The Disney Disappointment

In this podcast, Motley Fool senior analyst Tim Beyers discusses topics including:

• Disney's fourth-quarter financials disappointing Wall Street.
• How Disney's media division is dragging down the parks division.
• Redfin shutting down its home-flipping business and laying off 13% of staff.

Motley Fool analyst Deidre Woollard talks with Bernie Marcus, co-founder of The Home Depot, about the retailer's early days and other observations from his book Kick Up Some Dust: Lessons on Thinking Big, Giving Back, and Doing It Yourself.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 09, 2022.

Chris Hill: If you're looking for an investing show that won't be talking about the midterm elections, you are in the right place. Motley Fool Money starts now. I'm Chris Hill, joining me today, our man in Colorado, Motley Fool Senior Analyst, Tim Beyers. Thanks for being here, Tim.

Tim Beyers: Thanks, Chris, fully caffeinated, ready to go.

Chris Hill: Likewise, and we're going to need it because Disney added 12 million subscribers to its Disney Plus service in the fourth quarter, and that appears to be the lone bright spot for the house that Mickey built because Disney's fourth-quarter profits and revenue were solidly lower than expected. They warned about slowing growth for Disney Plus. Other than the sudden drop in March 2020 that we saw in most, if not all, stocks, shares of Disney are trading at their lowest point since 2014. Where do you want to start?

Tim Beyers: Well, I think we got to start with the subscriber numbers because what I see here, Chris, is that the media and media distribution business is the drag, it's the anchor that the parks business is lifting. The reason that parks business did well during the year and during the quarter is because there's no more COVID-19. People have gone back to parks, and that part of the business, Chris, did really well. I just want to cover that quickly because that's a great thing. The overall parks experience and products business for the quarter was up 36 percent on a revenue basis for the year up 73 percent. Again, not COVID, so this isn't too much of a surprise. On the operating income line, for the quarter, more than doubled, and for the year, more than doubled.

Again, not too surprising, but if we look at the media and entertainment distribution business on the operating income line, Chris, it was profitable, operating profit of $83 million in the October quarter. But it was down 42 percent year-over-year to four billion in terms of operating income. Making money, but not nearly as much as it was making. I think part of the problem is that the subscriber base isn't growing nearly as fast as Disney wants to see it grow. For example, Disney Plus domestically, which is the benchmark that's like, let's call it Disney Plus classic, that was up on a subscriber basis, it was up 20 percent year over year.

Chris, I don't think that's anywhere near good enough. Now, on the other side of that, there are some other subscriber numbers. It's fascinating to me. You and I are both sports fans. I love my sports ball, ESPN Plus. ESPN Plus was the bright spot on the subscriber numbers for this quarter up 42 percent year over year. The average revenue per subscriber, not nearly good enough. Disney Plus classic growth in that domestic part of the market, not nearly good enough. A lot of investment is going to be required to transition Disney from what it was profiting very heavily from cable and linear TV to more of a direct consumer business. The amount of lift here, Chris, I think is much bigger than maybe Wall Street, and most of us thought it would be.

Chris Hill: There's a lot to unpack there. I'm struck by the fact that we're seeing this reversal where you can go back a year or two and when the pandemic was really at its height and parks were shut down partially, if not entirely, it's the media business, it's the streaming services that's helping to lift the overall company and therefore the stock and now we're seeing the reversal of that. Let me go to the CEO for a second, because in February of next year, Bob Chapek is going to hit his three-year anniversary as CEO. The stock is basically today where it was when he took over, higher degree of difficulty for Chapek and all CEOs over the last few years with the pandemic. But I'm thinking ahead to an episode of Motley Fool Money that we're going to do in late December, Tim, where we do our preview for 2023 and longtime listeners know one of the questions we always kick around is, who's the CEO on the hot seat in 2023? I'm not going to be surprised if one of the analysts puts Bob Chapek's name in because it seems like if he's not on a hot seat, it's a seat that certainly getting warmer.

Tim Beyers: Fully agree and it's a little unfortunate because how much of this is Chapek's fault because he's trying to navigate a transition that incorporates a century of history. Building a really competitive but also profitable direct-to-consumer business for Disney media is incredibly difficult. They're in 150 countries right now. But just to give you a sense of how the degree of difficulty is, it's just so different and something to consider. The average revenue per subscriber for Netflix is what? It's certainly in the double-digits. It's well over $10. I think it's closer to 12, maybe 14. I should've been prepared with that number, Chris. Here's what I know. It's way bigger than the Disney number here.

The blended number for global Disney Plus as of October 1, 2022 is $3.91, and that was down five percent. Year-over-year domestically it's $6.10, that's down 10 percent year-over-year. Some of that's due to price increases. People not choosing to take up Disney Plus per se. There's some fluctuations there. But it's not just that they have to grow the pie, they have to charge more and they have to get the mix right. If you looked at, I guess it was the most recent Disney reveal of all the new programming, Disney went hardcore on lots of new programming, particularly on Disney Plus. That's not cheap, Chris.

At some point, Disney has to normalize, Chapek has to figure out how to normalize and get prices higher on Disney Plus, or figure out how to bundle better and get better bundled pricing. Because without that, the bleeding is just going to continue and we're going to have a different comparable next year for the parks division. Where's the growth going to come from? It looks like it has to come from price increases plus a larger pool of direct-to-consumer subscribers. Yeah, I do think this seat is warm. I think the job is difficult and all due respect to Netflix for figuring this out a while ago. I'm going to make a bold statement here that you should feel free to disagree with Chris, but I think the Netflix transition is easier than the Disney transition. How about that?

Chris Hill: I'm not going to disagree with that in part because Netflix has a simpler business. They're just doing the right thing. They're not dealing with parks. They're not really dealing with merchandise. If you want to zoom in on the ESPN part of the cost side of the ESPN business. Netflix isn't really dealing with the rising costs of live sports and the rights therein. It's going to be fascinating to watch. I want to get your thoughts on Redfin real quick before you go. Because Redfin announced they are closing down their home flipping business, they are laying off 13 percent of their staff. If you had asked me what Redfin's stock has done over the past year, I would've been directionally correct, but I would not have guessed that the stock is down 93 percent over the past 12 months. This is now a $350 million market cap business. Where does Redfin go from here?

Tim Beyers: I mean, it's so hard, Chris. I love this business. I love the CEO, Glenn Kelman. He wrote in a blog post, they're going to report earnings I believe a little bit later today as we tape this on November 9. He wrote a layoff is awful, we can't avoid it. We plan to keep increasing our share of the market. But that market in 2023 is, and he said this, I'm quoting here is likely to be 30 percent smaller than it was in 2021. Where does Redfin go from here? It's a bit of batten down the hatches time here, Chris, ride it out the way they rode it out in 2008. They've been in really tough positions before and Kelman's been through those tough positions. I think it's the right move to get rid of the iBuying business because it's capital-intensive and the return is uncertain.

The good news for Redfin shareholders like me not that there's much good news here, but that part of the business, iBuying, was always a very small part of the business and it was always experimental, and they were always really careful with it. They always said we could turn off the spigot at anytime. We don't believe this is something we should go all in on. By turning that off, they do make their business a little bit more capital friendly. The turnaround possibly comes a little faster when the market turns. But I think it's full-on batten down the hatches time, Chris, it's heartbreaking. I hate it. I plan to hold the stock because I believe in Kelman, and I believe in Redfin and just it's business of nationalizing real estate brokerage using technology. I think that's the right move, but it's going to be tough for a while, man.

Chris Hill: Is this a business that can survive another year or so if the housing market basically just stays where it is right now? I mean, activity has dropped off considerably. You see it even in things like the number of people looking to refinance their mortgages; that number has just dropped off a cliff. I'm wondering how well-capitalized is Redfin?

Tim Beyers: I mean, it's a really good question. Again, we're going to find out more when they report earnings. But if I just have to give you just a straight shot here, bear in mind that these numbers include the iBuying for the moment. But on the balance sheet as of the end of June. As of the end of June, in terms of net cash available on the balance sheet, there isn't a lot, unfortunately. The net debt is higher because of the investment in houses; they're about $1.3 billion in debt. They're going to have to unwind that. Their cash position was about $473 million as of June. Take a look at the quarter, let's see what the cash burn was. But I do think there is a path forward as they unwind the inventory of homes and honestly, they're not going to be looking to make profits off of these homes. They're just going to look to liquidate, get as much cash as they can on the balance sheet, and ride this out. For the moment, I think they're OK. But it's a bit of a wait and see. For those who are thinking about this as maybe this is a deep value play, I'd say not yet. Let's take a look and see just exactly how healthy this business is, and what they have to say about their plans to ride this out.

Chris Hill: Tim Beyers, always great talking to you. Thanks for being here.

Tim Beyers: Thanks, Chris.

Chris Hill: In 1978, Bernie Marcus co-founded The Home Depot, and all these years later he is still bullish on the company. Deidre Woollard caught up with Marcus to talk about The Home Depot's early days and other thoughts from his new book, Kick Up Some Dust: Lessons on thinking big, giving back and doing it yourself.

Deidre Woollard: I want to talk about founding of Home Depot because you're at this pivot point in your life, you're about 49 or 50. It starts with a humiliation. How did you turn what could have been just this career crushing moment into this amazing business?

Bernie Marcus: When you look at it, it was about the worst thing that could have ever happened to me in my life. I'd always been successful. We ran this business Handy Dan, which is a good business we started with a few stores. We built it into a big chain, a very popular chain, one that was very successful. But I didn't get along with the people who owned the stock in the company. Daylin owned 81 percent of the stock in the company and the head of Daylin basically hated me. He was antithesis of who I am. He's a raider, a guy who took over bankrupt companies, guy who loved to let people go. I'm more of a builder and a creator and a marketing guy and an advertising and promotion guy. We didn't see eye-to-eye on anything.

But I must tell you it was a shock walking into a room one day, full of lawyers, and finding out you had been thrown out on your It didn't really work well. It was the first time in my life I had been fired, and I didn't react well to it. It was a setback, but I couldn't. Why did this happen? How did it happen? I'm sure this happens to a lot of people in their life. They have that setback and some people come out stronger and some people never recover. The ones who don't recover are ones that carry a burden all their lives and have the blame thing. It wasn't my fault, I didn't do it. Why did this happen to me? Oh my God, look what you did to me. I have to assume that some of the responsibility was mine. Maybe I was arrogant, I don't know. Maybe I thought too much of myself.

Bernie Marcus: Maybe I didn't communicate well with the powers that be and I certainly didn't like to suck up. That was one of my big problems, sucking up. Along came Ken Langone. Ken Langone, as you know, of the Langone Center is a great friend of mine, he's like a brother. Ken had invested in our company, Handy Dan. He flew out to California and he called me on a phone one day and said, buy every blankety blankety blankety blankety share of stock you can in your own company because I'm buying all of the outstanding shares. Well, I thought the guy was a nut case. I said well, I can be here next week. He said, no, tomorrow morning. I said, where are you? He said New York. He says, I'm flying out. I will see you tomorrow morning. He didn't say, Poor Bernie and why did this happen to me? He said you've been hit in the ass with the golden horseshoe.

Now is the time to open the store that you told me about, because on one of our trips, Kenny and I, in Houston in fact, he was asking me why we were opening so many stores, and I said, because someday somebody's going to come in here and just wipe this industry out, and take it over, and he said, well, how? I said, if I tell you, you'll be the second one to know, but I'm not telling anybody, that's something that's in my own mind and we let it go. But Kenny brought it up and said, you remember that store you talked to me about? Let's open it. Let's do that store. Kenny is the one that gave me the emotional push to do it along with Arthur and Ron Brill, and we did it. We sat down, we figured it out, we put it on paper, we did projections. The projections didn't work. Arthur, who is the accountant and the financial guy, looked at the numbers and said the numbers don't crunch, we can't make money selling product for the price you want to sell it for with the overhead that you're talking about, and so it doesn't work.

I said, what do you have to do? He said, it just needs more volume. I said, good, put in more volume. He says, I just can't do that. I said, why not? I said, do you know anything about how much these stores would do? Do you have a clue? He said, no, I don't. I said, well, I have a feeling, it's going to do a hell of a lot more than you think they are, and just put the damn volume in, and we had this meeting in New York. Arthur, I thought, was very unhappy. He was going in with numbers that he didn't really believe in. I did, he didn't believe in it. We presented it to the board, they came up with $2 million to finance this adventure that we went into, that we found out that we didn't have enough money because in order to do it, we needed a hell of a lot more than $@ million. It set us on a journey. But the journey started actually with Ken Langone giving us the push to shove. Then Arthur and I took it over from there.

Deidre Woollard: I love that story so much. I love your confidence in that moment when Arthur's giving you those numbers and you just have to say no, we're going to increase the volume. What gave you the confidence to do that? What do you think was the secret sauce, the thing that you mentioned earlier that you saw something that other stores weren't doing that you think you could do? What exactly was that?

Bernie Marcus: It was all conceptual. I said, look, if people have the ability to buy a product in a store that they previously couldn't buy in that one store. The thing was to have everything under one roof so that people didn't have to go to five different stores. If you're a contractor and you're a plumbing contractor, you need different tools. You need different products to finish your product. Imagine the time it took for contractors going from store to store, paint store, carpentry store, hardware store to put it all together. My concept was put it all under one roof, and put it all under one roof but buy direct from the manufacturers, don't buy from middlemen. Therefore, you save the money of a middleman and you give it back to the customer in lower prices, and then on top of that, you have people on the floor who are plumbers, painters, carpenters, hardware people that understand tools, and all of those together give you a winning thing that nobody had ever done before. Nobody ever did it before.

So how do you know how much volume we're going to do? With me I said, I think it'll be enormous. I think the stores will be overflowing with people. I think they'll love what they have because people love a bargain. But not just the bargain, but on quality merchandise, and we worked out that way and we were very lucky. We found four stores to start with, and those four stores became the basis of really the Home Depot. But Deidre, one of the things that I like to bring up at this point is that this is where capitalism comes in. If it hadn't been for capitalism, these young, you're talking about Arthur, myself, Ron Brill, and Pat Farrah, we couldn't have gone anywhere or done anything without the money. You just don't have the money. The banks would not lend us the money. The banks didn't know who we were, didn't care. Home Depot, what? Are you kidding? What is that? It's like a train station somewhere.

So we went to the market, we sold stock, the stock that allowed us to buy four more stores. The business built up, and built up, and four more stores became available. We went to the market and we again sold shares, brought shareholders in, and capitalism won out and capitalism is the basis of Home Depot. It's one of the great stories of capitalism in the United States. If you think about the value of what's come out of Home Depot, the value of the stock over the years with its great history of earnings and sales, and profitability and innovation over the years, how many people have become millionaires in Home Depot, people especially that worked on the Florida stores who only had college or high school educations. These people didn't go to Harvard, didn't go to Yale, but they made a hell of a lot more than Harvard graduates, I'll tell you that much. They were successful because they worked their butts off, because they had a piece of the company, they knew they were working for themselves as well.

Deidre Woollard: You did mention something in there that I want to zero in on, which is the idea of how important the associates were for the business itself. When you think about your employee training program, why was that such an important part of it? I think you touched on this a little bit earlier with this idea that when you were 11, you learned how to do things in a store and that you could do it yourself? How did you pass that message on to your employees?

Bernie Marcus: It was an innate feeling about customer relationships. When you go into a store, and you stop at a cashier and just say, how are you? You say, fine, and she says, OK, and she bags it up. Once in California, I just did, a woman was bagging my stuff. She says, how are you doing? I said, I'm terrible. I've such pains in my back and my legs and my veins. She said, have a nice day. Boom. At a Home Depot, that's not what happens. They would stop you and say, what's wrong, what is happening? They care about you. They care about the customers, and because they care about the customers, the customers know that they are going to get a product that they need to help them do whatever project they're working on.

It's one of these things you teach them to treat people differently. I remember when we opened in New York. We had this great opening in New York, opened stores in New York. What do you want here? New York, tough people. You may be in New York, I'm not sure. But I come from the Northeast, so I could tell you that. I had a call from one guy said, what cult are you working with to find your employees? I said, what do you mean cult? He said, your people are not normal people, they probably come from some religious cult. I said, they come from the Home Depot cult. They said, it's a culture that we have at Home Depot that I will tell you, I've been out of the Home Depot now for 20-some-odd years, it's still alive and breathing and doing the same thing.

Our people care about a customer, they care what they know that when a customer comes into the store, they have a problem. They don't come through to drink Coke and an eat a Whopper. They come through because they have an issue, they have a plumbing problem, an electrical problem, they have a carpentry problem, and we have people there that could help them solve those problems. That's the role of Home Depot in everybody's life, and that's why the company keeps getting stronger and better. Even in these terrible, ridiculous times that we're living in, Home Depot is still number one out there and will continue to be number one.

Chris 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.