Since this was planned a few years ago and kept having false starts, can you elaborate on what finally pushed the decision?
One thing: they had no other choice. The park would have died (no, not closed or anything, but just been a place where folks visit only for hops and spend no money).
There isn't anything there any longer.
The holdup was a few factors that we've discussed and, likely, a few we don't know. But it had to finally happen and now is finally.
The delay in starting the DHS redo is going to take some time to explain. Please bear with me.
Many recall the 3-year construction for EPCOT, which was a phenomenal pace for a project of that magnitude.
The scale was massive:
Fewer seem to recall that EPCOT was in a holding pattern for several years, mostly as a result of Disney trying to line up funding. (There also were internal disagreements regarding which way EPCOT should go but money was key.)
The work being done at DHS is nowhere near the scale of EPCOT but there is a similar primary reason for its delay: money.
For Bob Iger’s first 4 years as CEO, Disney’s Parks & Resorts (P&R) division established an all-time low capital expenditure (capex) budget vs. revenue. From 2006 to 2009, capex averaged only
9.6%. The only other period with a similarly low capex was 1976 to 1979, right before the start of EPCOT construction. (See, there was a reason I started by mentioning EPCOT.
)
Under Iger, Wall Street began to think that a capex of less than 10% was normal for a theme park. Iger was Wall Street’s darling.
Of course, a theme park capex budget of less than 10% is not normal. Heck, that much is needed just to keep the place from falling apart, and Disney theme parks are supposed to be ‘the best’. Wall Street didn't understand this and thought Iger was a miracle worker.
When capex started to climb from 2010 to 2012 to fund 2 cruise ships, Cars Land, the New Fantasyland, and MyMagic+, Wall Street became concerned. They started to question Iger. For those 3 years, capex averaged
19.9%.
19.9% sounds great,
and it is. Arguably, Disney’s capex should average around
17%, especially since so much of what Disney classifies as capex is what CFO Jay Rasulo refers to as “maintenance capital”. The theme parks, hotels, and the supporting infrastructure undergo a lot of wear-and-tear. Disney’s resorts are getting old and in constant need of capital upgrades and repair.
However, we also have to put that 19.9% into historical perspective.
As I mentioned previously, Disney had a low capex from 1976 to 1979, similar to 2006 to 2009. However, for the 3 years after that (1980 to 1982), Disney averaged an unbelievable capex of
54.4%! In other words, in the late 1970s Disney was pooling its money before undertaking a massive expansion.
Thus, the 19.9% capex budget from 2010 to 2012 is nothing spectacular. In fact, it’s still below the average from the time WDW opened until Iger took charge. Over a 34-year period, Disney’s P&R capex averaged
23.8%. Considering that Iger’s
peak year (2011) was at 23.1%, Iger’s capex budgets haven’t been particularly impressive.
To be clear, 23.8% is too high for today’s Disney. It’s simply not expanding at the same rate as it did in the 1970s to 1990s, nor should it. However, an average capex of 17% is eminently reasonable in order to achieve sustainable growth. So far, Iger’s P&R capex budgets have averaged
14.4%. If that 2.6% difference doesn't seem like much, it comes out to
$2.4 billion in non-inflation adjusted dollars. That’s $2.4 billion that Disney’s theme parks have been underfunded since Iger took charge, at a time when Disney has spent over
$38 billion on stock buybacks.
Again though, Wall Street has a short memory. They have no historical perspective. They understand ‘today’. They wanted Iger to cut capex in 2013. Being a Wall Street darling, Iger complied. In 2013, capex was down to
15.0%.
For the first 9 months of 2014, capex was up to
16.7% but that number is deceptive. Because of the way Disney is required to report expenses, it’s reporting capex that’s actually being paid for by the Shanghai Shendi Group. In other words, Disney isn't paying a large chunk of that 16.7%.
Looking at Disney domestically (which Disney funds 100%), U.S. capex for the first 9 months of 2014 was
8.8%, a number beaten only by Iger’s record low domestic capex budgets in 2006 (8.1%) and 2008 (8.6%).
Cutting through all other excuses, work on DHS should have started years ago but was delayed because Iger and his minions didn't want to pay for it.
