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Disney's (DIS) Shanghai Park Closure to Hurt Q2 Operating Income

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Disney (DIS - Free Report) shut down its Shanghai Theme Park, effective immediately, as authorities try to control the sudden coronavirus flare-up in China.

Disney also reported that Shanghai Disneyland, Disneytown and Wishing Star Park would remain closed until further notice.

Shanghai, China’s financial hub, reported a surge in COVID-19 infections per day, in spite of the country’s efforts to contain the growing coronavirus outbreaks.

Disney expects second-quarter fiscal 2022 operating income to be affected by park closure in Shanghai due to coronavirus.

Disney’s shares are down 9.4% year to date compared with the Zacks Media Conglomerates industry’s fall of 5.8% and the Consumer Discretionary sector’s decline of 12.5%, on concerns about lost profits from the lockdown of its theme park due to the coronavirus outbreak in China.

Disney Shanghai Shutdown Threatens Top-Line Growth

Disney’s top line is expected to take a hit with the announced shutdown of Disney Shanghai.

Since early 2020, the world has been and still continues to be impacted by the coronavirus pandemic. This has impacted Disney’s business segments in many ways, but most significantly at the Disney Parks, Experiences and Products segment where the theme parks and resorts were closed and cruise ship sailings and guided tours were suspended.

These operations resumed at various points since May 2020, initially at reduced operating capacities due to COVID-19 restrictions.

In fiscal 2022, Disney reported that its domestic parks and experiences are generally operating without any mandatory COVID-19 capacity restrictions. The company has been maintaining basic capacity restriction norms to address ongoing COVID-19 considerations with respect to guest and cast health and safety.

Disney generated $7.23 billion in revenues in the Parks, Experiences and Products division in first-quarter fiscal 2022, contributing 33.2% to the company's overall revenues. In fiscal 2021, the company generated $16.55 billion in revenues, up 5% year over year.

Nonetheless, Disney has been making big moves to transition its business model to one that is more sustainable. The company’s focus on its direct-to-consumer (DTC) offerings reflects this transition.


Focus on DTC Business Expansion

Disney’s direct-to-consumer offering, which now includes Hulu, ESPN+, and Disney+, are becoming must-have services for consumers’ portfolio of streaming platforms.

The coronavirus-led global lockdowns over the past two years have increased the consumption of media content over the Internet, giving Disney+ a chance to prove its in-home entertainment worth.

Disney launched Disney+ in 2019, and since then, its streaming business has expanded rapidly.

On Aug 31, 2021, Disney launched Star+, its stand-alone general entertainment and sports streaming service in Latin America. Disney launched Disney+ Hotstar in Malaysia on Jun 1, 2021, in Thailand on Jun 30, 2021, in Indonesia on Sep 5, 2020, and in India in April 2020.

Disney+ added 179 million total subscriptions across its DTC portfolio at the end of fiscal 2021, up 60% year over year.

As of Jan 1, 2022, Disney+ had 129.8 million paid global subscribers since its November 2019 launch. It is predicted to hit 126 million subscribers worldwide by 2025.

Hulu and ESPN+ had 43.8 million and 17.1 million paid subscribers, respectively, at the end of fourth-quarter fiscal 2021.

In January 2022, Disney announced that it is creating a new hub for international content creation to boost the expanding pipeline of local and regional content for its streaming services. The extension plan would support the worldwide expansion of the company’s direct-to-consumer (DTC) business.

The growing popularity of Disney+ makes it a key growth catalyst owing to a strong content portfolio and a cheaper bundle offering.

In January 2022, Disney announced that it would premiere Disney and Pixar’s Turning Red on Mar 11, on Disney+ worldwide. Pixar’s Luca and Soul, which were premiered exclusively on Disney+, were received well by subscribers.

Released in December 2021, Disney-owned Marvel Studios and Sony’s (SONY - Free Report) co-production Spider-Man: No Way Home crossed the $1-billion benchmark at the global box office in its second weekend.

Sony’s latest Spiderman adventure cemented its place as the eighth highest-grossing movie at the global box office, earning $1.53 billion worldwide.

Over its fourth weekend after release, No Way Home generated another $64 million internationally and $33 million domestically.

Disney has also been riding on its expanding partner base. The company is focused on increasing its partner base to reach more consumers worldwide.

In November 2021, Disney —currently carrying a Zacks Rank #3 (Hold)—renewed its content carriage agreement with Comcast (CMCSA - Free Report) .

Per the agreement, Comcast will continue to distribute Disney’s cable channels, such as the Disney branded channels, the ESPN networks, the FX Networks and the National Geographic channels Xfinity X1 and Xfinity Flex.

Earlier in 2021, Comcast launched Disney+ and ESPN+ on Xfinity X1 and Xfinity Flex.

Disney renewed its distribution agreement with Alphabet (GOOGL - Free Report) division Google’s YouTube TV, after its previous agreement expired on Dec 17, followed by a two-day blackout.

Per the renewal of the agreement, Disney and Alphabet's Google reached a deal to restore ABC, ESPN and other Disney channels to YouTube TV.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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