Disney's (NYSE:DIS) parks and resorts went from one of its biggest sources of operating income to a major drag on earnings in a matter of a few weeks. It closed its Shanghai and Hong Kong parks in January, and its Tokyo parks closed at the end of February. In mid-March, Disney closed the rest of its parks as the novel coronavirus spread rapidly throughout the world.
For the company's fiscal second quarter, operating income from Disney's parks segment fell 58% to $639 million, and it's only going to get worse. Shanghai is now the only Disney park open, and management hasn't provided a timeline for its other parks to resume operations.
"We estimate the approximate monthly impact on [earnings before interest and taxes] will remain in the $1 billion range," Bernstein analyst Todd Juenger recently wrote in a note to investors. That's a huge drag on earnings, and it might be prolonged.
A look back at the second quarter
Disney CFO Christine McCarthy gave investors a good amount of detail about how closures impacted operating income during the company's second-quarter earnings call. "We estimate the disruption to our Parks, Experiences, and Products businesses adversely impacted Q2 operating income by approximately $1 billion," she told analysts in her prepared remarks.
That billion-dollar loss is heavily weighted toward its two weeks of domestic closures, though. "The two weeks' domestic [closure] is a little over half," McCarthy said regarding the $1 billion operating loss from the parks segment. That's over a $1 billion per month run rate for the domestic parks alone. With another $500 million or so lost from the closure of its other parks -- a month in Japan, two weeks in Paris, and about two months in its other parks -- it's looking at around $1.5 billion per month in operating losses.
Importantly, Disney didn't decide to furlough its park employees until mid-April. The company furloughed 100,000 workers, mostly in its parks and resorts, and it's estimated to save $500 million per month in salaries. Factoring that into the numbers McCarthy provided puts it right around Juenger's negative $1 billion in EBIT per month estimate.
The parks will probably still lose money when they reopen
Disney reopened its Shanghai park on May 11 and tickets sold out within minutes, indicating strong pent-up demand. But Disney has to operate the park at one-third its normal capacity, and it's also taking additional precautions, like temperature checks pre-entrance, sanitizing and disinfecting rides and other surfaces, and enforcing social distancing. That means less revenue and greater employee expenses.
CEO Bob Chapek clarified that reopening the parks doesn't mean it'll break even on operating them. He's merely looking for a positive net contribution. That's to say the increase in revenue needs to outweigh the increased expenses of running the park at limited capacity and with more stringent safety measures. "We would not reopen any park unless we can make at least a positive contribution to that overhead and operating profit level," he told analysts.
So, even when the parks reopen, there's still a long way to go before Disney can get back to breaking even on operating its parks, and even longer before it'll return to the level of profitability it saw pre-COVID-19.
"There is limited visibility into the timing of reopening and the conditions under which we can reopen the rest of our parks and resorts, cruise ships, and Disney stores," McCarthy said on the earnings call. But the early sales at Shanghai indicate Disney fans will still flock to the parks as soon as it can reopen them and start cutting into that $1 billion per month loss.