Disney Earnings Beat Estimates; Company Unveils Growth Plans

Walt Disney Co. pleased Wall Street on Tuesday with higher-than-expected quarterly operating earnings even as analysts expressed skepticism about the company’s growth projections in the face of an economic slowdown.

At an all-day analyst briefing in Anaheim to announce the earnings and outline growth prospects for each of its divisions, Disney also unveiled an alliance with Kmart Corp. that is the cornerstone of a plan for turning around the company’s slumping consumer products group.

The partnership, the first of its kind for Disney and a template for the future, marks a retreat by the company from licensing its characters to manufacturers and distributors. Rather, Disney said it will deal directly with select retailers such as Kmart, which has agreed to create an exclusive line of Disney-branded children’s clothing for all of its stores in the U.S. and Puerto Rico.

Andy Mooney, president of Disney Consumer Products Worldwide, said the agreement was similar to Kmart’s deal with Martha Stewart, which he said has created a line worth $1 billion a year in revenue. He said that Disney is in advanced talks with J.C. Penney Co. to create another apparel line and that such agreements could double Disney’s 5% share of the children’s clothing market.

“The key right now is the consumer products group,” said David Londoner, an analyst at ABN Amro. “They’re saying the right things, but it’s all in the execution.”

The consumer products group is one of several trouble spots for Disney, along with the company’s money-losing Go.com Internet operation, which is being shut down, and the decline in advertising sales that has already cut into the revenue of its television and radio stations and cable networks such as ESPN.

Disney reported a profit from operations of $341 million, or 16 cents a share, for its first fiscal quarter ended Dec. 31. That is up from net income of $278 million, or 13 cents, for the same period a year earlier and better than the consensus Wall Street estimate of 15 cents a share compiled by First Call/Thomson Financial.

In the latest quarter, Disney took charges of $228 million, or 11 cents a share, for new film accounting rules and $50 million, or 2 cents, for a change in accounting for derivatives and hedging activities. That made net income $63 million, or 3 cents a share.

Revenue for the quarter increased 7% to $7.3 billion from $6.8 billion a year earlier.

Disney said profit for the current year will be lower than expected, with per-share earnings rising by a single-digit percentage instead of 10% to 12% as many analysts expected.

Disney executives said that they are optimistic that the economy will recover, and that results will improve in the second half of 2001. Still, analysts were skeptical that the company would be able to deliver on the promise made Tuesday of 13% to 15% cash flow growth next year.

“That’s at the high end of expectations,” said Drew Marcus, an analyst at Deutsche Bank. “That will be a challenge because of softness in theme parks and per capita spending.”

Disney shares rose $1.18 to close at $31.61 on the New York Stock Exchange. Disney stock has fallen 17% in the last year and has under-performed the Standard & Poor’s 500 index and other entertainment giants’ stocks on average over the last five years.

The company’s stock roared to a 52-week high of $43.88 in May on the strength of strong broadcasting ad revenue and the success of “Who Wants to Be a Millionaire” but has retreated as the game show has weakened in the ratings and political and dot-com advertising disappeared.

At the outing for analysts here, which allowed Disney to showcase the $1.4-billion California Adventure theme park opening Thursday, management sought to calm investor fears about a faltering economy by stressing that the company is not heavily reliant on advertising.

“We are less vulnerable to a downturn than is generally acknowledged,” said Chief Financial Officer Thomas O. Staggs, pointing to the 74% of its revenue that comes from sources other than advertising.

At Tuesday’s meeting, Disney Chief Executive Michael Eisner was peppered with questions from analysts about his conspicuous absence from the merger frenzy of the last several years.

Eisner, who repeatedly has promised that he would wait for prices to return to Earth before making any acquisitions, said he continued to be interested in purchases, particularly of television stations. But he reiterated that he would not overpay for assets.

He specifically addressed Yahoo, the Internet portal that some on Wall Street say would be a good fit with Disney. He said that even at a deflated $25-billion market value, Yahoo is overpriced.

“They addressed the issues head-on, so the atmosphere today is pretty good, especially compared with the AOL Time Warner meeting last week, where there was a lot of tension because of the lack of specifics,” said Hal Vogel, chief executive of Vogel Capital Management.

In the first quarter, profit at the television networks division, which includes ESPN, the Disney Channel, ABC and the television and radio stations, fell 8% to $590 million. Added nights of “Millionaire” helped offset weaker advertising sales.

Those declines and ongoing losses at the Go.com Web portal were offset in the quarter by increased attendance at its theme parks and improved performance of the movie studio, fueled by home video and DVD sales worldwide.

Aided by higher sales of videos, such as “Toy Story 2,” the company’s film business had profit of $152 million, contrasted with a $45-million loss last year.

Results for the consumer group declined in the latest quarter because of poor performance at the Disney Stores, which are undergoing an overhaul, with 100 stores designated for closure over the next four years. Revenue for the group declined 6% for the quarter, and operating income was down 13% to $177 million.

Theme park profit rose 6% to $385 million, as guests spent more money at parks such as Walt Disney World in Florida.

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CALIFORNIA ADVENTURE

The park symbolizes a subtle departure from ideals that shaped the Magic Kingdom. F1