Wednesday, 29 March 2023

Stop Worrying About Disney Layoffs

by Earn Media

Stop Worrying About Disney Layoffs

The pink slips are starting to trickle down at Walt Disney (NYSE: DIS) this week. The Wall Street Journal is reporting that the company has disbanded its metaverse strategies unit, a roughly 50-person task force tackling next-gen storytelling and consumer experiences.

The layoffs won’t end there. Disney is expected to eliminate around 7,000 positions in the next couple of months. Job cuts are unfortunate, but this move doesn’t come as a surprise.

Many of the country’s most valuable companies have been trimming their head count over the past year, responding to rising costs and investors punishing stocks that lack fiscal responsibility. It’s Disney’s turn to deliver bad news, but it’s not something that shareholders need to worry about for now.

Job cuts aren’t enough

CEO Bob Iger announced that the layoffs would be coming seven weeks ago, when Disney discussed its fiscal first-quarter results. The dismissals are part of Iger’s plan to realize $5.5 billion in cost savings. Trimming 7,000 positions is a big number — and obviously painful for the 7,000 families who will bear the consequences of the cuts — but it’s ultimately around 3% of Disney’s total workforce.

Cutting thousands of jobs won’t be enough to save the company $5.5 billion a year. The biggest component of Iger’s strategy is to shave $3 billion from what it spends on produced and licensed content outside of live sports programming.

It will be challenging to shave billions from content spending for a media empire that needs a steady stream of hits to keep its vibrant ecosystem gushing. But it’s hard to stomach the more than $4 billion operating loss reported by Disney’s direct-to-consumer segment in fiscal 2022 without concluding that Disney+ will never turn a profit until it’s more prudent with its content allocation.

The balance of the cost savings will come from non-content moves that will lower overhead by $1 billion in fiscal 2023 and another $1.5 billion next year. The timing is intentionally swift. Iger returned to Disney as CEO on a two-year deal that concludes shortly after the end of fiscal 2024. With Iger also prioritizing Disney+ being profitable by the end of next year, he doesn’t have a lot of time to spare.

Image source: Disney.

The timing of the layoffs might seem ironic. Disney World announced late last week that it had brokered a deal with its unions to raise the minimum pay of about 32,000 cast members. Is Disney cutting jobs to pay more for those sticking around? No. The front line of Disney’s theme parks won’t take much of a hit in the next two months of layoffs. Half of the $2.5 billion in non-content savings will come on the marketing end. Labor will make up another 30% of the cost cuts, with the balance coming from elsewhere in the company.

The call for fiscal prudence has resonated with Wall Street over the past two years. Companies that are struggling to grow their bottom lines are being punished, and even iconic companies including Disney haven’t been immune to the markdowns. Disney stock continues to trade for less than half of its all-time high. Getting its cost structure back in order is important. Disney will also be resuming the semi-annual dividend distributions that it suspended at the onset of the pandemic three years ago.

Iger’s corrective measures won’t be enough to get the media stock back to its early 2021 peak. It was lofty expectations for Disney+ that pumped up the shares like helium inside a Mickey Mouse balloon down Main Street U.S.A. However, a more profitable Disney will make it a lot easier to start the long way back. Disney is heading in the right direction, even if it means that its head count will have to take a step back.

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Rick Munarriz has positions in Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.