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Disney Stock Rises as Cost Cuts Boost Profit Outlook

Published 09/02/2024, 12:52 am
Updated 09/07/2023, 08:31 pm

Walt Disney Co. (NYSE: NYSE:DIS) stock climbed 7% in early Thursday trade following the release of its fiscal first-quarter earnings, which surpassed analyst expectations. This stock was bolstered by the company's optimistic profit forecast for the year, a sentiment grounded in the cost-cutting measures Disney has implemented and the robust performance of its international theme parks.

How Disney Performed in FQ1

For its first fiscal quarter, Disney reported mixed results. While its Disney+ platform fell slightly short of expectations with 149.6 million subscribers against the anticipated 151.2 million, the company still managed to beat earnings expectations.

Adjusted EPS came in at $1.22, compared to the year-ago figure and the consensus estimate of 99 cents. Revenue saw a modest year-on-year increase of 0.2% to $23.55 billion, although this was modestly below the $23.64 billion forecast.

The entertainment sector of the company experienced a decline, with revenue dropping 6.5% annually to $9.98 billion, missing the average analyst estimate of $10.52 billion. Conversely, sports revenue, driven by ESPN, saw an uptick of 4.2% to $4.84 billion, ahead of expectations.

On the other hand, the experiences segment – which includes theme parks and resorts – reported a healthy 6.9% growth in revenue to $9.13 billion, slightly above the $9.04 billion consensus.

Operating income across Disney's segments also revealed solid growth, with total segment operating income rising 27% YoY to $3.88 billion, well ahead of the $3.3 billion estimate. This serves as an evidence that Disney is benefiting from aggressive cost cuts implemented since Bob Iger took over as CEO.

“Our strong performance this past quarter demonstrates we have turned the corner and entered a new era for our Company, focused on fortifying ESPN for the future, building streaming into a profitable growth business, reinvigorating our film studios, and turbocharging growth in our parks and experiences,” CEO Robert Iger said in a press release.

Subscriptions across Disney's various platforms showed a mixed picture. ESPN+ subscribers totaled 25.2 million, slightly below the expected 26.4 million, and Hulu & Live TV subscribers numbered 4.6 million, which was in line with the forecast. Total Hulu subscribers, however, exceeded expectations at 49.7 million.

The entertainment giant has set an optimistic tone for its fiscal year, forecasting adjusted EPS of approximately $4.60, comfortably surpassing the consensus estimate of $4.27. This is likely one of the key reasons why shares are up, as well as the fact that Disney announced a 50% increase in its cash dividend, alongside a commitment to repurchase $3 billion worth of shares in fiscal 2024.

Looking forward, Disney anticipates net additions of between 5.5 million and 6 million Disney+ Core subscribers for its second fiscal quarter. Day earlier, Disney teamed up with Fox and Warner Bros Discovery (NASDAQ:WBD) to create a joint sports streaming platform.

The company said it is confident in its strategic initiatives, including boosting its cash dividend and targeting significant share repurchases, as it remains on track to meet or exceed its $7.5 billion annualized savings target by the end of FY24.

Disney also expects to generate approximately $8 billion in free cash flow in FY24, with aspirations of achieving profitability in its combined streaming businesses by the fourth quarter of 2024.

Themes Park, Not Streaming, Is Still Disney’s Core Business

The entertainment behemoth reported a 3% increase in attendance across its theme parks during the quarter, attributing the rise primarily to the surge in visitors at Shanghai Disney Resort and Hong Kong Disneyland Resort.

Shanghai Disney was operational throughout the entire quarter, the company said, contrasting sharply with the same period last year when it was open for only 58 days due to COVID-19 restrictions.

This reopening contributed significantly to higher merchandise, food, and beverage sales, particularly at Shanghai Disney Resort and, to a lesser extent, at Hong Kong Disneyland Resort.

The entertainment segment's operating income improved dramatically to $874 million from $345 million a year earlier.

While the sports segment reported a reduced operating loss of $103 million, the experiences segment's operating income grew to $3.11 billion, reflecting an 8.5% increase on an annual basis.

Iger disclosed in an CNBC interview plans to introduce an all-new ESPN direct-to-consumer (DTC) product by 2025. The company is actively seeking partnerships for this venture.

Iger also highlighted that the cost-cutting strategy announced last year is expected to exceed $7.5 billion in savings.

“It will have many more features and provide a much more immersive experience for the sports fan than this bundle has,” Iger said.

The new product “will have features like integrated betting, fantasy, much more personalization, customization, probably some shopping in some form, much deeper in statistics and those sorts of things, kind of the sports lovers’ delight,” he added.

Solid results and guidance come at a delicate time for Disney and Iger. The management team has been engaged in a battle with activist investor, Trian Partners' Nelson Peltz, who is pushing for bigger changes to support the embattled stock price.

Shortly after Bob Iger resumed leadership at Disney, Nelson Peltz, mirroring a classic Disney antagonist, swiftly demanded a board seat, threatening a proxy contest just three days in.

Peltz's demands led Iger to propose a compromise by suggesting the addition of a mutually agreed independent director, akin to Disney's previous appointment of Carolyn Everson at the behest of activist Dan Loeb.

However, Peltz rebuffed not only this proposal but also other conciliatory offers from Disney, such as board observer status or an advisory role, insisting singularly on securing a board position for himself without presenting any strategic alternatives.

In the CNBC interview, Iger said he didn’t have recent discussions with Nelson Peltz or plans for immediate future engagements.

“I have not spoken to Mr. Peltz in a while. I have no plans to speak to him. I’m -- I will leave it at that.”

Summary

Disney shares jumped in early Thursday trade after the entertainment titan reported stronger-than-expected profit for its first fiscal quarter. Moreover, Disney offered an upbeat full-year profit forecast, in addition to a 50% increase in the cash dividend.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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