There are many ways to judge WDW. Some are subjective, resulting in endless debate.
One less subjective way is to look at WDW as a business. As a business, is WDW being run as effectively as in the past?
In their annual reports and SEC filings, Disney does not break down the financials by resort. However, since WDW represents more than half of Parks & Resorts (P&R) revenue, the published P&R numbers generally reflect what’s happening at WDW. These numbers are consistent with the limited numbers that Disney reports for domestic P&R. (Domestic P&R is 80% of P&R’s business, while WDW is about 80% of that.)
Looking at the numbers, it’s apparent that despite successes elsewhere, Disney’s leadership under CEO Bob Iger has made some poor decisions in P&R.
There are many ways to evaluate leadership’s effectiveness but, generally, gross margin is a good measurement of management’s overall performance, especially when compared with prior performance within that same company. Is current management making things better or worse than previous management?
Furthermore, it’s relatively easy for a company to boost short-term profitability by making bad long-term decisions. In order to consider whether leadership is making the right strategic decisions, it’s necessary to examine trends over multiple years.
Corporate Disney’s average gross margin under Iger is 21.3%, up from former CEO Michael Eisner’s 19.0%. This margin demonstrates that Iger has been an effective leader for Disney as a whole.
However, the situation is reversed in P&R. Eisner’s average P&R gross margin is 50% higher than Iger’s (22.0% vs. 14.7%).
Iger has been CEO for 8 full fiscal years. He is close to finishing his ninth year. As it so happens, his P&R margins fit neatly into 3 distinct periods of 3 years each.
For Iger’s first 3 years, P&R’s margin averaged 16.0%.
From 2009 to 2011, P&R’s average margin dropped to 12.9%.
Since 2011, Iger’s P&R margin has been climbing and, depending how the current fiscal quarter finishes, should finish back above 16% for the most recent 3-year period.
What gives?
Eisner’s organization produced strong P&R margins throughout his 21 years as CEO. Even during the horrendous post-9/11 period which decimated the tourist industry, Eisner managed an average 15.6% margin.
By comparison, Iger’s 12.9% margin from 2009 to 2011 represents a historic low for the company.
What Eisner did throughout his tenure was invest in P&R. Eisner’s annual P&R capital expenditures as a percentage of P&R revenue averaged 50% higher that Iger’s, resulting in consistently better margins, even during the most difficult economic times.
Boosted by Eisner’s higher P&R investments during his last years as CEO, P&R revenue increased an average of 8.5% during Iger’s first 3 years. As a result, P&R margin averaged 16.0%. After that, the P&R margin plummeted.
When Iger took charge in late 2005, he immediately slashed P&R investments. P&R capex was cut from $1.4B (Eisner’s last year) to $0.9B (Iger’s first year). It would be one thing if it were a one-year blip. However, P&R capex remained low for 3 years.
For amusement parks, capex is what drives future growth. The money spent this year pays for the new attraction next year.
In Disney’s case, projects take multiple years to develop. Thus, when Iger reduced capex from 2006 to 2008, it wasn’t until 2009 to 2011 that its effects were felt.
Some might blame a recession. However, it’s important to recognize that WDW and DLR attendance increased slightly during this period, so blaming the falling performance on a recession is a red herring. Throughout its history, P&R has reported strong margins during numerous economic downturns.
More recently, Universal reported impressive margins in 2010 and 2011 after the opening of WWOHP, which happens to coincide with the period when Disney’s P&R margins cratered. Universal invested in the right product and was rewarded for it.
Investing in the right product improves profitability regardless of business climate.
Except during the most dire circumstances (such as the Great Depression), consumers will spend when offered the right product. Profits can be adversely affected by a poor economy but, nearly always, a company will experience better profits by investing than by halting investment.
There are legitimate reasons to reduce investments. However, for a company like Disney with tremendous financial resources to weather the worst economic storms, reducing investment has avoidable negative consequences.
With Disney’s P&R capex budget slashed from 2006 to 2008, few brick & mortar projects were started. As a result, consumers from 2009 to 2011 had fewer reasons to purchase Disney’s P&R products at Disney’s P&R prices.
Without any appreciable P&R content added, Disney was forced to offer steep discounts to keep attendance up. These discounts hurt revenue which, in turn, hurt margins.
Iger’s decision to reduce P&R investments in 2006-2008 hurt P&R’s profitability in 2009-2011.
Beginning in 2009, Iger started increasing P&R investments. He approved a complete redo of DCA, the New Fantasyland, and MyMagic+. He approved 2 new cruise ships. As these new projects completed, the P&R margin began to improve. It was 15.8% in 2013 and is climbing further in 2014. Depending on how the last quarter of the fiscal year finishes, it might reach 18% for 2014, Iger’s best ever.
Investing in Cars Land and the New Fantasyland helped boost margins.
Investing in theme parks supports higher prices, improves attendance, and leads to increased consumer spending.
It’s really simple. Build something people want to buy and they buy it. Offer last year’s product at this year’s prices and discounts become necessary.
This is not rocket science.
A company needs to invest in itself if it wants to improve profitability. Cutting investments today hurts sales tomorrow.
With WDW generating more than half of P&R’s revenue, corporate Disney needs to invest in WDW.
Unfortunately, it appears that Iger has repeated his earlier mistake. P&R’s domestic investments for 2013 and 2014 will be less than half what they were in 2011 and 2012.
Although Iger has invested internationally in Shanghai, domestic investments are down to 2006-2008 levels.
Some exciting times lie ahead for WDW, but did it really need to take 9 years to figure this out?
