Why Disney Investors Are Cheering Bob Iger’s Return to the Company's Top Position

Walt Disney Company (NYSE:DIS) shares are trading higher this week after the media and entertainment giant announced the return of Bob Iger as the company’s CEO. Effective immediately, Iger will replace Bob Chapek, who faced heavy criticism during his tenure as Disney’s boss.

“It is with an incredible sense of gratitude and humility — and, I must admit, a bit of amazement — that I write to you this evening with the news that I am returning to The Walt Disney Company as Chief Executive Officer,” Iger told employees in an email, as reported by the Wall Street Journal.

Iger spent over 40 years at Disney, including 15 years as the company’s CEO (2005-2020). He agreed to return for two years with a mandate to “set the strategic direction for renewed growth and to work closely with the Board in developing a successor to lead the Company at the completion of his term.”

The turn of events comes just 11 months after Iger left the company and a couple of days after Chapek announced cost-cutting plans at Disney. The media company reported worse-than-expected Q4 earnings, missing estimates for profit and key revenue segments, therefore extending a period of consolidation for Disney shares.

Chapek has been criticized by investors for the disappointing stock performance as Disney shares traded over 40% lower YTD before Iger’s comeback was announced. Many believe that the execution is to blame for Disney’s underperformance, given the strength that Disney Parks enjoyed for the majority of this year.

Leadership Change Instills Hope

The dramatic return of Iger comes amid a critical period for media companies, which are struggling to catch up to the ever-changing landscape as consumers continue to cancel their cable subscriptions and shift to streaming services.

In the announcement, Disney said Iger would help the company develop a new successor. Interestingly, Iger handpicked Chapek to replace him in February 2020 as Disney’s chief executive officer.

According to CNBC, Disney’s board offered Iger to lead the company once again after receiving internal complaints from senior executives that Chapek was not the right fit for the role. CNBC reported that the leadership change came after Disney’s board contacted Iger on Friday, “blindsiding Chapek and his closest allies.”

The internal complaints mainly referred to Chapek’s leadership and the recent quarterly earnings report. According to the report, one of the executives who started losing confidence in Chapek was Disney’s CFO Christine McCarthy, who was also in charge of the company’s finance during Iger’s tenure before he stepped down from the top position two years ago.

As per the regulatory filing revealed Monday, Iger will serve as Disney’s CEO until the end of 2024, with a base annual salary of $1 million. The compensation package also includes an annual bonus target of 100% of Iger’s annual pay, as well as an annual target of $25 million for a “long-term incentive award.”

Iger has been continuously hearing complaints from his former colleagues about Chapek’s decisions, including the one to take away budgetary power from the company’s creative executives. Some of the complaints also referred to Chapek’s decision to move 2,000 Disney employees from California to Florida, a move that was later postponed.

Latest Disappointing Earnings Report the Final Straw for Board

Earlier this month, Disney reported quarterly results that fell short of expectations for profit and critical revenue segments. The company also issued a weaker-than-expected growth outlook for its streaming service Disney+.

The results missed analysts’ expectations across the board, with Disney’s parks and media divisions both falling short as well. Disney reported a 2022 fiscal revenue growth of 22% and offered a disappointing revenue forecast growth for the next fiscal year of less than 10%. The company also reported Q4 adjusted earnings per share (EPS) of 30 cents, compared to the Wall Street estimates of 55 cents.

Revenue came in at $20.15 billion, missing the estimated $21.24 billion. Revenue in the media and entertainment business dropped 3% year-over-year to $12.7 billion, due to weak demand in the company’s direct-to-consumer and theatrical businesses. This compares to analysts’ estimates of $13.9 billion, according to StreetAccount.

The number of total Disney+ subscriptions in the quarter stood at 164.2 million, beating the consensus estimates of 160.45 million. The company reported 12.1 million new subscribers in the quarter.

But Disney’s executives said they expect slower growth in the Q1 during the earnings conference call. The former CEO Bob Chapek said during the call that Disney+ is expected to reach profitability in fiscal 2024.

The company’s direct-to-consumer (DTC) unit sustained a loss of $1.47 billion in the fourth quarter, as well as a 10% drop in average domestic revenue per user (ARPU) to $6.10. Disney then announced plans to raise prices for the service in December and introduce an ad-supported tier in an effort to increase revenue.

Disney’s parks, experiences, and products segment reported record quarterly results, including revenue growth of 34% to $7.4 billion year-over-year. However, the results still missed analysts’ estimates of $7.5 billion.

Summary

Disney stock closed about 6% higher on Monday after the entertainment titan announced that its legendary CEO, Bob Iger is back to replace troubled Bob Chapek. Investors hope that Iger will be able to increase focus at Disney and help the company reaccelerate growth, which Chapek struggled to do given high investments in the streaming business.