Walt Disney Company reported its third quarter earnings for April through June and forward-looking forecast for 2020 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 beyond.
The last quarter was a perfect storm for the Walt Disney Company. The only theme parks that were open at all during the third quarter were Shanghai Disneyland and Hong Kong Disneyland, and as minority owners in both, they’re not exactly Disney’s cash cows. Beyond that, film releases were delayed, production was shuttered, there were no sports for ESPN to broadcast, and advertising budgets were slashed. Aside from Disney+, pretty much every aspect of Disney’s business was negatively impacted.
Consequently, analysts were predicting the worst for the Walt Disney Company in the third quarter of 2020. Forecasts called for millions in losses (potentially a $2 billion loss from the Parks, Resorts & Experiences division alone) as compared to $4.6 billion in profit during last year’s third quarter. Wall Street had already priced these losses into Disney’s stock, with the real questions being just how bad the damage was, whether there were any unexpected bright spots, and Disney’s forward-looking expectations for the fourth quarter and 2021…
Forecasts called for revenue of $12.39 billion, but the actual total was $11.78 billion–down 42% year over year. Despite this, $DIS was up in after hours trading as soon as the results were released, so clearly Wall Street was pleasantly surprised…
Disney+ was an expected bright spot, but even that fell short of subscriber projections hitting 57.5 million as compared to the forecast 59.4 million. However, analysts have adjusted their expectations upwards for Disney+ after its meteoric success. During the call, Chapek announced that Disney+ has hit 60.5 million subscribers as of August 2020.
It’s worth noting here that Hamilton didn’t debut until July 4, just missing the last quarter. Regardless of expectations, the Disney+ streaming service is doing far better than other newcomers like Apple TV+ and HBO Max, both of which are off to very slow starts.
Also announced during the call is that Mulan will be available to Disney+ subscribers as a premium video on demand release debuting September 4, 2020 for an additional $29.99 upcharge. Mulan will also be released in select theaters, although no additional details were provided regarding that.
Mulan is Disney’s biggest foray into PVOD and Disney made clear that this is a one-off and driven by the uncertainty of its release. Onward had its theatrical run shortened and Artemis Fowl was released directly to Disney+, but those obviously aren’t the same. Bob Chapek also announced plans to launch yet another streaming service in 2021 under the Star brand.
Of particular interest for 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 $3.5 billion due to revenue lost as a result of the closures–that’s a loss of roughly $40 million per day. Segment operating results decreased $3.7 billion to a loss of $2.0 billion.
Interestingly, capital expenditures were $1.86 billion in the third quarter, down from $2.49 billion year over year. We didn’t expect CapEx to plummet to zero, but this number was still higher than expected. Disney is a slow turning ship, so these numbers will still probably continue to drop, but hopefully that still bodes well for ongoing projects.
The losses in the theme park segment were partially offset by media networks and other divisions, but it was still a rough quarter for the Walt Disney Company. In total, the net adverse impact on operating income across all business units was approximately $2.9 billion. One minor positive note is that earnings per share were $.08 for the quarter. That’s a decrease of 94% from $1.34 in the prior-year quarter, but it’s still in the positives.
Another big positive that caused us to breathe a sigh of relief is that Disney has $23 billion in cash. That number is actually up significantly year over year. In fact, just at the end of the last quarter, the company only had $14.3 billion in cash on hand. Following that, Disney raised another $11 billion in new debt offerings to weather the current crisis. Obviously, more debt isn’t good, but the cash puts Disney in a good position to weather the storm.
On the call, Disney indicated that Walt Disney World is already covering its variable costs and making a positive net contribution towards fixed costs. Note that this doesn’t mean that Walt Disney World is profitable–it means the parks are losing less money by being open than they would lose by being closed.
Nevertheless, Walt Disney World’s results are below expectations, which the company attributes to the spike in Florida’s cases. Chapek stated that cancellations have been higher than anticipated and utilization of the parks has been lower than expected. Long distance travelers are making up a lower percentage of guests than expected (~50%) whereas Floridians are making up a higher percentage (~50%) of all guests in the parks on any given day.
At the end of the question and answer portion, Walt Disney World attendance once again came up with a question about resort occupancy, booking numbers, and guest spending. Disney stated that per guest spending is up (we call that “the eBay pirate effect”) but declined to provide an answer on the hotel inquiries, saying that the occupancy numbers were meaningless since so many resorts are not currently open.
Independent of this, we know that occupancy rates are way down (which is likely why this question was dodged). Even without that knowledge, you could surmise that more guests from in-state and fewer from out of state means lower numbers for the hotels. Even those numbers don’t tell the full story, as Disney Vacation Club is buoying the out of state percentage as DVC members are backed into a corner with the ‘use it or lose it’ nature of membership.
It’s good news in the short term that Walt Disney World being open is making a net positive contribution, but that’s still not a sustainable long-term position. This will improve as consumer confidence bounces back and willingness to travel increases, but that will take years to fully recover. In the short term, it’s all but inevitable that Walt Disney World will follow Universal and SeaWorld in announcing layoffs.
Disney didn’t broach the topic of discounting on the call, which is one way to entice out of state guests to return to Walt Disney World. As we’ve said before, our assumption is that both deals and out of state marketing will return as soon as Florida’s numbers improve to the point where it’s not a “bad look” or PR decision for Disney to actively lure guests to a hotspot.
Additionally, Disney noted on the call that the company is anticipating CapEx to be $700 million lower than previously forecast, which is due to lower investment in the domestic parks.
As noted above, we’re already starting to see this, but it’s not as pronounced as anticipated. Keep in mind that there were CapEx costs for Star Wars: Galaxy’s Edge last year, and Disney has consistently stated that the company was aiming for lower CapEx after that project was finished. Between that and the pausing of all construction projects at Walt Disney World and Disneyland for several months (thus deferring some of those costs), this doesn’t seem as bad as it could be. Time will tell, though.
Ultimately, we went into Disney’s earnings call knowing it would be a bloodbath–unquestionably the company’s single worst quarter ever–and the results were about on par with what we anticipated. Some results were better than expected, others were worst. All things considered, no colossal surprises. Given that we were dreading this call and fearing the worst, “no colossal surprises” is a pretty positive result.
There were also plenty of “optimistic nuggets.” Disney has a lot of cash on hand ($23 billion!!!), and is clearly positioned to weather the storm, even if the situation further deteriorates. Even with abysmal attendance, Walt Disney World is making a positive net contribution towards fixed costs, which should forestall further significant operational cuts. Disney+ is still going strong. Given all of this plus Disney’s resilience and brand affinity among consumers, we definitely left the call feeling fairly reassured. It should all be uphill from here!
What do you think of Walt Disney Company’s third quarter earnings and future forecast for the last quarter of 2020 and beyond? Are you worried about the future of Walt Disney World, Disneyland, or the company in general? Think things will turn around for the fourth quarter or in 2021? 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!