Disney's theme parks were a bright spot this quarter, but major competition looms

By Therese Poletti

Walt Disney Co.'s disappointing fiscal second-quarter results had one bright spot - its theme-parks business. But that unit is going to be under pressure in the next year.

On Tuesday, Disney reported earnings that were mostly on target with expectations, with its parks and experiences business exceeding analysts' estimates. That offset lower-than-expected revenue in entertainment and sports. Disney also said that its streaming business may be profitable by its fiscal fourth quarter, and it is "quite bullish" about plans to go forward more robustly with its password-sharing crackdown in September.

Disney shares (DIS) tumbled almost 10% on Tuesday, weighing on the Dow Jones Industrial Average DJIA, where it was the worst performer.

But Disney's experiences business grew 10% to $8.4 billion in the first quarter, with the biggest growth coming in its international segment. Disney called out strong results at its Hong Kong Disneyland Resort, where it increased ticket prices, along with higher prices for food, beverages and merchandise.

Florida's Walt Disney World Resort also had higher revenue due to higher average ticket prices, and its own rising costs were partially offset by cost-saving initiatives.

On the call with analysts, Disney executives referred to big capital-spending plans for the experiences business, where they plan to spend $60 billion over the next decade. Chief Executive Bob Iger said the company is "focused on turbocharging growth with a number of long-term strategic investments." One of those is a plan for a big expansion to its flagship Disneyland in Anaheim, Calif., to be called Disneyland Forward, a project that is expected to double the park's footprint.

And while the company dominates the $50 billion theme-park business, one of its rivals, Comcast Corp.'s (CMCSA) Universal is also betting big on its theme parks. It plans to open its Epic Universe park in Orlando, Fla., next year, also home to the Disney World Resort. Disney is not standing still, and $17 billion of capital spending will go to Disney World in Orlando.

"One can't help but conclude that the two will increasingly be in competition for each theme-park travel dollar," Moffett Nathanson analysts said in a recent note to clients. "The next battle in the theme-park wars will be a battle for market share as well as market size." They estimate that over the two-year period of 2025 and 2026, the opening of Epic will "drive about a 1 million decline in attendance at Disney World."

Higher costs are also going to be a continued headwind for the parks and experiences business, where higher wages will be a factor. In addition, Disney expects to see some pre-opening expenses related to its Treasure and Adventure cruise ships, and a Disney Cruise Lines new island.

Disney expects its big spending plans on the parks to pay off eventually. "It's a 25-plus [percent] margin business and has been for an extended period of time," Iger said when asked about capital-spending plans. "It has terrifically high guest-satisfaction scores, which create layers of advantage that would suggest we should be able to sustain high margins and high returns on investment. With a business with that profile, you invest in it."

But until its expansion plans are all realized, and begin to bear fruit, there will likely be some short-term pain for investors. Profits in the streaming business could prove to be a positive distraction.

-Therese Poletti

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05-07-24 1825ET

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