Cost Cutting Helps Disney Post a Surprise 1st-Quarter Profit

Walt Disney Co., which has been reeling from a slowdown at its theme parks as well as a television advertising slump, surprised analysts Thursday with better-than-expected fiscal first-quarter results, mostly because of aggressive cost cutting.

Disney posted net income of $438 million, or 21 cents a share, for the quarter ended Dec. 31, contrasted with a net loss of $36 million a year earlier. Included in this year’s results was a $216-million gain on the sale of Knight Ridder Inc. stock.

Revenue for the quarter fell 5% to $7.05 billion, from $7.43 billion. Excluding one-time charges and gains, Disney’s net income in the quarter fell 55% to $297 million, or 15 cents a share.

Still, those “pro forma” results were better than Wall Street expected. Analysts polled by Thomson Financial/First Call estimated Disney would earn 10 cents a share, pro forma, in the quarter.

The results, announced after the stock market closed, pushed Disney’s stock to $22.19 in after-hours trading. Disney shares closed at $21.06, down 34 cents, on Thursday on the New York Stock Exchange.

Disney executives said attendance at the company’s theme parks are showing signs of recovery and predicted tourist traffic would return to growth by year-end.

“We are now one difficult quarter closer to a new day of growth at Walt Disney Co.,” Chief Executive Michael Eisner said in a conference call.

Nonetheless, Chief Financial Officer Tom Staggs expects its operating profit to decline 10% to 15% in the next three quarters.

“The company is obviously making the very best of a bad situation,” said Chris Dixon, an analyst with UBS Warburg. “There’s every reason to believe that if the economy returns, Disney will continue to benefit.”

Disney executives attributed the better-than-expected results to vigilant cost cutting in the movie studio, theme parks and consumer products division, which has shut 50 Disney Stores.

All told, Disney has cut 4,000 jobs in the last year.

Disney and other media and entertainment companies have been battered by the economic slowdown after the Sept. 11 attacks.

Disney has been suffering from a deep ratings slide at its ABC network, which two years ago was the No. 1 broadcast network on the strength of the game show “Who Wants to Be a Millionaire.”

Since then, it has dropped to its current slot as the No. 4 TV network among total U.S. households.

As a result, operating income at Disney’s media networks divisions, which includes ABC, fell 58% to $246 million because of ad declines and poor ratings. The firm recently replaced ABC’s entertainment chief in hopes of improving ratings.

“ABC is one of the biggest under-performers of the company,” said Jeffrey Logsdon, an analyst with Gerard Klauer & Mattison. “The management changes are one attempt to build a solution, but it’s still a long-term process.”

In October, Disney paid $5.2 billion for the Fox Family TV channel.

Disney has been considered more at risk than its media peers because one-third of Disney’s operating income typically comes from theme parks.

Operating income for Disney’s parks and resorts division fell 51% in the first quarter. Theme park attendance fell 20% at Walt Disney World last quarter on concerns about travel after the terrorist attacks, and now is about 15% below last year’s levels.

Although attendance at Disneyland was up in the first quarter because of the opening of the California Adventure theme park, guest spending was down 10%.

Disney’s studio entertainment division had a flat quarter, with the huge success of “Monsters, Inc.” offset by marketing costs on upcoming films.

Eisner also said Thursday that Disney would no longer use its outside auditing firm for consulting projects. In 2001, Disney paid PricewaterhouseCoopers $8.6 million for its auditing and $32 million for other services.

Earlier, Disney opposed an effort by some shareholders to bar its auditor from providing these consulting services. But the debate over auditor independence, and possible conflicts of interest, has become a hot topic on Wall Street since the Enron Corp. debacle.