Key Takeaways

  • Adjusted EPS was $0.08 vs the -$0.70 analysts estimated
  • Parks, Experiences, and Products revenue plummeted 85%, roughly in line with analyst expectations.
  • Sales fell below analyst estimates.

What Happened

Disney reported mixed results, reporting positive adjusted earnings despite analysts predicting a loss for the quarter, but lower-than-expected sales. By far the worst-performing segment was its Parks, Experiences, and Products segment, which contains Disney's theme parks, resorts, and cruise lines. This segment's revenue fell by 85%, roughly in line with analysts' estimates. Disney said that a major factor offsetting the fall in sales was the "deferral of sports programming costs" due to the cancellation of many sporting events.

A bright spot is that the number of paid subscribers to all of Disney's direct-to-consumer services is over 100 million. However, that may take time to pay off, as Disney's Direct-to-Consumer & International segment still isn't generating an operating profit.

(Below is Investopedia's original earnings preview, published August 3, 2020)

What to Look For

Walt Disney Co. (DIS), one of the world's largest entertainment companies, is experiencing the worst effects of the COVID-19 pandemic and sharp contraction of the U.S. economy. Just about every aspect of Disney's business has been affected, from theme park closures and suspended cruise ship sailings to delayed movie releases and lower advertising revenue.

Investors will be looking at just how badly Disney has been hurt when it reports earnings on August 4, 2020 for Q3 FY 2020. Analysts expect Disney to report plunging revenue and its first loss in at least 19 quarters on an adjusted per share basis. The company's fiscal year (FY) ends in September.

One key metric investors will be especially focused on is Disney's revenue from its Parks, Experiences and Products segment. The segment comprised the largest share of Disney's total revenue during 2019 and was the hardest hit by the pandemic in the company's fiscal second quarter, which ended March 28, 2020. For Q3, analysts forecast a precipitous decline in the segment's revenue.

Disney's stock was struggling to keep pace with the broader market even before the outbreak of COVID-19. However, since the crisis began, the gap has only widened. Disney has provided investors with a total return of -19.7% over the past 12 months compared to the S&P 500's total return of 7.7%. All figures are as of July 30, 2020.

One Year Total Return for S&P 500 and Disney
Source: TradingView.

Disney's stock has rebounded from its mid-March low at a slower pace than the rest of the market following the coronavirus-induced crash that began in late February. It didn't help that earnings badly missed analysts' estimates for Q2 FY 2020. Adjusted earnings per share (EPS) fell 62.7%, marking the sixth consecutive year-over-year (YOY) decline and the biggest drop in at least 18 quarters. Revenue rose 20.7%, which gave the stock some upward momentum over the subsequent month before suffering a setback in early June.

Before the coronavirus began to spread, Disney had one of its best quarters in recent years as revenue grew 36.3% for Q1 FY 2020, which ended December 28, 2019. It was the fastest pace of growth in at least 16 quarters and was the third consecutive quarter of more than 30% growth. Adjusted EPS, however, fell 16.8% and Disney's shares trended lower over subsequent weeks before crashing with the rest of the market as fears of the spreading coronavirus mounted.

Disney's Q3 FY 2020 report is likely to confirm investors' concerns. Analysts forecast the company will post its first quarterly net loss per share in nearly five years. They estimate adjusted EPS of -$0.70, a major deterioration from a profit of $1.35 in the same quarter a year earlier. Revenue is expected to plunge 39.4%, which would mark the first decline since Q1 FY 2019 and the largest drop in at least 19 quarters.

Disney Key Metrics
  Estimate for Q3 FY 2020 Q3 FY 2019 Q3 FY 2018
Adjusted Earnings Per Share ($) -0.70 1.35 1.87
Revenue ($B) 12.3 20.2 15.2
Parks, Experiences and Products revenue ($B) 1.0 6.6 6.1

Source: Visible Alpha

As mentioned, a key metric for investors is Disney's revenue from the Parks, Experiences and Products segment. This segment is comprised of Disney's theme parks, resorts, cruise ships, and vacation clubs and is tied especially closely to the spending power of consumers in the U.S. and around the world. The segment comprised 37% of total revenue and 40% of operating profit in FY 2019, which was generated through park admissions, food, beverages, and resort and vacation stays. The segment has acted as a stable source of revenue for Disney in recent years. But during the pandemic, Disney's theme parks, cruise ships, and resorts are especially vulnerable. These tourist sites are crowded consumer spaces, and they rely on travel and non-essential consumption.

Disney's Parks, Experiences and Products segment posted YOY growth between 3-10% in each quarter between Q2 FY 2017 and Q1 FY 2020. But that trend changed in Q2 FY 2020. The segment posted a 10.2% decline in revenue amid forced theme park and resort closures, cruise ship suspensions, and shelter-in-place measures. Analysts expect an even bigger drop of 84.6% for Q3 FY 2020. Last year, such a disastrous decline would have been unthinkable as the U.S. economy entered its tenth year of expansion, luring millions of consumers to Disney's properties. Until a vaccine becomes available and as long as travel restrictions remain in place, Disney will be more dependent than ever on its other business segments: Media Networks, Studio Entertainment, and Direct-to-Consumer & International.