A Theme-Park Pop Could Help Disney Sparkle This Year

After a long spell of low attendance, crowds have begun flocking back to Disneyland and Disney World.
After a long spell of low attendance, crowds have begun flocking back to Disneyland and Disney World.

Last year, the Happiest Place on Earth didn't bring many smiles to Walt Disney (DIS) investors. But that may be about to change.

A big holiday rush shut down ticket sales at Disneyland in Anaheim, Calif., on two days during the week leading up to New Year's Eve after the park reached its full capacity. The burst of popularity may be a sign that Walt Disney's parks and resorts operations could turn from a liability to a money maker for the media giant.

Theme parks -- including Disneyland, Florida's Walt Disney World and overseas parks in Hong Kong and Paris -- account for more sales than Disney's filmed-entertainment revenue and consumer-products sales combined. So, a rebound in consumer spending stands to add far more to the company's bottom line than a blockbuster movie or big TV ratings, some analysts say.

"We believe the park recovery will be a strong point for Disney in 2011, but is largely discounted in the stock and may be partly offset by media network risks," wrote Janney Capital Markets analyst Tony Wible in a Jan. 3 note to clients.

The Lines Are Back

In particular, the attendance rebound at Disney World, which was helped by the midyear opening of The Wizarding World of Harry Potter attraction at the competing Universal Orlando resort, already has spurred airlines such as Air France and Virgin America to add flights to the area, according to BTIG Research analyst Richard Greenfield.

It's a big change from much of last year, when the Disney's parks and resorts division suffered from low U.S. attendance and high fixed costs, pulling down the company's overall earnings growth

For the year ended Oct. 2, operating income from the parks and resorts division fell 7% from the previous year on revenue that remained flat at $10.8 billion, accounting for 28% of Disneys sales. More telling, the division's operating margin, or operating income as a percentage of sales, fell to 12% from 13% a year earlier as a result of higher costs and lower attendance at Disney World and California Adventure. That compares to a companywide operating margin of 20%.

"California Adventure. . .was a bit of a brand withdrawal," said Disney CEO Robert Iger in a conference call with analysts last November. "We're putting capital in to fix a problem that we've had for a long time, and to help grow the overall Disneyland resort."

The Risk of High Oil Prices

Granted, just like a big-budget film, such investments aren't guaranteed to bring the desired results. Hiccups in the economy may cause families to pull back on spending and postpone theme-park visits.

"Attendance and per-capita spending at the parks is obviously highly correlated to consumers finding their way to Disney properties via public transportation," Caris & Co. analyst David Miller wrote in a Jan. 3 note to clients. "Should the price of crude oil, and therefore jet fuel and gasoline, spike to levels that force consumers into a 'cocooning' effect, Disney share could see material downside."

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That said, even a slight uptick in attendance could substantially boost operating profit by defraying some of the large fixed costs inherent in theme-park operations. Miller estimated that just a 5% increase in parks and resorts sales in fiscal 2011 would widen the division's operating margin to 21%.

And that uptick may be coming if Disneyland is any sign. Last week, attendance appeared to overwhelm park operators who already had been bracing for the park's traditionally busiest week of the year. Disneyland sold out of tickets mid-morning on both Dec. 28 and Dec. 31, according to company Tweets.

"Time will tell if this surge will carry over outside the holiday," Janney Capital Markets' Wible wrote. "But the holiday demand is a good harbinger for the company given massive operating leverage in the division."

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