Can Disney shares recover from the latest setback?

Disney delays reopening of Disneyland Resort in California

Disney shares have slumped to their lowest level in over a month after the company postponed the reopening of the Disneyland Resort theme park in California as the number of coronavirus cases spiked in the US state.

The media and entertainment giant was forced to close all of its theme parks around the world due to the coronavirus pandemic and lockdown measures. Shanghai was the first to shutter its doors in February and was quickly followed by Hong Kong, Tokyo closed in February and its sites in the US and Paris were shut in mid-March.

Disney has already started to reopen sites in Asia. Shanghai reopened in mid-May and Hong Kong followed in June. It has agreed plans with authorities on how to begin opening the rest of its sites from next month. But its plan to start reopening its park in California have now been put back.

The company said the state authorities ‘will not issue theme park reopening guidelines until sometime after 4 July’, which means it will not have enough time to prepare for a safe reopening a couple of weeks later.

‘Given the time required for us to bring thousands of cast members back to work and restart our business, we have no choice but to delay the reopening of our theme parks and resort hotels until we receive approval from government officials. Once we have a clearer understanding of when guidelines will be released, we expect to be able to communicate a reopening date,’ Disney said on 24 June.

California and certain other states are coming under pressure about easing lockdown measures after the US reported a spike in cases. California reported a record increase of over 5500 new cases in the 24 hours before Disney announced it had to delay reopening Disneyland Resort.

There have also been reports that some staff at its US parks have voiced concerns about returning to work. Over 7000 employees at its Florida theme park have signed a petition to delay reopening the site next month over concerns for their safety. Florida has been reporting a similar number of daily cases as California, and there are reports that staff there are also worried about returning to work.

Will Disney’s theme parks be the same?

Apart from its cruises, Disney’s theme parks will take the longest to fully recover from coronavirus, but there are questions about the long-term viability of them if the coronavirus is intending to stay around for longer.

Disney is all about providing an atmosphere of magic and wonder. But how well will that work when there is just one-third the number of normal visitors, princesses and other key characters are wearing face masks, and without major events like parades and night-time spectaculars? Much of Disney’s business is all about shared experiences and socialising, which won’t be back to normal so long as the coronavirus is around.

Having said that, its Shanghai park sold out tickets almost immediately when it reopened last month, albeit at just 30% its usual capacity, suggesting people are more confident about visiting leisure sites than first thought. Hong Kong, which is operated differently to Disney’s other sites, is reported to have reopened with a higher capacity, but all of its other sites will follow in Shanghai’s footsteps when they start to reopen next month.

Disney is renowned for creativity, but it has a huge task of maintaining its brand and the guest experience in the new world we find ourselves in.

Will Disney’s theme parks be profitable at reduced capacity?

Demand doesn’t seem to be a problem, at least at significantly reduced capacity. So Therefore the concern will be about the profitability of the parks whilst it must accommodate fewer guests. Disney is confident that it won’t be an issue. ‘Frankly we would not reopen any park unless we can make at least a positive contribution to that overhead and operating profit level,’ said Disney chief executive officer (CEO) Bob Chapek in May. Chapek was promoted from running the theme park division to CEO in February.

Disney’s long-term view on its divisions that have been hardest hit by the coronavirus has not changed, and it is quite happy to wait for a slow recovery rather than take any drastic action. ‘Obviously we had a lot of really big plans in the parks and we still continue to have big plans. Those good ideas before Covid are going to be really good ideas after,’ said Chapek.

What does it mean for Disney?

The coronavirus pandemic has hit Disney hard. Its theme parks, cruises and retail shops have all had to close. Filming of new productions have had to be paused, cinemas have had to close, and the lack of sports has also hit its TV offering.

Disney’s last set of results exposed the vulnerability of its business model in an age of coronavirus. The bright spot was the instant success of its video streaming service Disney+, but it simply isn’t enough to offset the dire impact the virus has had on the rest of the business.

Disney’s theme parks, experiences and products division is the second biggest contributor toward revenue after its TV business, and the main driver of profits.

Read more: Disney+ vs Netflix: where next in the streaming war?

The division’s profits in the three months to the end of March took a $1 billion hit from the coronavirus, and its performance in the next quarter are likely to be just as bad if not worse. You can read more on Disney’s latest quarterly results here.

There are still huge concerns over the spread of coronavirus in the US, but things are starting to return to normal for Disney. Cinemas are reopening and Disney has titles such as Mulan ready to go. Filming and production should gradually return this year. Sports is back on and retailers are starting to open their shops to customers again.

Where next for Disney?

Disney is hoping the worst of the coronavirus is behind it and that it can gradually recover. Disney has raised debt, cut spending and suspended its dividend to shore up the balance sheet, and there are few concerns over its ability to survive.

The question is whether the environment will allow Disney to recover, and if so, how quickly. Disney is a tale of two halves. One half focuses on TV, film and media, all of which have the potential to thrive in these uncertain times. But the future of the other half built around experiences is highly uncertain and could struggle for a much longer period.

Read more: What are the top UK leisure stocks to watch as lockdown eases

Where next for Disney shares?

The wheels have come off the rally here, as the price drops below trendline support from the March low and pushes on below the 50-day simple moving average (SMA) at $112.44. For now, the focus is on $110.64, the low from mid-June, when the price was able to resume a move higher, if only for a few days. Mixed trading in April and into early May saw support develop around $100.00, so in the event of a further decline this is the first target on the downside. Alternatively, a rebound needs to clear short-term trendline resistance from the June high around $127.00; this would be suggested by a rally through $115.00, and then on through the lower high around $120.00.

Interestingly, August and September are weak months for Disney’s stock, with declines of 3% and 1.7% respectively. Positive seasonality takes over in September, with a rally into the end of the year.

How to trade Disney shares

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