Disney's FY20 Q3 Earnings (8/4/20)

[GoofGoof]

I hate to interrupt the discussions on Covid and what is politics, but....is there any way to tell from the figures the cost of running the parks (& resorts) is being covered by the number of guests WDW has seen? Are they losing money, breaking even, or seeing a profit from being open?

You can’t tell that from the financials because they only cover through 6/30 and the parks were not open yet. Next quarter you will be able to see it a little better because the parks will have been open all but the first few weeks of the quarter. In the earnings call they did talk about current operations and confirmed that the parks being open had a positive net contribution so at a minimum the revenues coming in are more than enough to offset the variable costs from being open. They don’t really talk about whether that net contribution is also enough to cover fixed costs. I assume no, but until next quarter it will be hard to tell.

For the quarter the parks had just under a billion in revenue and expenses of $3B for a $2B operating loss. In an attempt to isolate the expense related to the period in March that the parks were open if we assume the same 25% operating margin that they had last year in Q3 the operating income for that period should have been around $250M so the operating loss for the time the parks were closed was roughly $2.25B which is in line with the $1B a month of costs talked about in Q2. Its further complicated by the fact that the CMs got paid for almost 1/3 of the quarter so that inflates the per month costs since most of their expense would be considered variable.

 

[Nubs70]

Because it's heated or because

Everybody is peeing in it some way or another

 

[tirian]

The money coming in for the day is covering money going out for the day. That's an *operational* profit. However, there is more to expenses than operations for that day, such as depreciation. The operational profit isn't covering those extra 'business' costs. But, many of those business costs would still be on the books whether opened or closed, so, it's better to be open than closed, but not *completely* profitable yet.

In which case, it’s good that the attendance is lower than expected because admission typically covers only operating expenses anyway. That might be why the parks aren’t gushing blood like the Black Knight in “Monty Python”: an 85% drop is huge, but at least current attendance is financing the reopening. Of course, the catch is that it doesn’t make WDW profitable yet.

 

[Chef Mickey]

Not sure why you think what I’m saying is that Disney itself has a problem. I’ve been pretty clear throughout this thread that I don’t think they have any issues financially. They have plenty of cash to ride out the storm and are much better positioned than almost anyone in the travel and leisure space to take advantage of travel demand as soon as people are interested. It’s the travel industry in general that’s going to take a year or more to come back. Disney had no control over what happened in FL with cases spiking out of control. Their safety protocols are better than anyone else. If anything they are a victim of some of the less responsible behaviors from some other businesses.

As far as my opinion about the customer base not feeling comfortable coming back to WDW now the exact quotes from the opening remarks were:
Chapek: “At Walt Disney World, we are achieving our objective of driving a positive net contribution at current attendance levels and we expect demand will grow when the COVID situation in Florida improves.“
Christine McCarthy: “At Parks, Experiences, and Products. It's worth noting that while Walt Disney World is operating at a positive net contribution level, the upside we are seeing some reopening is less than we had originally expected given the recent surge in COVID-19 cases in Florida.“

These comments back my opinion that enough people don’t feel comfortable going to WDW due to the current issues with Covid in FL and Disney internally is disappointed with the soft attendance numbers.

That‘s fair, but they likely created their modeling before Florida really started turning worse, so it’s not a surprise it’s somewhat worse at the moment.

As you say, with their safety protocols, I think word will get out it’s as safe there as anywhere or safer and people will come back.

I‘m just taking a more high level view that early success or failure is really not super relevant for the longer term health of Disney. Sounds like we agree.

 

[ParentsOf4]

and expenses down only 50%?

Focusing on Parks, Experiences and Products Operating Expenses, which improved by only 48.3% even as theme park revenue plummeted by 96.5%, Disney had this to report:

Operating expenses include operating labor, which decreased $943 million from $1,587 million to $644 million, cost of goods sold and distribution costs, which decreased $460 million from $698 million to $238 million, and infrastructure costs, which decreased $45 million from $607 million to $562 million, all of which were lower as a result of the closure of our theme parks, resorts and retail stores and the suspension of cruise ship sailings. The decrease in labor costs also included the benefit of government credits for certain employee costs. Lower infrastructure costs from the closures were partially offset by the write-down of assets at our retail stores. Other operating expenses, which include costs for such items as supplies, commissions/fees and entertainment offerings, decreased $233 million, from $590 million to $357 million due to the suspension of operations, partially offset by higher charges for capital project abandonments.​

Operating Labor was down by 59.4%.

Costs of Goods Sold & Distribution Costs was down by 65.9%.

Infrastructure Costs was down by 7.4%.

Other Costs (supplies, commissions/fees, entertainment offerings) was down by 39.5%.

What leaps out is the small decrease in Infrastructure Costs. Even though Disney closed down its theme parks, hotels, and cruise line, it still incurred a ton of infrastructure costs. As Disney explained: "Lower infrastructure costs from the closures were partially offset by the write-down of assets at our retail stores."

I don't know what "assets at our retail stores" could have "partially offset" Disney's "Lower infrastructure costs from the closures" but I cannot envision these covering most of the $562 million. Therefore, I suspect most of the $562 million represents operating expenses associated with maintaining its theme parks, hotels , and ships, even when these are closed or in port.

This might suggest why Disney wants to reopen its theme parks. Along with depreciation, a lot of theme park expenses are fixed even when they are closed.

 

[RunningKoen]

In which case, it’s good that the attendance is lower than expected because admission typically covers only operating expenses anyway. That might be why the parks aren’t gushing blood like the Black Knight in “Monty Python”: an 85% drop is huge, but at least current attendance is financing the reopening. Of course, the catch is that it doesn’t make WDW profitable yet.

Well, a lot of the current attendance are passholders, so there's little extra profit on the admission.

And while it's great to see the parks open again and the low waiting times do look appealing, it's hard to justify the current admission prices (I don't see a COVID discount on that) for the stripped down Disney experience. I wonder if there's a special part of the report for the firework cost ;-)

The current level of operating expenses might a bit lower due to that than the normal cost with this attendance.

 

[GoofGoof]

Well, a lot of the current attendance are passholders, so there's little extra profit on the admission.

And while it's great to see the parks open again and the low waiting times do look appealing, it's hard to justify the current admission prices (I don't see a COVID discount on that) for the stripped down Disney experience. I wonder if there's a special part of the report for the firework cost ;-)

The current level of operating expenses might a bit lower due to that than the normal cost with this attendance.

Current operating expense is definitely lower due to all the stuff not happening in the parks and the reduced hours. If attendance drops when school goes back it’s going to be hard to cut costs further to compensate. They are pretty bare bones now. Sept/Oct was always propped up by special events like F&W and conventions even with kids back in school. That’s not likely to move the needle this year.

 

[GoofGoof]

This might suggest why Disney wants to reopen its theme parks. Along with depreciation, a lot of theme park expenses are fixed even when they are closed.

Yes, exactly. Not all the fixed costs are non-cash items like depreciation. There are substantial fixed expenses that result in cash out the door. Even if they don’t get to net income from parks it’s all about reducing the drag from fixed costs.

 

[RunningKoen]

Current operating expense is definitely lower due to all the stuff not happening in the parks and the reduced hours. If attendance drops when school goes back it’s going to be hard to cut costs further to compensate. They are pretty bare bones now. Sept/Oct was always propped up by special events like F&W and conventions even with kids back in school. That’s not likely to move the needle this year.

Exactly. That's why the current balance of attendance and cost is interesting. It's good to see any form of profit in the current situation.

It's their first try to open the parks and, with some shifting and balancing of AP visits, it's a profit*!

But even those passholders will stop visiting, eventually. The next challenge is to find a way to get non-AP attendance and non-seasonal attendance high enough to make that operational profitable.

Parks itself wont be fully profitable for a while. Trying to keep those losses as low as they can and make a profit with other divisions is the most logical strategy for TWDC and based of the earnings report, enough people think that seems possible (stock price was up by what, 12%?)

Things will get interesting if/when the parks cannot be operational profitable. PR nightmare ...

 

[ParentsOf4]

Current operating expense is definitely lower due to all the stuff not happening in the parks and the reduced hours. If attendance drops when school goes back it’s going to be hard to cut costs further to compensate. They are pretty bare bones now. Sept/Oct was always propped up by special events like F&W and conventions even with kids back in school. That’s not likely to move the needle this year.

This has me wondering if Disney has/is going to mess with the Epcot capacity ratio for Food & Wine Festival. Getting local Passholders in to buy drinks & food at Epcot is better than it running under capacity.

At the moment, Disney is trying to attract Passholders back with some steep hotel discounts. However, the cheapest rate I can find is Pop Century for $139/night (taxes included) in the middle of the week in September, which might not be enough of a discount to attract the numbers I suspect Disney is looking for.

 

[GoofGoof]

Exactly. That's why the current balance of attendance and cost is interesting. It's good to see any form of profit in the current situation.

It's their first try to open the parks and, with some shifting and balancing of AP visits, it's a profit*!

But even those passholders will stop visiting, eventually. The next challenge is to find a way to get non-AP attendance and non-seasonal attendance high enough to make that operational profitable.

Parks itself wont be fully profitable for a while. Trying to keep those losses as low as they can and make a profit with other divisions is the most logical strategy for TWDC and based of the earnings report, enough people think that seems possible (stock price was up by what, 12%?)

Things will get interesting if/when the parks cannot be operational profitable. PR nightmare ...

Don’t forget that DLR is much more a locals park. If/when the situation in CA improves that park could return to a level of profitability much faster because there’s less travel involved. WDW still makes up a much larger portion of domestic parks profits, but DLR should help in the not too distant future. WDW is tough because you have to convince a large number of people not only that WDW itself is safe (they have done an outstanding job for that), but also that out of state travel is OK too. If the situation on the ground in FL gets much better that will be less of an issue, but right now a lot of people have no desire to travel into a hot spot. People also have to feel safe flying which is still a challenge. I do think as time goes on flying becomes less of an issue naturally as more people try it, but for now it adds to the WDW challenges.

 

[GoofGoof]

This has me wondering if Disney has/is going to mess with the Epcot capacity ratio for Food & Wine Festival. Getting local Passholders in to buy drinks & food at Epcot is better than it running under capacity.

At the moment, Disney is trying to attract Passholders back with some steep hotel discounts. However, the cheapest rate I can find is Pop Century for $139/night (taxes included) in the middle of the week in September, which might not be enough of a discount to attract the numbers I suspect Disney is looking for.

A bunch of drunk people walking around a lake stopping frequently to eat and more importantly drink sounds great, until you realize there’s no good way to social distance (lots of small kiosks with line markers I guess) or to have people constantly removing masks to eat and drink. I’m sure there will be some modified version of F&W but I don’t know if it can or will move the needle on attendance. They also pushed the opening date back for the EPCOT resorts. Those were prime beds for F&W in the past.

 

[flynnibus]

That 12% increase is really just restoring value that was lost due to Covid. It’s still lower than it was before all this started.

Lost due to covid?

You mean the actual business that has been lost during that period that isn't coming back? You know... the actual Year totals that will be in the toilet?

The market through this period has proven just how distorted and detached from reality stock prices really are.

Yahoo reports "With 384 companies in the S&P having reported earnings through Wednesday morning, results are coming in 23.5% above expectations, in aggregate, according to Refinitiv data, the highest on record back to 1994."

while companies are reporting numbers like 95+% drops in revenue... the employment numbers for July miss estimates by 90%... but hey, companies 'beat' analysts expectations so BUY BUY BUY.

Where any other quarter forecasting flat to negative GROWTH would doom you.

 

[RunningKoen]

Don’t forget that DLR is much more a locals park. If/when the situation in CA improves that park could return to a level of profitability much faster because there’s less travel involved. WDW still makes up a much larger portion of domestic parks profits, but DLR should help in the not too distant future. WDW is tough because you have to convince a large number of people not only that WDW itself is safe (they have done an outstanding job for that), but also that out of state travel is OK too. If the situation on the ground in FL gets much better that will be less of an issue, but right now a lot of people have no desire to travel into a hot spot. People also have to feel safe flying which is still a challenge. I do think as time goes on flying becomes less of an issue naturally as more people try it, but for now it adds to the WDW challenges.

True. I would say the international parks are more like WDW than DLR, so there's a risk. They all rely on safe (international) travel combined with a safe park visit.

I guess TDWC is willing to break even or even lose a bit of money by having the parks open, just for how long?
Balancing profits with prestige ...

 

[ParentsOf4]

A bunch of drunk people walking around a lake stopping frequently to eat and more importantly drink sounds great, until you realize there’s no good way to social distance (lots of small kiosks with line markers I guess) or to have people constantly removing masks to eat and drink. I’m sure there will be some modified version of F&W but I don’t know if it can or will move the needle on attendance. They also pushed the opening date back for the EPCOT resorts. Those were prime beds for F&W in the past.

These two contrasting images show that there's a middle ground. Both were taken on a Sunday (early) evening.

I took the first one in late September 2019:

My son took the second one in the middle of July 2020:

 

[brianstl]

These two contrasting images show that there's a middle ground. Both were taken on Sunday.

I took the first one in late September 2019:

View attachment 489212

My son took the second one in the middle of July 2020:

View attachment 489213

They should move Epcot’s opening and closing back at least an hour and maybe two if they want to entice locals to come to food and wine. Give people time to make an evening out of it after they get off of work.

 

[mikejs78]

I guess TDWC is willing to break even or even lose a bit of money by having the parks open, just for how long?
Balancing profits with prestige ...

They are losing less money with them open than they are with them closed.

 

[Mrtko]

Some thoughts on this discussion:

I doubt Disney will sell assets due to this financial crisis alone or that they are forced to sell to stay afloat. They will sell assets when Bob Chapek (not RealBobChapek, but the real Bob Chapek) lays out his vision for where he wants to take the company. Then there will be a restructuring and some things will be sold off.

Having said that, the vision of where Bob Chapek wants to go may be highly influenced by current events and the pending financial results. Bob may present a plan to create compelling content for Disney+ and rely less on purchasing content, maybe. In which case he greatly invests in PIXAR and funds multiple projects at the studios. Maybe he sheds ESPN because it has high value and can be used to pay down debt as he sees a decline in the audience for sports. Maybe he believes in sports and doubles down and goes after all the sports he can get so you have to have ESPN+ to see anything. He may want to aggressively defend the theme park business from Universal or he may abdicate leadership in that area. I don't know. I do think he has some ideas on where Disney should go.

What Disney is learning from this and why Bob Chapek was chosen to run the company is not obvious yet. I don't mean that in a negative way, we just haven't heard anything substantial and probably rightly so. It isn't the right time. When it is the right time then Igor will step away and let him run with it. I doubt Bob Chapek was hired only because he can control costs. There must have been a compelling reason beyond that. Maybe WDWPro can dig up some fun rumors?

 

["El Gran Magnifico"]

These two contrasting images show that there's a middle ground. Both were taken on a Sunday (early) evening.

I took the first one in late September 2019:

My son took the second one in the middle of July 2020:

At least it won't be three deep at the R&C.

 

[UNCgolf]

These two contrasting images show that there's a middle ground. Both were taken on a Sunday (early) evening.

I took the first one in late September 2019:

View attachment 489212

My son took the second one in the middle of July 2020:

View attachment 489213

That September photo looks miserable. I think you'd have to pay me to go to the park if it was that busy.

The July photo looks heavenly in terms of crowd size!