Disney Q3 Earnings Preview: COVID Carnage

Disney Q3 Earnings Preview: COVID Carnage
Cheyne Gateley/VIP

If you thought Disney’s fiscal second quarter was bad, the entertainment giant’s third-quarter results scheduled for Tuesday are about to be much worse. 

The ongoing COVID-19 pandemic likely delivered a gut punch to almost every single one of Disney’s business segments during the quarter. 

Disney is expected to have swung to a painful loss in the third quarter. Analysts predict the media company will report a loss of 61 cents per share compared to earnings of $1.35 per share last year. Revenue is estimated to have plunged 39% from the same period last year to $12.4 billion. On top of that, adjusted EBITDA likely tumbled to a $50 million loss from $4.6 billion in profit last year. 

Not to mention, Disney’s struggling stock this year. Although shares rallied 36% off the March lows, they are still down about 19% so far this year. 

With no end in sight for the pandemic, the worst-case scenario for Disney seems to be playing out. Fast-forward to August, and the majority of Disney’s theme parks are running limited operations, movie releases and production are at a standstill and live sports are just barely making a comeback. 

Disney’s parks, experiences, and consumer products segment matters because it is the biggest driver of free cash flow and the most profitable business for the company. But, the segment is also expected to have taken the biggest hit in Q3.

While a few of Disney’s theme parks including those in Shanghai, Paris, and Orlando, Fla., have reopened over the past month or so, they are currently operating with strict limitations and reduced capacity. 

With many of its theme parks still shuttered around the world, Disney’s free cash flow and operating income will have likely taken another massive blow in Q3. During Q2, Disney’s free cash flow tumbled 30% year-over-year to $1.91 billion. Closures of Hong Kong and Shanghai Disney parks in Q2 contributed to a 58% decline in operating income in Disney’s park segment.

In addition to shutting down its theme parks, Disney’s film segment has essentially been on hold since March. Scheduled for wide release in late March, Disney live action film “Mulan” has seen its release date pushed back twice so far, and Marvel films that were running on strict production and theatrical release timelines have been put on ice. 

During the second quarter, operating income in its studio entertainment segment sank 13% to $466 million. Disney said higher film impairment charges and decreases in theatrical distribution contributed to the decline. Things probably got a lot worse. Analysts are projecting a 55% year-over-year decline in operating income for the studio entertainment segment during Q3.

However, there is a bright spot amid the COVID carnage — Disney+. The streaming service has been reaping the benefits of the recent stay-at-home culture shift. 

In early May, Disney reported that it had 54.5 million subscribers globally, putting it far ahead of its schedule to have between 60 million and 90 million Disney+ subscribers by the end of its 2024 fiscal year. 

Disney’s legacy franchises and brands have kept the streaming service above water so far, but new strategies are being explored when it comes to fresh content during a global pandemic. Perhaps there is Disney Executive Chairman Bob Iger to thank for that. 

Originally slated to be released in theaters in 2021, Disney dropped a film version of Broadway smash hit “Hamilton” on Disney+ over the Fourth of July holiday weekend. It was a much-needed content jolt, and we could start seeing a lot more straight-to-streaming moves in the future. 

Disney+ is the lifeline that the media behemoth needs to weather the COVID-19 storm, and commentary regarding the streaming service will be closely monitored on the earnings conference call Tuesday afternoon. 

Of course what happened last quarter is important, but it’s about what management predicts for the future that will really determine price action in the after-hours session. 

While the long-lasting impact from COVID-19 is unknown, Disney needs to start assuring investors that it has a strategy in place to remain the leader in the entertainment and media space.