The pain of park closures and paused film releases - courtesy of the coronavirus pandemic and subsequent lockdown - has been laid bare at Walt Disney (US:DIS). The group’s second quarter results for the year to September 2020 revealed a $1.4bn (£1.1bn) dent in adjusted operating profits, a 36 per cent year-on-year decline.
Parks and experiences – 40 per cent of 2019’s annual operating profits – bore the brunt of the damage. Management attempted to restrict the carnage by extending park ticket dates rather than issuing full refunds, but revenues still plunged by a tenth to $5.5bn and segmental operating profits fell 58 per cent to just $639m. With deferred revenues – relating to holidays booked but not yet paid for – at 7 per cent of 2019 revenues, the pain inflicted by lockdown might have a knock-on impact for some time.
Elsewhere, media networks and studio entertainment were bolstered by the inclusion of Twenty First Century Fox. But the acquisition has stretched the company’s net debt to $41bn, equivalent to 43 per cent of equity. That debt position looked high when operations were running smoothly and now Covid-19 has led to a 30 per cent decline in free cash flow to $1.9bn.
Disney carries the risk of a high level of accounts receivable, relating to the licensing of television content (including its ESPN sports channel) and the sale of advertising around film and television. Disney books these sales, but they are conditional on the timely release of content. With sports, studio production and film releases on hold, those accounts receivable might not be as easy to collect as they were in the past.
Investors can take solace in the direct-to-consumer division, which reported an almost fourfold increase in revenues thanks to the astonishing uptake of Disney+. The launch of the streaming platform last November could not have come at a better time. With more of us at home, subscriptions have soared – reaching 54m by the start of May. But building a streaming service in an intensely competitive market does not come cheap and direct-to-consumer losses widened from $385m to $812m in the period.
Disney’s decision not to pay a semi-annual dividend in July should save around $1.6bn,assuming the payout had been held constant. That’s prudent, particularly since ratings agency Fitch has downgraded Disney from ‘A’ to ‘A-’.
