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Disney (DIS) reported a stronger-than-expected fiscal 2023 first quarter after the closing bell Wednesday, and Bob Iger struck the right tone on his first conference call since returning as CEO, prioritizing creativity and profitability. Revenue increased about 8% year-over-year, to $23.51 billion, beating analysts’ expectations for $23.37 billion, according to estimates compiled by Refinitiv. Earnings-per-share (EPS) fell 6.6% on an annual basis, to 99 cents, beating forecasts for 78 cents. DIS mountain 2022-03-01 Disney shares Shares of Disney jumped about 5% after hours to nearly $118 per share, a move that would extend its gains to more than 34% in 2023 on the new year after a terrible two-year stretch. The stock hit an all-time intraday high of $203.02 in early March 2021 before a massive slide to a 52-week low of $84.07 on Dec. 28, 2022. Bottom Line The Disney quarter had a lot to offer for the bulls. The upside came from the exact areas we wanted, with improved cost control at the streaming business and continued strength at the theme parks. In a market that wants to see sustainable growth over anything else, Disney’s focus on profitability instead of chasing growth is welcomed news. Reorganization and restructuring plans, which were announced shortly after the earnings, were positive developments as well. We have long said Disney’s costs are too high, so we’re pleased to see management make the tough but necessary action to reduce its cost structure and improve content monetization opportunities. These combined actions should make Disney’s earnings power much stronger in the years ahead. It was a great first conference call back by Iger and he checked off a lot of boxes in terms of costs, content, and providing a path toward reinstating the dividend. In fact, we liked what we heard so much that we believe activist investor Nelson Peltz should be satisfied. He doesn’t need to be on the board, because a lot of the changes he pushed for were delivered Wednesday evening. We cannot fault Peltz for wanting to take a victory lap and we, the shareholders, thank everyone. Even after the stock’s big run this year, we think the rally can continue, which is why we reiterate our 1 rating . Quarterly Commentary Starting with the streaming business, we were pleased to see the losses at DTC significantly improve sequentially by $400 million. (Even though as the earnings table shows, DTC’s losses grew substantially year-over-year to $1.05 billion.) Part of the quarter-over-quarter decline in losses was due to higher revenue, but lower spending was an important function as well. Disney meaningfully reduced its marketing expenses in the quarter. There’s no need to be so promotional and chase subscribers when you have a great brand and customers are loyal even through price hikes. In the current quarter, management expects operating results to improve by $200 million, pegging losses at around $800 million, which is in line with estimates on Factset. Turning to the parks, it was a bounce-back quarter, with $2.2 billion in operating income, with strong margins both domestically and internationally, especially as the post-Covid recovery in the latter began to take shape. It will be interesting to see how park margins fare this year now that management is focused on improving the guest experience by selectively managing capacity at more affordable pricing. But even with the economy slowing down, Disney has seen no real drop off in demand which makes sense to us. People everywhere are still prioritizing experiences like travel and restaurants over goods. Quarter to date, management said park attendance at both Walt Disney World and Disneyland Resort are pacing above the prior year, and this trend is expected to continue based on their reservation books. Iger’s Plan More than 2½ months after returning as CEO in place of the fired Bob Chapek, Iger started the post-earnings call by highlighting the success he’s had since becoming Disney CEO for the first time in 2005, navigating the company through two significant transformations before leaving the job in 2020. The first transformation emphasized new creative brands and franchises through the acquisitions of Pixar, Marvel, and Lucasfilm. The second was Disney’s push into the digital world with the successful launch of its streaming platforms. Iger now believes it’s time for a third transformation, one that puts the company, in his words, “on a path to sustained growth and profitability while also reducing expenses to improve margins and returns.” Right away, he stressed that creativity has to move back to the center of the company. He wants to empower creative leaders at the company and make them responsible for the major decisions, like what content is made, how it gets distributed and monetized, and how it gets marketed. By extension, Disney is reorganizing into three core business segments: Disney Entertainment, an ESPN division, and a Parks, Experiences and Products unit. It can be a bit unnerving to see Disney go through yet another reorganization, but this looks appropriate considering the creativity destruction and under monetization of content that occurred under the Chapek regime. Iger wants Disney to be more efficient, and he believes this overhaul will make for a more cost-effective and streamlined approach to its operations. Iger also announced a significant cost savings target of $5.5 billion and that should go over well with investors. Reductions to non-content costs will total roughly $2.5 billion, of which $1 billion in savings is already underway and was provided in guidance last quarter. These cuts are expected to come from selling, general and administrative expenses, and other operating costs across the company. Unfortunately, this means Disney will reduce its workforce by approximately 7,000. The other $3 billion in savings are from the content side, and they’re expected to be spread out over the next few years, excluding sports. Disney must do what is necessary to regain cost control and push its streaming business toward sustainable profitable growth. Management continues to target Disney+ reaching profitability by the end of fiscal 2024. Last but not least, we finally got an answer to when Disney will be in a position to reinstate its dividend, which the company has not paid since its initial suspension in the spring of 2020 during the pandemic. After the balance sheet got wrecked from the 21st Century Fox acquisition and the losses at streaming piled up, we started to lose hope that a dividend would return in the near term. We gained clarity Wednesday evening when Iger said he plans to ask the board to approve the reinstatement of a “modest” dividend by the end of this calendar year. A company as storied as Disney should be paying a dividend and we’re pleased that management’s cost-cutting efforts are putting the entertainment giant on a path to paying one again. (Jim Cramer’s Charitable Trust is long DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Bob Iger, former CEO, The Walt Disney Company
Scott Mlyn | CNBC
Disney (DIS) reported a stronger-than-expected fiscal 2023 first quarter after the closing bell Wednesday, and Bob Iger struck the right tone on his first conference call since returning as CEO, prioritizing creativity and profitability.
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