If only the budgets worked the way the author thinks they should. Quoting from the article:
It's easy to put two and two together, and... #ThanksShanghai. But blaming Shanghai Disneyland for operational cuts at Disneyland and Disney World reflects a simplistic conclusion. This just isn't the way that publicly-traded companies run.
To start, one basic rule of accounting is that capital expenditures — money spent on construction, new equipment, and buying land — is accounted differently that money for operations — such as paying employees. If Disney had to pay more than it planned to build Shanghai Disneyland, that's a hit to its capital budget. And no amount of cutting its operational budget will change that.
If Disney wants to offset an unexpected expense in its capital budget, it would need to do that by delaying or canceling another construction project.
The reality is that the highest levels of management look at budgets holistically. An expense is an expense. What executives care about is how those expenses hit the bottom line. Yes, operating expense (opex) is expensed differently than capital expenditures (capex) but that's the point. Since opex hits the bottom line immediately, it offers a much quicker way to fix capex overruns.
For the sake of discussion, let's say Shanghai capex is $3B over budget. With Disney depreciating attractions over 25-40 years, that's going to impact this year's bottom line by perhaps
$100M (assuming, for simplicity, 30 years to depreciate).
The same is true for any capex project in Orlando. Delaying those helps the bottom line, but nowhere near as immediately as opex cuts.
As Disney previously announced, this year's
domestic capex was supposed to increase by $800M. With domestic capex up $318M in 1Q2016, much of that previously announced increase has already been spent. There's not a lot of capex to squeeze out of the remaining 3 quarters. Even if all of the remaining $482M disappeared, it's still going to be depreciated over 30 years, improving this year's bottom line by no more than
$16M.
Now let's look at opex.
In 2015, Disney spent $9.7B on Parks & Resorts opex. Squeezing that by 1% (
$97M) immediately makes up for any Shanghai capex overrun.
This part is a bit more closer to reality:
Of course, all of Disney's capital and operational expenses get thrown together on the company's bottom line. And any corporate executive who wants to keep her or his job wants that bottom line to look as black and as fat as possible. But any analyst with the ability to read a spreadsheet looks far beyond the bottom line. They know exactly what's happening in Shanghai. Nothing that Disney does stateside will hide that.
However, despite what the author thinks, analysts look at the numbers the same way corporate executives do. If profits suddenly flat line or drop, Disney stock will be punished. That's really what analysts care about. Ultimately, analysts don't care what games Disney plays to keep the numbers up, as long as those games are legal.
