Wall Street Breakfast: Disney Edges Netflix

Disney edges Netflix

The magic has returned to Disney (DIS) as a vacationer surge back into parks led to a third-quarter earnings upside surprise. Shares climbed nearly 7% to $120 in post-market trading on Wednesday, with revenue for Disney Parks, Experiences and Products jumping 70% to $7.4B and operating income surging to $2.2B. Tech innovations like reservation systems played a role in the parks’ outperformance, while confidence appeared to return after a bruising few months triggered by the “Don’t Say Gay” tussle between Disney (DIS) and Florida’s legislature.

Conference call: CEO Bob Chapek said all of the company’s theme parks are now open, and visits are strong, but cruise ships and international visitors have some recovery ahead. “Even while the average daily attendance at our domestic parks across the first three quarters of this fiscal year was slightly below 2019, we have delivered significantly higher revenue and operating income over that same time period,” added CFO Christine McCarthy. “This approach also provides flexibility with levers we can adjust if demand were to shift.”

Over in streaming, the House of Mouse beat estimates by tacking on another 14.4M users during the quarter for a total of 152.2M Disney+ subscribers (or 221M total streaming subs when factoring in ESPN+ and Hulu). At those numbers, Disney would have a larger base than its closest competitor Netflix (NFLX), though it continues to bleed cash. Disney’s streaming operation lost $1.1B during FQ3, more than triple its loss of $293M a year earlier.

Oh, boy! Growth expectations were cut after Disney failed to renew cricket rights for the popular Indian Premier League. Subscriber forecasts for 2024 now range between 215M-245M, down from 230M-260M, prompting the company to unveil a new U.S. pricing structure to make its streaming business profitable. Starting Dec. 8., Disney+ with commercials will cost $7.99 per month – which is currently the price of Disney+ without ads – while the monthly membership of ad-free Disney+ will rise 38% to $10.99. (60 comments)

Markets celebrate

Wall Street saw a stampede of buyers on Wednesday, as signs of cooling inflation sent the major averages soaring. The Dow Jones Industrial Average added more than 500 points, while the S&P 500 rose more than 2%, with all 11 sectors of the benchmark index finishing higher. The tech-heavy Nasdaq Composite also soared, bringing its recent gains to over 20% to enter bull market territory, while adding to the two-month recovery for financial markets.

The data: The rate of annual CPI inflation fell to 8.5% in July, from 9.1% in the previous month. Core CPI rose 0.3%, less than forecast, dropping to 5.9% on an annual pace. Traders now see a 43.5% chance the central bank will hike rate by 75 basis points in September (compared with 68% before the CPI numbers), according to the CME Group’s FedWatch tool, while a 50 basis point hike is shown as a 56.5% probability.

Going deeper into the figures, not everything was so rosy. Grocery prices rose 13% in July from a year ago, marking the fastest pace of inflation since 1979, while dining-out shot up as well. Shelter costs, which make up about one-third of the CPI weighting, also continued their ascent, up 5.7% over the past 12 months. However, gasoline eased down 7.7% in July from the prior month, while used-car prices, airline fares and apparel dropped on a month-to-month basis.

Commentary: “The number is a huge relief because anything that keeps the Fed from doing more damage is a positive for all of us,” explained Bryce Doty, portfolio manager at Sit Investment Associates. “One month doesn’t necessarily make a trend but we are certainly encouraged that inflation is moving in the right direction,” noted Jack Ablin, chief investment officer at Cresset Capital. (164 comments)

Recipe gone wrong

Seven years after entering the Italian market, Domino’s (NYSE:DPZ) is closing up shop in the homeland of pizza. While the company had already stopped offering delivery at the end of July, the last of its 29 local branches just shuttered their doors. Social media is abuzz on the news, with some likening the situation to selling ice in the North Pole, or how the chain could compare their pizza to an authentic Napoletana.

History: Domino’s opened its first outlet in Milan in 2015, via a franchising agreement with a local business called ePizza SpA. At the time, it said it hoped to win over Italian palates with “purely Italian” ingredients like Prosciutto di Parma, Gorgonzola, Grana Padano and Mozzarella di bufala Campana. The biggest catch was a national home delivery model that could take on local artisanal shops and provide an alternative to Italy’s dining out culture.

Cracks in the plan first emerged during the pandemic, especially as delivery became essential during coronavirus lockdowns. Many traditional “mom & pop” restaurants went online, allowing buyers to order quality products and gourmet items straight to their homes. As takeout and delivery models were adopted, increased competition was also seen from a rising number of online platforms like Deliveroo (OTCPK:DROOF), Glovo or Just Eat Takeaway.com (OTC:TKAYF).

Out of toppings: ePizza borrowed heavily for plans to open over 800 Italian stores through 2030, attempting to land a 2% stake of the national pizza market. As recently as April, it filed for protection from creditors, and while the motion was granted for an initial 90 days, there have been no further updates on the court process. According to the latest audited reports, ePizza had €10.6M of debt at the end of 2020, but has since been running out of money and faltering on its debt obligations. (15 comments)

Metallic spoofing

Following a three-week trial and more than eight days of deliberations, two former JPMorgan (JPM) employees have been found guilty in a landmark case over futures market manipulation. Michael Nowak, the former head of the bank’s precious-metals business, was convicted on 13 charges including spoofing and fraud, while his top gold trader, Gregg Smith, was also convicted on 11 charges that included spoofing. A third defendant, Jeffrey Ruffo, who was a salesman on JPMorgan’s precious-metals desk, was acquitted entirely.

What is spoofing? The manipulative tactic, which was outlawed by the Dodd-Frank Act in 2010, involves rapidly placing orders with the intent to cancel them before they trade, creating the illusion of demand and influencing prices.

The case is a big victory for the U.S. Justice Department and marks the most aggressive lawsuit brought to date that targets spoofing. Sentences have not yet been handed down, but Nowak and Smith were acquitted of racketeering and conspiracy allegations that would have charged them as an organized criminal enterprise. Back in 2020, JPMorgan also agreed to pay $920M to settle DOJ spoofing allegations, which is by far the largest fine paid by any bank accused of market manipulation since the financial crisis.

Quote: “Today’s jury verdict demonstrates that those who seek to manipulate our public financial markets will be held accountable and brought to justice,” said Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department’s Criminal Division. “With this verdict, the Department has secured convictions of ten former traders at Wall Street financial institutions, including JPMorgan, Bank of America/Merrill Lynch, Deutsche Bank, The Bank of Nova Scotia, and Morgan Stanley. These convictions underscore the Department’s commitment to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets.” (5 comments)

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