The Disney 10k Annual Report Reveals Disney May Be VERY Worried About Their Place in the Culture War

Disney’s latest SEC Filing has mostly flown under the radar. Not here. There are some real gems that indicate Disney may be quite worried about the culture war and their place in it. Not that such a thing might change their full-throated support.

I’m a “big picture” kinda guy, not a number cruncher in detail, and there’s nothing wrong with experts doing that number-crunching and we are blessed on this channel to have real experts like Valliant Renegade and Jonas J. Campbell and Mexican Ironman Mike to do that for us.

But.

Disney released their “Form 10k” as obligated to the Securities and Exchange Commission as a public corporation must do, and this, the “10k” is the annual report on all things financial about the business past, present, and potentially future. I’ve read these before on companies in and out of the “Industry” and I read this one and putting aside the detailed calculations, some things stood out to me. Here we go:

There is in such things a statement of the various “Risk factors” the company may encounter, all in the obligatory legal way to avoid people later saying “You never warned us about this!!” and most of these are pretty obvious and boilerplate. But here’s some of the Disney language—and warning, it is dense but there’s a point in showing it all to you so we can dig in and find the, well, crazy bits.

“We face risks relating to misalignment with public and consumer tastes and preferences for entertainment, travel and consumer products, which impact demand for our entertainment offerings and products and the profitability of any of our businesses. Our businesses create entertainment, travel and consumer products whose success depends substantially on consumer tastes and preferences that change in often unpredictable ways. The success of our businesses depends on our ability to consistently create compelling content, which may be distributed, among other ways, through broadcast, cable, theaters, internet or mobile technology, and used in theme park attractions, hotels and other resort facilities and travel experiences and consumer products. Such distribution must meet the changing preferences of the broad consumer market and respond to competition from an expanding array of choices facilitated by technological developments in the delivery of content. The success of our theme parks, resorts, cruise ships and experiences, as well as our theatrical releases, depends on demand for public or out-of-home entertainment experiences. Demand for certain out-of-home entertainment experiences, such as theater-going to watch movies, has not returned to pre-pandemic levels. In addition, many of our businesses increasingly depend on acceptance of our offerings and products by consumers outside the U.S. The success of our businesses therefore depends on our ability to successfully predict and adapt to changing consumer tastes and preferences outside as well as inside the U.S. Moreover, we must often invest substantial amounts in content production and acquisition, acquisition of sports rights, launch of new sports-related studio programming, theme park attractions, cruise ships or hotels and other facilities or customer facing platforms before we know the extent to which these products will earn consumer acceptance, and these products may be introduced into a significantly different market or economic or social climate from the one we anticipated at the time of the investment decisions. Generally, our revenues and profitability are adversely impacted when our entertainment offerings and products, as well as our methods to make our offerings and products available to consumers, do not achieve sufficient consumer acceptance. Further, consumers’ perceptions of our position on matters of public interest, including our efforts to achieve certain of our environmental and social goals, often differ widely and present risks to our reputation and brands. Consumer tastes and preferences impact, among other items, revenue from advertising sales (which are based in part on ratings for the programs in which advertisements air), affiliate fees, subscription fees, theatrical film receipts, the license of rights to other distributors, theme park admissions, hotel room charges and merchandise, food and beverage sales, sales of licensed consumer products or sales of our other consumer products and services.”

Disney SEC Filing

WELL NOW….the key lines here?

“Further, consumers’ perceptions of our position on matters of public interest, including our efforts to achieve certain of our environmental and social goals, often differ widely and present risks to our reputation and brands.”

That’s the one that got me. SOCIAL GOALS? What the hell business does a public for profit company have enacting/espousing “social goals”??? I haven’t read a zillion 10k’s but a few and I’ve NEVER seen a company say “Hey, we’re in business to please our customers but we have SOCIAL GOALS and if they don’t like them and aren’t pleased, screw ’em and we risk all on that.” EVER.

I think it immunizes them on the grounds of “Hey, we warned you we were gonna piss people off and you bought in anyhow, so go fish” but on the other hand WISE heads would say “Yep, you’re warning us. Bye bye baby” especially now that everything they touch turns to crap and they admit publicly “poor quality” in what their prime business is.

In fact, I’m sure the language is there because their lawyers insisted “IF you’re gonna go social like this you HAVE to warn people it is a risk so they cannot come back and say “I thought you were like every RATIONAL company I invest in and wouldn’t DO this stupid crap!”

Here’s an interesting line up in another part of that “Risks” section too–which is part of the section overall on regulatory dangers and does NOT MENTION AT ALL the end of Reedy Creek etc. etc. which is kind of a big deal to ignore, no?

“New laws and regulations, as well as changes in any of these current laws and regulations or regulator activities in any of these areas, or others, may require us to spend additional amounts to comply with the regulations, or may restrict our ability to offer products and services in ways that are profitable, and create an increasingly unpredictable regulatory landscape.”

Yeah, like HUGE expenses not just in paying via taxes to the new district for the suit against them, losing the cases and incurring fines and penalties, the enormous cost of complying with the NEW non-Disney district’s mandates that Disney used to get a free ride on (which Legal Mindset’s Andrew Esquire has calculated at over a TRILLION bucks over time) not to mention the potential criminal and civil issues involved in the illegal freebies to Reedy Creek employees, the potential municipal bond issues with the SEC in future, etc. etc. Yep, risky alright, but kinda lacking on specifics, the kind of things less-aware investors are supposed to learn from such documents.

Not that they don’t mention those in this rather oblique way (kinda like Big Bob’s obfuscation in that earnings call mentioned-but-didn’t other problems):

“Contingencies and Litigation
We are currently involved in certain legal proceedings and, as required, have accrued estimates of the probable and estimable losses for the resolution of these proceedings. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and have been developed in consultation with outside counsel as appropriate. From time to time, we are also involved in other contingent matters for which we accrue estimates for a probable and estimable loss. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to legal proceedings or our assumptions regarding other contingent matters. See Note 14 to the Consolidated Financial Statements for more detailed information on litigation exposure.”

NOW THEN…. THIS is interesting: “Growth in resorts and vacations revenue was due to increases of 14% from additional passenger cruise days, 4% from higher occupied hotel room nights and 3% growth from guided tours.” In other words, MORE growth by far from more days at sea vs. hotel occupancy.

NEXT:

“The decline in domestic advertising revenue was due to a decrease of 14% from fewer impressions, reflecting lower average viewership, partially offset by an increase of 7% from higher rates.”

That’s kinda interesting, too, considering their moves to change from membership-pays-for-all-of-it to lower-priced-membership-means-more-ads revenue. And remember this “decline” due to LOWER average viewership is for the year passed, not the future, but the trends are clear.

HERE is a fun little stat about the weeks of operation of their domestic parks and resorts. On purely financial terms it is hilarious that they love Gavin Newsom and hate Ron DeSantis: WDW was open all 52 weeks of their year being reported on, Disneyland only 22.

And what about licensing of merch and trademarks and stuff? Well…

“The Company currently expects its fiscal 2024 spend on produced and licensed content to be approximately $25 billion, with sports rights expected to account for over 40% of spend.”

So if 40% is about contract renewals to cover major league and other sports, aka TEN billion bucks….THIS is interesting when you consider how LOUSY their theatrical returns are now. I know they have to admit it, but….

“With respect to produced films intended for theatrical release, the most sensitive factor affecting our estimate of Ultimate Revenues is theatrical performance. Revenues derived from other markets subsequent to the theatrical release are generally highly correlated with theatrical performance. Theatrical performance varies primarily based upon the public interest and demand for a particular film, the popularity of competing films at the time of release and the level of marketing effort. Upon a film’s release and determination of the theatrical performance, the Company’s estimates of revenues from succeeding windows and markets, which may include imputed license fees for content that is used on our DTC streaming services, are revised based on historical relationships and an analysis of current market trends.”

SO in other words, all those other downstream revenue sources—merch, licenses, themepark attractions, shows on the cruise ships, whathaveyou, are ALL based on their THEATRICAL motion pictures (note NOT including stuff for Dplus or other TV,) which…well…are serially tanking. Bad movies that lose money are the cancer that infects so many other areas of corporate behavior.

OH, and here’s a line Jonas caught when we chatted that I didn’t but that says something, well, huge:

“The decrease in licensing revenue was due to lower sales of merchandise based on Star Wars, Frozen, Toy Story and Mickey and Friends”

SO…lower revenue on LEGACY and ESTABLISHED stuff, and nothing even mentioned about the utter lack of the NEW IP/movie materials creating some sort of replacement revenue (which we know they are not.) So if the new stuff is tanking, everything else downstream depends on it, and your “fallback” classic and popular IP’s are selling “lower” than before….where does that leave you going forward? Up a reedy creek without being able to kiss-de-girl?

OKAY, there’s a lot of stuff to ponder, folks. Let’s just say that in what they say, how they say it, and what they do NOT say or get specific about, this is NOT the picture of a confident, moving-forward, and strong international company worth billions of dollars with investors big and small putting faith in them based on the very recent past to be just that.

Hope this gave you some insights. I defer to the money experts for more, but that’s the view from the Front Lot and me.