Last week, Walt Disney (NYSE: DIS) reported fiscal fourth-quarter results that were tepid due heavily to tough comparables from the year-ago period. The fourth quarter in 2015 benefited from an additional week of operations, compared with this past quarter. The results, however, capped off what’s been a great year for the entertainment giant, particularly in its legendary movie-making business.
This article’s purpose isn’t to rehash the results – you can read my take on them here — but to share key information discussed on the company’s analyst conference call. The focus here is on topics not related to cord-cutting, as that issue has been well covered, and beat to death by the financial media in general. Here are four key things investors should know.
Image source: Disney.
1. Shanghai Disney Resort should come very close to breaking even in fiscal 2017
CFO Christine McCarthy shared what had to be the best news covered on the conference call:
[W]e couldn’t be more pleased with the launch of Shanghai Disneyland. The financial results for the park’s first full quarter of operations [the park opened in mid-June] were ahead of our expectations. As we look to fiscal 2017, we expect Shanghai Disney Resort to be very close to breakeven for the year.
CEO Bob Iger added the following about attendance:
Turning to our success in Shanghai, we welcomed 4 million guests in our first four months of operation, which included the peak summer season.
Iger went on to say that some folks may infer from the park’s robust early performance that it could achieve 10 million in attendance in its first year — a number that the company would be thrilled with — but Disney isn’t providing any annual guidance at this point.
To provide some context, the Magic Kingdom park at Disney World had about 20.5 million visitors in 2015, while California’s Disneyland had about 18.3 million visitors. So a new park hosting 10 million visitors — or even a number coming relatively close – would be an amazing accomplishment. Likewise, being very close to financially breaking even for the year in fiscal 2017 would be a major feat, given the park just opened in June.
2. More pricing leverage left at domestic parks
Management believes there is room for more growth in average guest spending at the domestic parks. From Iger’s remarks:
[W]e believe we still have pricing leverage. And that’s not just from raising prices on your standard ticket; it’s from creating new packages. And we certainly have seen that in the last year, which was designed to do a few things. One, obviously when we put in more demand-oriented pricing, we’re able to move some of the attendance away from the peak period and improve the guest satisfaction.
This point is especially important because combined guest attendance at Disney World and Disneyland has been about flat over the last few quarters, usually with a decline at the former being offset by an increase at the latter. This quarter, however, it was the other way around.
Beyond believing there’s potential for per-guest-spending growth at its parks, Iger said the company has room for expansion on the hotel front, as well. According to him, “[W]e’ve seen such high occupancy rates in Orlando and in California, that we believe that it would be smart for us to build up more hotels…”
Lightning McQueen and pals are coming back in June, which should rev up toy and other merchandise sales. Source: Disney.
3. The release of Cars 3 in 2017 should help reaccelerate growth in consumer products
Here’s how McCarthy emphatically answered an analyst who asked if the release of Pixar’s Cars 3, slated for June, should reaccelerate revenue growth in the consumer products and interactive segment:
Absolutely. Cars is one of those evergreen franchises that has been very successful in consumer products. [And] … throughout our [business] — it is also represented in our parks, as you know, through Cars Land in Anaheim.
And also this year, we have the movie Spider-Man. It’s not our movie to release, but our consumer products will represent the strength in that franchise, as well.
Spider-Man: Homecoming is scheduled to be released in July. While it’s being distributed by Sony, Disney’s Marvel is one of the companies producing the film. And Disney’s consumer products business will benefit from the licensing of merchandise based on the movie.
4. Investors should expect a growth hiccup in fiscal 2017
From Iger’s remarks:
With modest growth due to some comparability factors that Christine [McCarthy, the CFO] will detail, fiscal 2017 will be an anomaly in our growth trajectory.
While growth is expected to slow in fiscal 2017, Iger said that management anticipates the strong growth dynamics that Disney has enjoyed recently to resume in fiscal 2018. McCarthy outlined why the company expects slower growth in fiscal 2017:
- Cable: Programming cost are expected to be up about 8% versus fiscal 2016, driven primarily by the first year of Disney’s new NBA contract.
- Parks and resorts: A main factor here is that Hurricane Matthew caused the company to close Disney World for about two and a half days in October, which it estimates will negatively impact its Q1 operating income by about $40 million.
- Studio entertainment: While Disney has a robust pipeline of films slated to open in 2017, its results will comp against a record-breaking 2016, due in part to the phenomenal success of Star Wars: The Force Awakens.
- Consumer products and interactive media: While Disney expects operating income growth for the full year, it expects operating income to be down more than 20% in Q1 due to the strength of Star Wars and Frozen merchandise licensing in Q1 last year.
Knowing what to expect in fiscal 2017 means investors will be less likely to make poor investing decisions. The good news is that more robust growth is expected to be on the horizon for fiscal 2018.
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