By Brooks Barnes
In The Walt Disney Co.’s seemingly never-ending game of corporate Whac-a-Mole, a new trouble spot has arisen: Americans — battered by years of high inflation — have less money to spend on amusement, imperiling growth at Disney theme parks.
Earlier this week, Disney reported weaker-than-expected theme park results for the three months that ended June 29. Revenue increased 2% from a year earlier, to $8.4 billion, while operating profit declined 3%, to $2.2 billion. Disney blamed a “moderation of consumer demand” that “exceeded our previous expectations,” along with higher costs. Disney said softening demand “could impact the next few quarters.”
“The lower-income consumer is feeling a bit of stress, and the higher-income consumer is traveling internationally a bit more,” Hugh F. Johnston, Disney’s chief financial officer, said on a conference call with analysts.
Theme parks have taken on much greater financial importance at Disney over the past decade. They have been the ATMs that have paid for Disney’s costly expansion into streaming and picked up the slack for the company’s atrophying cable television business. Last year, Disney Experiences, a division that includes theme parks and cruise ships, contributed 70% of The Walt Disney Co.’s operating profit, up from about 30% a decade ago.
Bob Iger, Disney’s CEO, has called theme parks and cruise ships “a key growth engine.” Last year, Disney said it would spend roughly $60 billion over the next decade to expand its parks and to continue building Disney Cruise Line, double the amount of the previous decade. Josh D’Amaro, chair of Disney Experiences, is expected to unveil an array of specific expansion projects Saturday at a fan convention in Anaheim, California.
But there are reasons to worry that the U.S. economy could be headed toward a recession. In addition, the global postpandemic surge in travel is largely over. Citing a “normalization” of demand, Comcast said last month that quarterly revenue at its Universal theme parks had fallen 11%, while pretax earnings plunged 24%.
“The level of discounting we are seeing at Universal, and to a lesser extent Disney, is increasingly worrisome,” Rich Greenfield, a founder of the LightShed Partners research firm, wrote in a client note Wednesday.
Iger has been trying to move Disney beyond a tumultuous period when activist investors sought to alter the company’s direction. One activist, Nelson Peltz, mounted a proxy contest for board seats and harshly criticized Disney’s streaming strategy, succession planning and lagging stock price. Disney fended off the attacks, but its share price has fallen more than 25% since early April.
On Wednesday, Disney shares declined 3% in early trading, to about $87.50.
“If Disney doesn’t manage to reverse this negative trend, the specter of an activist rebellion will rear its head again,” Paul Verna, a media analyst at Emarketer, a research firm, said in an email last week.
The remainder of Disney’s quarter was solid. Companywide revenue increased 4% from a year earlier, to $23.2 billion, slightly above Wall Street expectations. Adjusted per-share income increased 35%, to $1.39, beating expectations by 20 cents. Disney lifted its full-year target for adjusted earnings growth to 30%. Disney previously told investors to expect 25%.
Movies provided some of the quarterly upside. “Inside Out 2,” released in June, took in $1.6 billion worldwide and reversed a slump at Disney-owned Pixar. “Kingdom of the Planet of the Apes,” from Disney’s 20th Century Studios, was a hit in May, collecting nearly $400 million. (After the quarter ended, Disney released “Deadpool & Wolverine” to record-breaking ticket sales.)
A turnaround at Disney’s movie studio came in the nick of time, with results “more than offsetting” the slowdown at theme parks, Johnston said. Disney has several likely megahits headed to theaters in the six months ahead, including “Moana 2,” “Mufasa: The Lion King,” and “Captain America: Brave New World.”
ESPN delivered a 4% increase in operating income, to $1.1 billion, with most of the growth coming from overseas. Ad sales for ESPN’s domestic cable channels rose 17%, but higher costs, among other factors, limited the rise in domestic operating income to 1%.
Disney also benefited from improved streaming results. Together, Disney’s three services (Disney+, Hulu and ESPN+) generated $47 million in operating income, compared with a loss of $512 million a year earlier. It was the first time that Disney’s direct-to-consumer division as a whole turned a profit. Disney previously said it would not achieve that goal until later this year.
Disney+ ended the quarter with 153.8 million subscribers worldwide, an increase of 200,000 from the previous quarter.
As it has strained to make streaming profitable, Disney has introduced a series of price increases, with more on the way.
Starting Oct. 17, the ad-free version of Disney+ will cost $16 a month, up from $14, the company said Tuesday. (An ad-supported version of Disney+ will cost $10, also an increase of $2.) Next month, Disney+ will introduce “continuous playlists,” or constantly running channels that mimic the traditional television experience.
Disney also announced price increases for Hulu subscriptions.
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