In the newest chapter of Walt Disney's (DIS +0.00%) wild pandemic saga, the company announced on Sunday that former CEO Bob Iger was retaking the reins from ousted company leader Bob Chapek. Iger left his position as executive chairman just 11 months ago, but he's been called back by the board amid mounting streaming losses and a tanking stock price.
Part of the problem is an unclear direction for how to steer the company. The parks segment has been a major growth generator over the past few quarters, but underlying what looks like a strong business are multiple premium services and price hikes that aren't sustainable. At the same time, streaming is costing more and more to operate, and Disney's raising the price on that, too.
Does Disney have a pricing problem? And can Iger fix it and get the company back on track?
NYSE: DIS
Key Data Points
Are parks really on fire?
Yes, parks really are on fire. People are coming back and paying up. The parks and experiences segment increased its sales 36% over last year in the fourth quarter (ended Oct. 1) to $7.4 billion, and segment operating income increased more than 100% to $1.5 billion. Chapek said that parks are "generating consistently strong demand, which, on many days, exceeds our current capacity."
Part of the revenue increase came from a Disney pass price increase in February. That's OK; supply and demand laws mean prices will rise when there's strong demand. With demand still strong, Disney is raising prices again in December. The increase covers several types of tickets as well as premium services like Genie+, which allows holders to skip lines. However, it can't raise prices twice every year. And after the pent-up demand from the pandemic dies down, visitors may be less inclined to pay the steep prices.
Can streaming cut its losses?
Investors have been focusing on the widening losses at Disney+. But let's take a look at some of the positives here. Disney added 57 million new subscriptions to all of its streaming networks in fiscal 2022 (ended Oct. 1). That's a huge number, and it indicates that Disney is dominating this field. It also illustrates how well Disney can perform in new businesses where it really shines. It has an unstoppable creative team and its position as the leading world entertainment company is, at least for the foreseeable future, effectively unbeatable.
That lends itself to almost guaranteed future performance. However, as the market has seen time and time again, even this type of growth and dominance isn't sustainable without shifting focus to the bottom line.
Disney is no start-up, and it's well aware that its priorities need some assessment. It has provided profitability guidance for Disney+ almost since inception, and it's been reassuring investors that it still intends to meet its goals of profitability by 2024. There are two paths to take: cut costs and raise prices, and the company is doing both. However, by taking this approach, it's likely to see its subscriber growth slow down.
In the meantime, the $1.5 billion operating loss from streaming effectively wiped out the same amount of operating income from parks.
Can Iger steer Disney back to stardom?
Disney looks like it's in a bit of a pickle. However, Iger laid the foundation for streaming before he left the CEO role in 2020 and is acutely acquainted with its inner workings. Iger served as CEO for 15 years on top of a long career at Disney, and the board sees his return as a way to put Disney on a path to getting the most out of streaming while streamlining all of its businesses to work together profitably.
There don't seem to be easy answers right now, and in this kind of economy, investors shouldn't expect a rapid turnaround.
There are two pieces of good news, however. One is that Disney is still well-positioned to maintain its leadership role in the long term, and Iger, who has signed on for a two-year stint, certainly has the capabilities to get it back to speed before handing the reins onto the next CEO. The second is that down 41% this year, Disney shares are beginning to look like more of a bargain, with a forward one-year price-to-earnings ratio of 22.
However, with the current volatility, investors may want to stay on the sidelines and watch what's happening at Disney for the time being.
