Disney reported its second quarter fiscal year 2022 earnings for this January through March on an investor call held by CEO Bob Chapek on May 11, 2022. This covers the good & bad of these results, including Genie+ performance, guest spending at Walt Disney World & Disneyland, strong revenue from theme parks, streaming subscriber numbers, and more.
Let’s start with the numbers. The second quarter of the Walt Disney Company’s fiscal year (or the first 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.
While the Walt Disney Company exceeded Wall Street estimates across the board last quarter, the results for Q2 were more mixed. Forecasts called for revenue of $20.05 billion, but the actual total was $19.25 billion. Disney earned $1.08 per share in the latest quarter, whereas analysts were expecting earnings of $1.19 per share. With that said, those misses were relatively minor, and were dinged by over $1 billion in one-time early termination fees for TV shows and films it wanted to use on its Disney+ streaming service. Speaking of which, Disney+ was once again a bright spot…
Disney announced added 7.9 million subscribers, as compared to 11.8 million in the previous quarter that encompassed the holiday season. The number exceeded Wall Street expectations, with average forecasts anticipating around 5 new subscribers. Analysts on average expected Disney Plus to reach 135 million subscribers for the quarter.
In actuality, Disney+ had 137.7 million paid subscribers worldwide. The company also reiterated its guidance of of reaching 230 million to 260 million Disney+ subscribers by 2024. Currently, total subscriptions across all direct to consumer offerings exceed 205 million, which “once again proved that we are in a league of our own,” according to CEO Bob Chapek.
This caused an immediate after hours bump to Disney’s stock in after hours trading, as this bucks the narrative of slowing streaming growth. (The stock is now down ~2.5% after hours, following comments during the Q&A that subscriber growth might slow in the second half of the year.) After Netflix reported disappointing results a couple of weeks ago, including its first net loss of subscribers from quarter to quarter, its stock price and that of its competitors (WarnerMedia, Paramount, Comcast, Disney) have been hit hard.
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. The big question has been whether Netflix’s woes are reflective of the streaming segment as a whole, or are because of competitor’s gaining ground.
Netflix’s results been a big drag on Disney’s stock, which hit a new 52-week low today. Dropping below $105 per share, Disney’s price is on par with 2015–it’s down 30% year to date and over 40% in the last year. Although the broader market has been down of late, Disney and its streaming cohorts have been laggards.
Many fans and critics have attributed this to the company’s, ahem, assorted controversies. While it’s true that corporate leadership may be weighing on the stock to some degree, Disney has been performing on par with its streaming counterparts. For better or worse, Wall Street is singularly focused on the subscriber growth of Disney+ and the company’s other streaming products, and has largely ignored theme parks and everything else.
While streaming continues to be the emphasis, it continues to lose money–and likely won’t turn a profit for the company until 2024. Between now and then, Disney is chasing market share and subscriber growth. Disney reported an operating loss of $887 million related to its streaming services in the second quarter, up from a loss of $290 million a year ago. For the first six months of Disney’s fiscal year, streaming services have lost approximately $1.5 billion.
Of particular interest to us is Parks, Experiences and Products (or Parks & Resorts). Revenues for the quarter increased to $6.7 billion compared to $3.2 billion in the prior-year quarter. Segment operating results increased by $2.2 billion to income of $1.8 billion compared to a loss of $400 million in the prior-year quarter.
Domestic theme parks revenue was $4.9 billion versus $1.74 billion in the prior-year quarter, whereas the international parks revenue was $574 million. Income for the domestic parks was $1.39 billion, versus a loss of $587 million in the prior-year quarter.
International parks dragged down the results, losing $268 million for the quarter. This was largely due to the closures of Hong Kong Disneyland and Shanghai Disney Resort. HKDL was open for 3 days in the current quarter compared to 33 days in the prior-year quarter. SDL was open for 78 days in the current quarter and open for all of the prior year quarter.
However, Disneyland Paris was a bright spot. Higher operating results there were due to increases in attendance and occupied room nights–this should improve even more in the next quarter due to the Disneyland Paris 30th Anniversary celebration.
The earnings document also revealed that capital expenditures increased from $1.01 billion to $1.44 billion year-over-year, driven by the temporary suspension of certain capital projects in the previous year. Capex increased for domestic parks & resorts increased year-over-year to $1.05 billion, up from $656 million in the previous year.
Spending has increased in the last couple of quarters as projects have started to resume and kick into higher gear. Work has kicked into high gear in EPCOT and on TRON Lightcycle Run at Magic Kingdom. 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. Spending was also significant on the Disney Wish cruise ship and on corporate facilities.
When directly discussing theme parks during his opening remarks, Chapek said that Disney’s “domestic parks were standout” and that “they continue to fire on all cylinders.”
Chapek continued: “Powered by strong demand, coupled with customized and personalized guest experience enhancements, that grew per capita spending by more than 40%, versus 2019.” He also pointed specifically to Star Wars: Galactic Starcruiser, stating that guest satisfaction ratings were “incredibly high and in line with best-in-class offerings. Demand is strong, and we expect 100% utilization, through the end of Q3.”
Disney CFO Christine McCarthy stated that per capita spending at the domestic parks was up more than 40% versus fiscal second quarter 2019, and up 20% as of the prior quarter. This would be surprising, but it’s the same story as last quarter. She stated that this was due to increases across the board, on admissions, food and beverage, and merchandise.
McCarthy went on to state that demand for many days exceeded 2019 levels, but that Disney continued to manage attendance via reservations with “an eye on delivering, a quality guest experience.” Looking ahead to the third quarter, demand at both Walt Disney World and Disneyland “remains robust” according to McCarthy.
Once again, these increases were 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 Q2 revenue and operating income exceeding pre-pandemic levels, and that’s even as Disney continued managing attendance.
The higher year-over-year numbers are a result of favorable comparisons. Although Walt Disney World was open for the entirety of the prior-year quarter, attendance was capped at ~35% then. Disneyland was not open at all during the prior-year quarter. These favorable comps won’t last much longer.
During the Q&A, Chapek was asked whether the company expected a deceleration in coming quarters due the health of the economy, inflation, and consumer spending. He stated that Disney is “very, very encouraged by the continuation of the trends that we’re seeing in terms of number of people, for example, who [purchase] Genie+.”
Chapek went on to credit the “balanced reservation system” that helps the company manage price per day and yield management, which has structurally allowed the company to increase per capita spending meaningfully without having to rely solely on raising ticket prices. “We don’t see any end in sight” to the sky-high demand and strong spending numbers, said Chapek.
McCarthy was essentially asked the same question about inflation and guest spending, and stated: “we feel really good about consumer demand, and what we’re seeing, in the forward-looking bookings and…in the attendance levels.
With regard to inflation, McCarthy conceded that it was “more challenging” but that the company pays close attention to all inflationary pressures–everything from merchandise to food & beverage, and how to mitigate rising costs. She also gave a specific example of how this is done with the increased cost of fuel–the company has resumed its “very robust fuel hedging program” at Walt Disney World that reduces risk and minimizes volatility.
All in all a relatively uninteresting call. Most of the statements and questions & answers were covered on prior calls, with the answers just restated in slightly different ways. Nothing particularly illuminating about the future, major announcements or hints at what’s to come–not even any “good gaffes” as have become par for the course during the Chapek era. (Not that I’m actively rooting for those flubs, but they’re good for generating amusing discourse.)
From my perspective, perhaps the biggest takeaway is how much they’re leaning on the park reservations system to explain away problems or underscore demand. McCarthy and Chapek highlighted the reservations system on multiple occasions, presenting it as an asset to “balance demand” or improve the “consumer experience” (among other things) while not really speaking to its continued necessity due to staffing shortages and other operational woes. Even when asked directly about staffing, McCarthy pivoted to points about “managing attendance” and other purported benefits.
This question was presumably asked because Chapek spoke to staffing shortages during the last earnings call, and virtually every other hospitality company has discussed the same subject and the challenges it poses during their earnings calls. At the very least, it seems like the reservations system will stick around for the next few quarters since it’s a way to present problems in more favorable terms.
Other than that, not really many much of consequence discussed on this call pertaining to Walt Disney World.
As always, it’ll be interesting to see how Disney’s forward-looking forecast actually plays out. It makes sense that Chapek and McCarthy are optimistic in their forward-looking projections, as the mixture of pent-up demand and diminished capacity have produced strong results Things could continue to remain strong, with demand continuing to exceed pre-closure levels and reservations unavailable throughout the summer season. With Guardians of the Galaxy: Cosmic Rewind coupled with the summer tourist season, this seems likely.
However, at some point there’s likely to be a slowdown–which is exactly what was intimated by several analyst questions during that segment. Pent-up demand among domestic visitors could fizzle out, inflation on necessities might result in reductions to discretionary spending, and the same could also happen due to depleted household savings and stimulus money. Inflationary pressures and the rising cost of travel due to oil prices could bring the party to a premature end, too.
When all or 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 this summer. For now, 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. Of course, things could always change in a hurry–exactly that has happened before.
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What do you think of Walt Disney Company’s Q2 FY2022 earnings and future forecast? What about the 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!