Disney Q3 FY 2021 Earnings Report Preview: What to Look For

The Walt Disney Co. (DIS), which reopened its Disneyland theme park in California in late April, recently announced that it would require at least some of its employees to be vaccinated against COVID-19 in order to return to work. Disney is one among a number of U.S. companies that have announced employee vaccine mandates amid rising concerns over the spread of the more transmissible Delta variant of the coronavirus.

Investors will be looking for improvements in Disney's financial performance, as well as assessing risks associated with the Delta variant, when the company reports earnings on Aug. 12, 2021 for Q3 FY 2021—Disney's previous fiscal year (FY) ended Oct. 3, 2020. Analysts expect a strong rebound in both adjusted earnings per share (EPS) and revenue from lows reached last year amid the pandemic and related government restrictions to limit the spread of the virus.

Investors will also be focusing on revenue for Disney's Parks, Experiences and Products segment, which was hit hard by the pandemic as the company shuttered its theme parks and cruise operations. The relaxing of government restrictions and lifting of capacity limits is expected to provide a much-needed boost, with analysts anticipating the segment's revenue to rise for the first time since the first quarter of FY 2020.

Shares of Disney have outperformed the broader market over the past year. The stock had been barely keeping pace with the market from mid-August through the first few days of November 2020. However, that all changed following the outcome of the U.S. presidential election and rising optimism over the efficacy results of vaccines against COVID-19. The shares reached a peak in early March but have since given back some of their gains, culminating in a total return of 37.5% over the past year, which is above the S&P 500's total return of 32.0%.

Disney Earnings History

The stock sank after Disney reported mixed results in its Q2 FY 2021 earnings report released in mid-May. Adjusted EPS beat consensus estimates after rising 31.7% year over year (YOY)—the first increase since the final quarter of FY 2018. Revenue, however, missed expectations, falling 13.4% compared to the year-ago quarter, which marked the fourth straight quarter of revenue declines. While many of Disney's parks and resorts remained closed or operating at reduced capacity, the company said that it was beginning to see signs of recovery.

In Q1 FY 2021, both adjusted EPS and revenue surpassed analysts' expectations. The company avoided posting a loss per share, although adjusted EPS did plunge 79.4% YOY, the ninth consecutive quarter of declines. A 22.2% YOY drop in revenue was also viewed as a positive, even though it marked the third straight quarter of falling revenue. Disney said that the most significant impact of the pandemic was felt in its Parks, Experiences and Products segment as its theme parks and resorts have been closed or operating at reduced capacity and its cruise ship sailings have been suspended since late in Q2 FY 2020.

Analysts expect both Disney's adjusted EPS and revenue to make a significant comeback in Q3 FY 2021 from the pandemic-depressed lows reached in the year-ago quarter. Adjusted EPS is expected to rise 562.4% and revenue is predicted to climb 43.0% YOY, marking the first quarter
of revenue growth since the second quarter of FY 2020.

For full-year FY 2021, analysts expect adjusted EPS to rise 10.8%, the first increase since FY 2018. Annual revenue, meanwhile, is forecast to grow 3.4%, marking the first rise since FY 2019.

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The Key Metric

As mentioned, investors will also be focusing on 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 Parks, Experiences and Products segment was badly impacted by the pandemic and related government-imposed measures to limit the spread of the virus. But it has begun to recover from the worst of the pandemic, thanks to vaccine rollouts and the relaxation of restrictions that have allowed Disney to increase capacity limits at its theme parks. The recovery, however, is highly uncertain as the faster-spreading Delta variant of the coronavirus is raising concerns. The spread of the Delta variant has already prompted Disney to reimpose a mask mandate at its U.S. theme parks.

Disney reported annual revenue for its Parks, Experiences and Products segment of $26.8 billion in FY 2019, the year before the start of the pandemic, which accounted for 38.5% of the company's total revenue. That share fell to 26.1% in FY 2020, as the pandemic triggered a 36.4% decline in the segment's annual revenue. The segment's revenue has continued to decline YOY through the first two quarters of FY 2021, falling 52.7% in Q1 and 43.9% in Q2.

Analysts are expecting a better performance in Q3 FY 2021, forecasting that the segment's revenue will climb 271.4% YOY, the first rise since Q1 FY 2020. But even with that rapid growth, the segment's revenue is still expected to be well below pre-pandemic levels. For full-year FY 2021, analysts are currently forecasting the segment's annual revenue to fall 7.1%, which would be the second straight year of declining revenue.