Disney Q1 Revenue Up 36%

In this edition of MarketFoolery, Chris Hill and Abi Malin talk about Disney (DIS -0.04%), Snap (SNAP 27.63%), and Chipotle (CMG 2.41%) results. Disney is budgeting $175 million for park shutdowns in China. Snap shares went down as daily average users increased to 218 million. And Chipotle posted higher-than-expected profits with same-store sales growth of 13%. CEO Brian Niccol reiterated the company doesn't have plans for breakfast in 2020.

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This video was recorded on Feb. 3, 2020.

Chris Hill: It's Wednesday, February 5th. Welcome to MarketFoolery. I'm Chris Hill. With me in studio today the fabulous Abi Malin. Thanks for being here.

Abi Malin: Thanks for having me.

Hill: We've got more earnings. I love earnings season so much. [laughs] We've got some restaurant earnings. We've got some social media earnings. We're going to start with Disney though. Looked like another solid quarter. The first quarter results, you look at their Parks division, you look at Products, solid growth across the board. I know that Disney+ is getting the headline here, but worth remembering this is a diverse business with a bunch of segments. The stock is down a couple of percent but let's focus on the first-quarter results. Anything stand out to you?

Malin: Yeah, revenue was up 36% year-over-year to $20.8 billion; which is ... a massive increase really. I do think it's worth noting that Disney's revenue tends to be a little bit chunky. Especially for this most recent quarter, it was pretty influenced by the Studio Entertainment segment, which was driven by Frozen 2 and then the Star Wars movie. So, Disney does have a little bit of blockbuster lumpiness within their earnings, but you are right, it's a super-diversified business, lots of growth engines and lots of positive momentum.

Hill: Before we get to Disney+, also worth pointing out something. Bob Iger, the CEO, said with regards to China -- if I have the numbers right -- they are currently budgeting about $175 million miss due to their parks in China. And that is based on an assumption that the parks will only be closed for two months. I guess my first question is, that certainly sounds like a lot of money. And if it is in fact two months and then the parks reopen and business returns as normal, then this is a speed bump, but how concerned should shareholders be about that?

Malin: I think in the short term, it's definitely going to be a pressure cooker. I do think Disney tends to be a little bit more conservative in their management style. And so, for projections going forward, I would say that's probably sort of an outside case scenario, at least as I see it now. That is still developing obviously, so it could be much worse than that. But I do think, long-term it won't really matter because Disney has a magic, there's a pull to those parks, people will come eventually. Especially, if you told your kid you're going and then you cancel it, you, of course, have to make that up at some point, right? So, I think it's more a deferred situation rather than a total miss or completely gone.

Hill: So, Disney+ subscribers are now somewhere in the neighborhood of 26 million, which is great to see right out of the gate. I think that surprised some people to the upside. Were you surprised it was that big?

Malin: Yeah. I saw it was 28.6 million as of Monday, so a little bit into this next quarter as well. Which, if you think about it, is about 17% of the size of Netflix. So, within less than 90 days they've achieved humongous growth. When you look at that bundle that they're offering, so that $13 a month bundle for ESPN+ and Hulu as well. So, ESPN now has 6.6 million subscribers, up from 1.4 million a year ago. Hulu has about 30.4 million subscribers, up about 33% annually. So, it's not just about Disney+, it's really about the total package offering of these streaming services.

Hill: I think they've been really smart with the way that they have priced this. And while I was a little surprised at the size of the Disney+ numbers, maybe I shouldn't have been because they really priced it in such a way that you could tell, they wanted to get a bunch of people, although Iger did stress that they added 2 million subscribers after The Mandalorian came out or something like that. But as good a number is, the Disney+ number is, I'm now looking to the next quarter and I'm thinking, OK, what is a reasonable assumption in terms of growth, because if they priced it in such a way to get a lot of people right out of the gate, is there going to be a sell-off if they come out three months from now and say, oh, we've gone from 28.5 million to 31 million. Which is like, well, it's going up not down, that's good. But it almost seems like they -- I'm not saying I'm expecting another 25 million subscribers, but there is some number out there that they need to hit.

Malin: I would agree with that. I think people have big expectations, and they've sort of just raised their own ceiling, so you have to be conscious of that. I would imagine the longer term or medium-term plan is that, I would be very surprised if that $13 bundle stays at $13. I would expect that price to increase. I think the value of that package is certainly a lot more than $13 when you look at competitive offers. So, I think long-term this will be monetized, maybe through price rather than through quantity.

Hill: Let's move on to Snap. Shares of Snap are down 10% today. Fourth quarter revenue came in lower than expected for Snap. And that is notable because this is a growth company and this is the first revenue miss they've had in nearly two years.

Malin: Yeah. I mean, I think it's a fair critique. With that being said, I actually think this is the first quarter I find Snap's results actually a little bit interesting from an investing standpoint for me.

Hill: Why?

Malin: So, if you look at their key highlights for the quarter, daily average users increased 17% year-over-year. So, they now reach about 218 million people. And that increased in each geographic segment that they operate. So, North America, Europe and what they call the rest of the world. Total daily time spent by Snapchatters watching their Discover platform, which is a lot of their monetization, actually increased 35% year-over-year in the quarter. And particularly within that age demographic of 25-and-above time spent in Discover, so that same metric, increased 60% year-over-year.

So, I think when you think about the longevity of Snapchat, which I think has always been a question for them, those are very positive metrics at a time when I wouldn't have necessarily anticipated it.

Hill: Also, this is anecdotal, but there have been some companies that have reported so far in earnings season, that have name-checked Snap into their marketing spend. So, I think that bodes well. And I mentioned the stock drop today, down 10% to 12%. It's more than doubled over the past year. And I don't own Snap and I don't think I'm ready to put it on my watchlist, but this is one of those things that makes me think, well, maybe it should be on my watchlist. At least if you look at the results that they put up today and think, well, maybe a decent, if not a lot of this sell-off that we're seeing today is just based on valuation.

Malin: Right. I think a lot of the momentum over the past year has been in regards to their augmented reality technology, which I think it's cool what they're doing from a personal standpoint and just from product innovation I think it's cool. I don't necessarily see its current iteration, how that has a meaningful impact in driving long-term revenues for them. So, I'm not exactly fully bought into this optimistic bull argument regarding their augmented reality technology, but I think this quarter shows that there is something to be had within just the core Snapchat platform.

Hill: Right. And probably worth noting, the amount of skepticism when this company went public -

Malin: ... was super-high.

Hill: ... very high. In no small part because of the -- at the time -- the very young CEO, and brash CEO, Evan Spiegel, who famously turned down -- what was it? $6 billion/$3 billion? -- several billion dollars from Facebook.

Malin: Multiple Bs. [laughs]

Hill: [laughs] Multiple Bs. And I don't want to say that -- to your point, I don't think all the questions have been erased about this business, but they've certainly answered a lot of them in the same vein that when Facebook went public there were so many legitimate questions about their ability to make money off of mobile. [laughs] Because when Facebook went public, they weren't making any money off of mobile. I feel like Snap has answered a lot of questions so far.

Malin: I would say, Facebook, to their credit, has copied a lot of what Snapchat has done. And I would say, executed better. When you look at those metrics side-by-side, Snapchat maybe invented it, but Facebook perfected it. And so, that's always been my pause with Snapchat, that I didn't necessarily see a longevity or staying power to this business. And I think for the first time I'm starting to wonder if maybe I'm a little bit too skeptical.

Hill: Let's move on to Chipotle. Fourth-quarter results look great. Profits were higher than expected. Same-store sales for Chipotle in the fourth quarter were up more than 13%. That is a massive number for a mature business and a number that most restaurants would kill for. Is the 2% drop in the stock that we're seeing today, is a little bit like Snap or it's just a valuation deal?

Malin: I mean, Chipotle's shares hit an all-time high yesterday, so people were anticipating good news.

Hill: This was good news. [laughs]

Malin: I actually don't know what more you could have asked for; this was fantastic news in my opinion. Not only did same-store sales increase, the majority of that increase was actually driven by transaction growth, so rather than prices, people are actually just buying more, which is exactly what you want to see. And I think this management team has been really strategic in their choices. So, they talked a lot about Chipotlanes that they're installing, which is basically this new store concept that has drive-thru lanes. And I think that's a new market for them that I think when they first came public that would have been antithetical to Chipotle's good, fast food or however they wanted to pose that. So, there you have a nimbleness about them right now that I really think is commendable.

Hill: Back in September, Brian Niccol, the CEO at Chipotle, was asked about breakfast. And he said, we don't have any plans to do that in 2020. He reiterated that comment today. Do you think that -- I don't want to question Brian Niccol, because pretty much everything he has done as CEO of Chipotle has been the right call. I'm wondering though, and I'm unfairly going to ask you to play mind reader here, I'm wondering if you think that Niccol and his team look at breakfast as a lever they don't have to pull right now because they have other levers they can pull?

Malin: That's really interesting you say that. So, I was actually just thinking about this this morning, because I think breakfast as a concept for driving restaurant growth, it was McDonald's originally that came out with this and have had tremendous success with it. I think it was Wendy's -- I was just reading this morning. They tried it in 2010 and expired it in 2013 and now they're going back to it.

Hill: Right. It's coming back this spring, right?

Malin: It's coming back, yeah. So, I think it is sort of the lever of last resort for a lot of these restaurants, which, I mean it makes sense. I don't necessarily fault them. I think Chipotle, conversely, runs a really small menu and they do fewer things but very well. And so, I don't think it's necessarily within their wheelhouse and I think it would be a little bit harder for them to expand in that direction. Especially, this quarter, notably, we saw improved restaurant-level operating margins. And it's taken them a while to build those back up to where they were pre-crisis, I would argue. [laughs] So, I don't think they're really willing to sort of mess up the good thing they have going right now, but it's certainly an option in the future.

Hill: Well, and I'm just now thinking about this for the first time, listening to what you said about the delivery lanes. And it's entirely possible that that is part of their plan, that we think breakfast is going to be more successful if we make it easier for people to get, if we're able to ship to people when they're on the go.

Malin: Right. I feel like we can't not mention their digital sales too. Digital sales were up 90% for the year. So, they now account for about 18% of sales for the year; 20% in the most recent quarter. If you think about breakfast and speed and convenience and time, that is certainly poising them for maybe a better breakfast launch, if and when they ever choose to.

Hill: It's only a $24 billion company. It is basically the same size as Snap, which is bizarre. Because Chipotle is a more mature business and it almost seems like it should be bigger than this, but I think while it's natural for investors to look at a stock price, and in the case of Chipotle, even with the drop today, it starts with an 8, it's over $800 a share. But you look at the market cap and it seems like it's still got a long runway ahead of it.

Malin: Yeah. I mean, they're planning to open about 150 to 165 new restaurants next year, which at these margins is really impactful for them. I think the thing with Chipotle -- that it's going to take a couple of years to shake -- is people look at this company and think how fragile those numbers are and how quickly they can change and how quickly trends can reverse. And I just think restaurants, in general, are a much harder business to execute over a long period of time, versus technology is sort of bumpy, but we all have grown to expect and embrace that.

Hill: What is your go-to order at Chipotle?

Malin: I don't really have a go-to, but I always get the green salsa, that's my favorite.

Hill: That's my ... yeah, I love the green salsa.

Malin: I love the green salsa.

Hill: A little bit of spice, a little bit of heat, I like that. Abi Malin, thanks for being here.

Malin: Thanks for having me.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this episode of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.