Market Overview

6 May 2020

Disney’s Financial Thriller: Happy End in a Galaxy Not Far Away

Walt Disney Co announced it would reopen Shanghai Disneyland to a reduced number of visitors on May 11 but estimated on Tuesday that its measures to contain the pandemic has cut the company's worldwide profits by $1.4 billion, and about $1 billion of that financial damage came from losses at theme parks. Usually, Disney makes a third of its total revenues from parks, all kinds of entertainments based on direct face-to-face experience and the selling of co-products.

Disney has taken some involuntary steps to cut costs, including putting 120,000 employees on furlough, in accordance to official filing with securities regulators. The company announced that it is not going to pay a dividend for the first two quarters of 2020, which will secure $1.6 billion in the safe compared to a hypothetical assumption that the company would continue to pay last year's 88 cents per share.

The price of Disney's shares, which had been able to climb from the March bottom of $79.10 up to $112.25 in April, has already declined further in anticipation of the quarterly report release to the level of $101.06 by the end of Tuesday's trading session. Disney shares fell by 2.8% more in after-hours trade to $98.30, according to Reuters' data. The entertainment giant's shares has lost more than one-quarter of their value since the beginning of 2020.

All this happened despite the fact that 2019 was an incredible year for Disney, when total box-office takings from Disney's movies alone exceeded a record $10 billion, including six films that each made more than $1 billion. That was Avengers: Endgame ($2.797 billion), The Lion King ($1.656 billion), Captain Marvel ($1.128 billion), Toy Story 4 ($1.073 billion), Aladdin ($1.05 billion) and Frozen 2 ($1.032 billion), and also Spider-Man: Far From Home ($1.131 billion) produced together with Sony Pictures. Joker ($1.059 billion) turned out to be the only billionaire movie of the last year that was created without any involvement from Disney.

Disney+ streaming service, which was launched in November, 2019, reached 28.6 million subscriptions by the beginning of February 2020, and by that time the company's shares were over $145 in price. "In late March as planned and despite COVID-19, we had an incredibly successful launch of Disney+ in Western Europe, followed by a highly successful launch in India," said Bob Chapek, Disney's corporation Chief Executive Officer, during Q2 2020 Earnings Call on Tuesday. Disney+ had 54.5 million paying subscribers as of May 4, up from 50 million on April 8. This is an impressive growth rate, even despite the obvious popularity of online services, while the audience is sitting at home.

However, these shelter cash receipts are not enough for investors to price Disney's shares above the current range, which was formed at best near the $100 mark. The potential for the future is huge, but estimates concerning the company's capitalisation are limited to the here and now, and investors are timid. Business in the entertainment industry covers a lot more aspects than is usually considered. All new television and film productions are put on hold. Disney released the Pixar movie Onward just before theatres closed, then quickly moved it to video format on demand for home viewers. The direct-to-consumer division, which includes Disney+, lost $812 million in Q1 2020 and is still spending large sums to build the service. Disney's ESPN sports network lost all usual live sport events. Media networks, including ESPN and broadcaster ABC, made $2.4 billion of profit which is 7% higher than in Q1 2019, thanks to the addition of the FX and National Geographic Networks purchased from 21st Century Fox.

"I have absolute confidence in our ability to get through this challenging period and recover successfully," said Bob Iger, who stepped down as CEO in February. But the company does not intend to provide particular financial guidance for the rest of the year. Operating income from parks, and the experiences and products division dropped by 58% from a year earlier to $639 million. The Q1 2020 revenue is $18.01 after $20.86 in Q4 2019 and $19.1 in Q3 2019, and the second quarter of 2020 will probably be much weaker than the first quarter.

"The results that you saw... reflect approximately two-ish weeks of our domestic parks being closed because we closed Disneyland on the 14th and World on the 16th. And then you had the Asian parks closed, Shanghai closed fully in January on the 25th, Hong Kong closed on the 26th, Tokyo, which is a royalty revenue stream that we get, that closed on the 29th. So the $1 billion that was attributable to the parks business and products for the quarter just for that second quarter about $1 billion, you could roughly think of it that the two weeks domestic is a little over half. And then you have the Asian or the international parks and cruise, which are the balance," Christine McCarthy, a Senior Executive Vice President and Chief Financial Officer remarked during the Earnings Call.

Even with the opening of the Shanghai park, which could happen next week, the Chinese government ordered Disney to limit attendance to 30% of its capacity. Bob Chapek said that Disney is planning to restart operations with "far below" that number for a few weeks while it adjusts to all new measures like social distancing, masks and temperature screenings at the entrance. Even attractions like the Space Mountain roller coaster should embrace guests divided by social distancing. Families would be notified via a special mobile application when they can go on a ride or in a restaurant to eliminate lines. Employees would be supplied with masks in a fun, not scary manner, in true Disney fashion, but all this means expenses and expenses again, with less guests in return. The company risks a drop in audiences if any rumours of infections after visiting Disneyland appear.

Walt Disney Co said in the middle of April that it has entered into an unsecured credit agreement for $5 billion, and Citibank N.A. served as the designated agent for the agreement. Disney Co is very big and strong as nobody else in the industry but even this giant is trying to hedge risks taking additional credit liquidity to avoid potential problems due to falling revenues and market capitalisation. Other entertainment parks will likely closely monitor Disney's Shanghai park unique experience. Investors will also probably look for the timing of the company's retail stores and cruise ships coming back.

"The long and winding road that leads to your door will never disappear," as in the Beatles song. Such, of course, is the road to Disney's door, which will always attract more and more travellers. But in the meantime there is so much uncertainty, so today it looks like a well-produced financial thriller with a long-awaited happy-end, but not in the nearest proximity right now. So, Disney's shares remain under severe pressure.


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