Disney's Long Road Back

Walt Disney's fiscal third-quarter earnings report showed a company taking pressure from all sides. The media and entertainment giant has had to contend with disrupted production schedules, delayed film releases, closed theme parks, docked cruises, and clients’ slashed advertising budgets. Management estimated this evening that Covid-19-related disruptions took nearly $3 billion out of its operating income in the period, which corresponds to the calendar second quarter.

The numbers are staggering. Earlier this evening, Disney reported adjusted earnings of 8 cents a share, down from $1.34 a share a year earlier. Without adjustments for one-time costs, Disney lost $2.61 a share last quarter, or about $4.7 billion. Revenue dropped 42%, to $11.8 billion.

The sharpest revenue decline—down 85%—came at Disney’s theme parks, cruises, and consumer products segment. Sales fell 55% at its movie-studio business. Disney's TV networks managed an increase in operating income despite lower revenues—but mainly from delayed costs related to programming and rights for suspended NBA and MLB games. Those expenses will return in future quarters when games are broadcast.

The bright spot for Disney was its Disney+ streaming service, which is seemingly made for the social-distancing environment. It added millions more viewers last quarter, to end the period at 60.5 million subscribers world-wide. Like Netflix, Disney+ has seen a surge of subscribers during the coronavirus outbreak and stay-at-home orders. But it is a tiny slice of Disney’s revenue—and isn’t profitable yet.

Disney plans to lean more heavily on its streaming segment in coming quarters. Disney+ subscribers will be able to stream a live-action remake of Mulan starting Sept 4. Disney has pushed back the film’s theatrical release multiple times this year. It will cost $29.99 in the U.S., which sounds like a lot. But why not try it and see what happens, management's thinking goes.

Disney also said this evening that it would launch another international streaming service, to be called Star, next year. It will include general entertainment programming from Disney properties including ABC, FX, and 20th Century Studios.

Disney investors can be happy that management is moving fast to enhance its streaming offerings while its other segments remain pressured in ways out of Disney's control. But it will be several quarters before revenue or earnings return to pre-Covid levels for the overall business. Unlike businesses that can space out workers on a manufacturing chain or tell employees to work from home, several of Disney’s units rely on employees or customers being in close proximity to one another.

Movie theaters in North America and around much of the globe remain shut. Disney cruises won’t be sailing soon. And limited-capacity reopenings for Disney theme parks are a far cry from selling out entire weekends. Streaming gains are nice, but the segment is still in heavy investment mode for Disney.

It’s a long road back for Disney.