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New ownership turns Disney Stores around

The entertainment giant profits from licensing fees after selling its retail operation in 2004.

December 23, 2006|Joseph Menn | Times Staff Writer

This holiday season, more than 300 Disney Stores are putting an old favorite back in the Walt Disney Co. stocking: cash.

The Burbank entertainment company in 2004 sold its problematic U.S. and Canadian retail shops to Children's Place Retail Stores Inc. Now that move is paying off big time. Under terms of the deal, Disney in November started receiving licensing fees equal to 5% of the stores' revenue.

Sales are exceeding expectations, and surging as Christmas approaches. Sales in Disney Stores open at least a year were up 15% in the first 11 months of 2006 and 23% in November, growth that Children's Place attributed to "our merchandise strategies and appetite for popular franchises."

On a recent weekday afternoon at the Glendale Galleria, a dozen customers stood in a fast-moving line to buy plush Mickeys and Minnies, toy automobiles spun off from the movie "Cars" and assorted Princess dolls.

"It's better organized and more adult-friendly," said shopper Hun Lee, 36, who popped in and out with a brace of stuffed mice for his 4-year-old daughter. "The lines used to be ridiculous."

Disney stands to take in more than $30 million in the year to come. That's not much for a company with more than $3 billion in annual profit. But it beats the red ink Disney Stores generated before the chain was jettisoned.

Even under new ownership, the stores remain invaluable in burnishing the Disney brand, because many more people go inside them than cross the turnstiles at its theme parks. They also provide massive promotion for Disney movies and shows by running clips on the multiple in-store screens and by giving prominent display to the latest characters.

Synergy with Disney's entertainment operations was always the goal, dating back to when the stores opened under former Chief Executive Michael Eisner. But shoppers were eventually turned off when the stores shilled merchandise from poorly received movies.

"There was a heavy reliance on having synergy programs on at times of the year when it didn't match a traditional retail calendar," said consultant Peter Whitford, who ran the stores from 2001 to 2003.

Disney also stocked the shelves with high-priced and high-margin items, suffered from weak management and expanded too much, to more than 700 shops worldwide. It still owns Disney Stores in Europe.

"They opened so many of them that they each ceased to be special, and then you're just another retailer -- which is a very tough business to run profitably," said Marty Brochstein, who edits the Licensing Letter.

After closing hundreds of stores, Disney did manage to turn a small profit at the remainder. But it wasn't worth the aggravation, and after a year of looking for a buyer, Disney sold to Children's Place for just the cost of the chain's inventory. Best known for kids' clothing, the Secaucus, N.J.-based company also operates a larger chain under the Children's Place name.

The sale was for so much less than the net worth of the stores that to follow accounting rules, Children's Place later wrote down the $48 million in property and equipment it had acquired to zero.

Under a 15-year licensing agreement, Children's Place until last month enjoyed a "royalty holiday" free from payments to Disney while it revamped the operation. When the stores begin online sales in April, Disney will get a 9% to 10% royalty on those transactions.

Retail analysts say Children's Place has succeeded by offering a mix of prices, securing products directly from Asian manufacturers and responding quickly to what customers are buying -- even if it's from a movie that came out years ago. Children's Place also has benefited from Disney's much-improved performance at the box office and such runaway TV-driven successes as "High School Musical."

If Disney Stores' resurgence under new ownership is something of a rebuke to the company's past efforts, it's also a vindication of the broader steps taken to improve the profitability of Disney's consumer products.

"We decided it was better to have a steady flow of royalty payments, versus a very uncertain, vertically integrated retail operation," Disney spokesman Gary Foster said.

Disney has stepped back from micro-management and opened the floodgates, permitting the use of its characters on inexpensive cereals, high-end clothing and other goods in what is now the world's largest licensing program. The House of Mouse also has gotten more deeply involved with big retailers, giving them exclusive rights to specific items and thus a vested interest in promoting them.

As a result, Disney's consumer products unit, the smallest of Disney's four divisions, is now responsible for $23 billion a year in overall retail sales. In the fiscal year that ended Sept. 30, the division reported an operating profit of $618 million on revenue of $2.2 billion. Three years earlier, the unit had a profit of only $384 million even though revenue was slightly higher, at $2.3 billion.

It also helps that Disney managers don't have the stores as a distraction. And the change has made it easier to do business with more retailers, since Disney is no longer competing against them head-to-head.

"The licensing model is a great model," Whitford said. "Retail is very different."

joseph.menn@latimes.com

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