Image source: Disney.
Disney (DIS +1.34%) rewrote the way it sells one-day tickets to Disney World -- and Disneyland -- on Sunday. Naturally the headlines have centered around the shift to variable demand-based pricing, a move that will result in tickets to Magic Kingdom setting park guests buying single-day admissions back by as much as 18% as they were paying before.
It's a big move, but what does it mean for Disney shareholders? Let's take a look at some of the moving parts behind this move that could shape the stock's direction.
1. Disney planted this seed in October
The world's largest operator of theme parks dramatically hiked prices for its annual passes in early October, pushing through double-digit percentage increases in introducing new flavors of its plans that offer year-round access to its gated attractions. Instead of having a single pass that includes unlimited access to Disney World's four parks -- or a premium plan that includes the water parks -- Disney introduced a few more options for locals based on the number of blackout dates that customers were willing to accept.
Florida residents could choose the Silver or Gold pass if they wanted a cheaper option that would eliminate peak holiday periods, or in the case of the Silver pass also the summer travel season altogether. There's even a pass available now that is good only on off-season weekdays.
It was October's move that left many watchers of the company -- including the mouse ear-donning chap writing this piece -- predicting that demand pricing would inevitably be introduced in February.
2. Single-day tickets are not the admission media of choice at Disney World
It's easy for investors to begin drooling at the prospects of summer and holiday travelers paying 18% more this year than in 2015 to get into one of the Florida resort's four theme parks, but that's just not the way that things are. On any given day, most guests are on annual passes and, more often than not, multiday passes where they are paying far less on a per-day basis.
As strange as it may seem, making its one-day tickets more expensive pushes guests into spending more for multiday passes to get more bang for their buck. This helps fill up Disney's growing number of on-site hotel rooms, which now top more than 30,000. If it's more cost effective to spend several days at Disney World than a single day at the area's leading attractions, you're probably going to want to stay at the resort to take advantage of complimentary transportation and expanded hours that are available only to on-site resort guests.
3. More revenue typically results in expanding margins
Theme parks have high fixed costs. A new roller coaster isn't going to be priced based on how many people will come through the turnstiles. This is why Disney's operating income for its theme parks tends to grow faster than its top line.
We saw this happen in fiscal 2015, when a 7% uptick in theme park revenue translated into a 14% pop in operating profit. It happened in fiscal 2014 with its 7% increase in revenue resulting in a 20% surge in operating income. The year before that it was a 9% move up in segment revenue working out to a 17% gain on its bottom line. We've gone from an operating profit margin of 14.7% for Disney's theme parks segment in fiscal 2012 to 17.6% in fiscal 2015.
If folks put up with Sunday's price hikes -- and they have since Disney's been doing this for 28 years in a row -- it's going to be a big boost for its bottom line.
