The BLOG FLUME - Between the Lines

Disney has released its report for the Third Quarter and things are looking pretty good... or are they?

Written by Kevin Baxter
Published: August 16, 2004 at 3:09 AM

Orlando Sentinel - Aug 10
Orlando Sentinel - Aug 11
Orlando Sentinel - Aug 12

Disney has announced company earnings for the Third Quarter and things were mostly good. The company's profits rose 20%, mostly from the theme parks, which sounds great, right?

Well, attendance at the parks was up 20% over last April/May/June but hotel occupancy was only up 7%. The article doesn't mention that the Disney hotels - especially those in WDW - are where Disney makes most of their profits. 20% at the parks is no chump change, but 7% higher than an extremely flat 2003 Third Quarter isn't that big a deal.

Apparently it is to Michael Eisner, who had the nerve to claim the $11B in investments (mostly in the parks) the company has spent since 1997 is starting to pay off. Say what? Clearly the creation of AK, DCA and WDSP are included in that $11B, but it would take more clever accountants than those Disney employs to prove they are paying off. Then there's Fox Family, which is also not paying off. What investments really are paying off?

Take away those clever accountants and things don't look all that great. New accounting standards have forced Disney to include assets it controls on the books, which means the Paris parks and the upcoming Hong Kong Disneyland are now included in the financial reports. If the consolidation of these assets is removed, then profit only rose 15% instead of the 20% reported.

But market analysts are finally starting to read between the lines themselves. They have long complained about Disney's accounting methods, and this consolidation seems to be making matters worse. One analyst for RateFinancials rated Disney's balance sheet "below average" for clarity and disclosure.

And that disclosure seems to be the new focus for these analysts. For example, after adding the foreign parks to the report, liabilities rose by $3.69B. Could be true. But assets rose by the same exact figure. Hmmmm. Even stranger, revenue and costs balanced perfectly even though the Paris parks are losing money and the Hong Kong park hasn't made any yet.

So what to believe? An analyst at Morgan Stanley sees very slow growth after 2004. There are still too many problem areas and Disney relies far too much on one sole division - the cable channels. The defection of both Miramax and Pixar will hurt the mostly profitable movie division. Even worse, the division that has historically driven profits - the theme parks - is expected to have slow growth between 2005 and 2009. I think this is the most prescient of the analyses as WDW will most likely never reach its heights of the 1990s. There is just too much competition now and little desire on Disney's part to spend money properly to fight off the competition. The parks will simply never be a weeklong destination again and Disney needs to adjust to that or they will lose their dominance, at least in Florida.

Readers' Opinions

From Joe Lane on August 16, 2004 at 9:42 AM
The Disney Stores. Don't forget The Disney Stores.
From Robert Niles on August 16, 2004 at 9:46 AM
I've spoken to several analysts (hey, a perk of editing a site like TPI, the thorough ones seek you out...) and all report that they hear Disney's theme park attendance was level or down at its U.S. theme parks from July on. FWIW.... but some analysts seem to be doing their own research into Disney's numbers now.
From John Franklin on August 16, 2004 at 3:52 PM
And don't forget ABC which just seems like a bottomless pit for Disney to lose money in.
Just be glad that Disney sold off the Angels and is no longer losing money there.
Has Disney (i.e. Fox) Family Channel paid off yet?
I also heard that Disney is having problems with the Disney Channel as well.
And let's not forget the Ducks or the Disney Stores going under.
From Kevin Baxter on August 17, 2004 at 5:01 AM
The worst part of this whole thing? Before Disney bought ABC, the theme parks usually had to bail out the film division. With television doing so badly, now the parks may have to bail out TWO divisions. Disney has fortunately done fairly well in the movie division the past few years, which took some of the pressure off the parks, which haven't been doing well the past few years.

Then the heat got put on Eisner. ABC wasn't going to be doing well anytime soon? The film business is simply too unpredictable to expect huge returns every year. DVDs hadn't exploded yet. So where was he going to cut expenses to make profits appear to be on the rise. After all, percentages are easier to understand than Revenue and Profit and Expenditures, especially on the Disney balance sheet.

So the theme parks get reamed. Eisner allows big attractions to be thrown at DCA and Epcot and they haven't helped matters. If these 50th Anniversary attractions don't increase hotel occupancy, we better get used to the parks not getting the attention they deserve. If Eisner doesn't leave until late 2006, the earliest we will probably see major attractions would be 2008. Can AK, DCA and Disney/MGM survive for four more years without major help? And if they don't get that major help, will people continue showing up?

If they spend money on the parks, people still might not come, but if they don't spend money, people certainly won't come.

From Matt E on August 17, 2004 at 7:41 AM
Just one note, don't forget that although hotel occupancy at WDW rose "only" by 7% over last year, there is one major difference compared to last year...that is the addition of 2,880 rooms at Pop Century that were not open last year at this time. In comparison, Pop Century, in total number of rooms, is almost like 3 Grand Floridians combined. Another comparison is that it almost has 1,000 more rooms than Coronado Springs. In other words, room occupancy precents increased even with the addition of Disney's single biggest hotel (according to number of rooms available).

It is true that attendance has waned to around last year's level for the months of July and August. Several reasons can be attributed. First is fewer people traveling to the Orlando area as a whole than the incredible crowds seen earlier this year due to several reasons, including remaining high gas prices and other economic concerns. Secondly, there are less 'locals' at the parks this year compared to last, especially at Epcot which opened Mission:Space for "previews" during this time last year....but still attendance is on track with last year's for July and August from what I know...its just not showing that 20% and 15 or 17% gains seen in the past two quarters.

From John Dowling on August 17, 2004 at 2:17 PM
Where has T. Holland Creative gone to? I never thought I'd miss him but......
From Robert OGrosky on August 17, 2004 at 2:56 PM
Does this also take into the affect of all the time shares being built on wdw property???
From Kevin Baxter on August 18, 2004 at 12:39 AM
Matt, you are completely misunderstanding what that 7% increase in hotel occupancy means. It has nothing to do with the number of rooms WDW has now compared to last year. It is about how many nights people paid for. So, even with the addition of so many rooms, WDW was only able to increase the number of nights it sold by 7% over last year. And they probably sold most of those in the new Pop Century, which is the cheapest hotel in the resort.

Don't buy into the numbers game they feed you. So what if attendance is on par with last year. Attendance was AWFUL last year. Flat inside all of WDW except Epcot, which only increased by 4% over a HORRIBLE 2002. Still WAY down from the heights of a few years ago.

And don't expect it to change much over the next 5 years or so. If ever. The days when people spent a full week at WDW are over. There is too much competition, not only from other theme parks, but other destinations. A week in WDW is a pricey vacation, much more than a week practically anywhere else in the nation. Right now, trips to major European cities are much cheaper.

People will still head to WDW and Orlando, but the trips will be shorter and less frequent. WDW needs to adjust.

From gregory tulloss on August 18, 2004 at 6:43 AM
Another note about the Hotel Occupancy and Revenue. The Company reported that revenue from the Hotels was down 9%, this is no doubt a reflection of the cost of the Pop Century Resort. Kevin is then correct in his assumption that the Pop Century is selling the most rooms, because the increased room nights sold was at a lesser fare. But with a revenue loss of 9% against the occupancy increase of 7% Disney should be very worried that they have just opened a plague against themselves: consumers are beginning to suspect that a cheaper vacation may be just as good, but Disney is not ready for their customers to pay less. How can WDW's other hotels sell themselves to return visitors when the newest rooms on property are much less expensive? As you can see, these numbers are reflecting a HUGE problem in Florida.
From Matt E on August 18, 2004 at 1:41 PM
Oh, my bad. I was thinking that the percent gain meant how many rooms they were filling vs how many they had...and I was thinking that even with the addition of so many rooms they were filling their available rooms at a level 7% higher than last year. But it sounds like what it really meant is that the number of nights they sold rose by 7%, which would mean that even with 2880 more rooms, they were only able to make 7% more reservations, right? I agree, that doesn't necessarily sound as good now.

I wouldn't say though that attendance last year at Disney World was "bad". Its all in the way you look at it I suppose. In comparison to attendance at MK, Epcot and MGM prior to 1998 when the area saw two major new theme parks within a year open, I suppose its "bad". But when all 4 WDW parks are in the top 5 most visited parks in the nation with their own DL in that mix (and wasn't MK perhaps the most visited in the world last year???), that's still pretty darn "good", don't you think?. At this point, I don't necessarily see attendance at WDW last year or before a result of having an "inability" to continue to attract people, but part of a larger drop in worldwide tourism trend. If we were seeing other main parks in, say, the top 10 increasing and WDW parks decreasing...that would be "bad". If what I'm trying to say makes any

From Matt E on August 18, 2004 at 1:41 PM
"How can WDW's other hotels sell themselves to return visitors when the newest rooms on property are much less expensive?"

I agree. I don't know if more hotels were needed at WDW, especially so many in the "value" range which makes wonder if there would be any good reason to complete phase II of PC. I believe they thought that the value resorts would lure those who were planning to stay at cheaper rooms "off-property". But perhaps all that is happening is that folks who would have stayed on-site no matter what are now simply choosing the cheaper rooms vs the $300-400+ a night rooms at the deluxes. I don't know.

But because of a small trip I was making down to Orlando, I do know that for the weekend of August 6th-9th all 8 of the most expensive (deluxe) resorts (GF, Contemporary, Poly, Wilderness Lodge, Boardwalk, Yacht Club, Beach Club and AK Lodge) were sold out...but the moderates and values were still open for that apparently they can still sell the most expensive ones.

I wonder what kind of, if any, impact the "motels" close to Disney saw after Pop Century opened?

From Matt E on August 18, 2004 at 1:42 PM
One more quick question about "hotel occupancy". I remembered reading it and searched it out where one article from said, and I quote,...."Hotel occupancy also improved in Florida, with 83 percent occupancy for the quarter."....does that number take into account how many rooms they have on-site? I don't know what the occupancy was for last year during that quarter, but I imagine from they way that sentence was written that it was less than 83%.

Correct me if I'm wrong, but does that mean, on average, 83% of all of the thousands upon thousands of available rooms were filled for the quarter? If so, since they added 2,880 rooms to that repetoire since last year, but were still able to fill a greater "percentage" of total number of rooms, isn't that a good thing? (assuming I'm not misunderstanding...which is possible ;) )

From Kevin Baxter on August 19, 2004 at 2:43 AM
It's hard to say how many rooms Orlando actually added since several closed down also. I saw an article somewhere but I can't find it now. Orlando is in the midst of a building boom right now, but I tend to think the total number didn't change all that much from last year. Still, I don't doubt that total occupancy was up from last year since last year wasn't all that great.

As for WDW, their room total didn't actually go up by Pop Century's full 2880 as portions of the Port Orleans and Polynesian resorts were down for refurbishing during this quarter. Not 2880, certainly, but probably in the 1000 range.

As for the revenue being down, certainly some of this has to do with the Value resorts being more popular than the more expensive ones. But massive discounting is also to blame. I don't blame Disney for discounting, since an empty room makes you nothing, but if they cannot fill EVERY room during their biggest season, then they seriously need to look into closing one of them down or selling it.

As for the Deluxes being filled, Matt... that very well may be due to a convention. It's far too suspicious for the most expensive to fill up first. In fact, I find the fact that the Values didn't fill up for the weekend as yet another sign that the resort is having problems.

I did find national numbers and maybe they will shed a little more light on this whole mess. Looking at the first four months of the year Las Vegas, like WDW, increased its occupancy by a little more than 7%. But Vegas's room rates rose by a startling 9.3%, which is the opposite direction of WDW's. Even worse for WDW, Orlando's total occupancy increase was a double-digit increase. With attendance up higher than on-site hotels, clearly the Pop Century hasn't hurt the nearby motels as much as WDW had hoped.

As for attendance, I consider any year without an increase to be a bad year. Unless the previous year was a record year, which it certainly wasn't. It's especially bad since the Universal Orlando parks are both nipping at the heels of Disney/MGM and Animal Kingdom, neither of which got a new attraction this year. Once one of those parks passes up a Disney park or two, Disney will have lost their dominance forever.

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