Continued Cut Theme Park Hours

[Another Voice]

"Well is there any evidence that shows us the huge profit margin and stock increase since they started cutting the hours in 1998?"

The stock is Eisner’s problem, but I can certainly show you where you theme park money has been going. Hang on number fans – this is ‘Soaring over Annual Reports’ The Ride:

I’ll start in 1997 since that is the first full year that ABC affected Disney’s books. In that year, Parks and Resorts accounted for 22% of the total company’s revenues, but represented 26% of the company’s “profit” (on the financials it’s listed as the operating income, but profit is good enough for here).

Jump ahead two years to 1999. The parks now account for 26% of the company’s revenues (they were picking up some of the slack from Film and Consumer Products), but for a whooping 43% of the company’s profit. So – Disney made close to half its profits from the parks, even when that parks count for less than a quarter of the company’s business.

How did they do this? By improving the margins. In 1997 out of every $1 spent at the theme parks, Disney spent 77 cents and kept 23 cents for profit. But in 1998, for every $1 someone spent in the parks, Disney now spent only 68 cents and pocketed 32 cents in profit. So not only did the amount of revenue grow during this time (the only business segment in Disney to so increase every year since 1997), they were keeping even more of it in profits. That a really quick way to really make lots of money.

So how did the parks do in miserable 2001 – The Horrible Year? The year of the cutbacks? Parks increased their share of portion of Disney’s overall revenues to 28% and their share of the profits to 45% of the total. So, the year the parks were “suffering” and the year of the “profitable” ‘Pearl Harbor’ – the parks contributed an even greater of their share in profits than ever before. And the margins stayed right at 31% as well – there’s no impact of any discounting to be seen.

For comparison, the ratio of profit contributed by the Studio and Consumer Products (Disney combined these to in the 1997 numbers) was 44% of Disney’s total profit. By 1999 that was down to 21% and last year they represented only 16% of the total company profits.

In summary – Disney has been relaying on its theme parks for a greater and greater part of the company’s total profit even though its share of the revenues have remain about the same. One quarter of the company (the theme parks) now make up almost half of Disney's profits. They have done this by cutting expenses pure and simple, especially compared with the other divisions in the company

The question becomes when does this trend stop helping the company and start hurting the parks. There is only so much savings that can be squeezed out of any business. Soon you stop cutting fat and begin cutting muscle. For different people that point is different – for some it’s been early entry, for other the operating hours.

What’s your threshold?

 

[manning]

Landbaron - Let me sum up my view.

When I was working (retired), I had to make plan and change them because something unexpected always came up.

I went to WDW to change my routine and relax making my plans according to WDW published schedules. It made me happy.

Now, if I go to WDW, I now have to play guessing games on what I have to do because schedules change at the last minute?

Give a break! I'll go to the beach first, and it won't be a Disney beach!!!!

 

[space42]

Wow, Sir Voice! That is some VERY interesting reading.

Yup, just as I thought. It all makes perfect sese now.

I’ll start in 1997 since that is the first full year that ABC affected Disney’s books

This is very telling.. shortly after this many people realy started to notice the current decline...

 

[Eeyore2U]

AV,

Don't most companies have cash cows and losers? Isn't that they key to huge conglomerates? Isn't it important for an entertainment company to be involved in all aspects of entertainment or is Disney just an amusement park company?

 

[Another Voice]

Mr. Eeyore2U - that's one of the things you can see in the numbers. Back in 1997 the company was nicely split between Broadcasting, Theme Parks, Studio Entertainment and Consumer Products. But as the other divisions have had problems, Theme Parks have had to become more and more of the "cash cow" than the other divisions of the company. And this has been done by cutting the expenses at the parks - giving the guests less for the same amount of money.

The parks have always been very profitable. But now they have very much become the cash cow for the company. And many people worry they are also becoming a scarifical cow as well.

 

[EUROPA]

Gosh why would a company want a loser. It may happen but trust me no company wants a loser.

 

[Eeyore2U]

Originally posted by EUROPA
Gosh why would a company want a loser. It may happen but trust me no company wants a loser.

In Disney's case they needed TV, aka Cap Cities. Although it has been more of a loser then they imagined, it gave them a TV and cable outlet.

 

[EUROPA]

Originally posted by Eeyore2U


In Disney's case they needed TV, aka Cap Cities. Although it has been more of a loser then they imagined, it gave them a TV and cable outlet.

That is just it...it was not a loser until they took it over. I'm hoping they did not take it over with the mindset of running it into the ground to compete with the WB.

 

[manning]

Eeysor2u - I have been in the business world for 32 years and employed by one of the biggest. I have seen the losers bring the conglomerates down more times than not. You reach a point that you have to get rid of the losers to survive. One of the biggest problems is that it is not reconized in time to dump the losers until it is too late.

At ALL cost, you protect your money maker in order to survive, and the theme parks are the money makers. The simple fact is when you run them into the ground, nothing is left. Nothing!!!

In my opinion you make the cuts in all areas EXCEPT the theme parks. If it means getting rid of ABC, so be it. Get rid of it!!!

Being involved in all aspects of the entertainment isn't necessary. It's spreading yourself too thin. There is a point when you get too big and Disney has reached that point.

 

[Eeyore2U]

Being involved in all aspects of the entertainment isn't necessary. It's spreading yourself too thin. There is a point when you get too big and Disney has reached that point

If ABC ends up with 2 or 3 shows in the top 10 this will be a moot point.

That is just it...it was not a loser until they took it over. I'm hoping they did not take it over with the mindset of running it into the ground to compete with the WB.

I'm sure they didn't.

 

[DVC-Landbaron]

Here goes. Knowing this board all to well, i'm sure the answers won't suffice.

Hmmm. I’m not quite sure what this means. Anyone? Anyone? (Ferris?)

Hmmmmm. How many large companies have you run?

Would you mind if I added one small word to the end of your question? (He cups his hand to his ear and listens as hard as he can.) I’ll take the silence I am experiencing as an assent. Therefore, I hereby add the word “well”. And my answer would be, “As many as Ei$ner!!”

Not at all, Mr Baron. I don't think those with axes to grind can make clear judgements.

Should I assume that you mean all the good people on this board that are not in car #1, or just me in particular?

I think that it takes time to realize a job well done or poorly done.

Geeze! How much time do you think we’ll need? Until the stock reaches $14.00 a share? How about $10.00 a share?

If ABC ends up with 2 or 3 shows in the top 10 this will be a moot point.

Don’t you think that’s a pretty big IF?

 

[manning]

Eeysor2u - reread my post. You protect your cash first. ABC was in trouble when it was sold and it is in trouble now. The big play isn't in free tv anymore. They have tried to call the shots in cable, but the cable operators wheren't keen on that approach. Oh, and how about the fiasco over at ABC when they tried to get Letterman.

And another thing, when they start to look in all the corners to cut, start to get nervous. People don't work too well when they are constantly looking over there shoulders. In fact, the good ones say "enough with this" and are the first to leave. Been there, seen that and done that.

 

[Another Voice]

Hours:

From Mr. Show – “It is a fact that people are booking their vacations weeks in advance instead of the months in advance that used to be the case. The constantly fluctuating park hours are a reflection of this.”

Actually no, the fluctuation in the hours is a very recent feature. Summer closings for the Magic Kingdom and Disneyland at 11pm and Midnight have been a feature since the 1970s. In the eighties Disneyland would have 1am closings in the summer (I still have bloodshot eyes to prove it). Epcot was open until at least 9pm since the early eighties. I even remember midnight closings of World Showcase (that much more time for beer runs).

And the lead time on planning vacations just corporate spin. No one books a hotel room for Disneyland yet the company can gage attendance pretty well. And in Florida hotel bookings are just one of the factors that go into the attendance projections. Big conventions or discounts at major hotel chains can swamp out the trends that Disney is seeing on its own property. And the current downturn is nothing compared to past recessions or the Gulf War or the Gas Crisis. Somehow the company went through those without playing “What’s Today’s Operating Hours” with the guest.


Park Financials –

Imagine if the parks were run as a normal business and all the extra money went back into them instead of out to California. Imagine all the investments that could be made in the parks. Imagine all the debates about half day parks suddenly went away. Imagine if the parks still provided perks provided to resort guests. Imagine everyone whisked around property in a state-of-the-art transportation system that’s a model for cities throughout the world. Imagine all those happy on-property resorts guests eagerly spending more and more money at such a wonderful place. And Disney would still be pulling a b*ttload of money out the place each and every day.

But that’s not happening. We’re getting shorter hours, closed attractions, half completed parks and more busses than bingo night in Atlantic City because someone thought it be a great idea to rerun ‘Who’s Line Is It Anyway” fourteen times a week.

All businesses need investment to survive and entertainments demand even more – “new” is the strongest attraction any theme park can offer. WDW has fallen behind on the refreshing its offerings and is now cutting into what remains. That is not the way to make a business succeed in the long term.

 

[Bstanley]

{Doing my best John Wayne imitation from Big Jake}

"Nope, I'm not going to do it. I'm not going to get involved, it's none of my business...Oh, now why did they have to kick the boy... DOG! Let's go..."


Point #1:

The PERCENTAGE of total Disney corporate profit provided by the 'Parks & Resorts' (P&R) segment has NO direct linkage to the actual $ profits of the P&R segment and further has no direct linkage to actual park expenses. What!? Please follow-on:

Example Year 1:
P&R had a Gross of $10, Net of $2
Broadcasting had a Gross of $10, Net of $2
P&R is 50% of corporate profits.

Example Year 2:
P&R had a Gross of $10, Net of $2
Broadcasting had a Gross of $10, Net of $0
P&R is 100% of corporate profits!! They ripped the wallet right out of my hand at the parks to pay for broadcasting right? Nope, the P&R segment Net is identical and they still spent the same amount of money on operating/maintaining/etc the parks.

Point #2:

The P&R segment has made approximately the same NET profit of 20-23% each year for the last ten years (I don't have data for earlier years). So what? Well it indicates that for at least the last ten years anyway there has NOT been some great sea change in corporate direction mandating a "squeezing of the parks" for additional profits.

Point #3:

The P&R segment has averaged spending MORE THAN 100% of NET profit on Capital Expenditures for the last ten years (ditto data). That's right, over the last ten years for every dollar in NET profit there has been a matching dollar of Cap. Ex. Speaking personally if I were a corporate raider I would have taken a bunch of that $11B and used it to buy me another Gulfstream IV, or another network or something instead of plowing it back into the parks. Shoot - I could have doubled the profit of the segment!

Conclusion:

You may not like all the ways the Cap. Ex. money was spent over the last ten years -> AK, DCA, hotels, cruise ships, new parades, fireworks, attractions, etc, blah blah blah.

In fact - You may be abso-posi-lutely convinced that a trained seal could have done a better job with the Cap. Ex. money, but the reality is that the same % of P&R income HAS been reinvested into the P&R segment year after year for the last ten years and HAS NOT been going to pay for new shows on ABC or carpet at Cap Cities headquarters...

 

[Another Voice]

Again, since 1997 when Cap Cities became part of the company –

Point One

You are technically correct that the percentages do not indicate the absolute dollar value. It is a illustration that The Company is now much more dependent on the Parks for its profit than before. As all the other divisions tank, the Parks are left to pick up the load of supporting Eisner’s stock options.

And in fact, the profits from the Parks have almost double in dollars since the ABC era:

Operating Income by Business Unit:

Parks and Resorts:
1997: $1.136 billion
1998: $1.287 billion
1999: $1.992 billion
2000: $2.197 billion
2001: $2.190 billion
Total $8.802 billion

For comparison, the profits from Studio/Consumer Products fell from $1.882 billion in 1997 down to $0.798 billion in 2001.

Point Two

I’m sorry, but according to Disney’s annual reports the margins on the parks (measured by taking the operating income and dividing it by revenue) have increased from 22.7% in 1997 to 31.3% in 2001. The biggest jump occurred from 1998 (23.3%) to 1999 (32.4%) which happens to be when most of the significant cost cuts started. In comparison, the Studio’s margin fell from 17.2% at the start down to today’s 9.2%. Media has stayed right at 20% during the entire period.

The parks had to get better at changing a dollar taken into a profit because the other areas of the company either haven’t improved or they have actually gotten a lot worse at it over time. While the Parks’ profit almost doubled, their revenue in 2001 revenue was only 40% higher than in 1997. The majority of the profit increase came from lower operating expenses.


Point Three:

Since 1997 the Parks have brought in $8.8 billion dollars in net profits. Unless you want to claim that the Big Hat at the Studios is made out of gold, where did all that money go? Even with the giant projects of the last ten years – Animal Kingdom at $0.8 billion, California Adventure at $1.2 billion, the cruise ships at $0.3 billion each, the Disney/MGM studios at $0.5 billion on opening day, ‘Tower of Terror’ and ‘Indiana Jones’ at $0.1 billion each we seem to be way in the hole. Of course as we are all finding out these days “capital” can be used for a whole lot of things beside expanding a company’s asset base.

The squeeze is a recent trend. Most of the capital for the initial expansion came from ‘The Lion King’ and other company successes. And even that captial is factured out of the Parks' Operating Income number through the amortization expense. Without profits from the other areas, the parks are left to refill the pot. Unless all those profits from ‘Bubble Boy’ actually provided the cash for Fox Family...



Conclusion –

Over the last five years, the operating income from Parks has doubled to offset declines in other divisions. The first problem was the steep decline in Studio and Stores. After the ‘The Lion King’, hits became rarer and further spaced apart. And costs at the Studio increased as they chassed bigger and bigger movies. To add to the troubles, there were no hits to bring people into The Disney Stores. They too stagnated and sank.

Today’s problem is caused by the slippage in Broadcasting. Profits in 2000 were $2.154 in 2000 and slid down to $1.934 in 2001. But these numbers do not reflect the disastrous 2001/2002 season at ABC which will show a steep drop in the 2002 numbers. Since Disney is a quarter to quarter company – Parks have been tapped once again to make up the difference.

Disney has to show earnings growth quarter to quarter to quarter. Disney the last five years has been all about its stock price. As the other areas of the company have faltered – first the Studios and now ABC – they have been forced to rely more and more on the Parks to make up the difference.


Personal Note: Each and every time some cut has been made at WDW it has been justified as “Disney is a business” on these boards. And they’re right. What I find interesting is that everyone gets squeamish when they truly have to confront that fact.

The simple fact of the matter is that you don’t get Beastly Kingdom because the movies stink and you don’t get early entry because they can’t find a decent show to put on ABC.

Disney is a business.

 

[Bstanley]

Point 1:

I'm seeing an anomaly AV - are your numbers right or mine?

Here are the numbers that I used. They are from the 2001 Annual Report .PDF file - page 74 "Note 11. Segment operating income, Parks and Resorts":

1997: $1.136 billion
1998: $1.287 billion
1999: $1.494 billion
2000: $1.615 billion
2001: $1.586 billion

Was there an accounting change or something?

And yes - the other operating segments numbers are in the tank compared to P&R. But if the above numbers are correct the corporation hasn't been 'skimming' money off the parks - well any more than the average of the last ten years anyway - just the 'normal' 20-23%.

Point 2:

I'll wait until we figure out the 'numbers' situation before I respond. If I've got the wrong numbers it's a waste of electrons to answer.

Point 3:

Well - partly it's that numbers thing again - 'my' numbers show just over $7B in NET, not almost $9B - but there are things you haven't included as well: AKL, PC, other resorts that were 'updated', the 'infrastructure' for the ships (leasing Castaway Cay for example), changes at DTD, etc. Oh, also the costs for The Grand California hotel and DTD-West (or whatever it's proper name is).

Conclusion:

Help me with the numbers please - I may have to agree with you ...

 

[hopemax]

The $1.2 Billion AV listed for DCA includes the cost of DD and the Grand Californian. It was $1.2 Billion for the DL resort expansion project.

 

[Another Voice]

Even though it’s probably unfashionable these days, I was using the “as reported” EBITDA numbers lower down on page 54. Those numbers strip out a lot of the corporate overhead, allocations, and other fun & games. It gives a clearer picture of the segments operating results as opposed to the strictly financial/accounting results. I don’t think taking write-downs for the Angels or amortization of corporate executive stock options should really count against the Parks even though that’s where the accounting ends up. And Disney REALLY knows how to do some interesting tricks with spreadsheets.

If we use your numbers, Mr. Bstanley, then the park’s margin has remained steady at around 22%. But even here you can see a trend. Look at the money that “goes missing” between the two numbers, that ratio has increased over the last three years: from 25% of the 1999 results up 28% in 2001. Interest rates have not gone up, neither have income taxes. That really leaves depreciation, amortization and allocations as the only major factors – and they all work really well as mechanisms to move cash from the parks to Corporate. Interesting is it not? As an auditor, wouldn't someone wonder why all these cost cuttings and price increases seem to have no result on the margins?

The numbers are hardly perfect, but it’s the best information that’s available and they do show a definite trend.

On the other expansions, I’ve heard rumors that Animal Kingdom Lodge cost about $0.3 billion (it was on the high end), but the three All Stars and Pop Century cost under $0.1 each (they really are inexpensive boxes with some orientation). Building costs in Florida are tremendously cheap and it helps that Disney sets their own building codes. I’ve also heard that most of the Westside expansion was paid by the tenants with little outlays by Disney itself. The Vacation Club properties have their own financing and are paid for up front by the initial purchases (that’s why time shares are such a booming business). It’s rumored that the California Adventure park cost $0.75 billion, the remainder is the cost of the hotel, Downtown Disney, renovations to the other hotels, and infrastructure upgrades to support and parking.

Whether you want to use $7 billion or $9 billion I think the recent investments in the parks still falls short of a complete reinvestment of earnings back into the parks.

 

[Bstanley]

Hmm interesting, I hadn't considered EBITDA vs NET - although it makes sense that the parks would get hit harder than the other segments on depreciation.

I'll give the boys the benefit of the doubt (there's that Pixie dust again...) for the moment and say that the $600M in depreciation the last couple of years was caused by the writing down of AK/DCA and the accountants were just trying to save some tax dollars... but if they wanted to shuffle some money around it IS a really big bucket...and well, accounting machinations are certainly all the rage these days...

 

[larworth]

Disney has been pretty open with the street about their cost cutting efforts for many years now. Hard to imagine there was that much fat in the organization they could take out all these costs with no affect at all on their value proposition(??)

Divisional cash flow results are interesting. If I look at the financial statements I too see a division that has generated no real positive cash flow for over a decade. However, here is a recent quote from an interview with T. Staggs

Q. What about long-term growth at Disney? A. (Staggs) We’re not making specific growth projections, and I’m not sure it’s a good practice to do that anyway. The theme parks REMAIN a HUGE contributor to cash flow. Our cable networks…

It would be interesting to try to match up the investments we can identify against the reported capital investment each year. Wonder if we could get some reasonable picture of the baseline infrastructure investment.