Disney To Bring Frozen Attraction To The Walt Disney World Resort

Disney (NYSE:DIS) has started construction of a ‘Frozen’ attraction at The Walt Disney World Resort. This comes in as no surprise given the movie’s wide success across the globe. The Frozen attraction will come up at the Norway Pavilion in Epcot, replacing the Maelstrom. The attraction will include a royal greeting location where movie characters Anna and Elsa can meet the guests. Disney stated that in addition to character appearances, Cinderella Castle will be turned into an ice palace every night starting in early November. ^[1] Bringing Frozen to its theme park is a smart move by the company as it will ensure higher visitation at the resort once the attraction is open to guests.

Theme parks provide stable cash flows to Disney and in the first half of 2014, they generated revenues of $7.54 billion and operating income of $1.3 billion, reflecting growth of 8% and 21%, respectively, over the prior year period. ^[2] The growth was primarily driven by higher per capita guest spending at the parks. We expect the growth to continue primarily on higher consumer spending and an annual increase in ticket prices. Moreover, the company has made continuous efforts to bring in new rides that attract first time as well as repeat visitors.

We estimate revenues of $48.4 billion for Disney in 2014 and EPS of $4.00. We maintain a $94 price estimate for Disney’s shares, which is close to the current market price of $90.

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Frozen Has Been A Very Successful Project For Disney

Frozen is the most successful animation film in the history with a total box-office grossing of over $1.27 billion. The movie also created a huge demand for merchandise at Disney’s retail stores. The stores were unable to meet the demand for Frozen merchandise and even restricted customers to buy a maximum of two items per order. Frozen merchandise sold better than any other licensed toy in the first quarter of 2014. ^[3] Stores across the U.S. were sold out on Frozen costumes for most of the time of the first two quarters, and originals were being offered for as much as $1,600 on eBay as compared to the official price of $149.95 at Disney stores. Frozen is expected to rock the Christmas holiday season and its annual merchandise sales may exceed $1 billion in the U.S. alone. ^[4]

What Does This Mean For Disney?

It is clear that there is a huge demand for everything that is related to Frozen and a theme park attraction means a repeat trip for guests to The Walt Disney World Resort. The theme parks business is of immense importance to Disney as it not only generates stable cash flows for the company but also provides a platform to sell and cross-market its other products and services, including movies, retail merchandise and television. It must be noted that it is very important for theme park operators to come up with new attractions from time-to-time to lure more visitors in a competitive environment. For instance, Comcast’s (NASDAQ:CMCSA) new Harry Potter attraction has been very successful so far with high visitation and its impact will be visible when Comcast reports its third quarter earnings on October 23.

However, there is a heavy cost to maintain these parks, which is reflected in the thin margins of theme parks. While U.S. theme parks and resorts account for about 20% of Disney’s stock value, according to our estimates, the value contribution is relatively low despite the fact that Disney earns approximately 25% of its revenues from its domestic theme parks. This can be attributed to high capital expenditure associated with this business. Over the past few years, theme parks have benefited from strong attendance and higher per capita guest spending driven by higher ticket prices, which have fueled revenue growth. We believe that these factors will continue to drive growth at the theme parks in the near term as well as in the long run (read full story – Theme Parks and Resorts Provide Stable Cash Flows to Disney).

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1. ‘Frozen’ Attraction Coming to Epcot, Disney Parks Blog, Sep 12, 2014 [↩]
2. Disney’s SEC Filings [↩]
3. America’s ‘Frozen’ Obsession Continues, Leading to Disney Store Lotteries and Disneyland Craziness, The Wrap, May 2, 2014 [↩]
4. What’ll be hot for the holiday toy season? Disney’s Frozen, Fortune, Aug 2, 2014 [↩]