Disney+ subscriber growth had a strong showing during Disney’s fiscal Q2, and it deserves all the credit it got, but it’s time to admit that Disney’s real work horse is the theme parks biz.
What a comeback for Disney’s cash cow. The media giant reported fiscal Q2 revenue of $6.7 billion for its Parks, Experiences and Products segment, which is made up mostly of theme parks. Operating income for the segment was $1.8 billion compared to a loss of $400 million in the same period last year.
Not only has attendance made a comeback with all domestic parks being open as of March, but visitors are spending a lot more per visit, too. CEO Bob Chapek noted that per capita spending at domestic parks grew by more than 40% compared to the same period in 2019. It’s worth nothing that Disney’s fiscal Q2 is usually seasonally the weakest quarter for Disney’s theme parks. On top of that, Disney has been limiting attendance by implementing an attendance reservation system.
Unfortunately, international parks haven’t been thriving as much due to COVID-related closures at Shanghai and Hong Kong during the quarter. Disney CFO Christine McCarthy noted the company expects about a $350 million hit to operating income in fiscal Q3 coming from the Shanghai and Hong Kong parks. There is still no estimate on when Shanghai’s Disney Park can reopen its doors.
From an objective standpoint, the fiscal Q2 results were strong across the board. Disney proved that its streaming business is still in a high-growth phase, and that its diversified revenue streams are propping up the company as the world begins to enter another phase of heightened uncertainty.
More uncertainty lies ahead, especially threatening Disney’s now recovered theme parks business. Macroeconomic pressures are showing no signs of abating with inflation persisting near four-decade highs, looming recession fears, a tight labor market and continued supply chain disruptions.
All of these factors will likely put immense margin pressure on Disney across its parks, affecting merchandise, food and beverages. According to the U.S. Labor Department’s monthly consumer price index report released Wednesday morning, consumer prices rose 8.3% in April compared to last year.
Even as demand is extremely high, as management alluded to, the threat of a dip in visitation at theme parks is increasing as prices continue to ratchet higher and consumers decide to pull back on discretionary spending. As the government report showed, the consumer goods categories most impacted by inflation over the past twelve months included gasoline, airfare, hotel rooms and rental cars, which are all categories that would impact Disney’s consumer base.
McCarthy mentioned that Disney is paying attention to inflation. As an example, she noted Disney’s fuel-hedging program used to reduce volatility in oil prices. However, even as McCarthy attempted to quell investor fears, the stock took a meaningful leg lower and pared all its after-hours gains during her comments on the earnings call.
As important as Disney’s streaming business and strategy are, it is nothing if the cash-flow driving theme parks business is sustainably propping it up. Any concern regarding the thriving parks has investors worried about growth, especially as Disney stock is down more than 30% so far this year, not including the decline in the after-hours session Wednesday. It is also one of the worst performers in the Dow over the past 12 months.
Disney investors are tough, and the lack of enthusiasm from the investment community shows that it's going to take a lot more than one good quarter to reassure investors, especially as we enter a new phase of global economic uncertainty.