New cruise ships don’t exactly go up overnight. That makes Disney’s timing all the more fortuitous.
Walt Disney Co. has been in the cruise business for nearly 30 years, but it has long been a drop in the industry’s ocean: The five ships it operates have a combined passenger capacity of about 5% of market leader Carnival. But three more ships are coming online over the next 18 months, including a 208,000 gross ton behemoth called Disney Adventure that will be the Magic Kingdom’s first entry into the flotilla of megaships that have been hitting the seas lately. The three new vessels will more than double Disney’s cruise capacity by the end of next year, Bernstein analyst Laurent Yoon estimates.
The timing couldn’t be better: Disney’s land-based theme parks have hit a bit of a rough patch. Revenue growth has slowed notably following a strong two-year run fueled by pent-up demand after the pandemic’s lockdowns. The company warned in its fiscal second quarter report in early May that operating profit for the Experiences segment that includes parks and cruise ships would fall well short of Wall Street’s forecasts for the June-ending quarter. Disney cited “some normalization of post-Covid demand” as a factor, which was enough to sink the stock: Disney shares are down around 15% since that report. Rival theme-park operators United Parks, Six Flags and Cedar Fair have averaged a 25% gain since their respective reports.
Theme parks play a particularly important role in Disney’s business model these days. Streaming has decimated the cable-TV industry, while the pandemic and last year’s crippling Hollywood strikes have kept box-office sales well below their levels from five years ago. Domestic and international parks—which include the cruise business—accounted for one-third of Disney’s revenue but 52% of its operating profit for the 12-month period ended March. Their bottom-line contribution averaged just 29% in the three fiscal years before the pandemic.
Hence, the outlook for theme parks has become the biggest area of concern for Disney’s investors lately. For its part, the company has painted the problem as temporary. Chief Financial Officer Hugh Johnston said on the last earnings call that operating-income growth in the Experiences segment is expected to “rebound significantly” in the September quarter.
But some analysts aren’t so sure. In a June 10 report, Brandon Nispel of KeyBanc Capital predicted that the company’s domestic park business “will be pressured for the rest of 2024,” in part as attendance normalizes following anniversary celebrations at the Florida and California parks over the prior few years. There is also the threat posed by Comcast’s Universal, which is opening a major park in Orlando next year called Epic Universe. MoffettNathanson analysts expect that facility to cost Disney World about one million visitors over the next two years.
An expanded cruise-ship business should help Disney offset that. Business is still booming for the industry as the three largest cruise operators—Carnival, Royal Caribbean and Norwegian Cruise Line Holdings—all exceeded expectations for the “wave season,” the period between the holidays and March when many cruises are booked. Carnival reported a surprise net profit for its fiscal second quarter last week and raised its full-year projection, with Chief Executive Josh Weinstein citing an “unprecedented level of demand for 2025 sailings” in the company’s earnings call.
For Disney, cruise ships have also turned out to be a natural fit for a company skilled at getting entire families to fly across the country, spend gobs of money and spend hours waiting in sweltering heat. And those families apparently don’t age out. “A number of people who go on our cruises are without kids because their connection to the brand and the [intellectual property] is extraordinary,” Disney Chief Executive Bob Iger said at MoffettNathanson’s investment conference in May.
Disney doesn’t disclose financial details of the cruise business, but it told analysts last year that the yield on its floating theme parks—meaning the amount of revenue per passenger per cruise day—is twice the industry average. UBS analyst John Hodulik said in a June 27 report that “rapid expansion of cruise capacity helps de-risk the medium term outlook” for Disney’s Park business.
Yoon of Bernstein estimates the three new ships will bring Disney’s cruise revenue to more than $5.1 billion in fiscal 2026 compared with the approximately $2.5 billion he projects for the business in the current fiscal year ending in September. “We expect the additional Cruise revenue to more than offset the Epic revenue impact,” Yoon wrote in a June 17 note to clients.
New competition on land won’t sink the Mouse House after all.
Write to Dan Gallagher at dan.gallagher@wsj.com