Walt Disney Company reported its first quarter earnings for October through December and forward-looking forecast for 2021 on an investor call held by CEO Bob Chapek. In this post, we’ll cover the good & bad of these results, plus updates on the future of Walt Disney World and Disneyland, including Disney’s internal expectations about the relaxation of face mask and physical distancing rules.
The first quarter of the Walt Disney Company’s fiscal year (the last quarter of the calendar year) was something of a turning point. While Disneyland remained closed for the quarter’s entirety and two of the international parks were partly closed, Walt Disney World was open. Not only was the flagship resort complex open, but it was the busiest post-reopening stretch of the year.
Less significantly for theme park fans but more so for the company, Disney+ had another stellar quarter. Even before the company released subscriber numbers, it was safe to say that Disney+ had crushed it. Investor Day was essentially a second launch for the streaming service, with a barrage of programming announced during the 4-hour event (see our post, Like 937 Things Announced for Disney+ During Investor Day, for specifics). And investors took note.
Following Investor Day, shares in the Walt Disney Company surge, with the stock price rising almost 14% to finish at $175.72. Trading volume was about nine times its normal level. In the two months since then, $DIS has maintained that momentum, edging above $190 per share as of February 2021.
Multiple Wall Street analysts have expressed further optimism about the Walt Disney Company’s stock, with many upgrading it to “buy” with price targets at or above $200. Investor enthusiasm is driven by the belief that Disney+ can achieve scale similar to industry leader Netflix. It’s also probable that the theme parks will become the beneficiary of vaccine availability and pent up demand for leisure travel in the second half of 2021, per analysts.
Forecasts called for revenue of $15.91 billion, but the actual total was $16.25–that’s down as compared to $20.86 billion year over year, but still better than expected. Consequently, $DIS has been up in after hours trading as soon as the results were released, so clearly Wall Street was pleasantly surprised…
Per usual, Disney+ was the expected bright spot. Subscribers to Disney+ surged even more than expected to 94.9 million, which is well ahead of the 90.2 million anticipated. Disney+ beating projections even after analysts have adjusted their expectations upwards for Disney+ after its meteoric success is really impressive.
It’s also worth noting here that Disney’s direct-to-consumer division includes ESPN+ and Hulu, which don’t grab the headlines but also performed very well. ESPN+ has eclipsed 12.1 million subscribers, almost double the number of a year ago; Hulu rose 30% to 39.4 million subscribers. It’s likely this was driven by advertising for the “Disney Bundle” which we saw pretty much nonstop during the Christmas season.
Of particular interest to us is Parks, Experiences and Products (or Parks & Resorts). Disney estimates that the total net adverse impact on that segment’s operating income for the third quarter was approximately $2.6 billion due to revenue lost as a result of the closures, capacity caps, and operational cutbacks–that’s lost revenue of over $30 million per day.
Disney Parks, Experiences and Products revenues for the quarter decreased 53% to $3.6 billion, and segment operating results decreased $2.6 billion to a loss of $119 million. That might sound good as compared to the billions of past quarters, but keep in mind that consumer products are now under the same umbrella as theme parks…and the first quarter encompassed the holiday shopping season.
Remove all those toys from the equation and the numbers are worse. Walt Disney World and Disneyland lost $798 million for the quarter, while the international parks lost a collective $262 million. That’s just above an operating loss of $1 billion for the theme parks alone.
As with the previous two quarters, all theme parks that were open for a portion of the quarter covered their variable costs and made a net positive contribution towards fixed costs. Keep in mind that this does not mean Walt Disney World or any other park is profitable; it means the parks are losing less money by being open than they would lose by being closed. (Making this statement instead of “Walt Disney World is profitable” suggests that the parks are not yet profitable.)
Let’s get the rest of the bad theme park news out of the way so we can get to the optimistic stuff. Due to the ongoing closure, Disney CFO Christine McCarthy stated that the company has chosen to slow spending on capital expenditures in the parks.
Consistent with that, the Q1FY21 results document revealed that Disney spent $760 million on capex in the parks in the first quarter of fiscal year 2021 as compared to $1.3 billion spent in the previous year’s first quarter. Note that the previous year would’ve included work on Star Wars: Rise of the Resistance as well as Mickey & Minnie’s Runaway Railway, and there was going to be some degree of winding down of spending after that. But not cutting the number essentially in half.
Now let’s turn to the positives. Average daily attendance at Walt Disney World grew significantly in the quarter, and the operations team found “innovative ways” to increase capacity while maintaining health safety protocol. Disney indicates that they’re pleased with booking trends, as well as consumer sentiment for visiting in the future.
In terms of forward-looking projections for the second quarter (through the end of March 2021), Disney CFO Christine McCarthy indicated that Walt Disney World is facing “headwinds” in terms of seasonality and pessimism around current travel. This much has been obvious to us thus far in visits the last two months–as we covered previously, Crowds are Down Over 40% at Walt Disney Worldthus far during the winter off-season.
Additionally, McCarthy stated that Disneyland and Disneyland Paris would likely remain closed for the remainder of the current quarter, which was pretty much a given. They do expect Hong Kong Disneyland to reopen in the very near future, but that’s peanuts as compared to the other multi-park complexes over which Disney has sole ownership.
To kick off the Q&A, an investor asked CEO Bob Chapek about how park capacity increases would be undertaken. CEO Bob Chapek replied that capacity is “really going to be determined by the rate of vaccination of the public.” He further stated that Disney has ample demand for the theme parks, it’s the current attendance caps that are the issue.
This is actually something we’ve touched upon from time to time, most recently in our Walt Disney World 50th Anniversary Info post. Suffice to say, Disney is limiting attendance to roughly 35% of normal levels because of physical distancing requirements from the CDC. That is the upper limit on park capacity while adhering to health guidance based on Disney’s industrial engineering estimates.
Shifting to vaccination rate would be significant and potentially accelerate the timeline for relaxing rules and health safety protocol. It could allow attendance to increased, and with it entertainment and other costly offerings to be restored.
While it might be difficult to envision such a scenario right now as most vaccine-related headlines concern the slow rollout, but that has already started to gain momentum and will hopefully continue to improve. In fact, just this morning, Dr. Anthony Fauci told the Today Show that the pace of vaccinations will pick up as we get into March, and that by April, it will be “open season” for all groups to receive shots. That is great news for Walt Disney World, and alone cause for optimism!
A subsequent question specifically inquired about face masks and physical distancing even after the rollout of vaccinations. This is something about which we’ve been speculating for the last several months, as well.
In response to this question, Chapek stated that Disney has no doubt that parks will have “some level” of physical distancing and mask-wearing for the remainder of 2021. However, if vaccines are available to the general public per the April timeline above, Disney views that as a “game-changer.”
Chapek stated that there will be some overlap until herd immunity has been reached, but it won’t be the same as today. Specifically, he said: “Do we believe we’ll be in the same state of 6 foot social distancing and mask wearing in 2022? Absolutely not.” (Note: While Chapek did not specify whether he was referring to the fiscal or calendar year, these calls concern the former and financial topics are usually discussed as such. However, this is obviously not a financial topic. Regardless, FY22 starts on October 1, 2021.)
Editorializing a bit here, the most obvious way to accomplish this is shifting from rules to recommendations. This is something we discuss at length in When Will Walt Disney World Stop Requiring Face Masks? The analysis is pretty much unchanged from that post. In our view, Disney moving from reliance upon health expert recommendations to the vaccination rate is laying the groundwork for changing its approach to health safety protocol.
Ultimately, the financial results were about on par with what was anticipated. Familiar beats were hit–the resounding success of Disney+ and consumer products, with continued losses from the closure and scaled back operations of the theme parks. Some results were better than expected, others were worst. All things considered, no colossal surprises.
For most Walt Disney World fans (us included), the earnings calls are less about the financials and more about the trajectory and future prospects of the parks. There has been a lot of pessimism of late, in particular about the need to wear face masks and distance “indefinitely.” While this call did not set forth a definitive timeframe for the relaxation of rules (that would be premature and foolish), it did establish a new benchmark while also articulating the internal view at the Walt Disney Company. Between that and today’s optimism about the vaccine rollout, we’re excited for October and beyond at Walt Disney World. The last quarter of the calendar year and first quarter of the 2022 fiscal year could shape up to be a great one, with things starting to return to normal!
What do you think of Walt Disney Company’s first quarter earnings and future forecast? Are you likewise optimistic for October 2021 and beyond, or think even that is premature? Are you worried about the future of Walt Disney World, Disneyland, or the company in general? Excited by Disney+ continuing to do exceptional numbers? Think things will turn around in 2022? Do you agree or disagree with our assessment? Any questions we can help you answer? Hearing your feedback–even when you disagree with us–is both interesting to us and helpful to other readers, so please share your thoughts below in the comments!