Is Disney Broke Right Now?
Every couple of years, the same rumor reappears. Some analyst speculates that Apple will purchase The Walt Disney Company, and it gets reported as fact.
The truth here is that if Apple ever seriously contemplated Disney, everyone would find out because it’s too difficult to keep something like that secret. Even when Disney bought Pixar, Steve Jobs and Robert Iger had to ignore the entire chain-of-command to negotiate.
Still, recent events have caused the rumor to resurface, and there’s actually a thought process behind it this time. Disney has taken more of a hit from Coronavirus than almost any other company. And it does raise an important question. Is Disney in Solid financial shape? Here’s what we know.
Why Disney Is Struggling
We’re in a pandemic. Everything we discuss here circles back to that undeniable fact.
Coronavirus forced the closures of many longstanding businesses in the United States. Restaurants, malls, movie theaters, and, yes, theme parks all shut down for several months.
While many businesses suffered, Disney absorbed a body blow. Think about the situation from the perspective of Disney CEO Bob Chapek.
Dude had been on the job for like two weeks when a COVID-19 outbreak impacted several of his core businesses.
How does Disney make money? The company sells merchandise at Disney Stores, it makes money from movie releases, and it earns a lot of cash at theme parks.
Yes, that’s a lot of red ink on a spreadsheet ledger. Disney suddenly found itself missing lots of revenue.
How Bad is the Damage?
Have you ever worked at a job that primarily paid commission? I know a lot of people who have recklessly taken these jobs, not fully appreciating the downside of the “opportunity.”
I had a friend who worked 70 hours at a used car dealership for one week. He wanted to show he was a go-getter, but all he really proved was that he couldn’t close on car deals.
That way, he could buy his own used car and maybe even save enough money for a down payment on a house.
He earned about $370 that week…before taxes. He quit the following day, finally having done the math on how well incentives-based performance jobs pay.
Disney just experienced something similar. From late March through June of 2019, the company earned nearly $20.3 billion.
During the same months in 2020, the pandemic period, revenue dropped to $11.8 billion.
On a larger scale, Disney was like my friend. The company planned its investments based on the thought of gaining at least $20 billion from spring sales. Instead, Disney faced a shortfall of $8.5 billion.
Folks, nobody wants to be out $8.5 billion. Even Jeff Bezos would get annoyed by that.
The Hardest Hit Divisions
Disney faced revenue shortfalls across divisions. Two of the company’s primary moneymakers are Parks, Experiences and Products and Studio Entertainment.
During the spring of 2019, those two core divisions earned more than $10.4 million. As a reminder, Disney as a whole managed only $11.8 billion for the same quarter in 2020.
In the Studio Entertainment and Parks silos, total revenue fell to $2.7 billion. That’s a 74 percent sales loss in a calendar.
I realize I’m throwing a lot of numbers at you. So, let me put this in simpler terms you’ll understand.
Imagine if you expected your paycheck to be $2,500 for two weeks. Then, when the bank deposit entered your account, it showed as only $650. You’re eating ramen noodles for the next month.
For Chapek and his team, this revenue shortfall somehow shocked everyone but also became entirely predictable.
Shanghai Disneyland closed on January 24th, 2020, giving executives a hint at a potential future without open theme parks and movie theaters.
Coincidentally or not, then-CEO Bob Iger chose to retire in February, leaving the COVID-19 fallout for his successor, Chapek.
Since then, Disney has reopened theme parks and recently released its first new release into movie theaters since the pandemic began. So, normalcy is returning, even in these hard-hit divisions.
What Steps Has Disney Taken to Cut Costs?
I just said that the situation became predictable once Shanghai Disneyland closed. This scenario provided a hidden benefit, as Chapek knew what to expect if the same should happen in America.
Once the parks closed, Disney tried to keep cast members employed. Unfortunately, the pandemic lasted longer than the best-case scenario, a six-week closure.
The United States reacted slowly to the dangers of Coronavirus, and Disney got caught in the crossfire.
Sadly, on April 19th, Disney laid off tens of thousands of loyal employees, some of whom have yet to return to work four months later.
Back on April 5th, Disney’s leadership team tried to cut corners a different way. Chapek reduced executive pay across the board.
This tactic came with a significant explanation. Chapek stated:
“This temporary action will remain in effect until we foresee a substantive recovery in our business.”
The rest of our conversation hinges on this comment. Presuming that Chapek spoke truthfully at the time, Disney must have reached that milestone in its recovery.
As of last week, company executives have had their full pay reinstated. No, that’s not a great look as cast members remain unemployed, but let’s ignore that conversation for now.
Disney has apparently recovered enough to go back to paying its current employees everything they were promised.
Is Disney Broke Right Now?
Also, during the earnings report conference call in early August, analysts were aghast over Disney’s finances…but not in the way that you’d think.
Some of them expressed frustration that Disney is carrying too much in cash reserves right now. To them, Disney has too much money!
Obviously, given that sentiment, the wolves aren’t howling at Disney’s door. You may wonder about this aspect, especially since Disney famously took on multiple billion-dollar loans during the pandemic.
Appearances are a bit deceiving on this subject, though. Interest rates reached record lows in March and April. Many people rushed to refinance at these attractively low rates.
Disney was no different from consumers in this regard. The company recognized unprecedented financial opportunities in the marketplace and grabbed low-interest loans.
Reports indicate that Disney acquired billions in capital at interest rates ranging from 3.35 to 4.7 percent. That’s a reasonable rate in normal times, much less a pandemic.
The situation differs dramatically from one like Tilman Fertitta faces with his restaurants and casinos. The owner of T-REX and Yak & Yeti café offered a 15 percent interest rate to acquire funding.
As an owner of an NBA team, many restaurants, and Las Vegas hotel casinos, Fertitta faced similar Coronavirus-related challenges, but he lacked the liquidity to address them effectively.
By all accounts, Disney isn’t in that position, and that’s reason enough to believe that the company is in solid financial shape.
2020 has been brutal for everyone. However, your favorite company has somehow survived and is now ready to prosper once again.
Feature Image Rights: Disney