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Disney World is Cutting Costs at the Worst Possible Time

By Rick Munarriz - Feb 18, 2016 at 12:36PM

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The leading theme-park operator is reporting going through layoffs and shift cuts. That's just Goofy.

Source: Disney.

A company born out of ink and paint is going a little thinner on the paint. Disney (DIS 2.21%) laid off 100 to 140 of its Disney World resort painters, a union rep is telling the Orlando Sentinel. It's a move that is "out of sync" according to the rep, and it may seem odd at a time when the parks are presumably expanding to accommodate growing attendance levels.

The article also goes on to single out some of the other ways that Disney is cutting corners. A Teamsters rep points out that the world's leading theme park operator is trimming times of character meet-and-greet experiences. It also refers to a blog post on WDW News Today, where "inside sources" claim that Disney's in the process of cutting curbside greeters at the resort hotels and that front desk and concierge employees will only be offered up to 32 hours of work a week. With some nighttime performances at the parks now being curbed until peak Easter season, it leads one to wonder why Disney is reportedly getting so stingy these days.

Disney is widely expected to raise single-day ticket prices for its Florida theme parks later this month. Rival Comcast (NASDAQ: CMCSK) (CMCSA 1.43%) has already done so earlier this month, paving the way for Disney's fourth consecutive February increase. However, paying more for a day at the park isn't going to go over too well for folks that notice the cuts.

It also leads one to wonder if Disney shouldn't be spending more instead of shaving its head count. Disney is coming off of another strong quarter. The media giant's theme parks division saw its revenue climb 9% since the prior year's holiday quarter. Perhaps more importantly, operating profits soared by 22% for the quarter. That's pretty impressive, especially with a decline in its international theme park interests weighing down the results. You don't normally see a company scramble to cut costs when margins are widening, especially in a consumer-facing industry where the measures can result in a reduction in guest satisfaction.

The online chatter points to weakness at ESPN as well as the delay and budget overruns at Shanghai Disneyland as the causes for Disney's attention to whittling down costs at its stateside theme parks. That doesn't make sense.

For starters, Disney was able to overcome lower attendance at Disneyland Paris and a spike in pre-opening expenses at Shanghai Disney to still deliver widening profit margins for its theme park division. Then we get to how the market weighs Disney itself. It posted a blowout quarter, with the only decline in its segment revenue and operating income breakdown coming from its ESPN-fueled media networks division. The stock still moved lower on the news, fearing the continuing weakness at ESPN. Improving the already widening margins at its theme parks isn't going to fix ESPN or make Mr. Market look away from the challenges at the leading sports programming network.

In a grim scenario that isn't entirely farfetched we could see the reported cost cuts at Disney World -- and Disneyland -- make matters even worse. If guest satisfaction suffers as a result of understaffed service or shortened attraction times of availability it could make people less likely to visit Disney World. With so many of Disney's more anticipated new attractions still at least a year away it could give potential visitors pause as they map out their spring and summer getaways. Even if Central Florida is in the cards, hitting up Comcast's parks a few miles away -- which unlike Disney has been adding several new attractions -- could be compelling. Comcast has seen Universal Orlando's attendance grow at a faster clip than Disney World for several years now.

There's never a good time to issue layoffs and turn trim the hours of existing works, but it certainly looks bad at a time when margins are increasing and ticket prices are likely to follow suit.

Rick Munarriz owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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