Walt Disney (DIS -0.34%) turned in exactly the quarter investors need to see to send the stock higher after the recent dip. Revenue surged 34% year over year, with strong results across streaming and theme parks.
While streaming is a long-term growth catalyst for Disney, it's improving profitability at the parks business that should get investors really excited. Here's why.
Image source: Getty Images.
Digital services are driving record profits for Disney's parks
Revenue from the Parks, Experiences, and Products segment more than doubled year over year to $7.2 billion as it returned to more normal traffic patterns. Excluding international theme parks, Disney disclosed that the domestic theme parks achieved record revenue and operating profit during the fiscal first quarter.
The segment didn't quite reach the same level of revenue in the same quarter two years ago. But most importantly, the segment achieved a higher operating margin.
| Parks, Experiences, and Products | Fiscal Q1 2022 | Fiscal Q1 2021 | Fiscal Q1 2020 |
|---|---|---|---|
| Revenue | $7.23 billion | $3.59 billion | $7.39 billion |
| Operating profit | $2.45 billion | ($119) million | $2.33 billion |
| Operating margin | 34% | (3.3%) | 32% |
Data source: Walt Disney. Disney's fiscal year ends in September.
The profit performance is not surprising, given CEO Bob Chapek's record of improving operating margin at previous segments he led for Disney before taking over as CEO in 2020.
Going back to Chapek's time serving as head of the Parks segment in 2015, Disney has spent the last several years improving the guest experience by investing in new technology that reduces wait times and speeds up check-in at hotels. Investors are seeing the outcome of those improvements.
Last year, Disney introduced the Genie+ service, which is integrated in the My Disney Experience mobile app and helps guests manage their daily itinerary at the parks. It costs $15 per ticket per day, which is padding Disney's profit margin, but guests believe it's worth paying up for.
During the earnings call, Chapek said Disney anticipated Genie+ would be popular, but it was "blown away by the reception." More than half of park guests purchased Genie+ during the holiday period.
With high demand for a premium digital service, Disney should continue to see margins improve at the parks segment coming out of the pandemic. This segment comprised one-third of Disney's total revenue in the quarter, so the extra profits from the parks can go a long way toward driving shareholder returns.
Parks are growing in value for Disney
Chapek characterized the demand at the parks as "extraordinary," which indicates they could grow revenue further in the near term. Disney is continuing to open new rides and attractions to drive traffic, which in turn, could drive more high-margin revenue from Genie+.
The biggest new attraction is the Star Wars: Galactic Starcruiser that opens at Walt Disney World on March 1. It's an immersive two-night experience that makes the guests feel like they are role-playing through a Star Wars story. Chapek said Disney is "pleased with demand" ahead of launch.
As park traffic returns to normal, the improving profit margin can offset some of the losses Disney is experiencing from content investments for Disney+. The operating profit at Disney's media and entertainment distribution business plunged 44% year over year to $808 million in the quarter. But the recovery in Parks, Experiences, and Products pushed Disney's total operating profit up to $3.2 billion -- more than double the year-ago quarter.
At the current share price of $154, the stock is trading at 22 times Disney's peak earnings achieved in fiscal 2018, which is a slight discount to the market average price-to-earnings multiple of 24.5.
At these price levels, investors can earn good returns on their investment from further growth at the parks. Whatever Disney+ is worth just becomes a bonus.
