Disney has a great problem on their hands. With Disney World doing so well, do they go ahead and invest in expansions in the face of recession?
The third quarter earnings report for Disney Parks, driven primarily by tremendous revenue growth at Walt Disney World and Disneyland Paris, were remarkable. The parks were able to return to 2019 attendance levels while also increasing revenues by 40%… all while not increasing ticket prices. Much of that revenue increase comes from monetization of previously free services (think Genie+), but that doesn’t seem to have dampened consumer demand for the parks. That may be coming from the mad rush of international guests to make a family trip to Disney World in case more pandemic closures happen in the future. But even so, as much as the policies put into place may be anti-consumer, it all seems to have worked very well for The Walt Disney Company.
Demand at our domestic parks continues to exceed expectations with attendance on many days tracking ahead of 2019 levels. Our continued focus on improving the guest experience through the use of our reservation systems to purposefully manage capacity versus simply increasing volume has the added benefit of improving yield and optimizing overall economics. So, even while the average daily attendance at our domestic parks across the first recordings of this fiscal year was slightly below 2019, we have delivered significantly higher revenue and operating income over that same time period. This approach also provides flexibility. With levels we can adjust if demand were to shift. Per capita spending at our domestic parks also remains strong. Increasing 10% versus Q3 of fiscal 2021 and over 40% versus fiscal 2019.
At the same time all of this is happening, recessionary forces are definitely in the economy. Inflation has cooled ever so slightly but remains rampant. Unemployment continues to drop, but so too does labor participation. In almost every way you might look at economic futures, it seems we’re likely in a recession and also likely moving farther in that direction albeit with some slightly better news over the last week.
Former US Treasury Secretary Larry Summers pegs recession likelihood at 75% chance
The reason to bring up the economy in reference to the Disney Parks’ returns is one of eyeballing Disney’s future plans. In most years, if we saw these sorts of results out of Chapek’s House of Mouse, we’d just assume that massive capex investments would be on the way. That would mean huge expansions, new rides, infrastructure upgrades, etc. But with recession either here or likely on the way, all eyes will be on D23, the giant Disney expo in September, to find out how the company views the future. It’s hard to imagine them going forward with accelerated capacity increases and expansions with a recession at their heels… and it’s also hard to imagine them not building, building, building with these kinds of numbers.
Will we get bigger announcements out of D23 than previously anticipated? Will the new ultra-luxurious hotel expansion to Adventureland be announced? Will the secondary street expansion of Main Street USA happen? What about a total overhaul of Tomorrowland in Disneyland? All of those are huge investments… and all seem far more likely in reflection of the numbers we just saw.
If Disney chooses, however, to hedge their bets and provide a more conservative upgrade package for the domestic Disney Parks over the next year or two, consider that Mickey’s actuaries may believe that either recession is on the way or demand for the parks could cool over the next 24 months. That would be especially true if they continue to be hesitant even as Universal Studios adds a new theme park at their doorstep.
We’ll find out what they’re thinking in just about a month.
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