A strong U.S. consumer could be key to Disney (DIS) stock riding higher on theme parks in 2019.
The segment was certainly a strong point in the Burbank-based company's earnings release on Tuesday evening.
Parks, Experiences & Consumer Products charted revenue of $6.8 billion beating consensus and reported operating income of $3.66 billion, roaring past expectations of $3.26 billion.
"The new parks, experiences & consumer products segment posted 5% growth, as the park and resort business continues to report strong results," Morningstar analyst Neil Macker said. "The increased admission pricing does not appear to have negatively impacted attendance or dampened in-park spending."
The company reported that while domestic attendance was flat, consumer spending grew by 7% and per room spending improved by 5%, helping bolster the results.
CFO Christine McCarthy added that results so far in 2019 are strong as well.
"So far this quarter, domestic resort reservations are pacing up 4% compared to prior year, while booked rates are up 1%," she reported.
The stronger spending is indicative of a key underlying driver for Disney, that being the continued strength of U.S. consumers willing to travel to a resort for vacation or at the least spend more once there.
"Real disposable income is likely to continue its strong growth due to accelerating wage growth," Goldman Sachs (GS) said in a report forecasting 2019 trends. "The bottom line is that even after [fourth quarter 208] declines in the equity market, we continue to expect strong but decelerating consumption growth over the next few quarters."
The strong consumption methods of course carry over to increased spending on travel spending, which has shown a marked pick up in recent years according to Statista reports. A destination like Disney's resorts could be a key beneficiary.
To be sure, the thesis is not safe from the spending concerns that have curbed Disney stock after comments on spending related to its DTC push.
The company disclosed in its that it currently expects its fiscal 2019 capital expenditures will be approximately $1 billion higher than fiscal 2018, attributable to increased investments in domestic and international parks and resorts.
The spending will be utilized to create a number of new attractions, including the Star Wars: Galaxy's Edge themed park in Disneyland, Mickey & Minnie's Runaway Railway to Disney's Hollywood Studios, a Coronado Springs Hotel Expansion at Disney World, a Skyliner Gondola system at Disney World, a Lightning McQueen Racing Academy to open in Hollywood, and new Pixar Pier rides in Disneyland among others.
While the spending plan appears ambitious, the return on investment on these projects has historically been quite positive, providing more visibility on the action than Disney's first foray into DTC programming offers.
According to the Orlando Sentinel, Disney's Animal Kingdom saw a 15% attendance increase one year after opening an Avatar-themed extension.
If that trend can continue with the myriad of projects underway this year, it could serve to further ignite share gains for Disney.
"Execution at the Parks has also been stellar, and we see it as the best source of upside to forward estimates," RBC Capital Markets analyst Steven Cahall said, praising Disney as a "top pick" stock for 2019.
It is also worth noting, on the cost front, that expenses will be aided by prudent spending on marketing.
"I would say by the way on the marketing expense side, don't expect much. I'm thinking that maybe I should just tweet it's opening and that will be enough," CEO Bob Iger told analysts during a Q&A session on Tuesday evening. "I think that we're going to have absolutely no problems gaining attention for [the parks] or [the parks] and it's not going to take much marketing to do that."
Trade War Takedown
While U.S. consumers have remained resilient, the same cannot be said for Chinese consumers at the other end of the Sino-American trade spat.
The political development has been a headwind for Disney as it maintains massive theme park offerings in Shanghai and Hong Kong.
While Hong Kong remained a strong spot in East Asia, Shanghai was shown to be a sticking point of slowing consumer spending in China.
"On the Shanghai side, we've seen some attendance softness this year," Iger acknowledged. "Some of the issues that China has been facing, slowdown or a decrease in consumer confidence, which has resulted in fewer Chinese people traveling within China has had an impact on our business. That has made it less profitable than we hoped it would be at this point."
He reiterated that he maintains a strong belief in the business long term, but admitted the impact will remain a concern in the near term and requires increased investment.
The park is currently among the most visited attractions in the world, marking over 11 million visits in only its first year and continues to benefit from the middle class in the world's most populous nation.
Still, that's less than one fifth of the 55.9 million charted by Disney's domestic properties and about half of the attendance of Disney's Magic Kingdom.
The slowdown in Shanghai is also less impactful than domestic parks revenue, as Disney is not a majority owner of the Shanghai operation.
The house of mouse owns 43% of the resort while the majority is held by a joint venture of three companies owned by the Shanghai government. That mitigates a portion of the company's overall interest in this park compared to those that it owns wholesale.
If the company can continue to get an A grade in its domestic, majority-owned parks, it should be able to continue to bring up its average.
For more on the economic situation in East Asia, check out Real Money's Asian markets expert Andrew Frew McMillan's column on Japanese and Chinese markets.