Disney: The End of an Unprecedented Year

A look at the company's fiscal 2020 results

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The Science of Hitting
Nov 14, 2020
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On Thursday, The Walt Disney Co. (

DIS, Financial) reported results for the fourth quarter of fiscal 2020. For the year, revenue fell 6% to $65.4 billion, with a meaningful decline in Parks, Experiences and Products as a result of the pandemic offset by growth at Media Networks, primarily due to the inclusion of the assets acquired from 21st Century Fox. Segment operating income for the year declined 45% to $8.1 billion, with an improvement at Media Networks (up 21% to $9 billion) offset by the results in all other segments. Despite the significant reduction in profitability in 2020, Mr. Market has looked past those issues, largely due to the company's astounding success in the direct-to-consumer business (DTC). As shown below, the company's namesake service, Disney+, which launched in November 2019, has already attracted 74 million paid subscribers around the world.

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In April 2019, when Disney held an investor day event to outline its strategic objectives and long-term targets in DTC, management said they expected to have 60 million to 90 million global Disney+ subscribers by the end of fiscal 2024. That they reached the midpoint of those expectations four years ahead of schedule is truly astounding. As CEO Bob Chapek noted on Thursday's conference call, this speaks to the fact that Disney is a media company unlike any other:

"The response from consumers has been overwhelmingly positive. Everywhere that we've launched Disney+ audiences have embraced the wide array of high quality entertainment - both original and library content… The growth of Disney+ speaks volumes about the strength of our IP, our unparalleled brands and franchises, and our amazing content creators - all part of the Disney difference that sets us apart from everyone else."

Despite the unparalleled success of Disney+ to date, there's more to come: the service is now available in roughly 25 markets and will be launching in countries throughout Latin America later this month (countries that collectively have a population of more than 400 million people). If I were a betting man, I'd say Disney will have more than 100 million subscribers by the end of the coming fiscal year – putting the company in a position to begin realizing the DTC economics that I discussed in my recent five-part series on the company.

Returning to the 2020 results, Disney was materially impacted by the pandemic in its Parks, Experiences and Products segment in the second half of the fiscal year. As a result, revenue in the segment declined by 37% to $16.5 billion – nearly $10 billion less than in fiscal 2019. In addition, compared to an operating profit of $6.8 billion in fiscal 2019, the segment reported a small operating loss in fiscal 2020. As management noted in the press release, they estimate the net adverse impact from the pandemic on the company's segment operating income in fiscal 2020 was $7.4 billion, with the vast majority of this impact in Parks, Experiences and Products (after accounting for the $7.4 billion, adjusted operating income was up mid-single digits).

As shown below, after climbing from $2 per share in fiscal 2010 to more than $7 per share in fiscal 2018, Disney's adjusted earnings per share has declined in each of the past two years.

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Personally, I expect the short-term pressure on the company's income statement to remain for the foreseeable future. First, the Parks business has a long way to go until it returns to pre-pandemic levels. Second, the direct-to-consumer business will continue to generate losses as it continues to launch in new markets and invest in its services. Finally, I also have some questions about the short-term profits and losses in the Media Networks business, particularly as we get past the next NFL renewals. For those reasons, I would not be surprised if Disney's adjusted earnings per share does not exceed the 2018 levels shown above for at least the next three years.

Thankfully, Disney remains in a sound financial position. The company has suspended share repurchases and the dividend, meaning the few billion dollars a year that it generates in free cash flow can be used for debt repayment. In addition, the company ended fiscal 2020 with roughly $19 billion in cash and equivalents on the balance sheet. While the $59 billion in total debt on the books may appear large at first glance, I think a full appraisal of the current results suggests that the company remains well positioned financially.

Conclusion

The past year has been a memorable one for Disney. On the one hand, they've quickly shown that the strength of their brands / intellectual property (IP) and the quality of their content puts them in a position to be a long-term winner in DTC. On the other hand, theme parks and movie theaters have faced previously unimaginable headwinds as a result of the pandemic. Add to that the continued pressure on the pay-TV business in the U.S., of which Disney is a primary beneficiary (as a result of ESPN), and you're left with a pretty messy story – and that's all before considering the integration of much of 21st Century Fox. Long story short, it's been a year that Disney management, employees and investors will not forget anytime soon.

As we look ahead, I remain confident that Disney will ultimately be for the better as a result of industry changes that have taken place over the past five-plus years. The strength of the company's IP and its ability to monetize it more effectively than any of its competitors continues to be a competitive advantage. For that reason, I plan on continuing to hold a sizable position in Disney.

Disclosure: Long Disney.

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