https://www.msn.com/en-us/money/com...ers-can-t-smooth-parks-rough-ride/ar-AA1ooYsV
Disney’s Blockbusters Can’t Smooth Parks’ Rough Ride
Weakening consumer spending is hurting the Mouse House in its most profitable business
By
Dan Gallagher
Updated Aug. 7, 2024 12:52 pm ET
Disney is getting more people out of the house these days. Just not to the right places.
The storied Hollywood company is riding high from the success of two recent box-office smashes. “Inside Out 2” and “Deadpool & Wolverine” are now the top-grossing movies globally and the former’s debut in mid-June provided a nice lift to Disney’s theatrical business in the company’s fiscal third quarter. The company said Wednesday that revenue in its entertainment division grew 4% year over year to $10.58 billion, topping Wall Street’s projections for the first time in nine quarters, according to FactSet.
But box-office receipts only do so much for Disney nowadays. The company’s theme-park business turned in disappointing revenue and operating profit for the quarter, with domestic-parks revenue showing its slowest revenue growth since Covid-era shutdowns. The company cited “economic uncertainty that is impacting consumers” and warned that the weakness would likely persist for “a few quarters.” The company’s shares were down 2.9% in early afternoon trading on Wednesday.
That further weighs on a stock that had already shed 23% of its value since its last quarterly report three months ago, when Disney first warned of weakness impacting its parks. The decline of the cable-TV business and growth of the far-less-profitable streaming side has given theme parks a starring role on Disney’s bottom line. Combined operating profits from domestic and international parks accounted for 54% of Disney’s total operating income in the last fiscal year ended September, compared with a 26% contribution averaged in the five years before the pandemic
Other factors are weighing on profit as well. Disney is adding three new ships to its cruise business over the next 18 months, and start-up costs associated with those launches will be “a little over double” in the next fiscal year compared with the current one, according to Disney Chief Financial Officer Hugh Johnston on Wednesday’s investor call. The overall cruise industry has been performing well lately and reporting strong bookings for the year ahead, which speaks well of Disney’s ultimate prospects there.
But weakened consumer spending that has also hit rival theme-park operators bodes poorly for Disney as it works to cope with the broad industry shifts that have hit the media industry with a vengeance. Revenue from the linear networks unit, comprising the company’s traditional cable and TV businesses, fell 7% year over year due to a drop in both affiliate fees and advertising. It came in below Wall Street’s projections for the September quarter. Sports helped offset some of that weakness; ESPN’s domestic revenue rose 5% year over year to about $3.9 billion.
Disney also managed to hit its profitability goal for its streaming business a quarter earlier than it originally projected. Combined direct-to-consumer operating profits for the entertainment and sports segments were $47 million compared with a loss of $512 million in the same period last year. That was helped by a surprising bit of growth for Disney+, which added about 700,000 net new subscribers to its core segment during a period when Wall Street was expecting a decline. The company noted that the original “Inside Out” film from 2015 drove much of that traffic as that movie racked up more than 100 million views ahead of and following the release of the sequel.
That speaks well to the multiplier effect—often referred to as a flywheel—that has long been the strength of Disney’s business model. Original theatrical content has typically driven other business opportunities for the company, such as video sales, consumer products and theme-park attractions. The company also has a strong pipeline of other potential theatrical blockbusters from its animated, Marvel and Star Wars franchises in the queue. That is a major change from just three years ago when the focus was almost solely on streaming.
But the parks business will need to get over its slump to convince investors to come along for the ride. And that will be a rough ride for a bit longer: The company said operating income in the experiences business will see a mid-single-digit percentage decline in the current quarter, compared with the 12% rise Wall Street had been expecting, according to FactSet estimates.
Without theme parks, Disney’s flywheel is a bit of a flat tire.
Write to Dan Gallagher at
dan.gallagher@wsj.com
