Budget cuts at Walt Disney World

[Eoghann]

Just out of curiosity, what was Phase 3 of DHS supposed to look like...?

Depends who you ask. Carsland? Monsters Inc? A further Star Wars expansion? Those seemed to be the favorite three rumors but I don't think there's any evidence that they settled on a single plan.

 

[♡ Mimi ♡]

They're all under the Disney Parks umbrella. And it's Shanghai.

"Shanghi" is almost as cringeworthy as the folks on Amazing Race who thought they were going to Cart-uh-gene-uh, Colombia. Actually, it might be worse.

 

[rpb718]

Forget it Jake... It's (a) Chinatown.

 

[JimmyV]

Some of the very first articles I read about the cuts strongly implied that it was related to Shanghai, but I haven't seen anything directly connecting the two. I initially felt very much like OP but none of the information has panned out - reports were somewhat misleading. I think it's more likely, like @bryanb says, internal restructuring to increase profitability. It still sucks that things are being cut, and I'm hoping that it's all part of a larger plan beyond boosting the numbers, although I'm probably wrong. Maybe moving resources to staff ROL and night time at AK?

To me, this is actually worse. I'don't rather live in blissful ignorance that current cuts are the result of cost issues overseas than be faced with the reality that these cuts are a shameless attempt to boost profits to a domestic division that is seeing record attendance and record profits every quarter.

 

[AtlantaDisneyDreamer]

I thought I read an article that said the big financial issue with Disney now is less Shanghai Disney and more that their stock is down 20% due to the fact that so many people are dumping expensive cable television packages in favor of other, cheaper alternatives. Disney is a huge media company and there are a lot of fears that media companies may be in trouble now.

Is it possible that Disney is cutting park costs because of media losses, or are the two entirely separate entities that do not affect one another? I have worked in pubic service most of my life so my business understanding is not that of some of you. Is it possible (in a business sense) that Disney could be expecting park profits to offset media losses, or is that totally off base? Are those of us who keep going to the parks indirectly paying for Disney Channel and ESPN?

 

[mom2rtk]

And I am quite skeptical that they are using this as cover to recoup some of the $2B investment in MM+. You don't make that that kind of investment back selling a few more t-shirts and sodas. I think it was meant all along to gather the information they needed to "right size" all sorts of things in the company.

 

[Eoghann]

Change is difficult but it is constant. So as much as one may wish to blame the Chinese for this, I hardly think that can be the main reason why things are changing. Ultimately, Disney has to increase to profitability of every part of the company. They don't just take money out of one pocket to put into another pocket and call things square.

I keep seeing this line of argument that they "have to". Actually they don't have to, they are choosing to. Disney is a very profitable company. They are not legally obligated to increase their profit margin further, nor are they at any real risk as a company if they don't.

The board may be scared of its shareholders, but that's an entirely different story. A stronger CEO might actually put the case to the shareholders that a dip in returns this year for necessary park investments will pay itself off in the future. Amazon for example has managed to run at a loss for most of its existence because it reinvests so heavily.

 

[Eoghann]

Is it possible that Disney is cutting park costs because of media losses, or are the two entirely separate entities that do not affect one another? I have worked in pubic service most of my life so my business understanding is not that of some of you. Is it possible (in a business sense) that Disney could be expecting park profits to offset media losses, or is that totally off base? Are those of us who keep going to the parks indirectly paying for Disney Channel and ESPN?

It's all one company so at the end of the day everything is related. Yes there are separate buckets of money, but they all end up in the same vault.

It's certainly possible that a mandate has gone out to cut back across the board. That hasn't been reported, but the focus of places like this is so heavily on Parks and Resorts we might just not be aware of it. Disney has in the past pursued stock buy backs in an effort to boost share prices. They might be looking to do so again.

Again I want to stress, none of this is "neccessary". It's a strategic choice they are making, but it's not like it's the only one. The narrative that "this is what they have to do" is false.

 

[Eoghann]

I should also point out that while I'm critical of the penny pinching, American's really need to get over the notion that the rest of the world doesn't affect them and that they are living on a private island. Companies are international. Economies are tied together. This is how the world works.

It has actually worked like that for a very long time, it just so happens people here are privileged to live in a physically large country with very few direct neighbors. The borderline xenophobic language that starts to emerge as soon as China is mentioned bothers me.

The problem isn't "China" or any other country. The problem is Disney and/or the way that public companies are run these days. Which arguably has more to do with the US than China.

 

[Tonka's Skipper]

Shanghai has been the Iger and Igertrons pet project for years. He brabed many time how he was going to make Disney a China/far eastern/international company............They have talked it up as the best park ever. Now due to mismanagement, it (and Hong Kong and Paris) has problems, they are willing to cut all the other parks budgets to make it work!

WDW has always been the Golden Cow, and they think nothing can harm it. This is just another nail in the coffin. They may be surprised and find the Cow is ill! I can only hope they get a person in command that understands Disney is a special corporation and lives or dies on how good guests feel its reputation is and if they live up to what Walt created, EI, magic and pixie dust.

AKK

 

[Budshark]

I keep seeing this line of argument that they "have to". Actually they don't have to, they are choosing to. Disney is a very profitable company. They are not legally obligated to increase their profit margin further, nor are they at any real risk as a company if they don't.

The board may be scared of its shareholders, but that's an entirely different story. A stronger CEO might actually put the case to the shareholders that a dip in returns this year for necessary park investments will pay itself off in the future. Amazon for example has managed to run at a loss for most of its existence because it reinvests so heavily.

Its a bit misleading to state that. Its true, but it masks the truth if that makes sense.

No, Disney does not HAVE to increase profit margin.
The same way you and I don't HAVE to actually do our job (save safety regulations, blah blah). We can show up, surf the web, and otherwise not contribute.

However, we don't do that.. we do our job. Is that because we're SCARED of our boss or company? You can say thats true, but its not the truth. I'm scared of losing my job. I'm scared of not succeeding at my responsibility. I'm not scared of the person or entity - I'm scared of the results.

The Board of Directors has judiciary responsibility to maximize the return of investment for its shareholders. Unfortunately, that return is measured by stock price and dividend return. And the market today is driven by EBITDA growth, future guidance, and market willy nilly feeling. Which is stupid. But... for a "successful" company to remain successful in today's market they need growth upwards of 10-12% which is <redacted> stupid. But it is what it is.

So, to wrap up my musings...
The Board is employed to maximize shareholder earnings. They are currently considered successful in this. Theme parks, Marvel, Star Wars, Animated films... Win. Win. Win.
They bet big on Shanghai, Digital integration into parks (Fastness, MagicBands, etc), Theme park expansions. All of which are over budget, unknown returns, and essentially behind schedule.
ESPN is a massive margin contribute (i.e. cash cow) at over 45% EDITDA. That is HUGE. But... facing pressure and declining.

Leaving us with a Board that must look at the future .. FY16, FY17 are both going to be challenging. And if Shanghai is on the low end of projections, and AvatarLand/RoL doesn't generate massive attendance spikes at AK, and ESPN keeps faltering - all of which are very likely - then the Board will not return the growth demanded, the stock price will fall, dividend returns will shrink. They will have failed at their job. They see this coming, and have advised as much.

So they take the short term actions they have to stem the tide. Hope to offset the challenges. Will the cuts stick? If people don't complain, if they have no evidence they hurt the business? Yes. Otherwise, as soon as they get some cash inflow and return to growth numbers, they will reinvest.

Sorry... long dissertation... I just don't like to personalize these things. The Board is acting the way they act because of their ideas, dreams and who they are. Hold them accountable to that. The rest? They are acting this way because their "boss" the shareholder, will fire them if they don't. And that is the risk of a public company.

 

[Eoghann]

The Board of Directors has judiciary responsibility to maximize the return of investment for its shareholders. Unfortunately, that return is measured by stock price and dividend return. And the market today is driven by EBITDA growth, future guidance, and market willy nilly feeling. Which is stupid. But... for a "successful" company to remain successful in today's market they need growth upwards of 10-12% which is <redacted> stupid. But it is what it is.

No I think what you said and what is so often parroted is what is missleading. The board has a fiduciary duty (I think that's the word you were going for) to act in the best interests of the shareholders. There is nothing that says those best interests are served by only looking at the short term for growth while ignoring the long term. There are many, many successful companies who do not have that sort of growth. They're not exciting companies and they may not grab headlines, but they are solid and have been for years. IBM doesn't have 10-12% market growth, nor does Microsoft. Are those failing companies?

This isn't meant as an attack on what you said, but far too many people are repeating what they've been told without understanding it. Disney are choosing to act this way, they have other options.

 

[Budshark]

No I think what you said and what is so often parroted is what is missleading. The board has a fiduciary duty (I think that's the word you were going for) to act in the best interests of the shareholders. There is nothing that says those best interests are served by only looking at the short term for growth while ignoring the long term. There are many, many successful companies who do not have that sort of growth. They're not exciting companies and they may not grab headlines, but they are solid and have been for years. IBM doesn't have 10-12% market growth, nor does Microsoft. Are those failing companies?

This isn't meant as an attack on what you said, but far too many people are repeating what they've been told without understanding it. Disney are choosing to act this way, they have other options.

True.... But (you knew that was coming).

In the market its all about where you fall on the chart. MSFT and IBM are held like bonds. Safe bets for investing to protect your cash. Bad bets for growing cash.

Disney has been valued a growth company. Outperforming its peers, EBIDTA growth at the upper end (I think they are actually at around 8%), with guidance and plans for more.

Until FY16. The transition from a growth stock to a hold stock is painful and is never desired. Once you park yourself on the growth trajectory you rarely (never on a Fortune 100 company) transition from growth to holding without leadership shake up. It's a failure. Disney is at risk of doing this if Shanghai and theme park expansion doesn't drive significant EBIDTA growth (enough to offset expendentures and ESPN losses).

The board isn't trying to pocket cash. They are trying to save their butts. Their guidance indicated this and the direction of the wind we all see and acknowledge.

I'm not saying they are going bankrupt and the company will fail. I'm saying they are at risk of shifting on the scale from growth to hold. And that is not going to be received friendly by the market.

To be fair - Satya (I think?) is doing a good job at MSFT and moving them back towards a growth after years under Ballmer. He's also quickly becoming a darling of Wall Street for doing it.

 

[Eoghann]

The board isn't trying to pocket cash. They are trying to save their butts. Their guidance indicated this and the direction of the wind we all see and acknowledge.

I'm not saying they are going bankrupt and the company will fail. I'm saying they are at risk of shifting on the scale from growth to hold. And that is not going to be received friendly by the market.

And whose fault is that? Who let their stock get overpriced in the first place? Who failed to manage market expectations? Who failed to recognize what was coming with ESPN?

The presentation I keep seeing is that they "have no choice" as though it is somehow not their fault. But it's almost entirely their fault. They have lots of choices, they've always had lots of choices. They've chosen badly but even now they have a myriad of other options. Honestly I don't see any way they can squeeze enough extra money out of Disney World to offset Paris, Shanghai and ESPN all at once...

 

[Budshark]

Hindsight is always much clearer.

Why didn't Microsoft anticipate the browser war? Why didn't they see mobile? Why couldn't they transition to tablet? The market is riddled with bad mistakes.

Like I said - hold them accountable to decisions. Which arguably they've had more good than bad. There's some fairly narrow areas of problems.

But the market? Who let the stock price get out of hand? The only way to stop EBIDTA growth is to mismanage your company or overspend in other areas. You want to artificially discourage people from paying for ESPN, Disney trips? Make bad movies?

The growth they had was a result of aligning decisions with the market, and then having good timing and execution. It's a reflection of success as it should have been.

Then all the investors jump on board. And they bank their returns and money on continued success. When that dries up (ebb and flow) they scream and holler and then jump ship en masse to the next darling. And the stock price overcorrects.

It's pathetic but it's a reflection of the culture and me now and money greed of today.

By the way - same as you and me. You have to trumpet your successes and temper your failures in your own life too. The Board is no different. You don't necessarily hide failures but you don't scream them from the rooftop either.

 

[Eoghann]

By the way - same as you and me. You have to trumpet your successes and temper your failures in your own life too. The Board is no different. You don't necessarily hide failures but you don't scream them from the rooftop either.

Well, no I don't. But that's probably just me being old fashioned and stubborn. I don't talk up my successes (I don't even like writing stuff like that in my yearly review) and I own my failures. I don't play politics at work.

 

[Budshark]

Well, no I don't. But that's probably just me being old fashioned and stubborn. I don't talk up my successes (I don't even like writing stuff like that in my yearly review) and I own my failures. I don't play politics at work.

I think you are reading too far into what I am saying. but that isn't fixed here.

We mostly agree on this. But I do think history and the evidence of work will show this board was very successful for the company.

Theme park enthusiasts might have a different sub-opinion. But then again for the most part from what I can tell no matter what, no Board will live up to Walt. Same as Apple. Regardless of financial or market success, no board will live up to Steve.

I understand why the Board is doing what they are. I don't like it personally. But we are also seeing one part. They have already cut costs in other areas - it just ended up not being enough and the parks eventually got hit.


Good discussion by the way. Thank you.

 

[Budshark]

One more point when we say Board... They give guidance. They never say cut 20% from Theme Park operations. Those specific decisions are made at the management level.

The Board simply demands a certain cash flow. When the inflow minus outflow doesn't equal - you have to increase inflow, decrease outflow, or both. And those are the exact actions we see the division managers making. So the evidence is that the financials were falling short of the desire or guidance given by the Board to the market.

 

[DDLand]

On the Shanghai issue...

It's easy to say you want all the divisions to have their own pot of money. Those that generate more would then get more to invest back in. Now ask yourself these questions:

1) Why should movie making Walt Disney Productions help pay for a theme park that likely won't succeed?

2) Why should Disneyland subsidize the Florida Project?

3) Why should the existing Magic Kingdom and Disneyland subsidize Epcot?

4)Why should Disneyland and Walt Disney World subsidize the Disney Cruise Line's startup?

5)Why should Walt Disney World subsidize fixing Disney California Adventure?

6)Why should Domestic Disney Parks subsidize Shanghai's startup?

Sometimes it just makes sense.

 

[Budshark]

On the Shanghai issue...

It's easy to say you want all the divisions to have their own pot of money. Those that generate more would then get more to invest back in. Now ask yourself these questions:

1) Why should movie making Walt Disney Productions help pay for a theme park that likely won't succeed?

2) Why should Disneyland subsidize the Florida Project?

3) Why should the existing Magic Kingdom and Disneyland subsidize Epcot?

4)Why should Disneyland and Walt Disney World subsidize the Disney Cruise Line's startup?

5)Why should Walt Disney World subsidize fixing Disney California Adventure?

6)Why should Domestic Disney Parks subsidize Shanghai's startup?

Sometimes it just makes sense.

Because a rising tide raises all ships.

If the company as a whole fails, the fact that WDW or Star Wars or any one piece was insanely profitable won't matter.

So for the health of the whole, decisions are made that affect the healthy to support the struggling.