Here's something you don't often hear: a hotel company's biggest growth driver isn't actually the hotels. It's the pillows.

Atour Lifestyle Holdings Ltd. (ATAT) just proved that sometimes the secret to success in hospitality isn't about filling rooms—it's about selling what's in them. The upscale hotel operator announced third-quarter results last week that sent shares up 8.5% over the following five trading days, and for good reason. The company raised its full-year revenue growth forecast to 35% from an earlier prediction of 25%, and the star of the show isn't room bookings. It's retail.

Atour operates an online store where guests can purchase products they encounter in their hotel rooms. Think of it as impulse shopping meets hospitality. And business is booming, particularly for bedding products. The company's Deep Sleep Memory Foam Pillow alone racked up 100 million yuan in gross merchandise value within just 25 days of launching, with 8 million pillows sold since the product hit the market. Not bad for a hotel company.

The Numbers Tell an Interesting Story

Atour's third-quarter revenue jumped 38.4% year-over-year to 2.63 billion yuan ($372 million), accelerating from the previous two quarters. For the first nine months of the year, revenue climbed 35.5%, which gave management the confidence to upgrade their full-year outlook.

But here's where it gets interesting. The retail business grew 76.4% in the quarter to 846.3 million yuan, up from 479.7 million yuan a year earlier. Meanwhile, the core hotel business—you know, the actual hotel part—grew a more modest 25.5% to 1.72 billion yuan from 1.37 billion yuan. The retail operation now represents nearly a third of total revenue, compared to about a quarter a year ago.

Why does this matter? Margins. The retail business operates at a gross margin of 52.7%, while the hotel business manages just 37.3%. When you're selling high-margin pillows and bedding alongside lower-margin room nights, suddenly the math starts looking pretty attractive.

The Revpar Challenge Continues

It's not all smooth sailing, though. Like most of its peers, Atour has been dealing with declining revenue per available room (revpar)—the industry's most closely watched metric that combines room prices with occupancy rates. The company saw revpar drop 2.4% year-over-year in the third quarter to 371 yuan as it lowered prices to attract guests.

This decline reflects broader challenges in China's hospitality sector. After a strong 2023 fueled by post-pandemic "revenge travel," the industry started contracting last year as China's economic slowdown took hold. The good news? Atour's rate of decline has been moderating throughout the year, and there were some encouraging signs during China's weeklong National Day Holiday starting October 1, which saw revpar increases that will show up in fourth-quarter results.

"For the hotel sector, the overall market has shown a moderate recovery since the third quarter," said Atour founder and Chairman Wang Haijun on the earnings call. "While travel and leisure demand continues to be robust, the industry is also characterized by rapidly shifting hotspots and uneven recovery across regions."

One bright spot has been the Atour Light brand, positioned at the lower end of the company's mid- to upper-range offerings. Budget-conscious travelers have gravitated toward this option as economic uncertainty persists.

Aggressive Expansion Continues

Atour isn't sitting still while waiting for the broader market to recover. The company opened 152 new hotels during the quarter, bringing its total to 1,948 by the end of September. That's roughly equal to the number it opened in the entire first half of the year, showing a clear acceleration in expansion.

And management isn't pumping the brakes. On the earnings call, the company expressed "full confidence" in hitting its target of operating 2,119 hotels by year-end. That means adding 171 hotels in the fourth quarter alone—an ambitious goal that signals continued aggressive growth despite market headwinds.

Bottom Line Performance

Net profit rose 24.6% year-over-year to 474 million yuan in the quarter. The growth rate lagged revenue expansion primarily due to non-operational factors, including higher tax expenses. The company also announced a second dividend for the year, bringing total dividend distributions to just over $100 million.

For the full year, management expects retail business revenue to grow "at least 65%." It's worth noting, however, that this represents a significant deceleration from 2024's 126% growth rate. As the retail business matures, such slowdowns are natural, though the growth remains impressive by most standards.

What Analysts and Investors Think

Wall Street is remarkably bullish on Atour. All 19 analysts covering the stock rate it either a "buy" or "strong buy"—a relative rarity these days given uncertainty around China's economic trajectory. The retail business appears to be a key differentiator, giving Atour a unique competitive advantage that traditional hotel operators lack.

Investors seem more cautiously optimistic. Despite a 45% gain this year, shares trade at a forward price-to-earnings ratio of just 20. Compare that to rival H World Group (HTHT), which trades at a forward P/E of 35. H World's core China business is also struggling, with revpar down 4.7% in the third quarter, but the company owns a large overseas hotel portfolio that's starting to show improvement, including a 6.1% revpar increase in the quarter.

The valuation gap suggests investors may be waiting to see whether Atour's retail-driven growth model can sustain momentum as the business matures and China's economy remains uncertain. But if the company keeps selling pillows at this pace, it might just have found a unique path forward in a challenging market.