Disney faces more doubts as delta variant prolongs pandemic fears

With masks now mandated for everyone indoors in California, New York and other states — regardless of vaccination status — Disney could take a financial blow at theme parks, movie theaters and live productions. And that is on top of the difficult changes Disney has already begun.

Start with movie theaters, the lifeblood for Disney’s film division. The debut of “Jungle Book” simultaneously on Disney+ (for an additional fee) and in theaters July 30 highlights the uncertainty. The comedic adventure took in $34 million in North America and $30 million on Disney+ worldwide. Last week, Scarlett Johannson, who played super assassin Black Widow, sued Disney, claiming the dual opening of “Black Widow” on Disney+ and in theaters July 9 “dramatically” undercut box office revenue, which cost her millions of dollars in compensation. Disney responded the lawsuit has “no merit whatsoever.”

Pre-pandemic and before the launch of Disney+ in November 2019, Disney’s Marvel slate of movies were killing it in theaters. “Avengers: Endgame” (April 2019) and “Captain Marvel” raked in $357 million and $153 million, respectively, during their 2019 domestic opening weekends.

Bowing to a surge in COVID cases and hospitalizations in Florida and California, the homes of the Walt Disney World Resort and Disneyland Park, the company reintroduced mask requirements for attractions and indoor venues. The immediate impact, if any, on attendance is hard to gauge, though should show up in the company’s forecast.

Then there is sports programming, a key piece of the Mickey Mouse empire thanks to ESPN. More than a few television executives may have experienced heart palpitations from the ratings carnage of NBCUniversal’s presentation of the Tokyo Olympics — down 42% from 2016 — and what it could say about the demand for live sports even as ESPN lays down billions for rights to sports events.

In the end, that leaves Disney in a similar spot that it has been in for the past year and a half: Relying on its young streaming service to make up for doubts about the rest of its offerings.

Despite a momentary return to some sense of normalcy because of vaccinations, Americans’ appetite for video-streaming services remains high: Nearly four out of five said they watch as much or more content than they did six months ago, use more providers (4.5, compared with 3.9 in earlier surveying), and spend more on services ($55 from $47), according to a J.D. Power survey of 1,209 people in June.

The list of streaming competitors is prodigious and deep: Netflix Inc. NFLX, -0.79%, Apple Inc.’s AAPL, -0.34% Apple TV+, AT&T Inc.’s T, +0.86% HBO Max, Amazon.com Inc.’s AMZN, -0.63% Prime Video, Comcast Corp.’s CMCSA, +0.29% Peacock, among others. But there are significant cracks at Netflix, where net paid subscription growth has slackened following the dizzying heights of video-streaming viewership during the great lockdown of 2020.

In maintaining a hold rating on Disney shares, Needham analyst Laura Martin says consensus estimates for Disney are “too high owing to high near-term investment in [direct-to-consumer] in 2021, and another year of unclear earnings contributions from theme parks, ESPN and film releases as vaccines roll out slowly globally.”

“We worry that theme parks, cruise ships, or cinema attendance may not return to pre-COVID levels during 2021, which current valuations anticipate,” Martin said in a July 1 note. “We do believe that Disney has a strong enough balance sheet to weather a longer COVID-induced earnings downdraft.”

What to expect

Earnings: Analysts on average expect Disney to report earnings of 55 cents a share, up from 8 cents a share a year ago. Analysts had been forecasting 73 cents a share at the end of March.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are projecting earnings of 74 cents a share on average.

Revenue: Analysts on average expect Disney to report $16.77 billion in third-quarter revenue. Estimize contributors predict $17.00 billion on average.

Stock movement: Disney stock has declined in the trading session after its past two quarterly earnings reports, and after seven of its past 10. Disney shares are down 2% so far this year, while the Dow Jones Industrial Average DJIA, +0.46%, which counts Disney as a component, has gained 14.7% and the S&P 500 index  SPX, +0.10% has climbed 18%.

What analysts are saying

Disney analysts were uniformly startled by a steep drop in domestic box office business for Black Widow, which premiered at the same time on Disney+. The superhero flick starring Scarlett Johansson plunged 67% in its second weekend, the worst of any Disney-era Marvel film.

“We think one hot topic for management will be windowing of tentpole content following the Disney+ Premier Access [DPA] debut of ‘Black Widow’ (in addition to hitting theaters),” Wells Fargo analyst Steven Cahall said in a July 20 note to clients. “DPA certainly cannibalizes box office but with Disney’s much higher take rate vs theater splits, its impact on revenue and prots is less clear, especially if it means less marketing spend.”

Michael Nathanson of MoffettNathanson believes that the Olympics viewership shouldn’t reflect poorly on Disney, and suspects that its sports offerings will show a rebound in Thursday’s results.

“Those conglomerates with returning flagship sports events like Disney and ViacomCBS VIAC or quickly scaling [adversting-based video on demand] platforms (again) like Disney and ViacomCBS should be able to report aggregate 2Q 2021 ad revenues close to 2Q 2019,” Nathanson wrote in an Aug. 2 note.