NEW YORK — Viacom will end its 18-month experiment in studio stores, announcing Friday it would close its Chicago entertainment shop next month and phase out 15 Nickelodeon stores by next spring.
The entertainment conglom will take an unspecified charge expected to be between $50 million and $100 million against its fourth-quarter earnings to cover the cost of the store closures, a spokesman said.
While the Chicago store, opened in May 1997, had not been a smashing success, the 15 Nickelodeon stores that opened gradually over the past 18 months as an offshoot of the Chicago outlet have done well. But the entertainment conglom decided the cost of expanding the Nickelodeon stores into a full-fledged chain was not worth the potential return, particularly as Viacom can make a lot more money simply licensing the right to Nickelodeon characters.
Indeed, Viacom deputy chairman Philippe Dauman told an investment conference Friday afternoon — several hours before the store closings were announced — that the company plans to aggressively grow the Nickelodeon merchandising business in 1999.
“The success has been higher than what we projected,” Dauman said, singling out as big hits items from popular children’s programs “Rugrats” and “Blues Clues.” He said that since 1993, sales of Viacom-licensed merchandise has grown from $1.1 billion to $2.8 billion.
Viacom only gets a royalty share of that revenue, of course, and Dauman did not disclose that share, although a spokesman said later Viacom’s royalty revenues were up 38% in 1997. Viacom noted that licensing “offers significantly greater flexibility and potential to expand faster with very limited use of capital” than retailing.
Wall Street analysts said the decision made sense, particularly given the financial restructuring that Viacom has undergone in the past year in which noncore assets have been sold and debt pared. Dauman said Friday that Viacom’s year-end debt would be down to about $4.6 billion, from around $8 billion, mainly as a result of debt repayments flowing from its $4.6 billion publishing sale.
Sanford C. Bernstein analyst Tom Wolzien said the 15 Nickelodeon stores represented only an “experiment,” and that Viacom would have had to open hundreds of such stores across the country if it wanted to develop a full-fledged store unit.
He estimated each store would have cost $2 million to open and reach the breakeven point, so 100 stores would have cost $200 million over time.
“It’s a real capital hit and they have been trying to hold the capital spending in line and improve the balance sheet,” Wolzien said of Viacom.
Walt Disney Co. and Time Warner both operate studio stores, but Wolzien noted that in Disney’s case at least, despite its operating almost 500 stores in the U.S., its overall merchandising business is substantially bigger than its retail store business.
The decision to pull the plug on the stores, which comes during Viacom’s annual budget review for next year, is also another sign that the company is committed to selling its Blockbuster video chain.
Viacom chairman Sumner Redstone has said several times in recent months he plans to sell 15-20% of Blockbuster in an ini-tial public offering in the first quarter of next year, and the rest of the chain in the fourth quarter when tax obstacles to a full sale are removed.
People close to the situation said the stores use Blockbuster’s warehouse, and ordering for next fall is going on now, forcing Viacom to make a decision now.
Viacom’s move into studio stores coincided with a now-abandoned strategy at Blockbuster to broaden its outlets into broader retail stores, which backfired and is blamed by Viacom for the disastrous slump at Blockbuster last year that new CEO John Antioco appears to have fixed.