Why Now is a Bad Time for Disney to Announce Theme Park Expansions

This weekend the media industry's focus will be on Disney's D23 festival at the Anaheim Convention Center , just steps away from Disneyland . The location is fitting as Disney plans to make several major announcements , hoping to spark optimism after months of steep declines in its stock price.

The event is expected to feature appearances by A-list actors & footage from upcoming films , along with the likely reveal of new theme park projects . This may even include the long - rumored fifth park at Walt Disney World in Orlando. However, Disney's third-quarter earnings report , released just yesterday , highlighted" upcoming attractions & experiences". But failed to impress investors. Disney's stock dipped 4.5% to close at $85.96 & showed little movement today . This response signals a deeper issue.

For a company that thrives on creating magic , Disney's timing has been anything but magical since the onset of the pandemic.

When COVID-19 began spreading globally in early 2020 , Disney seemed to have the perfect ace up its sleeve . Just a month before the 1st case of the virus was reported , Disney launched its highly anticipated Disney+ streaming platform in November 2019. The platform was an immediate hit , largely due to the success of its Star Wars spinoff, ‘The Mandalorian’ . Disney+ was considered a parting gift from the company's long-time CEO , Bob Iger who had championed the service before stepping down in February 2020 , handing the reins to Bob Chapek , then-head of Disney's parks & resorts division. Even during the bleakest days of the pandemic , Chapek basked in the glow of Disney+'s success.

The platform attracted 10 million sign-ups on its first day , far exceeding projections of 14.3 million by the end of the year and that was just the beginning.

As lockdowns confined millions of people to their homes, Disney+ saw its subscriber count skyrocket 60 million after eight months & 100 million after 16 months, surpassing Disney's 5 years projections. Investors were thrilled as Disney+ seemed to be the future especially with traditional movie theaters still shuttered . The company's stock price reached an all-time high of $197.16 in March 2021, giving Disney a market capitalization of $357.2 billion. The studio saw even greater potential ahead.

Disney's first major post pandemic release, the Marvel movie ‘Black Widow’, hit theaters in July 2021. The studio controversially decided to release it simultaneously in theaters & on Disney+ for an additional $29.99 through its Premier Access service. This decision drew sharp criticism from the National Association of Theatre Owners who blamed it for a 67% drop in the movie's box office revenue during its second weekend, making it Marvel's worst performer in that period. Despite this, Disney was focused on keeping 100% of the earnings from Disney+, leading to a string of shows & films that were exclusive to the platform. Some films were even released directly on Disney+, bypassing theaters altogether.

This strategy had significant drawbacks.

For instance , Kenneth Branagh's 2020 adventure film, ‘Artemis Fowl’ , was intended to launch a franchise but ended up as a standalone flop. The decision to release movies directly on Disney+ cannibalized Disney's own revenue stream. Previously a family of 4 would need to purchase four theater tickets, with Disney receiving 50% of the box office revenue . But with Disney+, one streaming subscription initially costing just $6.99 per month & set to rise to $15.99 in October was all it took to watch a new movie.

With theaters under immense pressure, competing with them did not seem like a huge risk, so Disney doubled down on streaming. Content costs ballooned, reaching a record $29.9 billion in 2022. Then the tide began to turn.

The widespread adoption of COVID-19 vaccines led to the lifting of lockdowns, & workers returned to the office, leaving them with less time to binge watch streaming shows . Disney+ subscriber numbers began to decline just as a flood of new content was being released. The timing could not have been worse & Disney paid the price. Disney+ was still not profitable & the surge in content spending drove the company deeper into the red , sending its stock price plummeting. By October 2022 , operating losses from Disney's streaming business hit a high of $1.5 billion & its stock price had fallen 52.2% from its peak to just $94.33. Disney's board responded decisively, firing Chapek and bringing Iger back. Yet Iger's return has not been the panacea the company hoped for.

One of Iger's first moves was to restore the traditional release model with a dedicated window for theaters before films were available on streaming. Unfortunately this decision came too late.

"People have become conditioned to expect that things will quickly appear on Disney+,” said Neil Macker a senior equity analyst for Morningstar Research Services. This shift in consumer behavior helps explain why the 2023 global box office revenue of $33.9 billion was 15% down from the average of the three pre pandemic years from 2017 - 2019, according to Gower Street Analytics.

Making matters worse, Iger's announcement came just before a major Hollywood strike by actors & writers which began in May of last year and lasted for over 6 months. The strike , aimed at securing better royalties, delayed the release of many films from 2023 - 2025, putting theaters in jeopardy once again.

In light of these challenges, now mayn’t be the ideal time for Disney to announce major theme park expansions.

Just two months into the strikes, Cineworld, the world’s second-largest theater chain, sought Chapter 11 bankruptcy protection in the U.S. Although it has since emerged from bankruptcy, its UK operations are still struggling to restructure and have recently announced the closure of six theaters. The more theaters that close, the lower Disney's box office revenue becomes.

Prioritizing theaters wasn’t Iger’s only move. He also slashed Disney's spending and reduced the number of productions as part of a $7.5 billion cost-cutting plan. In March last year, he told a Morgan Stanley conference that he had begun "reducing the expense per content, whether it’s a TV series or a film, where costs have just skyrocketed in a huge way and not a supportable way in my opinion."

Recent filings show he is targeting a $4.5 billion reduction in annual entertainment content spending, mainly by cutting down on the number of productions and lowering the cost per title. This strategy included shrinking the upcoming Disney+ content slate, a shift acknowledged by Kevin Feige, president of Disney's Marvel Studios, who admitted that "the pace at which we're putting out the Disney+ shows will change so they can each get a chance to shine." This means more time between projects and fewer releases each year.

Feige’s world-building has led Marvel to dig deeper into its superhero roster, resulting in sequels featuring increasingly obscure characters. Several movies featuring these lesser-known heroes were released last year, despite Iger’s insistence that fewer films would be made. Instead of scrapping them and getting a tax write-off, as Warner Bros. did with its Batgirl movie, Marvel released a string of flops.

The finale of Marvel’s Secret Invasion series suffered the ignominy of scoring just 7% on Rotten Tomatoes, the lowest-rated episode of any Marvel streaming series. The series cost an astonishing $211.6 million to produce, contributing to Disney’s direct-to-consumer streaming business racking up $11.4 billion in losses since Disney+ was launched. Although the platform turned a profit in the latest quarter, Disney's entertainment segment still posted a $19 million loss. On the silver screen, Ant-Man and the Wasp: Quantumania and The Marvels fared even worse, with combined losses of $157.9 million at the box office. In response to this debacle, Iger admitted to CNBC that Disney had "made too many" sequels, but the damage had already been done.

In stark contrast, Disney’s Experiences division, which includes its theme parks and cruise lines, had been a shining star. When lockdowns ended, consumers, flush with furlough cash and pent-up demand to travel, paid a premium to visit theme parks. Disney capitalized on this by raising ticket prices while limiting attendance, reducing costs and boosting both revenue and profit. This strategy led to the Experiences division contributing just over a third of Disney’s $88.9 billion revenue and more than two-thirds of its $12.9 billion operating income last year. However, even this division is starting to show signs of strain.

In May, Disney's stock began to decline sharply after CFO Hugh Johnston warned of softening theme park attendance due to "a global moderation from peak post-Covid travel." In other words, the furlough money has long been spent, and travelers who wanted to visit parks have already done so. Reports about the high cost of visiting Disney’s theme parks support Johnston’s observation that "things are tending to normalize."

Brandon Nispel of KeyBanc Capital Markets predicted that Disney’s domestic park business “will be pressured for the rest of 2024,” a forecast that is proving accurate. Disney’s third-quarter results showed $4.3 billion in operating income on $23.2 billion in revenue, a 4% increase year-over-year. However, a closer look at the numbers reveals troubling trends for Disney’s Experiences division.

Higher guest spending at Disney’s domestic parks and cruise lines, as well as increased spending per-room, drove up Experiences revenue by 2% to $8.39 billion. Yet, this was a sharp decline from the 13% revenue increase in the same period the previous year. Worse still, the division’s operating income declined by 3% to $2.2 billion in the latest quarter, driven by rising costs at Disney’s domestic parks. This likely explains why Disney recently delayed giving pay raises to workers at its California parks.

The timing of these rising costs couldn’t be worse, as Disney’s earnings statement revealed that "we expect that the demand moderation we saw in our domestic businesses in Q3 could impact the next few quarters. While we are actively monitoring attendance and guest spending and aggressively managing our cost base, we expect Q4 Experiences segment operating income to decline by mid-single digits versus the prior year, reflecting these underlying dynamics as well as impacts at Disneyland Paris from reduced normal consumer travel due to the Olympics, and some cyclical softening in China."

Johnston described this as "a bit of a slowdown that's being more than offset by the Entertainment business," and there is evidence to support this.

On the surface, Disney’s entertainment division appears to be thriving, having recently become the first studio to cross $3 billion globally in 2024. Animated sequel Inside Out 2 is the highest-grossing movie of the year, with $1.6 billion in takings, according to industry analyst Box Office Mojo. Marvel’s Deadpool & Wolverine has recently moved into second place with $903 million, though revenue isn’t the only metric investors are watching. Profit is their yardstick for success, and Marvel’s high production costs are a concern.

Moreover, Deadpool & Wolverine is Marvel Studios’ first R-rated movie, but it has no others in the pipeline, making it difficult to build on this success. Even if Disney announces more R-rated movies at D23, they will take years to hit theaters, which isn’t reassuring to investors. Marvel’s next movie features a red version of the Hulk, which hardly targets the same adult audience as Deadpool. Although Robert Downey Jr. will return in a future film, his role as the villainous Doctor Doom, rather than the heroic Iron Man, has left even his former co-star Gwyneth Paltrow questioning the move on social media, asking, "I don't get it, are you a baddie now?" Investors might share her confusion and wonder if this is a step too far, especially given reports that Downey Jr. is being paid significantly more than $80 million for the role.

Despite some positive signs, Disney’s Entertainment division still has a long way to go. Although its operating income tripled to $1.2 billion in the latest quarter, largely due to narrowing losses from Disney+, the platform still needs to recoup the $11.4 billion in accumulated losses since its launch.

While Netflix reached profitability in 2016 with a 21% operating margin in 2023, Disney+ is still playing catch-up. Assuming Disney+ hits a similar margin by early 2025—a big assumption, given Iger’s comment that he expects double-digit profit margins "eventually"—it could still take years for the platform to clear its accrued losses.

Disney+ has generated average annual revenue of $17.1 billion so far, but this could decrease as the platform’s top line has been driven by a torrent of new content, which is now slowing under Iger. A 21% margin would yield annual operating profits of $3.6 billion, bringing Disney+ close to breakeven in three years.

This leaves Disney’s Entertainment division with a lot of catching up to do, putting even more pressure on the Experiences division to deliver profits. As we recently revealed in British newspaper City A.M., Disney’s cruise line hit record revenue last year, but it represents just 6.8% of the total Experiences revenue. Moreover, the cruise line's net profit of $180.5 million was less than half of its peak of $406.2 million in 2019, so it is still not performing at full capacity.

Nevertheless, Disney has recognized the cruise line's growing popularity and has commissioned new ships, with more to come. However, these ships come with significant expenses, and Johnston noted that "we do have some expenses attached to our ships coming in, and that will affect us a bit in '24 and a bit in '25," which isn’t exactly what investors want to hear.

Additionally, Johnston provided insight into the challenges facing Disney’s domestic parks, noting that "the lower-income consumer is feeling a little bit of stress. The high-income consumer is traveling internationally a bit more. I think you're just going to see more of a continuation of those trends in terms of the top line." He added that "we saw attendance flat in the quarter," with a "flattish revenue number" forecast for the fourth quarter and a slowdown expected for "a few quarters."