profit margins of recent years, has now been
largely remedied by means of a "Belt-Tightening" program which has reduced overhead to the
extent of approximately $3,000,000 a year.
Serious competition in two areas, —
Montreal and Pittsburgh, where Sheraton was
especially vulnerable due to its significant position in those cities, tended to narrow over-all
profit margins. This loss appears to be largely
of a temporary nature.
During the three years since major competition developed in Montreal, much of the lost
earning power has already been regained. Even
in Pittsburgh, where competition from a major
new hotel occurred only a year and a half ago,
there are already strong indications of recovery
in earning power. Fortunately there are no other
major cities where we are similarly vulnerable to
any possible competition that may occur. We
anticipate that our hotels in Montreal and
Pittsburgh during the coming years will be contributing to, rather than retarding our future
growth rate or profit margins as these hotels face
anticipated further recovery.
High interest rates will probably be with us
for some time to come, though there are some
indications that the recovery philosophy of the
present Administration in Washington is leaning
towards lower long term interest rates.
With possible prospects of a resumption of
an inflationary trend amounting to perhaps two
to three per cent a year as a further Administration recovery measure, this could add an actual
five to eight per cent to our eleven per cent
growth objective, due to the leverage inherent in
our debt structure. Each Sheraton share, we
estimate, represents $64 gross value of real estate at indicated fair market value. (For further
discussion of profit margins, see page 14.)
Sheraton's room occupancy of 72 per cent
is the same as it was five years ago. The trend
for the past three years has been moderately upward, and with signs of economic expansion,
this trend should accelerate.
Occupancy levels for Sheraton mainland
hotels, compared with the industry as reported
by Horwath and Horwath, were as follows:
(calendar years) 1956 1957 1958 1959 1960
Sheraton 72 73 69 71 72
Industry 72 70 67 66 65
Sheraton's improved occupancy is attributable in part to a campaign to attract permanent
guests, a policy which necessarily affects average
room rates adversely. On balance, this policy
seems to have considerable merit.
Last November Sheraton, realizing that
profit margins were somewhat narrower than
seemed warranted, and believing this was largely
due to excessive overhead, inaugurated its
$3,000,000 "Belt-Tightening" project. This was
accomplished without materially affecting sales
promotion, maintenance or service to guests. Not
until April 1961, the final month of our last
fiscal year, did we feel anywhere near the full
impact of this program. Last April proved to be
one of the best months of April in the Company's
history, — both with respect to basic as well as
reported hotel earnings.
The full benefit of this economy program is
expected to be felt during the new fiscal year
which started in May.
Profit Improvement Projects
Much of Sheraton's growth each year is due
to profit improvement projects. A survey covering such projects completed in recent years indicates that these investments can produce average
annual profits or savings before income taxes of
from 20% to 30% of the investment. This estimated return is after providing for appropriate amortization of these expenditures.
Sheraton customarily reinvests each year a
substantial portion of the depreciation reserve
set up for that year in profit improvement projects. Much of the balance is usually reinvested
— either in new properties, or in profit maintenance projects necessary to sustain earning
power of the various Sheraton properties.
For the past fiscal year we estimate that
some $1,500,000 of added basic earnings were
created by profit improvement projects of the
type referred to above. Several adverse and presumably nonrecurring circumstances caused offsetting reductions in basic earnings for the year.
These include: —
(a) Shrinkage in earnings of the Penn-
Sheraton in Pittsburgh noted above.
(b) Losses due to an estimated 1 J^% reduction from otherwise attainable rooms occupancy due to the 1960 recession.
(c) Reduction in the contribution of
Thompson Industries, Inc. to Sheraton
earnings in fiscal 1961.
There should be few losses of this nature in
the current (1962) fiscal year; in fact several added
new sources of revenue are indicated. These include over twenty millions of temporarily non-
income producing assets consisting primarily of
new construction. The greater part of these assets
are now producing income and should add to