The Update Issue: A Near Perfect Quarter at Disney, Never-ending Drama at Peloton

After the big disappointment at streamer Netflix (NFLX), Wall Street was bracing itself for a potentially bumpy announcement from its rival Disney (DIS)... After so much focus on Netflix's disappointing subscriber guidance, it was surprising to see Disney blow away the estimate for Disney+ subscribers. Street expectations had been for Disney+ to end its fiscal […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: A Near Perfect Quarter at Disney, Never-ending Drama at Peloton By Berna Barshay After the big disappointment at streamer Netflix (NFLX), Wall Street was bracing itself for a potentially bumpy announcement from its rival Disney (DIS)... After so much focus on Netflix's disappointing subscriber guidance, it was surprising to see Disney blow away the estimate for Disney+ subscribers. Street expectations had been for Disney+ to end its fiscal first quarter in December with 125.1 million subs, but the service bested that handily with 129.8 million. Its sports streaming service, ESPN+, also handily beat expectations of 18.8 million subs, instead ending the quarter at 21.3 million. In total, Disney reported 196.4 million streaming subscribers across its three services: Disney+, Hulu, and ESPN+. It added 17.4 million subs in the quarter, 11.8 million of them at Disney+. Like all streamers, Disney continues to invest heavily in content. In the fourth quarter, the company had $4.7 billion in revenue in its direct-to-consumer media and entertainment businesses (primarily streaming) but put up a $600 million loss. The company cautioned it hadn't reached a steady state on content expenses yet... but said it was getting closer. In terms of what Disney is spending all that money on, the call outs were Pixar's new movie Turning Red and a new Marvel series Moon Knight, both coming in March. Looking later in the year, look for two Star Wars series, including Obi-Wan Kenobi with Ewan McGregor in the title role, two Marvel series, a live action Pinocchio reimagination starring Tom Hanks as Geppetto, and a long-awaited sequel to 1993's Hocus Pocus. In terms of broader implications for the entertainment space, one of the most interesting things on the call were CEO Bob Chapek's comments about Disney's recent hit animated movie, Encanto – which he notably referred to as a "franchise," so expect to see more of these characters. The film was released on November 24 to movie theaters and didn't make much of a splash... It only became a global phenomenon once it hit Disney+ on December 24. Once on Disney+, Encanto was the fastest title on the service to ever hit 200 million viewing hours. The movie has become a giant trend on social media, and eight songs from the film are sitting on the Hot 100, including the earworm "We Don't Talk About Bruno," which became the first song from a Disney flick to hit No. 1 since "A Whole New World" from 1993's Aladdin. Disney actually saw sales of Encanto merchandise accelerate after Christmas, when holiday shopping was done. Chapek was adamant about pointing out that the big lesson from Encanto is that theatrical distribution isn't the only way to build a Disney franchise. He was also explicit that families with young children haven't returned to movie theaters in strong numbers. That may change with time... but between his strong comments about not needing theaters to make a hit animated film franchise and the unspoken truth that Disney's Pixar animation studio has basically become a machine for generating direct-to-streaming movies of late, this was a bad call for the movie theater chains. Even though all eyes were on streaming, I don't think the subscriber beat at Disney+ was the most important thing to happen in the quarter... While the entire world focused on that streaming sub number, to me the real fireworks were in the Parks, Experiences, and Products ("PEP") division. This segment beat expectations by more than $1 billion, posting $7.2 billion in revenues versus estimates of $6.1 billion. There is – as one analyst noted on the call, "ginormous operating leverage" in the Parks business – and the division put in a stunning 34% operating margin in the quarter. The division posted $2.5 billion in operating income... It's a stunning turnaround from last year when it lost 120 million with properties shuttered or operating with significant capacity restrictions. Despite all the disruptions of the pandemic and the omicron surge happening right at Christmas, the division posted its best quarter of all time. It did this despite many significant headwinds. Back in October, I predicted the "[Parks business will come roaring back, aided by the 50th Anniversary celebration at Disney World]( and Genie+... but this exceeded even my wildest expectations. Per capita spending at the domestic Parks was up more than 40% from 2019 levels... This is just astounding given how expensive Disney Parks already were. The $15-per-day Genie+ option for shorter lines as well as the establishment of Individual Lightening Lanes ("ILLs") provided a huge boost to per capita spend. ILLs are effectively "cut the line" passes for the most popular rides, typically priced at $7 to $15 per person. Management indicated that one-third of domestic guests purchased either Genie+ and/or an ILL during their stay, with that number increasing to more than 50% over the holidays. In addition to these new premium services, spending was also higher in food, beverage, and merchandise. The PEP division putting up its best quarter of all time is pretty shocking given that there were three major headwinds for the quarter... - International operations continue to be severely impacted by the pandemic and basically only broke even, posting just $21 million in operating income. - International visitation to the domestic Parks hasn't really come back yet. These guests tend to stay longer and spend more than domestic ones. - Supply chain issues likely had some effect on the consumer products piece of the business. There was also a headwind to consumer products during the quarter as Disney exited most of its physical retail locations last year. Simply put, the performance at the domestic Parks was mind-blowing. Even for investors who only care about streaming, the Parks are important because when they do well, they gush cash... and that cash can go towards buying tons of content to fight the battle of the streaming wars. --------------------------------------------------------------- Recommended Links: [Man who called AZO before it soared 6,900% makes shocking real estate prediction]( Whitney Tilson, who's appeared twice on 60 Minutes, has just dropped one of the biggest bombs of his career. He's predicting an abrupt end to the global real estate market. [Here's everything he's saying](. --------------------------------------------------------------- [80% CRASH coming?]( The analyst behind 24 different triple-digit winners just gave what he calls the most important interview of his life. He thinks the market could be on the verge of an 80% collapse. He lays out all the proof... plus a detailed plan for exactly what to do. (Hint: It doesn't require shorting, options, or "timing the market.") [You must see this interview today](. --------------------------------------------------------------- If there was anything to worry about in the quarter, it's whether or not the Parks are doing too well... There's growing unrest among the hardcore Disney Parks loyalists, who are saying that they're being price gouged and that service levels have dropped. I was in Walt Disney World over the holidays and can attest firsthand that all these upcharges for the shorter lines added more than $1,000 to my already expensive five-person trip. And while Disney stated on the call that 85% of former employees returned to their jobs when called back after furloughs or layoffs, the place felt understaffed. Individual shareholders are currently plotting to vote against CEO Chapek's re-election to the board at the March 9 shareholder meeting. While they don't have the votes to succeed, the fact that people are this upset is notable. I recently expressed my frustration with my holiday stay in a Disney survey. I had many disappointments on my trip – ranging from my room being ready hours late to housekeeping issues to being woken up before 7 a.m. on New Year's Day by deafening, non-urgent maintenance work. To my pleasant surprise, I was contacted by Customer Service and literally doused with a silo of pixie dust after completing the survey – they offered me a free two-night stay in a very expensive suite. It's good to see that the rank and file are still trying to deliver on the customer service that the company is so famous for, but 40% per capita spending growth gives me a little pause. It's incredible Disney has this much pricing power... but should the company take as much as it can? If trying to maximize short-term earnings, sure. But if playing for the long-term... maybe not. This is a corporation that is in the last year of its first century... It's playing for the long haul. When a vacation that might cost a family of four $800 per day suddenly costs $1,100... sure, they may come once (especially after not traveling for two years). But will they come next year? The big question for me is whether these price increases will have an effect on visit frequency. It will take a few years, not a few quarters, to figure that out. Balancing short-term results versus long-term profits is always one of the toughest problems for the C-suite to figure out. Disney has a very high-class problem here. No doubt this was a quarter of redemption after Disney posted disappointing results in November... in the wake of all this good news, I retain my conviction that DIS shares are a buy. While they're up about 3% today, at around $152, they are well off the 52-week high of around $200.  Meanwhile, the drama just won't stop at home exercise company Peloton (PTON)... You may have already heard that co-founder John Foley stepped down from his position as CEO on Monday. I applaud this move, which I had been calling for since December... [I thought that PTON shares were unownable with Foley at the helm](. Foley had made so many errors – building up the expense base and inventory as if pandemic levels of demand would be the new normal... failing to forecast demand or cash requirements properly, leading to a disastrously timed stock sale... mis-stepping with public relations... and displaying a lack of personal judgment when he threw a lavish party while the company was reeling, drawing ire from employees. Earlier this month, activist Blackwells had made its case that Foley should be fired. While the recruitment of a high-profile replacement indicates that Foley's departure was in the works long before Blackwells' cage rattling, the activist's deck included some gems that were too good not to share...  Source: Blackwells Capital However, Peloton hit the jackpot in recruiting Barry McCarthy – the former CFO of streamers Netflix and Spotify (SPOT) – to take the helm. McCarthy obviously knows subscription businesses, and people familiar with him speak extremely highly of him. McCarthy has his work cut out for him, between working down that inventory pile, cutting $800 million in costs, restoring company morale, figuring out how to resuscitate consumer demand for bikes and treads, and possibly engaging with potential acquirers. After all those fireworks, you would think things would have settled down – but no... Over the past three days, we've learned that... - Many of the 2,800 employees being laid off found out they were on the firing line by trying to log into their Slack on Monday and seeing they had already been cut off (classy!) - Disgruntled terminated employees crashed a virtual all-hands meeting held by McCarthy and Foley on Wednesday - The New York Post is reporting that Peloton paid $25 million to failing, soon-to-be bankrupt competitor FlyWheel to falsely claim it had infringed on Peloton's patents, in an effort to protect patents that would not have otherwise held - Peloton's head of hardware engineering has left the company. I assume it was voluntary, since Peloton wisely advised that staffing cuts would not affect instructors, engineers, or other functions responsible for the customer experience. This company is a mess, and I'm still dubious that a deal will happen. But if I am wrong and Peloton does get sold, it's hard for me to see how it goes for more than 20% above the current quote... and the stock could definitely go for much lower than the $37-per-share price that it trades for today. And as a standalone, it has downside of 50% or more. I still recommend you avoid PTON shares. In the mailbag, readers weigh in on Meta Platforms (FB) and sports betting... Have you been to a domestic Disney Park recently? I would love to hear your opinion on all the changes, including Genie+, Individual Lightening Lanes, Mobile Ordering and Check-In, etc. Do the premium add-ons feel like price gouging, useful innovations, or both? Do you think Peloton gets bought, and by whom? Share your thoughts in an e-mail by clicking [here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "You miss another less obvious non quantifiable influence. Investors like me HATE Facebook/Meta for its woke values and its flagrant heavy handedness in canceling members for posts that don't align with its politics. Fine. I voted with my checkbook selling the 2000 shares I acquired in the IPO at $340 because I don't want to own a company whose values contradict my own. So while I miss my 800 Facebook friends from high school, college, and beyond, I celebrate Meta's demise. Can't happen soon enough for me. I suspect there are others who share my contempt and that's not good for business." – John G. Berna comment: John, congrats on getting out before the big crash. I understand your contempt for Facebook, but the amazing thing about the company is that it manages to equally enrage people, no matter their politics. Some people, like you, hate Facebook because they believe it censors too much and is left-leaning. Others think the company is right-leaning, and isn't doing enough to stop misinformation about elections, vaccines, and other topics. I'm not sure anyone has warm and squishy feelings about Facebook... other than early employees who made a fortune (and maybe not even all of them!). "A number of people use Zynga (ZNGA) for online poker play. ZNGA is being bought out by Take-Two Interactive (TTWO). "There is a need to list all of the companies that would benefit from Online Gambling in its various forms. The four mentioned in your article get a lot of press, but some kind of rating needs to be developed and applied. "Frankly, I found DraftKings (DKNG) to be a terrible investment... which means it will probably take off in 2022 with buy out rumors! "The Caesars (CZR) and MGM (MGM) plays are interesting, but they are much more dependent on their real estate and IN PERSON experiences. Until the Covid pandemic is fully contained, those properties will struggle, but people who gamble will probably not be kept away for long! "The Macao Casino Businesses have struggled lately. Between a slowdown in China and the pandemic which has hit them harder than they are willing to admit, the big casino operators will have to adjust. Again, their clients like to gamble, so they will be back!" – Lauren G. Regards, Berna Barshay February 10, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](