Disney Posts a Scant 0.7% Rise in Profit

Walt Disney Co., the world’s second-largest entertainment company, said fiscal third-quarter profit rose less than a percent because of lower merchandise sales and marginal growth at its broadcasting business.

Profit rose 0.7% to $418 million, or 20 cents a share, from $415 million, or 20 cents a share, a year earlier. The results matched the average estimate of analysts surveyed by First Call Corp.

The results underscore the continued struggle of Disney, once a star performer on Wall Street, under Chairman Michael Eisner’s leadership. Fewer top-selling home videos, sluggish sales at its Disney Stores, and declining ratings at ABC, mixed with an ambitious expansion program that has resulted in higher costs, have led to a 26% drop in Disney stock over the last 12 months and restlessness among its shareholders.

“Home video had been the growth engine for the 1990s. Now, not only has it stopped growing, but it’s declining,” said Alan Gould, analyst at Gerard Klauer Mattison & Co.

Revenue rose 5% to $5.52 billion from $5.24 billion, while operating income rose 3% to $951 million from $923 million.

“While we aren’t satisfied with our current operating trends, we firmly believe in the long-term strength and growth potential of the company’s brands and franchises,” Eisner said in a statement.

To reverse Disney’s weak earnings, Eisner has been cutting costs and streamlining divisions, such as television and home video. The company also hopes to take advantage of the high valuations of Internet stocks by creating a separately traded stock that tracks the performance of its Internet assets, including Infoseek Corp.

The company’s messy legal battle with former studio chief Jeffrey Katzenberg over a disputed bonus hasn’t helped either. Disney settled with Katzenberg this month for an estimated $250 million after a lengthy and distracting trial.

Operating income in the creative content division, which includes Disney’s film and TV production studios, retail stores and consumer products, fell 33% to $74 million from $111 million. Revenue was unchanged at $2 billion.

Disney said better performance at the box office because of “Tarzan” and improvements in home video, driven by the release of “A Bug’s Life,” were offset by lower merchandise licensing of its products and higher production costs for network TV shows.

The decrease in merchandising licensing reflected lower sales in the U.S. and Japan. Those declines were tempered by growth in Europe. Higher network TV production costs stemmed from an increase in the number of shows produced, including four new prime-time series.

The broadcasting division’s operating income rose 4% to $399 million as higher ad sales and subscriber growth at ESPN and the Disney Channel cable networks helped offset soft advertising at the company’s TV stations and ratings declines and higher costs at ABC.

Theme parks and resorts continued to post the most growth. Operating income rose 12% to $478 million while revenue rose 14% to $1.7 billion, reflecting growth at Walt Disney World Resort in Orlando, Fla., including higher guest spending and record attendance at the park.

Shares of Disney fell 19 cents to close at $27 on the New York Stock Exchange.