Film, consumer products cut into bottom line
NEW YORK — Walt Disney Co. warned Friday that its fourth quarter earnings are likely to drop 31% as a result of sharply lower profits from the Disney film studio and in consumer products business, hurt by the Asian economic crisis and higher film marketing costs.
Disney said it would take one-time charges against profits for the quarter of between $57 million and $97 million for the cost of both consolidating its film studio labels earlier in the summer and downsizing its international consumer products business in response to the Asian slump. Excluding these charges, the company’s total net profit will be down 21%.
Most startling was the news that Disney’s record summer box office, which made the House of Mouse No. 1 for the season, did not translate to higher profits. While the quarter does not end until Sept. 30, a spokesman for Disney said higher marketing costs for hit pics like “Armageddon” ate into increased box office revenues and meant theatrical release profits were expected to be down for the quarter.
International homevideo business was also hurt because the studio had fewer releases than last year, while the Asian economic slump ate into merchandising business. All in all, Disney’s creative content division — which includes both consumer products and the studio — is expected to show operating income roughly 20% down on last year (before the impact of one-time charges).
In contrast, broadcasting profits are expected to be “comparable” to last year while theme parks are expected to improve on last year. All total, Disney’s operating income is expected to fall 12% to $813 million in the quarter while net profit is expected to be down 21% to 15-16 cents a share, or $349 million, before the impact of the charges.
The disclosure, which was made after stock market trading ended for the day, came a few days after a handful of Wall Street analysts had lowered their estimates for the quarter. Disney stock fell $1.25 to $25.81 in after-market trading Friday as a result and could fall further today.
A spokesman for Disney said one of the reasons the company issued the warning was that the analysts’ revisions were not deep enough, as the Wall Streeters revised their estimates assuming net profit fell only 5%.
“We knew things were weak, but its softer even than we thought,” said Merrill Lynch analyst Jessica Reif Cohen, who had been one of the analysts to revise her estimates.
The earnings warning “shows that these companies don’t go unscathed in this economic crisis. It is clearly seen in Disney stores in Asia,” said Cowen & Co. analyst Harold Vogel.
The quarter caps an uninspiring performance for Disney through the entire fiscal year, largely in film and consumer products. While Disney noted that its full year net profit would still finish the year higher than fiscal 1997, the increase is expected to be only about 2%.
On Friday’s closing price, Disney stock has now dropped 40% from its peak in April, reflecting the slowing profit growth seen through the fiscal year.
For the first nine months, to June 30, the company reported 10% lower operating income from creative content and 8% growth in broadcasting. Theme parks, which has provided most of the growth this year, was up 14%.
While creative content is largely responsible for dragging down Disney’s earnings in the fourth quarter, broadcasting was also soft. Disney said the ABC TV network’s operating profits fell, although the decline was offset by higher profits from ESPN.
The Mouse House blamed the lower broadcast network profits both on weaker primetime ratings and “the impact of the new NFL agreement.”
The onetime charges for reorganizing the film division flow from the creation in mid-July of an umbrella entity at the studio called Buena Vista Motion Pictures Group, run by David Vogel who took charge of the production divisions of Touchstone Pictures as well as the two he already ran, Walt Disney Pictures and Hollywood Pictures.
Disney did not specify how much of the charge related to the film reorganization. It said the charges covered the cost of eliminating unprofitable operations “and the consolidation of certain creative, administrative, warehousing and distribution functions.”