Disney’s Quarterly Profit Drops 30% as Sales Slow
Walt Disney Co. said Tuesday that its fiscal second-quarter profit fell 30% because of weaker home-video and merchandising sales and higher costs at its ABC network.
Profit from operations fell to $269 million, or 13 cents a share, from net income a year ago of $384 million, or 18 cents, adjusted for a stock split. Earnings matched the average estimate of analysts polled by First Call Corp. Revenue rose 5.1% to $5.51 billion from $5.24 billion.
In the most recent quarter, Disney took a charge of about $44 million for its purchase of a 43% stake in Infoseek Corp. That made net income $226 million, or 11 cents a share.
Operating profit for the theme parks and resorts division, which includes Disneyland in Anaheim, rose 13% to $305 million, reflecting the recently launched Disney Cruise Line and record attendance and increased guest spending at Walt Disney World in Florida.
The world’s No. 2 media company behind Time Warner, Burbank-based Disney, which already has done some cost-cutting in its film and television divisions, will try to increase efficiency across all its businesses, spokesman John Dreyer said. In particular, he said, it aims to boost cash flow at its “bricks and mortar” businesses, including theme parks and retail stores.
For instance, Disney plans to concentrate on adding merchandise to its stores, as well as electronic commerce over the Internet, as opposed to opening new stores, Dreyer said.
Revenue from the Disney Stores in the U.S. and worldwide merchandise licensing continued to decline in the latest quarter.
One reason for the fall is that the novelty of the stores is beginning to wane with consumers, said analyst Barry Hyman, who compared the retail stores to theme restaurants, which typically open to popularity that quickly fades.
Disney’s earnings have declined for four quarters because of higher programming costs and lower ratings at ABC, which Chairman Michael Eisner purchased three years ago for $19.6 billion. Profit also has been hurt by weak animated films that haven’t matched the success of mega-hits like 1994’s “The Lion King,” developed under former studio chief Jeffrey Katzenberg.
“As the years go by, it’s most assuredly apparent that Disney overpaid for ABC,” said Hyman, an analyst at Ehrenkrantz King Nussbaum Inc. He has a near-term “hold” and a long-term “buy” rating on the stock.
Disney shares, which have declined 18% in the past year, fell 7.1%, or $2.50 a share, Tuesday to close at $32.50. That’s the biggest percentage decline in the stock since Aug. 31, when the shares fell 10.4%.
Many top industry analysts began to lower their estimates for Disney starting in September, when the company warned that fiscal fourth-quarter earnings would decline on weakness in its consumer products and film businesses.
“Disney has tremendous resources. The question is: What are they going to do with them?” said Richard MacDonald, an analyst at J.P. Morgan Securities with a “strong buy” on Disney shares.
Disney will conduct an across-the-board review of costs in response to the lackluster results, Eisner said in a statement.
“It’s clear management isn’t happy with the current situation and that they are going to scrutinize every business,” said Jill Krutick, analyst at Salomon Smith Barney Inc. who downgraded Disney shares to “outperform” from “buy.” “We estimate that Disney could see $200 million or so in savings that could be achieved from various initiatives.”
One obvious way that Disney could cut costs would be for ABC to force its affiliated TV stations to pick up some of the network’s programming costs, such as National Football League broadcasts, analysts said. ABC also might try to cut the so-called compensation payments that it makes to affiliates so they will carry network programming.
There’s also widespread speculation that the big, traditional media companies like Disney and Viacom Inc. soon will package their online assets, most of which are not yet profitable, for a stock sale to the public.
“It’s a necessity at this point for all media companies,” Hyman said. “It makes sense for a lot of companies’ online assets to be stand-alone companies so the parents don’t have to completely shoulder the expenses and lack of earnings.”
Disney declined to comment on whether it was considering such a move. Viacom said again Tuesday that it planned to spin off its Internet assets in the future.
Disney, though, is exploring “new Internet initiatives” such as international search directories and other online services, Eisner said in a statement, without elaborating.
In the latest quarter, profit in the creative content division fell 52% to $163 million on slower sales of videos such as “Mulan,” compared with last year’s hits like “The Little Mermaid.” The company also released fewer videos from its library of animated classics.
The outlook for the remainder of the fiscal year doesn’t look much better, analysts said.
One reason is that News Corp.’s highly anticipated film “Star Wars: Episode I--The Phantom Menace,” to be released in May, may squeeze Disney and other Hollywood studios out of profits they’d normally get from box office and product sales for their big summer movies, analysts say.
