You know things are tough when the world's most famous mouse is watching his budget.
In a memo to cast members (what the company calls its employees) on Monday, The Walt Disney Company (DIS 0.99%) announced the next wave in its corporate realignment, which includes its second -- and largest -- round of layoffs.
This week's cuts will bring the total workforce reductions to roughly 4,000, putting the company about halfway to its previously announced target. In conjunction with Disney's first quarter financial report, the media company announced plans to cut a total of 7,000 jobs, with the initial round of reductions occurring in late March.
Like many of its peers, the House of Mouse has been struggling with the downturn, which drove its stock down 43% in 2022. It's clear investors are expecting decisive action from returning CEO Bob Iger and the job cuts, while painful, are a necessary step to returning the magic to Disney.
Image source: The Walt Disney Company.
Part of a bigger plan
Back in February, Iger announced a broad strategic reorganization designed to "return creativity to the center of the company," which in turn was expected to improve Disney's results. The job cuts are part of a broader plan "for creating a more effective, coordinated and streamlined approach to our business." The strategy included cost cuts of $5.5 billion.
The total included slashing roughly $2.5 billion in operating costs, primarily from its sales, general, and administrative expenses -- which includes reducing its workforce by 7,000 jobs. CFO Christine McCarthy said the cuts would include 50% from marketing, 30% from labor, and 20% from technology -- and that about $1 billion of those costs were already under review.
The first round of job cuts came in late March, which included the elimination of Disney's metaverse division and cuts to its streaming team in Beijing.
This second and larger round of reductions is expected to cut across a large swath of the company, impacting employees from its parks, experiences, and products segment, as well as its entertainment business, including jobs at ESPN.
Disney expects the final wave of workforce reductions to be complete before the start of the summer season.
A renewed focus on the bottom line
Disney also plans to achieve another $3 billion in cost savings on content over the next several years.
This is particularly important to the company's plans to accelerate the profitability of Disney+. The company struggled with mounting losses from its steaming business last year. Disney's initial strategy was to attract as many subscribers as possible to its nascent streaming service, spending heavily on content in order to achieve that goal.
The company was wildly successful, attracting more than 164 million subscribers just three years after the debut of its namesake streaming service. There was a downside to that approach, however. Disney made headlines -- and not in a good way -- with the revelation that its direct-to-consumer (DTC) segment operated at a loss of $1.6 billion in the fourth quarter, pushing its DTC losses for last year to more than $4 billion.
What it means to investors
Nobody likes to see jobs cut, but Disney was forced to take drastic steps in order to right the ship. Not only were shareholders losing faith, but the company narrowly averted a potentially bruising proxy fight from Nelson Peltz's Trian Partners.
Iger has made it clear that the workforce reductions were difficult and "not something we take lightly." In all, the 7,000 jobs cut represents roughly 4% of Disney's global workforce. If the company is able to achieve the $5.5 billion in cost cuts it's targeting, it would have a huge impact the bottom line. For context, Disney generated net income of $3.2 billion in 2022, a far cry from the profits it delivered in 2018 and 2019, when it generated net income of $12.6 billion and $10.4 billion respectively.
It would also backstop Iger's plan to reinstate the shareholder dividend by the end of the year. Disney first suspended its dividend in early 2020, citing "the significant operational and financial disruption caused by Covid-19." The reinstated payout is expected to be modest at first, increasing over time.
While the jobs cuts might be concerning at first glance, Iger is merely following the plans the company has already laid out. Disney is positioning itself for a broad-based profit rebound in the coming years, which will ultimately benefit shareholders.
