Disney Adjusts to Fallibility : Entertainment: It cuts costs after its worst quarter in six years. And it admits it goofed by letting spats with Peggy Lee and the Muppets go to court.

A routine financial audit at Walt Disney Co. turned up a real eye-opener recently. More than $80,000 a week, or $4 million a year, was being spent on private messenger services.

Other entertainment companies might have written it off as one of the costs of doing business in Hollywood, where extravagance tends to be flaunted. But the frugal-minded Disney summarily dispatched the messengers to the unhappiest place on Earth, the unemployment line.

Calls for austerity can be heard throughout the Magic Kingdom as the Burbank-based company struggles to recover from its worst quarter in six years. Disney, which wrote the book on entertainment management in the freewheeling 1980s, is examining everything from projection room costs to employee efficiency in its effort to adjust to the recessionary ‘90s.

The Persian Gulf War and economic problems have cut deeply into theme park profits. Box office receipts were in a downward spiral until last weekend, when “What About Bob?” took in a morale-boosting $9.2 million.

The company’s wholesome image has even been battered in recent court cases that improbably pitted Disney against the Muppets and a disabled Peggy Lee.

Most financial analysts remain high on Disney, which was recently added to the Dow Jones industrial average of 30 blue chip stocks. But the prevailing wisdom is that the company will be unlikely to sustain the phenomenal growth it enjoyed when Chairman Michael D. Eisner and his management team increased earnings from $98 million to $824 million between 1984 and 1990.

Disney’s profit margin slipped more than a point, to 14.1%, last year. The company still outperforms competitors in most areas, but Disney’s legendary corporate arrogance has lost a bit of its edge.

Company executives readily acknowledge their mistake in allowing the disputes with singer Lee and the creators of the Muppets to reach the courts.

“When it comes to the hardball issue, we are guilty and we know it,” said one executive. “We also know that we better change it. It’s been win-win for us for a long time. But it’s time we introduced some compassion and sensitivity into the process.”

Disney’s California and Florida theme parks, which accounted for some $3 billion of the company’s $5.8 billion in revenue last year, took the biggest hit in the most recent financial reporting period. Operating income from the parks dropped 33% in the second quarter of this fiscal year, compared to the previous year’s quarter. Overall earnings were down 29%, while revenue rose 10%.

The war, the recession, high airline costs and growing competition have contributed to a slowdown that may not be over, financial analysts say. “It is difficult to see how this dominant segment of the company will grow at anything more than 8% to 10% annually,” even with the 1992 opening of the Euro Disney park near Paris, Merrill Lynch analyst Harold Vogel wrote in a recent report.

Disney is counting on Henson’s Muppets to boost attendance at Disney-MGM Studios Theme Park in Florida, now that its legal skirmish with Miss Piggy and her pals is resolved. Patriotism’s drawing power will also be tested. Red, white and blue are the prevailing colors this summer as Disney World features “America: The Musical,” a salute to the armed forces, and Disneyland offers a daily parade celebrating American heroes.

But the parks are going to need more than a public relations campaign. The company, which has doubled admission prices since 1984, is holding the line on costs this year. It has cut operating expenses by postponing equipment purchases and trimming its labor force. Disney has even found ways to increase the capacities of its attractions.

“The last couple of weeks have looked encouraging,” said Disneyland President Jack Lindquist. “We are feeling good. But it’s too early to tell if we have turned a corner.”

While companywide morale is said to be low--in part because recent staff efficiency studies have led to fears of layoffs--the consumer conglomerate is hardly in retreat. Disney is aggressively moving forward with its multibillion-dollar Euro Disney, is developing a Florida resort and is planning to add a second park in Southern California. The consumer products division is also expanding its retail and restaurant operations.

And the company’s television unit, which makes such hits as “Dinosaurs” and “The Golden Girls,” is expected to lead all studios in placing programs on the networks next fall, with 11.

Last week’s opening of the Bill Murray-Richard Dreyfuss comedy “What About Bob?” came not a moment too soon for Disney’s film division, which has been hit-starved this year after placing first at the box office in 1990. “Bob” appears to be a solid “double,” in the baseball parlance favored by Disney executives. The box score has been heavily weighted lately with such strikeouts as “RUN,” “Scenes From a Mall” and “The Marrying Man.”

Since the huge success of “Pretty Woman” last spring, Disney’s biggest profits have come primarily from re-releases of animated classics and two recent movies, “Arachnophobia” and “Three Men and a Little Lady.” Both films, however, apparently failed to live up to studio expectations.

Disney’s biggest write-off before last year was “Blaze,” sources say, which incurred a loss of about $8 million. But last year, both “Mr. Destiny” and “Taking Care of Business” lost that much, while write-offs on “Scenes From a Mall” and “Marrying Man” were each in the $18-million range, sources said.

Still, those numbers pale next to the kinds of losses that other studios have been chalking up on big-budget movies, such as Warner’s “The Bonfire of the Vanities” (estimated loss: $40 million) and Universal’s “Havana” (estimated loss: $50 million). To Disney executives, a $28-million movie--the industry average--is an expensive project.

Disney’s Hollywood Pictures division, which operates alongside the more established Touchstone Pictures and Walt Disney Pictures banners, is off to a rocky start, with “Arachnophobia” its only hit in five films released so far. But sources say it is too soon to write off the unit or its young president, Ricardo Mestres. “People are burying it prematurely,” agent Martin Bauer said.

One theory has it that Disney’s obsession with making last year’s costly “Dick Tracy” as big a hit as Warner’s “Batman” the previous year diverted attention from other projects. “Tracy” cost $46.5 million to make and $54.7 million to market and distribute. Despite that investment, domestic ticket sales for the Warren Beatty-directed film were disappointing at $104 million.

It was Disney’s travails with “Tracy” that supposedly inspired studio Chairman Jeffrey Katzenberg’s now-famous memo calling for a “major self-examination” of business practices. “Katzenberg got seduced by Warren Beatty and lost sight of the ball,” said one source. Katzenberg’s memo touched on many points, but it primarily called for an end to the blockbuster mentality.

Big-budget fare such as “Rocketeer” and “Billy Bathgate,” both said to cost more than $40 million, can still be found on Disney’s schedule under an edict that says occasional event movies are OK. David Hoberman, who heads the Touchstone Pictures and Walt Disney Pictures divisions, said the company expects to be batting homes runs come summer.

“It’s one thing for a place to change when a new boss comes in,” he said. “But it’s much more difficult--and rewarding--when you don’t have that outsider.”

The company has also struck a deal with mega-producers Don Simpson and Jerry Bruckheimer of “Days of Thunder” and “Beverly Hills Cop” fame. And the studio distributes and foots some of the costs of big-budget fare at Andrew Vajna’s Cinergi Co.

But people close to the studio say Katzenberg has largely stuck to his guns on cost cutting. The average price of films in production is 35% to 40% less than last year, according to Disney. The company has gone so far as to enforce guidelines on what can be spent on talent fees.

A dramatic example is “Evita.” Disney painstakingly put together the elements of the musical, which has been on the drawing boards at other studios for years.

Glenn Gordon Caron, who created the popular TV series “Moonlighting,” was set to direct. Madonna agreed to star as the charismatic wife of Argentine dictator Juan Peron.

The budget started at $18 million, but before the cameras had rolled, the producers’ estimate had ballooned to what Disney executives considered a very optimistic $28 million. So the studio put the project on the auction block, opting instead to back a series of smaller films notably lacking in star power.

The unanswered question is whether these films can compete in the big-budget marketplace.

Opinions are mixed. One film executive foresees problems. “Disney is a company that fundamentally pays more attention to money than talent,” he said. “I think they’ll fail if they continue that way.”

Others see Disney’s thriftiness as a logical response to tough times. “We’re all struggling,” said Robert Cort, president of Interscope Communications, which has produced some of Disney’s top films. “But others are not looking at themselves as carefully or as publicly. . . . It’s like when someone is a lifetime .320 hitter. You get a hitch in your swing. . . . But over the long term, their average will be .320, not .280, because that’s not who they are.”

Mestres makes the allusion to a batter coming out of a slump. “We’ve had a bad run, not a disastrous run,” he said. “It does go in cycles. Sometimes having a bad run is healthy: It makes you think about things.”

Disney’s Shrinking Profit Margins (Pretax operating income as a percentage of revenue)

As Walt Disney Co. feels the pinch from the recession and Gulf War, profit margins have declined in the latest quarter at...

Theme Parks and Resorts...

Fiscal Years Ended Sept. 30

1988: 28%

1989: 30%

1990: 29%

2nd Quarter ended March 31: 19%

Filmed Entertainment...

Fiscal Years Ended Sept. 30

1988: 16%

1989: 16%

1990: 14%

2nd Quarter ended March 31: 8%

and Consumer Products

Fiscal Years Ended Sept. 30

1988: 54%

1989: 45%

1990: 39%

2nd Quarter ended March 31: 35%

Disney Film Releases

Disney’s last runaway hit, “Pretty Woman,” earned $178 million, but it was released more than a year ago. Here is how Disney’s movies have fared in the last 12 months. TOUCHSTONE PICTURES

Domestic Opening Date Film Ticket Sales June 15, 1990 “Dick Tracy” $104 million June 22 “Betsy’s Wedding” $20 million Oct. 12 “Mr. Destiny” $15 million Nov. 21 “Three Men and a Little Lady” $68 million Dec. 23 “Green Card” $25 million Feb. 22, 1991 “Scenes From a Mall” $7 million April 26 “Oscar” *$18 million May 17 “What About Bob?” *$9 million

WALT DISNEY PICTURES

Domestic Opening Date Film Ticket Sales July 13, 1990 “The Jungle Book” $45 million Aug. 3 “Ducktales: The Movie” $18 million Oct. 5 “Fantasia” $25 million Nov. 16 “The Rescuers Down Under” $27 million Jan. 18, 1991 “White Fang” $29 million March 1 “Shipwrecked” $4 million Today “Wild Hearts Can’t Be Broken” N.A.

HOLLYWOOD PICTURES

Domestic Opening Date Film Ticket Sales July 18, 1990 “Arachnophobia” $53 million Aug. 17 “Taking Care of Business” $20 million Feb. 1, 1991 “RUN” $4 million April 12 “The Marrying Man” *$12 million May 3 “One Good Cop” *$9 million

* Through May 19; film still in theaters

Sources: Entertainment Data, Variety