Avatar sequel box office returns drag Disney stock even lower

The Walt Disney Co. has had good reason to expect big things, and big returns, on the long awaited sequel to 2009’s “Avatar,” a film that earned $2.9 billion and still stands atop the list of all-time highest grossing movies.

And superstar director James Cameron’s “Avatar: The Way of Water” was by no means a slouch on its opening weekend, bringing in $134 million from US theaters and over $434 million globally. Problem is, the US returns fell short of analysts’ predictions for the film, which projected “The Way of Water” would pull in $150 million to $175 million over its opening weekend, according to a report from CNBC.

That perceived underperformance served to drag Disney’s stock value down on Monday to a 52-week low and close to its lowest value since 2014, perpetuating a cycle that’s been in play as the company faces myriad financial challenges. Disney stock has lost over 40% of its value in the past year.

Beside coming up short on expected US ticket sales, “The Way of Water” also saw disappointing ticket sales in China over the weekend, a country that helped drive the original “Avatar” to its record earnings. China’s current COVID-19 restrictions including temporarily shuttered movie theaters helped steam returns there, which came in at just over $57 million for the weekend, according to The Wall Street Journal. Only about 35% of China’s movie theaters were open when “The Way of Water” opened.

Moviegoers’ fears of contracting the virus also played into the underwhelming attendance numbers.

“The problem is nobody wants to go to the cinema, because they’ve been told that COVID is extremely dangerous,” Tony Chambers, Disney’s global head of theatrical distribution, told the Journal. “Although cinemas are open, the appetite for going to them isn’t really there.”

While Disney’s stock value dropped almost 5% on Monday, shares were up 1.45% for the day at the end of regular trading on Tuesday.

What are Disney’s financial woes all about?

Tinkerbell’s wand may not be packing the magical punch it once did, according to the latest financial reports from the world that Walt Disney built.

But the return of Bob Iger last month, the longtime Disney head who built a reputation for minting gold when it came to creating profit for the company, is boosting investor hopes that he can still conjure the twinkle of success even as a global economic slowdown looms .

To be sure, Disney theme parks are wildly popular and generate a lot of business — and profits — for the multisectored Walt Disney Co. Last quarter, the company division that includes parks operations brought in a record $7.42 billion in the third quarter, up 36% for the same period a year ago.

However, while overall revenues were up, according to the company’s most recent financial reporting, the profit margins fell well short of projections. Per The Wall Street Journal, profit margins at Disney’s domestic parks and experiences business, which also includes cruise ships, fell by nearly 16 percentage points from the prior quarter to 14.8%, well below analyst expectations of around 20%.

The Journal noted that while it’s typical for those margins to decline for the quarter that straddles the end of summer and beginning of the school year, this year’s slide was more significant than usual and could signal trouble ahead as a slowing economy and recession worries impact how families spend on recreation and entertainment.

“The miss on the parks was a big surprise,” David Goodman, a senior analyst at Columbia Threadneedle Investments, the asset management arm of Ameriprise Financial and a large Disney shareholder, told The Wall Street Journal.

“The biggest issue is that as they ramp back up and things reopen, there seems to be a mismatch between revenues and expenses,” Goodman said. “Thinking about next year for the parks, even if demand now seems strong, that’s just today, and with the market thinking about a possible recession, there are a lot of unknowns.”

Disney’s park profits bolster bigger bets

Disney has worked to pump up park profits by increasing basic admission fees as well as adding new, pay-to-play services like the Genie+ pass that allows entrants to skip long lines at popular park rides and attractions. But it’s also been hit with unexpected issues, like Hurricane Ian that temporarily closed Disney World in Florida, costing the company $65 million, according to The Wall Street Journal. Bigger investments in marketing and events also ate into profits over the last quarter.

While park profit margins were down, and Disney stock has slipped some 35% since the start of the year, the company and its investors look to those revenues to offset some serious red ink being generated by other projects.

In the third quarter of this year — the fourth quarter for Disney’s fiscal calendar — the company added 12.1 million Disney+ subscribers and 14.6 million total direct-to-consumer customers, surpassing most analyst estimates and blowing away quarterly additions from Netflix, which gained just 2.4 million new subscribers in the quarter, according to CNBC.

In spite of the surge in subscribers, net operating losses in Disney’s streaming division, which includes Disney+, Hulu and ESPN+, ballooned to $1.47 billion in the quarter, per CNBC. That’s more than double the loss from a year ago, which Disney partially blamed on the lack of “premier access” content, or theatrically released films for which Disney charged an extra $30 to stream, such as “Black Widow” and “Jungle Cruise. “

Since its launch, Disney+ has reportedly amassed some $8 billion in losses.

Disney said during its earnings call, which came a few weeks before Iger was reappointed to the company’s chief executive position, that it expected losses to ease in the coming quarters, but the statement didn’t keep the disappointing earnings report to drag Disney stock down even further.

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