What This Stock Teaches Us About Pricing Power (And Why It’s Worth A Look Right Now)…
Disney World is often said to be the most magical place on earth. Maybe. But that charm wears thin when you’ve been standing in lines for about eight hours at the end of a tiring day. On my last family trip to Mickey’s house, the shortest queue was perhaps 30 minutes… but that was only for ice cream.
We thought February might be a bit less crowded than the peak summer months. But there is really no “off-season” in Orlando. Approximate wait times for most of the larger attractions were still 120 minutes or more. Trying to ride more than four or five in a single day is logistically impossible.
But Disney is still finding creative ways to improve guest experiences. Case in point: implementing a boarding pass system for Star Wars: Rise of the Resistance at Hollywood Studios. The line for this newest immersive adventure is virtual. As soon as the gates open promptly at 8 AM, visitors simply log in to their Disney apps and click a button to reserve a ride time.
Sounds simple enough. Except every boarding pass for the entire day is gone within 60 seconds. Don’t blink. Arrive at the park at 8:01, and you’ll be greeted by a sign out front apologizing that there are no more available slots for the day.
But in the end, the hassles are well worth it, and the lasting memories are priceless. This is why families keep returning – and why Disney can raise ticket prices year after year without making the slightest dent in the crowds. They just quietly went up again, with the popular four-day park-hopper passes (which lets you bounce between parks) rising from $525 to $540. That rate can surge to as much as $685 on busy days.
At $135 per person per day, you can do the math for a large clan. Some of the free perks have disappeared as well. The popular “Fast-Pass” that allowed guests to skip to the front of the line on select rides has been discontinued. Once complimentary, this service has been replaced, rebranded, and now costs extra.
Why Pricing Power Matters
Has that deterred customers? Not a bit. Sites that monitor visitor traffic report that attendance is stronger than ever. It really is astonishing. $99. $115. $135. It doesn’t really matter. Disney can seemingly charge whatever it likes without any discernible impact on demand – it defies the most basic law of economics.
Make no mistake, this is a rarity in the business world — the exception to the rule. In more competitive industries, even a modest uptick in prices can force shoppers to take their business elsewhere or subscribers to hit the cancel button on a service. That’s why many deliberately accept thinner margins in order to attract and retain customers. It’s a delicate balancing act.
Unfortunately, they may not have much of a choice these days. Inflationary cost pressures are mounting. Labor. Freight. Raw materials. They’re all getting more expensive. In fact, three-fourths of all S&P 500 companies cited the negative impact of supply chain woes and inflation in their latest quarterly earnings reports.
Needless to say, many companies will suffer in this hostile environment. But those with strong brands and proven “pricing power” will be just fine, considering they can pass the higher costs along with no adverse effects. Don’t just take my word for it.
Warren Buffett addressed this very topic back in 1981 (a time when inflation was running wild). In a letter to Berkshire Hathaway shareholders, the Oracle of Omaha explained that businesses with certain characteristics were better adapted to this type of climate. First and foremost:
An ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume.
Bringing It All Together
Anybody can raise prices. The trick is finding those who can sell just as many widgets at $8 as they did at $7.
Hershey (NYSE: HSY) is one of those names. Faced with rising costs for cocoa and packaging materials, the chocolatier raised prices across all segments last year. And it did so without fear of backlash because there is only one Hershey.
Disney is cut from the same cloth. Loyal customers are conditioned to paying a bit more each year, so throngs of guests continue to file in through the turnstiles.
Precise figures can be a closely-guarded secret. But it has been estimated that the Disney World campus draws over 58 million visitors annually. The Magic Kingdom alone welcomes more than 57,000 paying customers on an average day. And to think when old Walt started buying up large tracts of rural Florida swampland in the 1960s, people thought he was crazy.
Disney has become highly skilled at monetizing that traffic and separating park-goers from their hard-earned cash. It’s not just the gate receipts, but food, lodging, souvenirs, and private dinners with your favorite characters.
Do customers grumble? A few perhaps. But others chalk it up as part of the Disney experience and get tee-shirts bemoaning their drained bank accounts. What’s another $20 here or there.
No longer handcuffed by Covid capacity restrictions, revenues in the Theme Parks division just doubled to $7.2 billion last quarter from $3.6 billion a year ago. Operating profits swung from a loss to a $2.5 billion gain. Management cited increased guest spending.
And that’s just one cog in the Disney machine. Thanks to the acquisitions of Marvel, Pixar, and Lucasfilm, the movie studio generated a whopping $13 billion in global box office revenues last year. This same media empire also controls ABC and ESPN. And the Disney+ video streaming service attracted 11.8 million last quarter alone, bringing the total number of streaming subscriptions across all platforms to 196 million.
Source: Statista, Walt Disney Company Q1 Results
Action To Take
Put it all together and you can see why this one-of-a-kind business is built to withstand inflationary storms. Yet with the recent drop in the stock during the broad market pullback, DIS has retreated all the way back to where it was trading in the fall of 2020.
And with operating income now eclipsing pre-Covid levels and setting new record highs, the resumption of another Disney tradition – annual dividend hikes – can’t be too far behind. That makes DIS a strong candidate to consider for investors in this uncertain market.
In the meantime, if you’re looking for picks that allow you to sleep at night (while still paying generous dividends), then you need to see this...
I’ve identified 5 safe, high-yield stocks that allow you to keep it simple. Each one has proven to hold up well in any market — providing some of the best long-term returns in the market and paying increasing dividends every single year.
You can forget about meme stocks, volatile cryptocurrencies, and complicated trading strategies… With picks like this in your portfolio, you may never have to worry about what the market is doing again!