Walt Disney (DIS): After a tough FY20, the pandemic is likely to take a toll on operations next year too

The Walt Disney Company (NYSE: DIS) had a tough time in fiscal year 2020 with the COVID-19 pandemic bringing its operations to a standstill like never before. The company incurred significant losses during the year as its prime venues closed down and its studio content production was halted. By the looks of it, Disney will continue to feel the pain of the pandemic going into fiscal year 2021 as well.

Pandemic pressure

Disney took the biggest hit from the health crisis to its Parks, Experiences and Products, and its Studio Entertainment segments, as it was forced to close down its theme parks, suspend its cruise ship sailings and suspend the production of film and TV content for the most part of the year.

Revenues for fiscal year 2020 were down 6% year-over-year at $65.4 billion while adjusted EPS dropped 65% to $2.02. The biggest hit to operating results from the pandemic was an estimated impact of approx. $6.9 billion on operating income at the Parks segment due to lost revenue from the closures.

The Parks segment recorded a revenue decline of 37% for the year while Studio Entertainment saw a drop of 13% compared to 2019. Studio Entertainment suffered from fewer theatrical releases due to theater closures. The notable releases included Frozen II, Star Wars: The Rise of Skywalker and Maleficent: Mistress Of Evil.

To mitigate the impact from the pandemic, Disney suspended certain capital projects, did not declare a dividend, reduced expenses and furloughed over 120,000 of its employees.

Bright spot

The bright spot for the company during this tough time was without doubt, Disney +, its streaming service. As people stayed at home and turned to digital platforms for entertainment, Disney + gained popularity, helped massively by its strong content that includes around 700 movies from its library and over 15 original movies produced by its studios in addition to popular TV shows.

As of October 3, 2020, the number of paid Disney +/Disney + Hotstar subscribers was estimated at approx. 74 million. Disney +, which completed one year of service, has expanded its services across several countries worldwide and is set to expand its footprint further in the coming year.

Disney’s Direct-to-Consumer segment includes ESPN+ and Hulu, which had around 10 million and 37 million paid subscribers respectively, as of October 3, 2020.

During FY2020, Disney reorganized its business in order to give more focus to its streaming division. The operations of the Media Networks, Studio Entertainment and DTC segments were reorganized into four divisions. The first three divisions – Studios, General Entertainment and Sports will focus on content creation for all the company’s platforms while the last division, which is the distribution group will be in charge of distribution and commercialization.

The year ahead

After a tough 2020, fiscal year 2021 is not looking too bright either. Disney will continue to feel the impact of the pandemic on its financial results through FY2021. The company expects to incur approx. $1 billion in COVID-19 related costs in fiscal 2021.

Disney employed approx. 203,000 people as of October 3, 2020. The company has decided to lay off 32,000 employees in the first half of 2021. These job cuts are expected to impact the Parks segment the most. Disney plans to take further actions to mitigate the impact of the pandemic, which include not declaring dividends, suspending capital spending, reducing investments in film and television content and implementing more furloughs or reductions.

Also read: The high point and low point of Walt Disney’s (DIS) Q4 2020 earnings report

Disney plans to roll out its Disney + service into various markets in the Asia-Pacific region in 2021. The company also has plans to launch a general entertainment DTC video streaming offering under the Star brand outside the US in 2021.

Disney’s stock has gained 10% over the past three months and 21% over the past one month. The stock was down 1.3% in midday trade on Friday.

Click here to read the full transcript of Disney’s Q4 2020 earnings conference call