DIS Walt Disney Co

By Erich Schwartzel 

Walt Disney Co. said the coronavirus pandemic took a $1.4 billion bite out of its earnings, as the company detailed how the global economic fallout would affect every part of its entertainment business for the foreseeable future.

Total operating income for the three months ended March 28 fell 37% from a year earlier to $2.4 billion, the company said Tuesday, while revenue rose 21% to $18 billion.

The business impact of the pandemic will likely be even more pronounced in the current quarter. Shutdowns that first began in Asia became more widespread globally only in the final few weeks of Disney's fiscal second quarter.

Disney's net income for the quarter fell 91% to $475 million, due to both the impact of the virus and accounting for the consolidation of assets acquired in its 2019 acquisition of assets of 21st Century Fox.

Analysts have downgraded Disney stock, envisioning a future defined by the highly contagious virus, even as stay-at-home orders are lifted and businesses reopen.

Disney Executive Chairman Robert Iger sounded an upbeat note for investors, saying the company's movies and parks will be sought out once again when lockdowns end. "People find comfort in our messages of hope and optimism," he said.

But the coronavirus pandemic and the economic shutdown it triggered have exposed a vulnerability to Disney's once-bulletproof business plan.

Unlike conglomerates that encompass various holdings without much functional interconnection, Disney is a finely tuned franchise machine, capable of absorbing a set of characters like the Marvel Studios superheroes or the Star Wars universe and using them to sell movie tickets, action figures, streaming-service subscriptions and theme-park tickets.

But the pandemic has caused practically every part of that machine to grind to a halt. The close coordination that made for lucrative use of characters and story lines across different parts of the company has now led to a domino-like cascade of problems throughout its divisions.

Disney said the $1.4 billion pandemic-related impact in the latest quarter reflected not only movie-release delays and theme-park closures, but also lower ad revenue at its TV networks and shuttered productions on Broadway.

The company has raced to cut costs, shaving executive salaries and furloughing more than 100,000 workers. On Tuesday, Disney finance chief Christine McCarthy said the company board had decided not to pay a semiannual dividend scheduled for July, a move expected to preserve about $1.6 billion in cash.

In the quarter reported Tuesday, the pandemic's primary impact was on the theme-parks division, with international operations like Shanghai Disney Resort closing well before the mid-March closures of Disneyland and Walt Disney World in the U.S.

The division that includes Disney parks saw its operating income fall 58% to $639 million and revenue drop 10% to $5.5 billion. Disney estimates the pandemic eliminated about $1 billion in operating income for the division in the fiscal second quarter..

Disney Chief Executive Bob Chapek said Shanghai Disneyland would reopen on May 11, but in a phased manner that includes limits on capacity, mandatory masks for guests and temperature screenings before entry. Performers who portray characters like Snow White won't wear masks but will keep a distance from guests, Mr. Chapek said.

The Chinese government is limiting capacity at the park to 30%, or about 24,000 guests, Mr. Chapek said. The park will operate at capacities far below that in its first days of reopening, he added.

Disney's parks division had been among its fastest-growing, and the company said guest spending at its domestic parks was up in the quarter prior to the closures. They are now shut down for the foreseeable future, presenting a huge economic drain on the company's finances.

Other divisions posting year-over-year declines in operating income included studio entertainment. The unit released movies such as Pixar Animation's "Onward" that were forced out of theaters as exhibitors closed.

Studio-entertainment revenue rose 18% to $2.5 billion, but operating income fell 8% to $466 million.

The division that includes the Disney+ streaming service posted revenue of $4.1 billion in a quarter that registered a significant boost in subscribers.

But Disney is still spending heavily on production and marketing the service, and consolidation of its Hulu holding led to an operating loss at the division of $812 million. Disney controls Hulu following its $71.3 billion acquisition of the entertainment assets of 21st Century Fox.

Disney+ has been a rare bright spot for the company since the pandemic led to stay-at-home orders around the world. The streaming service had 54.5 million subscribers as of Monday, Ms. McCarthy said, up from 33.5 million on March 28.

Like its parks division, Disney's media networks segment, which includes ESPN, will likely take a big hit in the fiscal third quarter as major sports leagues stay on the sidelines. Some ESPN efforts to engage sports fans in alternative ways appear to be paying off. A popular Michael Jordan documentary has set viewership records, executives said, and a remotely hosted National Football League draft was watched by more than 55 million viewers over three days.

For Mr. Chapek, the pandemic's impact has been a baptism by fire. He was named CEO in late February, after running the company's parks-and-resorts division for about five years, generating routinely strong earnings via a combination of cost-cutting and record-setting attendance at the parks. Mr. Iger had been CEO for more than 14 years and delayed his retirement several times before finally taking the post of executive chairman.

Disney shares have fallen more than 20% from six months ago, erasing months of steady gains buoyed by Mr. Iger's bold bet to operate three separate streaming services: Disney+, ESPN+ and Hulu.

Movie theaters have opened in only a handful of communities, and no major Disney title is scheduled for release until a live-action update of "Mulan" hits theaters in late July, after being postponed from late March. Disneyland and Walt Disney World remain closed and workers say they expect the company will limit capacity upon reopening.

Disney risks opening "Mulan" at a time when theaters are operating at limited capacity.

"At that point, we're hoping that there's some return of semblance to normal," said Mr. Chapek.

Write to Erich Schwartzel at erich.schwartzel@wsj.com

(END) Dow Jones Newswires

May 05, 2020 19:01 ET (23:01 GMT)

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