Analysts pan Disney profits

Merchandise biz slipping

NEW YORK — The slump in Walt Disney Co.’s consumer products business is worsening, Wall Street analysts warned Tuesday, prompting yet another round of downward revisions to earnings estimates for the Mouse House and sending Disney stock down sharply.

Disney fell $1.25 to $29.62 after influential Goldman Sachs analyst Richard Simon sent a note to clients warning that the June quarter earnings report will likely show a 17% drop in net profit, similar to the reduction he now predicts for the September quarter. And he warned that he expects to have to reduce his estimate for Disney’s fiscal 2000 earnings.

Highlighting the main area of continued problems in a report Tuesday, ING Barings analyst Stewart Halpern said, “We now see the weakness in Disney’s highly profitable merchandise/licensing business as more fundamental and severe” than just a “crowding out” of Disney product by “Star Wars” merchandise as was previously thought.

As a result Halpern predicted operating income from Disney’s creative content unit, which includes the studio and consumer products, to drop 9% to $101 million in the quarter. Only a few weeks ago he had expected income to hit $201 million.

The latest forecasts by analysts suggest that Disney’s performance has deteriorated since chairman Michael Eisner warned in late April that an expected improvement in the second half of the fiscal year would not be enough to offset the drop in Disney’s first half.

Eisner made the comments after Disney reported a sharp drop in its second quarter earnings. At the time Eisner declared Disney was “taking a number of steps,” including an across-the-board cost review, to improve its earnings growth.

Disney stock down 28%

Disney declined comment on the latest analyst predictions Tuesday. Disney’s earnings performance has been deteriorating for over a year, sending Mouse House stock down about 28% over that period while other entertainment stocks have rallied dramatically.

The latest signs of trouble in the business could not come at a worse time for Eisner, who is coming under increasing criticism from investors for his refusal to settle litigation with former Disney exec Jeffrey Katzenberg. Disney and Katzenberg have been locked in a high-profile trial in recent weeks as a result.

At the same time, analysts said Tuesday that problems with the Go Network, the Internet portal operated by Disney partner Infoseek, may have prompted Disney to start talks aimed at buying the outstanding 57% of Infoseek.

‘Speed bumps’ at Go

Go, which links Internet users into Disney-Infoseek jointly operated Web sites such as ESPN.com and ABCNews.com, was launched in January amid great hoopla. But PaineWebber analyst Christopher Dixon, who regularly uses Go Network, said Tuesday the site had “run into some speed bumps in the rollout, particularly as it relates to e-mail and personal pages.”

Other Wall Street analysts have said Infoseek’s March quarter performance was disappointing, with revenue growth coming in below expectations. Customer usage had also disappointed, and one analyst said Tuesday that “given Disney’s market muscle, I think people are concerned.”

The current corporate structure simply isn’t working, the analyst added. Whether or not Disney can solve the problem by taking full ownership isn’t clear, however.

Despite these worries, Infoseek’s stock price jumped an additional $5.62 to $48.62, raising the cost of any bid to almost $2 billion.

‘Stale’ Mouse outlets

As for Disney, there’s no question that its operating businesses “are in some disarray,” concluded PaineWebber’s Dixon. He said the problem in the consumer products area, reflected by declines in store sales adjusted for new store openings, appears to flow from over-emphasis on the wrong sorts of merchandise and the generally stale look of the outlets.

In April Disney said fixing the stores was a top priority and analysts expect a reorganization to be unveiled eventually.

Also worrying many on Wall Street is the impact of Universal Studios’ newly opened Islands of Adventure theme park in Orlando, Fla., on DisneyWorld. Most analysts believe it is too early to tell, although Schroder analyst David Londoner said in a recent report that growth in Disney theme parks’ operating income likely would slow in the second half “as Islands cuts into gains.”

Dixon said Disney’s Orlando hotels were benefiting through higher occupancy rates from Universal’s new park.