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Disney profit drops 32% in quarter

February 04, 2009|Dawn C. Chmielewski

Caught up by weak holiday DVD sales and a brutal recession that has cut into television advertising and consumer spending, Walt Disney Co. reported a 32% drop in quarterly net income.

All of Disney's major divisions -- the movie studio, the television group, parks and resorts, and consumer products -- experienced drops in operating income for the fiscal first quarter ended Dec. 27, compared with the same period last year. The company's net income fell to $845 million, or 45 cents a share, from $1.3 billion, or 63 cents, a year earlier. Revenue fell 8% to $9.6 billion.

Disney badly missed analysts' projections. Those surveyed by Thomson Reuters had expected, on average, earnings of 52 cents a share on revenue of $10.1 billion.

Disney Chief Executive Bob Iger said the entertainment giant was reeling from more than the effects of consumers scaling back spending amid the "weakest economy in our lifetime." At the same time, Disney is grappling with fundamental changes in how people seek to be entertained -- changes that are undermining the company's television business and eroding DVD sales.

"We don't believe the changes we are seeing in consumer behavior can all be attributed to a weak economy," Iger said. "And we feel it is important for us to address them as more than just cyclical issues. The combination of these changes with the severe economic downturn has caused us to examine much of what we do."

Studio executives, who often rely on DVD sales to push a film into the black, quietly have been expressing concern about a 30% decline in DVD shipments to retailers in the fourth quarter. This drop in home entertainment sales hit Disney's studio hard. Disney's studio division revenue for the quarter fell 26% to $1.9 billion and operating income plunged 64% to $187 million. Consumers bought fewer new releases on DVD and there was less demand for Disney's classic titles.

Anthony J. DiClemente, an analyst with Barclays Capital, said this was the first time a studio executive had publicly acknowledged that falling DVD sales might have something to do with changes in how people watch films. The shift could rock the economics of the movie industry, which depends on home video sales for as much as 70% of a film's profit, he said.

"With the DVD business in decline, it brings to question whether or not investment in filmed content is going to generate an adequate return on capital for Disney or other media company shareholders," DiClemente said. "The industry is caught in a vortex of dramatic, structural change."

David Bank, an analyst for RBC Capital Markets, said he would be watching other major entertainment conglomerates, such as Time Warner Inc. and Viacom Inc., to see whether they report similar fundamental changes to the DVD business. Time Warner and News Corp. are scheduled to report quarterly results this week.

"That's really the only way we'll know how major an issue this appears to be," Bank said.

Iger said Disney would respond to the changes in the DVD market by reducing marketing and distribution expenses and taking other steps to enhance the perceived value of its home entertainment products -- such as including a digital copy of a movie that can be downloaded and watched on a portable device in the same package that includes DVD and Blu-ray discs.

Disney's television divisions turned in disappointing numbers. Advertising revenue dropped sharply at the company's flagship ABC television network and its owned TV stations, primarily because of low prime-time ratings for the new fall shows. Disney also took a $60-million charge, which it attributed to the bankruptcy of one of its television program buyers, Tribune Co. Operating income in the broadcasting division decreased $205 million to $138 million for the quarter.

Meanwhile, two longtime jewels in Disney's empire -- cable sports powerhouse ESPN and the Disney Channel -- also lost some luster during the quarter. ESPN suffered from a slowdown in advertiser spending -- particularly from auto and consumer electronic companies -- and higher programming costs, primarily its pricey NFL broadcast rights contract. The company said lower DVD sales for productions from Disney Channel, which released "High School Musical 2" in the year-earlier quarter, also dragged down earnings. Operating income at cable networks decreased $69 million to $517 million for the quarter.

Parks and resorts reported a 5% decline in attendance at its domestic parks, with roughly equal drops at Walt Disney World in Orlando, Fla., and the Disneyland Resort in Anaheim. However, attendance was up at Disneyland Resort Paris and Hong Kong Disneyland. Overall, revenue for the quarter fell 4% to $2.7 billion, but operating income decreased 24% to $382 million.

Hotel bookings for the second and third quarter are up, in part because of the success of a promotional campaign that allows people to stay at Disney hotels for a week for the price of four nights.

"The strength of the guest experience we offer, combined with new marketing and pricing strategies, has enabled us to do reasonably well in terms of attendance and advance bookings," Iger said.

Consumer product sales rose 18% to $773 million during the holiday season, reflecting the firm's acquisition of Disney Stores North America. Operating income fell 8% to $265 million.

Disney for the first time broke out results for its Interactive Media group, which encompasses the company's video game development and virtual worlds. Revenue for the quarter increased 13% to $313 million, while operating income decreased $58 million to a loss of $45 million.

Disney shares rose 42 cents to $20.62 in regular trading but fell $1.55 in after-hours trading on the earnings news.

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dawn.chmielewski@latimes.com

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