I read the 10Q and have to admit that there is a grey cloud hanging over what I thought were some great numbers at WDW.
Please recall that P&R revenue was up a weak
5.6% (the lowest increase in 5 years) but operating income was up an impressive
23.9% (the highest in 2 years). I was hoping this was a result of improved operational efficiency due to higher volumes at WDW. However, looking at the 10Q, there were several special factors that conspired to inflate operating income, even while Disney struggled to contain core operating expenses.
For background, Disney reports 3 categories of expenses against P&R revenue. These are operating expense (opex), selling, general, administrative & other (SG&A), and depreciation.
Quoting from the 10Q:
Operating expenses include operating labor, which increased $76 million from $1,032 million to $1,108 million [up 7.4%], cost of sales, which increased $14 million from $334 million to $348 million [up 4.2%], and infrastructure costs, which decreased $19 million from $475 million to $456 million [down 4.0%]. The increase in operating labor was due to inflation, new guest offerings and higher pension and postretirement medical costs. The increase in cost of sales was due to inflation and higher volumes. The decrease in infrastructure costs reflected higher costs in the prior-year quarter in connection with the launch of MyMagic+ and the absence of costs that were incurred in the prior-year quarter for the dry-dock of the Disney Wonder. Other operating expenses, which include supplies and commissions, increased driven by new guest offerings and inflation. Operating expense growth was partially offset by a 2% decrease from foreign currency translation due to the strengthening of the U.S. dollar against the euro.
Selling, general, administrative and other costs decreased $32 million from $488 million to $456 million [down 6.6%] primarily due to the impact of foreign currency translation due to the strengthening of the U.S. dollar against the euro and lower marketing costs.
In other words, like last year, some of the operating income gain simply was the result of an absence of expenses associated with the rollout of MyMagic+ rather than an improvement in operational efficiency.
Looking at the SG&A
decrease of
6.6%, let's compare it to the previous quarter, which saw a
6.6% increase:
Selling, general, administrative and other costs increased $27 million from $408 million to $435 million [up 6.6%] driven by higher marketing costs.
It appears some of P&R's gain came from favorable currency transactions on expenses (which also adversely affected overseas revenue) and lower marketing expenses. Tack on the reduced costs associated with completion of the MyMagic+ rollout and the operating income number doesn't look as impressive as it did at first glance. It's still good but not 23.9% good.
Finally, depreciation was up only
1.6%, a depressing number since this represents actual capital projects. This unusually low number (the lowest increase in 4 years) means that Disney simply didn't build much to be depreciated.
WDW still had a great quarter but it seems that without these special transactions, P&R's financial performance would have lost some of its luster.
