Pixar Shares Fall on DVD Sales Warning

Pixar Animation Studios shares took a 10% drubbing from investors late Thursday after the company revealed that “The Incredibles” had failed to live up to its name in the DVD market.

Although the hit film about a family of superheroes is this year’s top-selling DVD to date, sales were softer than expected.

Pixar’s pummeling by Wall Street mirrors a similar one given to DreamWorks Animation SKG in May when the Glendale studio’s earnings disappointed Wall Street because of slower-than-expected “Shrek 2” DVD sales.

Hollywood studios are increasingly finding that their hit movies have a short shelf life in the minds of DVD buyers. Retailers are seeing top titles sell briskly just after being introduced but drop off quickly as consumers move on to the scores of other new titles Hollywood churns out.

As a result, retailers are shortening promotional periods and quickly moving titles off prime shelf locations in favor of newer movies. For studios, DVD sales are more of a guessing game.

“It has become tougher to predict how many videos to ship and how much may come back,” said Jeffrey Logsdon with Harris Nesbitt. “It’s a learning curve for the studios.”

Pixar revealed that it would set aside additional money as a reserve to cover unsold DVDs returned by retailers. The Emeryville, Calif.-based computer animation studio estimated that the move would cut earnings in the fiscal second quarter ending Saturday to 10 cents a share from 15 cents, representing about $6 million in profit.

“Of course we’re disappointed,” Chief Executive Steve Jobs said during a conference call with analysts.

But Jobs downplayed the development, saying the company had reduced by only 7% the estimated DVD units it expected to sell.

“It’s valuable to put this in perspective,” Jobs said.

Pixar projected that “The Incredibles” would generate $450 million in worldwide home video revenue through the second quarter. Pixar’s movies and videos are distributed through partner Walt Disney Co., which shares costs and profits.

Investors hammered the stock on the news, announced after the market closed. Pixar had already closed down $1.62 a share to $50.05 in regular trading. After the announcement, Pixar shares tumbled the additional 10%, or $4.98, to $45.07 a share.

For Pixar, the news marks a rare stumble for a company that rarely misses its stride. Thursday’s announcement was only the second time that Pixar has revised its reserves for home video sales.

The company has become a darling of Wall Street for producing six consecutive blockbusters, which include “Finding Nemo,” “Monsters, Inc.,” “A Bug’s Life” and the “Toy Story” films.

Michael Savner, an analyst with Banc of America Securities, wrote in a report that he did not believe the DVD shortfall represented “any fundamental problem in Pixar’s business.”

During the conference call, Jobs did not offer any explanations for the weaker-than-expected home video sales.

Jobs said that despite the blip, Pixar still expected the movie to ultimately generate home video sales similar to sales of the hit “Monsters, Inc.”

“We’re talking about units that are 7% lower than expected,” Jobs said. “Projecting something within 7% isn’t so bad.”