Kodak Sees Grim Profit Picture

Eastman Kodak Co., the world leader in photography, slashed its fourth-quarter profit expectations by one-third largely because last month’s terrorist attacks had hurt film sales as travel decreased.

The news sent Kodak’s shares tumbling 10% to a 10-year low. Kodak closed Wednesday at $30.71 a share, down $3.46 on the New York Stock Exchange.

Kodak will cut up to 4,000 jobs in 2001. The company employed 78,000 at the start of the year.

The company’s third-quarter results announced Wednesday were in line with Wall Street’s reduced expectations. Kodak’s third-quarter net income fell 77% to $96 million, or 33 cents a share, from $418 million, or $1.36 a share, in the year-earlier period.

Kodak’s third-quarter sales fell 8% to $3.31 billion.

“All signs suggest the weakness will continue into next year,” said Daniel Carp, Kodak’s chief executive.

Profit at Kodak has declined five quarters in a row, as it struggles to make the transition from traditional photography to digital pictures.

“Film is a cyclical thing, and in tough economic times people take less pictures, so the economic downturn has already squeezed them,” said David Kathman, an analyst with Morningstar Inc. “Travel has been down since Sept. 11, and people take a lot of pictures when they travel.”

Kodak’s medical imaging division, which sells equipment to hospitals to create things such as X-ray images, is also hurting largely because of the vigorous competition, said Jeff Pittsburg, president of Pittsburg Research Inc. “They have maintained market share, but had to lower their prices, which hurts their profits,” he said.

But Kodak faces its most significant challenges in the digital camera arena.

Kodak became a financial powerhouse by marketing to consumers who used conventional cameras. For decades Kodak sold inexpensive cameras, as well as film and film processing that used Kodak paper and chemicals. The move to a digital environment threatens the company’s bottom line in several ways.

Once consumers have purchased a digital camera and some type of storage medium, the only thing they buy when they’re taking pictures is batteries. If consumers make a big shift to digital photography, Kodak’s long-term prospects for film sales are threatened.

So the company has been trying to reinvent itself as a developer of solid consumer-level digital cameras and as a source for sharing and distribution of digital photos online. As a part of that strategy, Kodak hopes to entice digital camera users to create physical prints using Kodak facilities.

But by promoting digital wares, Kodak is cannibalizing its traditional photographic business. And its major competitors in the digital space, such as Sony Corp., have no such concerns.

“There’s a fair amount of uncertainty about how well Kodak can do with digital photography,” Kathman said. “In the short term it’s a money-losing business. And the margins on consumer electronics, like digital cameras, tend to be low, so there is a general fear that when this does become profitable, it will be less profitable overall.”