Disney reported its first quarter fiscal year 2022 earnings for last October through December on an investor call held by CEO Bob Chapek on February 9, 2022. This covers the good & bad of these results from “the final year of the Walt Disney Company’s first century,” including Genie+ sales at Walt Disney World & Disneyland, record revenue from theme parks, surprising Disney+ subscriber numbers, and more.
Let’s start with the numbers. The first quarter of the Walt Disney Company’s fiscal year (or the fourth quarter of the calendar year) is another quarter of positive results, especially as the previous year offers an weak comparison due to ongoing closures and soft attendance last year.
In fact, this was the Walt Disney Company’s best quarter in two years, exceeding Wall Street estimates across the board during the quarter, sending the stock up more than 8% in after-hours trading. Forecasts called for revenue of $20.91 billion, but the actual total was $21.82 billion. Earnings per share for the quarter were $1.06 versus $0.63 expected in a survey of analysts. The biggest bright spot was Disney+, which rebounded in a big way after a disappointing fourth quarter…
Disney announced added 11.8 million subscribers, as compared to 2.1 million in the previous quarter. The number exceeded Wall Street expectations, with average forecasts estimating between 7 and 8 million new subscribers. Analysts on average expected Disney Plus to reach 125.1 million subscribers for the quarter. In actuality, Disney+ had 129.8 million paid subscribers worldwide. The company also reiterated its guidance of of reaching 230 million to 260 million Disney+ subscribers by 2024.
This has caused an after hours spike to Disney’s stock in after hours trading, as this bucks the narrative of slowing streaming growth. That has been the story of earnings calls for many other legacy media companies in recent quarters, as AT&T’s WarnerMedia (HBO Max), ViacomCBS (Paramount+), and NBCUniversal (Peacock) all added fewer new subscribers than anticipated.
Even Netflix reported disappointing results a couple of weeks ago, dragging down its stock price and that of its competitors. Netflix also lowered its forward-looking forecast in its latest company outlook, citing heightened churn, delayed content, and pulled-forward demand in the past two years. Investors also believe that market maturity and heightened competition from Disney and other platforms could be playing a role.
For their part, Disney executives predicted this during the last quarterly earnings call where they noted that the Disney+ slate was fuller in Q1 than Q4 FY2021. Chapek also praised the launch of a new franchise in Encanto. He has further stated that the second half of this year is expected to be stronger, with the massive investment in original programming starting to pay off with regular releases from Marvel, Star Wars, and more.
Of particular interest to us is Parks, Experiences and Products (or Parks & Resorts). Revenues for the quarter increased to $7.2 billion compared to $3.6 billion in the prior-year quarter. This also beat analyst expectations of $6.13 billion. Segment operating income results were $2.45 billion, as compared to a loss of $119 million in the prior year-quarter.
For the first time in…a while (sorry, I’m not sure how long)…theme parks outperformed consumer products. Domestic theme parks revenue was $4.8 billion (versus $1.49 billion in the prior-year quarter), whereas the international parks made $861 million. Income for the domestic parks was $1.56 billion, versus a loss of $800 million in the prior-year quarter.
The earnings document also revealed that capital expenditures increased from $760 million to $981 million year-over-year, driven by the temporary suspension of certain capital projects in the previous year. Capex increased for Walt Disney World and Disneyland year-over-year by $121 million, and for all of the international parks combined by about $20 million.
Spending has increased in the last couple of quarters as projects have started to resume and kick into higher gear. Work has resumed at Epcot and on Tron Lightcycle Run. For the international parks, the Zootopia expansion at Shanghai Disneyland, Arendelle: World of Frozen at Hong Kong Disneyland, and the expansion of Walt Disney Studios Park at Disneyland Paris are all underway again.
In an interview with CNBC prior to the earnings call, Chapek indicated that the cheapest days have stayed the same price for 3 years at both Walt Disney World and Disneyland, offering those on a budget an opportunity to visit the parks. He also said that there were a range of upgrade options, pointing specifically to Genie+ and Lightning Lanes.
Chapek indicated that between one-third and half of all guests at Walt Disney World are upgrading to those paid line-skipping services. He said that this has surprised even Disney, which did not anticipate uptake that high for Genie+ and Lightning Lanes.
The CNBC interviewer asked about online backlash among fans to pricing for vacation packages, and what was the primary cause of the increases. She offered Chapek a range of palatable options, from labor shortages to inflation.
Chapek didn’t take the cop-outs, instead bluntly stating that demand was the driver. He said that Disney’s theme parks are seeing unprecedented demand, and they have pricing power as a result. (During the CNBC interview, he didn’t mention labor costs or inflation.)
During his prepared remarks on the earnings call, Bob Chapek expressed a lot of enthusiasm about Encanto, the breakout Disney+ hit. He covered its popularity in the parks (specifically, DCA–I don’t think it’s anywhere else yet), boasting that merchandise is flying off the shelves, and how proud he was that the franchise was launched by the Disney+ streaming service.
At this point, it’s probably not premature to fire up the rumor and/or speculation mill about how and when Encanto comes to Walt Disney World and Disneyland in full form. Every CEO tends to make their mark on the parks, and Encanto is the company’s biggest success under Chapek’s stewardship thus far. I wouldn’t be surprised if there’s an announcement at or before the D23 Expo.
When directly discussing theme parks, Chapek said that Disney’s “domestic parks and resorts achieved all-time revenue and operating income record despite the Omicron surge.” He said that this stellar performance was achieved at lower attendance levels than 2019, which was due to carefully managing demand via the ticket and reservation systems.
He also said that during the holiday season, over 50% of guests bought Genie+ at Walt Disney World and Disneyland.
Disney CFO Christine McCarthy stated that attendance at Walt Disney World and Disneyland was up 10% as compared to the prior quarter. That’s not particularly significant since the prior quarter was the off-season and also saw a Delta-driven downturn in Florida.
Honestly, I would’ve guessed attendance was up way more than 10% for the quarter, which encompassed the start of the 50th Anniversary, Thanksgiving, Christmas, and New Year’s Eve.
More notably, McCarthy stated that per capita spending at the domestic parks was up more than 40% versus fiscal first quarter 2019, an absolutely staggering number. (It was up 30% as of the prior quarter.)
She said this was driven by a more favorable guest and ticket mix (read: fewer Annual Passholders), plus higher food & beverage and merchandise spending, as well as contributions from Genie+ and Lightning Lanes. Putting these factors together, domestic parks and resorts delivered Q1 revenue and operating income exceeding pre-pandemic levels, and that’s even as Disney continued managing attendance.
The increase in per guest spending should be unsurprising–it’s been a similar story in the past few earnings calls. You don’t even need to follow earnings calls to observe it: resort discounts are virtually nonexistent and prices of everything else–from tickets to food to souvenirs–is all up. On top of that, merchandise is flying off of the shelves and Advance Dining Reservation availability is minimal for most table service restaurants.
What’s notable is that revenue and income are now exceeding pre-pandemic levels, as this was not the case before. And again, this is with Disney “managing attendance.” The company notes in the earnings report that “our domestic parks and experiences are generally operating without significant mandatory COVID-19-related capacity restrictions.” Mandatory is the operative word there–Disney is now self-limiting capacity at the parks and resorts for a different reason: staffing shortages.
During the Q&A, McCarthy was essentially asked whether per guest spending would increase even more as bigger-spending international guests return. In response to that, she basically said yes–and that technology plus “creativity at our parks” was driving incremental spending increases and helping the margins get to this quarter’s level. Your guess is as good as mine as to what that latter quote means.
Joking aside, it’ll be interesting to see how that plays out. The return of international guests in full force definitely could drive those per guest spending numbers higher. However, that could also be offset by the return of more hotel rooms to the inventory. No one knows how many rooms are currently out of commission at the operational resorts, but at some of them, it’s a lot. Pent-up demand among domestic visitors could also fizzle out, and spending could decrease as household savings decreases and stimulus money dries up.
Chapek actually addressed the staffing issues directly later in the Q&A when asked about attendance caps. He stated that “the two areas that have been difficult is hospitality, and right now we’ve got 90% of our hotels at Walt Disney world open, all hotels at Disneyland open, and all sorts of cooks, short-order cooks. The capacity constraints are self-imposed capacity constraints and are really a function of our food and beverage sort of mitigation, if you will…because people spend a long time in our parks and Resorts, the food and beverage component is a big one.”
He did not specifically mention the housekeeper shortage, which we addressed a couple weeks ago in this post. That’s a significant impediment for resort occupancy, and is one reason hotels aren’t filling all of their rooms. The causes of the current labor shortages are multifaceted, and the analysis in the above post more or less applies to both housekeepers and cooks.
In that same answer, Chapek also addressed entertainment: “One of the last things to come back for us in a post-COVID world–that we hope is a post-COVID world–is actually live entertainment. Because much of the live entertainment is close proximity, we are self-regulating that. We are self-managing that, because we don’t want our guests to feel an excessive level of density.”
“The place that you get [excessive density] is parades, fireworks shows, and things like that. I suspect that over time we’ll start to regain some of the capacity drop off we’re kind of self-imposing on ourselves.” (Note: fireworks shows returned to Walt Disney World and Disneyland in July 2021.)
Ultimately, it’s always interesting to listen to these earnings calls to get an idea of the company’s results and expectations for the future. While there was no bombshell news during this one, it was particularly illuminating on the topics of per guest spending, record revenue, capacity constraints, and forward-looking expectations about demand and revenue.
It’ll be interesting to see whether per guest spending actually can maintain or exceed the incredible 40% growth over 2019 levels, even as Walt Disney World and Disneyland return to full operational capacity. That number is absolutely staggering, especially since there’s still more pent-up demand among international guests.
Personally, I’m skeptical–which is exactly what I wrote in response to the last earnings call when per guest spending was up “only” 30% over 2019 levels. At some point, pent-up demand fizzles out, inflation on necessities influences discretionary spending, and the stimulus money plus what people saved during the pandemic is depleted.
When all of some of that happens, consumers will return to being more cost-conscious and price sensitive, and things will normalize to at least some degree. However, there don’t appear to be any signs of those things happening anytime soon. So, get used to high prices, heavy crowds, and nickel & diming at Walt Disney World and Disneyland as this record run of revenue and income continues for the foreseeable future.
What do you think of Walt Disney Company’s Q1 FY2022 earnings and future forecast? Thoughts on the company’s claim that xxx? What about the sharp spike in per guest spending? Are you worried about the future of Walt Disney World, Disneyland, or the company in general? Think things will improve or get worse throughout this year? 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!