If you thought the surprising decline in attendance at Disney's (NYSE:DIS) Florida theme parks was a fluke during the March quarter, you may as well buckle up for the ride and pull on those yellow safety tags. It will more than likely be even worse for the June quarter, something Disney will make official when it reports fresh financials in nine days.
This may come as a surprise to some investors. The economy appears to be holding up, and low fuel prices are making airfares and road trips surprisingly affordable. That's the kind of rising tide that should lift the entire fleet of It's a Small World ships, but that doesn't seem to be the case.
I've spent most of the past two months in Central Florida, and I've noticed the lighter crowds. I'm a seasonal resident of Celebration, Fla. -- in the foothills of Disney World's empire -- and as a Disney shareholder I'm bracing for the admission of another sluggish quarter. This doesn't mean things will end badly for Disney on Aug. 9 when it reports. There's a silver lining that matters, but first let's go over a few of the reasons the House of Mouse got itself into this mess.
1. International tourism has taken a hit
The strong dollar and political volatility overseas have weighed on international travel, particularly when it comes to Latin America. Brazil, Argentina, and Venezuela experienced 10%, 15%, and 34% declines, respectively, in visitor counts to Florida, according to tourism-marketing agency Visit Orlando. That's important, because Brazil rivals the U.K. as the biggest source of international tourism into Central Florida, outside Canada.
Currency swings have also eaten away at what folks from Canada and the U.K. can spend on stateside getaways. Disney World isn't a regional theme-park operator that pulls its audience from locals. It needs a healthy flow of foreign travelers, and right now that's just not in the cards.
2. Guests are paying an audacious 18% more
Disney got bold with its pricing earlier this year, introducing tiered pricing for its one-day tickets. There are now three pricing categories, and since summertime is peak season, guests have been paying 18% more for single-day tickets than they did a year earlier.
Prices have also moved higher for multi-day tickets and annual passes, but not as high as the record-breaking 18% spike for peak season park goers on single-day tickets. Disney justified the increases as a way to ease demand for when its parks are the busiest. Mission accomplished on that front, but at what cost?
3. Annual passes became more restrictive
Disney's annual passes went in for an extreme makeover late last year. It pushed rates for its year-round passes higher with double-digit percentage increases at Disney World and Disneyland. To help soften the blow, Disney also introduced new levels of annual passes at Disney World that are more reasonably priced but at the expense of blackout dates.
Limiting access to more of its pass holders during peak travel periods would naturally result in a downturn in attendance this summer. The industry is feeling the pinch. Disney and Comcast's (NASDAQ:CMCSA) Universal Orlando have recently lifted blackout restrictions for the balance of the summer. The damage has still been done this time around.
4. New rides are coming along too slowly
Only one of Disney World's four theme parks has new rides that didn't exist last summer, and even then Epcot is merely updating two existing attractions. Frozen Ever After is replacing the Maelstrom boat ride that closed two years ago, and Soarin' Around the World is a global update to its California-based hang-gliding attraction. It also doesn't help that Frozen Ever After has been marred with technical glitches. Soarin' Around the World has held up better, but it too suffers from jarring CGI and poor sight lines where some of the projections look warped from the side seats.
Comcast has also had its hiccups at Universal Orlando this summer. Its signature Hulk roller coaster that was originally supposed to open in June won't open to the public until August, missing most of the summer season. Skull Island: Reign of Kong has opened this summer, and unlike Epcot this is a new addition.
New rides are big drivers. They generate headlines, and they encourage previous visitors to come back. Disney bet too big on temporary shows and fireworks displays, and that's not the way to woo summer travelers after a historic price increase.
5. "Come back later" seems to be the motto at Disney World
Animal Kingdom is open later this summer, but the real payoff will be when the Rivers of Light nighttime show makes its debut later this year and when the Pandora-themed expansion rolls out next year. Disney's Hollywood Studios has become a hardhat zone, with several sections of the park shuttered as crews build out Star Wars Land and Toy Story Land.
Even folks who were planning late-summer trips to check out the two new rides at Epcot may be holding off until Frozen Ever After is running reliably and the odd projection bugs at Soarin' Around the World get worked out. Disney World is going to be awesome in a few years, but the waiting is the hardest part.
Disney can still win
The weak attendance trend is going to surprise some investors who haven't been paying attention. Combine that with the declining subscription trend at ESPN, and the boo birds will have plenty to make noise about in a few days.
However, Disney has proved in its previous quarter that revenue and operating profit can still grow in its theme-parks division despite attendance declines in Florida. It should be even easier this summer with the new rates. If margins expand, investors may even warm up to the new normal, especially with the media giant lining up some juicy catalysts in the years to come.