990s, downsizing, right-sizing and the persistence of the
American entrepreneurial spirit have fostered spectacular growth in the number of
consultant specialists who go on assignment for weeks at a time -- too long for a hotel
stay and not long enough for an apartment.
Relocations and extended corporate training programs are another valuable source of
business for this segment.
Today, there are 22 MainStay Suites hotels open and under development nationally, with
an average length of stay of 20 nights. We expect this brand to grow quickly.
One of our most significant accomplishments in the last year was the development of a
three-year strategic plan to enhance franchisee - and Choice - profitability by sharpening
the company's focus on consumers, realigning corporate resources and implementing new
growth and service strategies. The plan's underlying objectives are profitable franchisees
The first step in implementing our plan was creating five new U.S. regions. Franchise
sales and service functions will be consolidated in each region, which will have
bottom-line, profit-andloss responsibilities. Each franchisee will be assigned a service
representative who will serve as their principal liaison with Choice. This move alone will
enable us to double the support we provide our franchisees.
The pilot regional office opened its doors in Charlotte, N.C., in June. Four other
offices will open later this year in Silver Spring, Maryland;
Indianapolis, Indiana; Denver, Colorado; and Orange County, California. With our new
regional structure, we will be able to better serve our franchisees' needs, being closer
to our customers than ever before.
In conjunction with our franchisees, we will identify the best opportunities for new
development or conversion to a Choice brand in 520 markets throughout the country. This
strategic approach to system growth will benefit existing franchisees by providing them
with an early view of additional development opportunities within their communities and
ensure we are optimizing the addition of new hotels to the system.
Recently, we also introduced to franchisees a new state-of-the-art property management
system called Profit Manager by Choice Hotels. The system, which is targeted to have 100
percent system utilization by the year 2000, will help franchisees maximize revenue per
available room and profitability by managing inventory, rates and reservations more
In addition, to create more consumer focus and drive demand for Choice brand products,
we have combined brand management, new product development and traditional consumer
marketing into one department responsible for advertising, marketing, sales, brand
positioning and standards.
Integral to this sharpened consumer focus is our commitment to enforce tougher
standards and implement a new quality assurance program based in large part on guest
assessments of each hotel.
International Growth and Profitability
Our international operations offer significant long-term potential for growth and
profitability, and we anticipate placing near-term emphasis on further development in
Canada, Mexico, the Caribbean, Europe and Japan.
In fiscal 1997, we dramatically improved the financial performance of Choice's overseas
operations, and we intend to accelerate that progress with the objective of delivering a
significant profit contribution by the year 2000.
To accomplish that end, Choice will focus resources against select master franchisers
and joint ventures, prioritize regions and move to establish brand-specific area
development agreements with strong partners.
Seperating Franchising from Real Estate
Focus, in any business, helps to improve performance and returns to stockholders.
That's why we decided earlier this year to separate our franchising from our real estate
activities in a tax-free spinoff to stockholders. We expect the spinoff will take place in
the fall of 1997.
Don Landry, Choice's President and the person most responsible for the real estate
unit's tremendous success, will become Chief Executive Officer of the new company,
Sunburst Hospitality Corporation.
Our real estate division has been a remarkable success story, and we believe Sunburst
looks forward to a bright future.
Since 1993, the year after Choice began to take advantage of a down real estate market
by buying, renovating and repositioning undervalued hotel assets, the division's revenues
have grown at a compounded annual rate of more than 43 percent.
The real estate division finished fiscal 1997 with 71 hotels in the United States and
$168 million in revenues. Gross profit margin in fiscal 1997 was more than 36 percent.
As a separate, publicly traded company, Sunburst will continue to build on the
performance of its existing properties; develop MainStay Suites and Sleep Inn hotels and
other high-margin properties; and pursue opportunistic acquisitions.
Our vision is to be a global leader in high-margin lodging brands and to expand
selectively into complementary businesses when attractive and sustainable economic
propositions are achievable. To date, we have done well, but we can do better.
Among a host of initiatives planned for 1998 are value-added promotions to improve
market share in competitive markets and programs to create more differentiation for each
of our brands. We are also developing a program to increase our penetration in major
metropolitan areas where we are currently underrepresented. Most important, we are
launching a number of initiatives to increase franchisee satisfaction across the whole
spectrum of our brands.
In short, we have much to do, but I am excited about our opportunities and the
potential of this company.
I'd like to add a personal note about Don Landry. Don has been President of Choice for
the last two and a half years. Since I joined the Company, he has played a critical role
in my transition - not just to Choice, but to the lodging industry in general.
Don is a good friend and advisor, and everyone at Choice wishes him well in his new
role as Vice Chairman and CEO of Sunburst.
I am delighted that through a variety of strategic alliances and initiatives, Choice
and Sunburst will remain in close touch, and I look forward to a continued productive
working relationship with Don and his team.
Thank you for your support.
William R. Floyd
Vice Chairman & Chief Executive Officer