This weekend, the media industry’s eyes will be on the Disney D23 festival at the Anaheim Convention Center, just steps from Disneyland. Its location is suitable as the company is set to make a series of announcements that it hopes will give it a happy ending after months of sharp declines in its share price.
The dazzling event is expected to feature appearances by A List actors and photographs from upcoming films. Disney will no doubt also unveil its plans for theme parks, which could even include the creation of a fifth outpost at its Walt Disney World hotel in Orlando, as we reported. Disney’s third-quarter earnings report revealed that “upcoming attractions and experiences” will be showcased at D23, but that failed to delight investors. Disney’s inventory fell 4. 5% to close at $85. 96 and moved slightly today. There is a clever explanation for this discomfort.
For a company that claims to be built on magic, Disney’s moment has been fascinating since the pandemic began.
When Covid-19 began to spread around the world in early 2020, Disney, first of all, seemed to have the best trick up its sleeve. In November 2019, just a month before the first case of the deadly disease was reported, Disney unveiled its highly anticipated streaming platform Disney, which has become a fortune overnight thanks to its hit Star Wars spin-off series, The Mandalorian.
Disney was seen as a parting gift from the company’s veteran executive leader, Bob Iger, who had defended the platform and resigned in February 2020 to be replaced by Bob Chapek, head of Disney’s parks and resorts division. Even in the darkest days of the pandemic, Chapek shared the brilliance of Disney.
On its first day alone, the platform recorded 10 million registrations, far exceeding forecasts of 14. 3 million by the end of the year. It is nothing compared to what is to come.
Lockdown has forced millions of consumers to remain confined to their homes all day, with little more than television and the web to keep them company. Disney’s popularity grew at the same time, reaching 60 million subscribers after 8 months and one hundred million after 16 months. That’s more than Disney had originally planned to have within five years, and shareholders couldn’t get enough of it.
With many movie theaters still closed, streaming will be the way of the future and Disney’s extensive archive of content puts it in the most sensible place on the wave. Its percentage value reached an all-time high of $197. 16 in March 2021, giving it a market capitalization of $357. 2 billion. The study saw the prospect of even greater growth.
Disney’s first major release after the pandemic began was the Marvel film Black Widow in July 2021. The studio made the debatable decision to release it in theaters and on Disney, where subscribers can access it for a month through its Premier Access service for $29. 99.
The National Association of Theater Owners criticized the decision and blamed it for the 67% drop in the film’s second weekend box office earnings, making it the worst Marvel film in that period. period. Theaters generally keep about 50% of box office profits and studios receive the rest. Disney was therefore taking on a threat at the festival with some of its biggest clients.
Black Widow underperformed at the box office after an early release on Disney
Blinded by the prospect of keeping one hundred percent of Disney’s revenue, the studio bet on streaming and commissioned a series of series and videos that can only be discovered on its platform. It has even released some films exclusively on Disney at no additional cost. when they were originally intended to be screened in theaters.
One of them was Artemis Fowl, Kenneth Branagh’s 2020 adventure film about a 12-year-old delinquent mastermind, which was destined for a franchise but turned out to be unique in the end. Perhaps this is not surprising, as this launch strategy cannibalized Disney’s own revenue stream.
If a family of two adults and two children wanted to see a new movie at the cinema, they previously had to buy four tickets and Disney received 50% of the profits. However, with Disney+, all that was needed was a streaming subscription which initially charged just $6. 99 per month and is expected to increase to $15. 99 in October, which is still less than 50% of four tickets for one movie.
Theaters were under so much pressure in the early days of Disney that it didn’t seem like such a big gamble to compete with them, so Disney went for streaming. The prices of its content have skyrocketed and reached a record $29. 9 billion in 2022. . Then came a disturbance within the force.
The emergence and widespread adoption of anti-Covid vaccines has led governments to lift lockdown measures and staff to return to the office. This left them less time to stream shows, so Disney+’s subscriber numbers began to decline just as its slew of new content was released. The timing couldn’t have been worse and Disney paid the price.
Disney subscribers since 2020
Disney, struggling with huge upfront costs, had yet to turn a profit, and higher spending on content sent its numbers into the red, sending the value of its inventory plummeting. Operating losses for Disney’s streaming business peaked at $1. 5 billion in the 3 months to Oct. 1. 2022, and its percentage value had fallen by 52. 2% from its high of just $94. 33 until then. Disney’s board of directors has taken decisive action. A month after the disastrous effects were announced, Chapek fired and Iger was tempted to return to the bench. It is not the dream ticket that society expects.
One of Iger’s first decisions to return to the style of new theatrical releases with a strong window of exclusivity to protect this lucrative revenue stream. Again, Disney’s timing was terrible because the damage was already done.
“People are conditioned to expect things to temporarily pop up at Disney,” said Neil Macker, senior equity analyst at Morningstar Research Services. This explains why the global box office of $33. 9 billion in 2023 was down 15% from the previous three years. pandemic average from 2017 to 2019, according to Gower Street Analytics.
What made Iger’s moment even worse was that his announcement about a return to exclusive theatrical releases came just before actors and writers went on strike in Hollywood for more than six months starting in May of last year in a effort to increase the royalties they collect. This delays the release dates of many films from this year to 2025 and once again puts movie theaters in danger.
Just two months after the measures began, Cineworld, the world’s second-largest cinema chain, filed for Chapter 11 bankruptcy coverage in the United States. Although it has since pulled out, its United Kingdom subsidiary is still seeking a restructuring deal and has announced the closure of six cinemas in the past two weeks alone. The more theaters close, the more Disney’s box office declines.
Prioritizing theaters wasn’t the only thing Iger did. It also cut Disney’s spending and the number of ongoing productions as part of a $7. 5 billion cost-cutting plan. In March last year, he told a Morgan Stanley convention that he had to “cut spending. “coherent with the content, whether it is a television series or a film, whose prices have skyrocketed spectacularly and unbearably in my opinion”.
According to recent filings, it’s targeting $4. 5 billion in annualized spending on entertainment content “primarily due to listing/volume discounts and declining spending consistent with the title. ” It has narrowed down the list of upcoming Disney content, and as Kevin Feige, president of Disney subsidiary Marvel Studios, admits, “the speed at which we release Disney screens will allow them a chance to shine. ” He added that this means having more time between projects or spending less time each year.
Feige’s world-building led Marvel to harness the intensity of its superhero stories to produce sequels with difficult-to-understand characters. Movies about several of them were released last year despite Iger’s insistence that fewer videos would be released. Instead of cutting them and getting a tax write-off, as Warner Bros. did with its Batgirl movie, Marvel released a series of flops last year.
The finale of his show Secret Invasion suffered the ignominy of scoring just 7% on Rotten Tomatoes, making it the lowest-rated episode of any Marvel streaming series. As we revealed, the series charges a whopping $211. 6 million to contribute to Disney’s direct-to-consumer streaming business, burning $11. 4 billion in losses since Disney’s launch. In fact, as the chart below shows, the company only made a profit in the last peak quarter and even then, its entertainment segment posted a loss of $19 million.
Disney’s direct effects on consumers
On the big screen, Ant-Man and the Wasp: Quantumania and The Marvels charge even more than Secret Invasion. As we revealed, the knowledge stems from Disney’s presentations that they lost $157. 9 million at the box office. After that debacle, Iger admitted to CNBC that Disney had “done too many” sequels, but the curse of bad timing struck back because the damage was already done at the time.
By comparison, the functionality of Disney’s Experiences division, which includes its theme parks and cruise line, is a fairy tale. By the end of the shutdown, consumers had a lot of pent-up demand and a licensing budget that allowed them to pay more to make a stopover at theme parks.
Disney took advantage of this and higher ticket costs, while restricting attendance, cutting costs, and expanding cash receipts and benefits. That magic formula allowed the reports to account for just over a third of Disney’s $88. 9 billion in cash and more than two-thirds of its $12. 9 billion operating profit last year. However, the shine is fading even now.
In May, Disney shares began a sharp decline after its chief financial officer, Hugh Johnston, warned of a slowdown in the theme park trend due to a “global moderation from the post-Covid peak. “For a long time, and travelers looking to stop at parks have now done so. Many reports have pointed to the higher rate of scale at Disney theme parks, which is why Johnston added that “compared to post-Covid highs, things have a tendency to normalize. “
After crunching the numbers, KeyBanc Capital Markets’ Brandon Nispel predicted that Disney’s National Parks business “will be under pressure for the rest of 2024” and that’s not an exaggeration.
Yesterday, Disney announced that in its third quarter ended June 29, the company generated an operating profit of $4. 3 billion on a profit of $23. 2 billion, up 4% from the same period last year. This is a respectable result, but further investigation of the information revealed a worrying trend for Disney’s Experiences division.
Increased guest spending at national parks and Disney cruise lines, along with increased room-based spending, boosted Disney Revel’s earnings by as much as 2% to $8. 39 billion. However, this is a sharp drop compared to Disney’s 13% increase in profits. Worse, the steady source of profit from Disney’s outside services department fell 3% to $2. 2 billion last quarter compared to the same period last year. The move was due to skyrocketing prices at Disney’s national parks, possibly explaining why it has recently resisted staffing its California parks for so long.
The accumulation of charges came at the wrong time, as Disney’s earnings report revealed that “we expect that the moderation in demand we saw in our domestic business in the third quarter may have an effect in the coming quarters. ” Experiences’ operating revenue stream in the fourth quarter is expected to decline by mid-single digits year-over-year, reflecting underlying dynamics as well as the effect on Disneyland Paris of a easing in overall customer travel due to the Olympic Games and some cyclical slowdown in China. “
Johnston described it as “a slight slowdown that is more than offset by the entertainment sector” and there is some of that.
At first glance, Disney’s entertainment department appears to be on a roll, as it recently became the first studio to cross the $3 billion mark internationally by 2024. The animated sequel Inside Out 2 is the highest-grossing film of the year with earnings of $1. 6 billion. according to industry analyst Box Office Mojo. Deadpool
Then there are other more express problems. Deadpool
Robert Downey, Jr. will return to the MCU (Photo via Jesse Grant/Getty Images for Disney)
Downey Jr. is known for betting on the heroic character of Iron Man, but he will return as the villainous Doctor Doom, prompting his former co-star Gwyneth Paltrow to ask on social media: “I don’t understand, are you a bad guy now?Investors might share their confusion and wonder if this is going too far, especially since Downey Jr. reportedly made more than $80 million.
Disney has no reason to be complacent with the functionality of its Entertainment division. Last quarter, its operating profit tripled to $1. 2 billion, largely due to Disney’s loss reduction. However, this is only part of the picture, as Disney still has. to recover the $11. 4 billion in accumulated losses generated so far through the platform.
Netflix reached profitability in 2016 and had a 21% operating margin in 2023. Assuming Disney reaches a similar point in early 2025, and there’s no guarantee of that, as Iger told CNBC earlier this year he expects margins double-digit profit “eventually. ” – It may still take years for the platform to erase its accumulated losses.
Disney has generated an average annual cash inflow of $17. 1 billion so far, that figure may simply decrease because while its cash inflow has increased, it has been driven by a torrent of new content slowing under Iger. A margin of 21% would generate an annual operating profit of $3. 6 billion, bringing Disney closer to breakeven in 3 years.
This means that Disney’s Entertainment department has a lot to do to catch up, which puts even more emphasis on sprees to generate profits. As we recently revealed in the British newspaper City A. M. , Disney’s cruise line made record profits last year, but that’s only 6. 8% of the total revels in profits. In addition, the cruise line’s net source of profit is $180. 5 million less than part of its peak of $406. 2 million in 2019, so it is not yet operating at full capacity.
Nonetheless, Disney learned that the cruise line’s popularity is booming and has ordered several new ships and there will be more to come, as we recently revealed. In general, they are unreasonable and Johnston pointed out that “we have similar expenses to the arrival of our ships, and that will come out a little in 24 and a little in 25”, which is not more what investors want either. listen.
Likewise, Johnston yesterday gave insight into the perfect storm facing Disney’s domestic parks as “the lower-income consumer is feeling a little bit of stress. The high-income consumer is traveling internationally a bit more. I think you’re just going to see more of a continuation of those trends in terms of the top line.” He added that “we saw attendance flat in the quarter” with a “flattish revenue number” forecast for the fourth quarter and a slowdown expected for “a few quarters.”
It doesn’t seem like the best time to announce a series of expansions to Disney’s beloved theme parks, but that’s exactly what it’s doing this weekend. Disney has been contacted for comment on the reason for this decision and any response will be inserted into this report in an update. Disney’s inventory functionality is the clearest evidence of how investors feel about its resolve to invest heavily in its Experiences division.
In September of last year, Disney announced that it would spend $60 billion on it over the next decade. This cast a dark spell on Disney’s share price, which fell 3. 6% to close at $81. 94 on the day of the announcement. This is not an isolated case.
Two months ago, Disney signed an agreement with the local government of Orlando, allowing it to spend part of the $60 billion to build a fifth theme park at Walt Disney World. Instead of having a magical reversal in its price percentage, it fell below $100. for the first time since February.
Disney shares have fallen 15% since then, and the company expects its Experiences segment to slow in the coming months. So it’s easy to see why investors might not be excited about Disney announcing how it will spend billions there. Theme park attractions cost millions of dollars and take years to build, so they are far from a short-term win for investors. This is just the beginning.
While theme park visitors can purchase skip-the-line passes for express attractions, they are not required to do so as they have access to them through their general attendance price ticket. In other words, building a theme park costs millions of dollars. park attractions, but consumers don’t have to pay directly to use them. This limits your chances of generating a source of income and profit. Therefore, they not only want years to be operational, but also years to be profitable. Operators can make a quick profit through increasing ticket prices when new attractions open, but it’s not a walk through the park for Disney as their costs are already high, which is why attendance is declining. Again, this is not the kind of news that drives up a company’s stock price. .
Tokyo Disneyland’s stock value fell after the recent opening of a new land (Photo via YOSHIKAZUArray. [+] TSUNO/Gamma-Rapho Getty Images)
This is obviously noticeable in Japan, where Tokyo Disney Resort is operated under license through the publicly traded recreational operator Oriental Land Company (OLC). In June, the company opened a new piece of land called Fantasy Springs, which cost a whopping $2. 1 billion, making it the largest expansion in the resort’s history. As we reported, OLC’s filings imply that it expects Fantasy Springs to increase its consolidated net sales by approximately $490 million (75 billion yen) a year and, it does not specify how much of that will go to the bottom line, OLC’s overall operating effects. The margin is 26. 7%, so, again, it may be many years before Fantasy Springs breaks even.
In this context, OLC’s percentage value has fallen 13. 5% since the new land was inaugurated just two months ago, which seems to be what investors think.
Even if theme parks generated revenue, the biggest margins would be on high-priced food, beverages and merchandise. The higher the attendance, the higher the spend, so the secret to satisfying investors may simply be to attract more visitors to theme parks. the turnstiles without spending copious amounts of cash on new draws.
It might also make sense to open attractions in the city center, as planned in the past. They would attract travelers who can’t stop at their theme parks, charge less to build and take less time to get up and running. . Universal, Disney’s main rival, is doing just that and opening entire parks near Disney outposts in Paris and Orlando. In May, Iger described this as not “distracting or anxiety-provoking,” though his preference for expanding Disney’s parks in the face of investor apathy suggests otherwise.
“We wouldn’t be making capital investments on an accelerated basis if we didn’t plan to boost the expansion of those companies,” Johnston said yesterday. Although investors may not be seduced by this, there is no doubt that enthusiasts will appreciate it. Many of them are also investors, but this will not increase the value of the shares over the weekend, as trading will not take place at that time.
The news of Experiences’ slowdown really sent the stock up, and interestingly, Disney even made the case to do it. Until last quarter, its earnings announcements were made after the market position was closed, but starting in May, when it first revealed the slowdown. In demand, he did so before the market position was opened. As a result, inventories fell throughout the day due to the news. The timing isn’t much worse than that.
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