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Trouble At The Sheraton? Starwood Hotels CEO Is Stepping Down

The CEO of Starwood Hotels and Resortsannounced his resignation today. The move sent the stock moving up, but was a reminder of challenges ahead for the $14 billion hotel operator.

Last updated on February 17, 2015, at 2:18 p.m. ET

Posted on February 17, 2015, at 2:18 p.m. ET

Jeff Haynes / Reuters

Less than a week after hospitality giant Starwood Hotels and Resorts said it would spin off its growing timeshare business, the Westin, Sheraton, and W Hotels parent's board announced Tuesday that CEO Frits van Paasschen would step down.

Starwood's board delivered the relatively sudden announcement without many specifics as to why it reached a "mutual decision" with van Paasschen to end his seven-year run at the helm of the $14 billion hotel company, but analysts and investors began weighing in in short order on Tuesday, when the company's stock jumped by 3% following news of van Paasschen's departure.

Starwood had struggled to compete with Marriott, Hyatt, and Hilton, due in part to its exposure to volatile emerging markets, an area in which van Paasschen had pushed Starwood to pursue growth opportunities during his tenure.

While the board searches for a new CEO, one of its directors, Adam Aron, will serve as interim CEO.

"Adam has been a Starwood director for nearly a decade and has deep hospitality industry experience as former CEO of both Vail Resorts and Norwegian Cruise Line," Bruce Duncan, Starwood's chairman of the board, said in a statement. "He is very familiar with our strategy, brands and leaders around the globe, and we are confident Starwood won't miss a beat as he steps in to lead the Company during this transitional period."

The incoming CEO will likely not be responsible for implementing a new strategy for Starwood, as Duncan later told Reuters the board did not disagree with van Paasschen on Starwood's current strategy, it only took issue with the strategy's execution.

Analysts, while encouraged with Starwood's move, are wary about how exactly it will improve execution of some of the company's biggest initiatives to sell more rooms and target a younger demographic.

"We believe, over the past year, investors have grown increasingly frustrated with [Starwood's] slower system expansion than peers as well as what evolved into a very murky return of capital story," MLV & Co. analyst Ryan Meliker wrote in a note Tuesday. "Additionally, Frits' marketing tendencies seemed to agitate investors more than normal over that time frame, given the aforementioned issues. It is our understanding that the Board of Directors heard from multiple investors about these concerns."

According to Meliker, Starwood has also struggled in the "select service" space, or brands that don't offer full-service amenities like a bellman, banquet space, or even room service.

"The big thing in general is growth — Starwood has lagged peers in hotel brands that don't offer full-service amenities," Meliker told BuzzFeed News. "Starwood launched Aloft and Element and has Four Points, but Marriott, Hilton, Hyatt, and IHG all offer a lot of brands in that space, and that's the space that's growing robustly. That's where consumers are choosing to spend. They don't want to pay for a bellman and they don't necessarily need room service, especially in an urban area."

Indeed, Starwood has dramatically missed its stated goals for the development of its "millennial-focused" Aloft and Element brands, with the company stating in 2007 that it would open 200 Aloft properties by 2010. There are currently fewer than 100 Aloft finished properties as of January 2015.

"We are encouraged by Starwood's desire to improve its operating performance, as room growth disappointed in 2014, and both asset disposals and shareholder return have lagged investors' expectations the last several years," Morningstar analyst Adam Fleck wrote in a note Tuesday on the heels of Starwood's announcement. "That said, details as to how execution will improve moving forward are vague."