The Walt Disney Company (DIS, Financial) has just posted some truly magical Q4 results. EPS has jumped by over one-third, revenue is up 9% year-over-year and operating efficiency is flying high. In fact, Thursday’s solid earnings report sent shares up by some 3% – with plenty of analysts predicting a stellar 2016 on the horizon. Things are certainly going well for Disney. Yet a question begs the answer: Couldn’t the company be doing a whole lot better?
It’s no secret that Disney has never been great at hedging against certain risks. But when it comes to currency fluctuations, the company is really starting to take a hit. Last year, Disney lost $143 million to unfavorable exchange shifts in Venezuela alone. And with the strength of the dollar surging, this year has proven a bit rocky, too. Adverse forex conditions weighed down what could have been a phenomenal consumer products performance. Meanwhile, low footfall at Hong Kong Disneyland, increasing operating costs at Disneyland Paris and sky-high expenses at Shanghai Disney Resort marred an otherwise sterling performance by the company's parks division.
Okay, so the negative impacts of currency fluctuations weren’t enough to throw Disney off track across FY 2015. It’s been a great year. But in 2016, the company might not be so lucky.
For the next fiscal year, Disney is already forecasting a $500 million shortfall in operating income thanks to a lack of currency hedges. Even stacked against 2015’s full year net income of $8.4 billion, the loss of half a billion dollars is a big deal. According to CEO Bob Iger, who’s been warning investors about this for months, the disappearing funds are due almost exclusively to the ever-increasing strength of the U.S. dollar. Disney claims it simply cannot secure decent exchange rates overseas, which will ultimately continue to put a damper on its bottom line. That certainly seems like a reasonable narrative, but there’s got to be a bit more to it than that.
It goes without saying that Disney has no control over the value of the dollar. But blaming shifting exchange rates for a $500 million loss seems a little lazy. In reality, Disney simply must have mismanaged its foreign-exchange risks somewhere along the way. Either the company didn’t expect the dollar to continue climbing so high in value across 2015, didn’t understand the impact that climb would have on its books or simply didn’t care. Either way, somebody has royally messed up.
Now, it’s not always easy to predict where the markets are heading – which is why corporations should always start hedging their currency exposure a couple of years in advance. According to CFO Christine McCarthy, Disney hedges its position on a “multi-year basis," too. Yet with the dollar’s appreciation kicking off well over a year ago, Disney should have known better (or at least known enough to protect against $500 million in losses).There are plenty of financial products out there the company could have taken advantage of, including options contracts to secure resilient asset prices or forward contracts to lock down favourable, pre-agreed exchange rates. But pointing this out in hindsight doesn’t really help anybody.
In the end, we all know Disney can take that $500 million hit without losing investor confidence. For the full year 2015, the company recorded $52.5 billion in revenue, a 12% net income jump and a 19% hike in EPS. Disney is consistently outperforming competitors like CBS (CBS, Financial) and Twenty-First Century Fox (FOX) in terms of cash flow, and with a new Star Wars release imminent, business is going to be booming for Q1 2016. The problem is, the value of the dollar is going to be booming, too. So, Disney execs had better bear that in mind as the company places its bets for 2017. If the C-level continues to shun basic risk management strategies in the long-term, investors aren't going to be so forgiving.
