Disney Class Action Suit Accuses Execs Of Giving Analysts Inaccurate Guidance

Anyone who owns stock knows that guidance is just a rough estimates and companies often miss or beat estimates and then change them quite often. In the recent Class Action suit filed against Walt Disney
DIS
, however, management at the division which previously housed the company’s streaming division are being accused of putting out forecasts that they didn’t believe they would meet.

The lawsuit alleges the company put out Disney+ subscriber numbers they couldn’t reach and then shifted marketing and production costs to linear networks to reduce losses at the streaming division, something that Disney denies. In a statement to The Hollywood Reporter, Disney replied “We are aware of the complaint and intent do defend vigorously against it in court.”

In fact, it’s common in Hollywood when you own multiple distribution platforms to change your mind and put a movie or TV show on a platform that it wasn’t initially planned for. And in the lawsuit, they even quote from Kareem Daniel, a defendant in the lawsuit who headed the division housing the streaming division under former CEO Bob Chapek. “One of the primary benefits of our new organizational structure is our ability to quickly reevaluate and adjust our plans in light of changes in the marketplace, and we will continue to shift and optimize our mix of window theatrical, day-and-date, and D2C exclusive offerings according to what is best for the consumer and our business.

The news that the Local 272 Labor-Management Pension Fund filed this lawsuit against the Walt Disney Company, Bob Chapek, Christine McCarthy (who was likely targeted due to a story in The Wall Street Journal saying she was aware of and concerned about the Company’s accounting) and Kareem Daniel comes as no surprise as plaintiffs allege that then CEO Bob Chapek decided to “go all in” on Disney’s direct-to-consumer (DTC) service. In fact, even current CEO Bob Iger now admits that a better strategy than focusing on subscriber growth is to focus on streaming profitability.

This was prudent as COVID-19 came on just about a month after Chapek was promoted to CEO, so the timing couldn’t be worse for an incoming CEO which relies on selling people products which, in many cases causes them to leave their house and be in close proximity to other people (i.e. theme parks, movie theaters, etc.).

At the heart of the lawsuit, however, is a major reorg that happened in 2020 which the Pension Fund alleges damaged shareholders by taking power away from creative content-focused executives and putting them under a new group called DMED (Disney Media and Entertainment Distribution) headed by Kareem Daniel, who reported to Bob Chapek. There were three reporting lines under DMED, DTC, Linear Networks and Content Sales and Licensing.

The class action states that statements made by management that the company was on track to achieve profitability and have 230-260 million paid global subscribers by the end of Fiscal 2024 were not supportable due to the fact that Disney+ “had been boosted temporarily and unsustainably by a low launch price of $6.99/month,” other promotions and the prevalence of COVID-19, which made most people want to stay inside.

“In truth, during the Class Period, Disney+ was never on track to achieve the 2024 profitability and subscriber figures provided to investors and such estimates lacked a reasonable basis in fact,” they claim. I would point out, however, that projections are extremely difficult to do with a new streaming service as there are so many unknowns like other services which may launch, adjust their price, marketing, or acquire top tier programming.

They also claim that due to the DMED structure management “inappropriately shift[ed] costs out of the Disney+ platform and onto legacy platforms by first debuting content meant for Disney+ on a legacy platform and shift marketing and production costs onto the linear networks.”

There are serious accusations in the class action, notably “Each Individual Defendant was provided with copies of the documents alleged herein to be false and misleading before or shortly after their issuance, participated in conference calls with investors during which false and misleading statements were made, and had the ability and opportunity to prevent their issuance or cause them to be corrected.”

They also detailed in the lawsuit that management made false and misleading statements such as

(a) That Disney+ was suffering decelerating subscriber growth, losses, and cost overruns;

(b) That the true costs incurred in connection with Disney+ had been concealed by Disney executives by debuting certain content intended for Disney+ initially on Disney’s legacy distribution channels and then making the shows available on Disney+ thereafter in order to improperly shift costs out of the Disney+ segment;

(c) That DMED had made platform distribution decisions based not on consumer preference, consumer behavior, or the desire to maximize the size of the audience for the content as represented, but based on the desire to hide the full costs of building Disney+’s content library;

(d) That the company was not on track to achieve its 2024 Disney+ paid global subscribers and profitability targets, that such targets were not achievable, and that such estimates lacked a reasonable basis in fact; and

(e) That, as a result of (a)-(d) above, defendants had materially misrepresented the actual performance of Disney+, the sustainability of Disney+’s historical growth trends, the profitability of Disney+, and the likelihood that Disney could achieve its 2024 Disney+ subscriber and profitability targets.

These accusations seem fairly definitive, implying they have one or more former disgruntled employees ready to testify. If so, this case could become much to do with “he said” and “she said.” As previously noted, companies miss forecasts all of the time, due to a variety of issues.

It is clear there are going to be some angry shareholders given the company’s admission that Chapek was not the right fit for the job, and given the huge gyrations in share price. On Investor Day in 2020, DIS closed at $154.69 and then rallied 31% to as high as $203.02 (intraday on 3/8/21) before slumping to less than half that at $99.90 when Chapek was replaced. Since then, it slid another 8.6% to $91.99 on the day that the class action lawsuit was filed.