Even With Frozen and Star Wars Marqueeing, Disney's Film Segment Still Underachieved

Disney's (DIS -0.45%) fiscal 2020 first quarter was a hotly anticipated one, as it was the first period that included results from the Disney+ streaming service. The subscriber tally was even better than many had been anticipating, with Disney+ alone amassing 26.5 million households in its first month-and-a-half in existence. Disney's total direct-to-consumer segment (also made up of Hulu and ESPN+) ended the quarter with 63.5 million subscribers worldwide, compared with just 24.2 million a year ago. 

The nascent streaming division is still running at a loss (negative $693 million in Q1), leaving the company's other more mature segments to pick up the slack. And pick up the slack they did, with "studio entertainment" especially notching huge gains thanks to film releases like Frozen 2 and Star Wars: The Rise of Skywalker. The numbers from Disney's theatrical features aren't telling the whole story, though. They certainly did their fair share of offsetting Disney's investments into a new business, but the movies should have performed even better.

Image source: Getty Images.

A good news/bad news situation

First, here's the skinny on Disney's films during the 2019 holiday season: Revenues doubled from a year ago and were 18% of Disney's total sales, and operating income tripled and made up 24% of the total. Combined with a 23% increase in operating income for media networks and a 9% increase at parks and resorts, Disney's adjusted earnings per share only declined 17% year over year (mostly due to Fox acquisition costs and streaming losses).  

YOY = year over year. Data source: Disney.

The results from Disney's film studio are dramatic, but here's the rub. First, the 2018 holiday movie lineup from Disney was light, featuring Ralph Breaks the Internet, Mary Poppins Returns, and The Nutcracker and the Four Realms. Pitted against Frozen and Star Wars in 2019, 2018's features were never going to provide a good apples-to-apples comparison.

Second, 2018 was only Disney. In 2019, though, the film studio also included the acquired productions from 21st Century Fox, which included Spies In Disguise, Terminator: Dark Fate, and Ford v. Ferrari. With two massive blockbusters and an entire studio added to results, it should have been no surprise that 2019 was going to be much stronger than 2018. 

The results should have been even better, though. Star Wars: The Rise of Skywalker underperformed the previous two installments in the latest Star Wars trilogy and made a few hundred million dollars less at the box office than many were projecting. And management said that the Fox films actually lost money (somewhat surprising given the Best Picture Academy Award nomination for Ford v Ferrari), a problem Disney has been dealing with all year since it took over its former competitor. But let's not make Fox a scapegoat. Even some of Disney's global box office results were quite disappointing considering that the cost to produce a film these days often runs north of $100 million -- or sometimes several hundreds of millions (ahem, Star Wars) -- not including distribution and marketing costs.

Data source: Box Office Mojo.

Not firing on all cylinders, yet

With double the films and hype, it's thus disappointing that the "studio entertainment" division at Disney wasn't able to pull more weight than it did this past year. An identity crisis at Star Wars parent Lucasfilm needs to be addressed, and it's possible the old Fox studio and Disney are cannibalizing box office tickets from each other. Mickey and friends have some work to do to improve the performance of this consumer discretionary stock.

I have no doubt these kinks will get massaged out. CEO Bob Iger indicated on the last conference call that Star Wars is taking a silver screen hiatus for a while (though I don't think quantity is the problem, as much as quality is), demand for Marvel superheroes is still insatiable, and an already powerful Disney library now includes Fox -- including James Cameron's Avatar movies that are set to return to theaters in 2021. Holiday 2019 was mixed, but I fully expect Disney to recapture its big-screen magic and dominate the global box office for years.