Walt Disney Co. (DIS) reports fiscal Q3 2020 earnings after Tuesday’s closing bell in the United States, with analysts expecting a loss of $0.64 per share on $12.48 billion in revenue. The stock tread water after missing Q2 profit estimates by a wide margin in May, with shareholders hanging tough as soon as the company reported outstanding subscription growth in the Disney+ streaming service. It is now trading 15% higher but still below levels broken in the first quarter.

The company kept California and Florida parks closed in the to-be-reported quarter, while Shanghai and Hong Kong parks were reopened on May 11 and Jun 18, respectively.

However, reduced capacity due to strict social-distancing norms is expected to have hurt occupancy, thereby negatively impacting top-line growth.

The Zacks Consensus Estimate for Parks, Experiences & Consumer Products revenues is currently pegged at $899 million, significantly down from $6.58 billion reported in the year-ago quarter.

Walt Disney Co. (DIS), one of the world’s largest entertainment companies, is experiencing the worst effects of the COVID-19 pandemic and sharp contraction of the U.S. economy. Just about every aspect of Disney’s business has been affected, from theme park closures and suspended cruise ship sailings to delayed movie releases and lower advertising revenue.

Investors will be looking at just how badly Disney has been hurt when it reports earnings on August 4, 2020, for Q3 FY 2020.2 Analysts expect Disney to report plunging revenue and its first loss in at least 19 quarters on an adjusted per-share basis. The company’s fiscal year ends in September.

One key metric investor will be especially focused on is Disney’s revenue from its Parks, Experiences, and Products segment. The segment comprised the largest share of Disney’s total revenue during 2019 and was the hardest hit by the pandemic in the company’s fiscal second quarter, which ended March 28, 2020.1 For Q3, analysts forecast a precipitous decline in the segment’s revenue.

Disney’s stock was struggling to keep pace with the broader market even before the outbreak of COVID-19. However, since the crisis began, the gap has only widened. Disney has provided investors with a total return of -19.7% over the past 12 months compared to the S&P 500’s total return of 7.7%. All figures are as of July 30, 2020.

Disney’s stock has rebounded from its mid-March low at a slower pace than the rest of the market following the coronavirus-induced crash that began in late February. It did not help that earnings badly missed analysts’ estimates for Q2 FY 2020.3 Adjusted earnings per share (EPS) fell 62.7%, marking the sixth consecutive year-over-year decline and the biggest drop in at least 18 quarters. Revenue rose 20.7%, which gave the stock some upward momentum over the subsequent month before suffering a setback in early June.

As mentioned, a key metric for investors is Disney’s revenue from the Parks, Experiences, and Products segment. This segment is comprised of Disney’s theme parks, resorts, cruise ships, and vacation clubs and is tied especially closely to the spending power of consumers in the U.S. and around the world. The segment comprised 37% of total revenue and 40% of operating profit in FY 2019, which was generated through park admissions, food, beverages, and resort and vacation stays. The segment has acted as a stable source of revenue for Disney in recent years. But during the pandemic, Disney’s theme parks, cruise ships, and resorts are especially vulnerable. These tourist sites are crowded consumer spaces, and they rely on travel and non-essential consumption.

Disney’s Parks, Experiences, and Products segment posted YOY growth between 3-10% in each quarter between Q2 FY 2017 and Q1 FY 2020. But that trend changed in Q2 FY 2020. The segment posted a 10.2% decline in revenue amid forced theme park and resort closures, cruise ship suspensions, and shelter-in-place measures. Analysts expect an even bigger drop of 84.6% for Q3 FY 2020.4 Last year, such a disastrous decline would have been unthinkable as the U.S. economy entered its tenth year of expansion, luring millions of consumers to Disney’s properties. Until a vaccine becomes available and if travel restrictions remain in place, Disney will be more dependent than ever on its other business segments: Media Networks, Studio Entertainment, and Direct-to-Consumer & International.

Studio Entertainment Revenues to Decline:

Disney’s Studio Entertainment segment revenues are expected to decline due to lack of any major release amid the shutdown of movie halls beginning mid-March.

The coronavirus outbreak forced Disney, which has a Zacks Rank #5 (Strong Sell), to suspend the release of Mulan and reschedule other upcoming releases including Marvel’s Black Widow.

The Zacks Consensus Estimate for Studio Entertainment revenues is currently pegged at $2.02 billion, suggesting a decline of 47.2% from the figure reported in the year-ago quarter.

Disney+’s Solid User Base to Boost Top Line:

Notably, as of May 4, Disney+’s subscriber base had reached 54.5 million, triggered by higher media consumption during lockdowns and on the following of pandemic-related physical-distancing norm.

Disney released much-anticipated Artemis Fowl on the streaming platform during the to-be-reported quarter. Further, Pixar’s Onward was added to the Disney+ library within a few weeks of its release after the movie’s theatrical run was dampened by the closing down of theatres.

Moreover, Disney+ debuted in Japan during the to-be-reported quarter. This expansion is likely to have aided subscriber base.

The Zacks Consensus Estimate for DTC & International/Consumer Products revenues is currently pegged at $4.43 billion, indicating 14.8% growth from the figure reported in the year-ago quarter.

Disney Short (Sell)

ENTER AT: 113.67

T.P_1: 108.92

T.P_2: 104.24

S.L: 118.25