Disney Should Go Shopping

The $38 billion entertainment and media giant, The Walt Disney Company (NYSE: DIS), announced depressing Q1 results yesterday. It was the first major US media company to report results for the quarter.

Revenue of $9.6 billion was short of the Street’s expectations of $10.0 billion and declined 9% over the year. EPS of $0.41 also missed the market’s expectations of $0.50 and declined 35% over the year.

Disney’s financial woes continued in the quarter. After having lost $92 million in a currency exchange due to Lehman Brothers’ liquidation, this quarter, the company suffered a $60 million charge on account of the Tribune bankruptcy.

The decline in revenue was led by the Studio segment falling 26% over the year to $1.95 billion. Broadcasting revenue at ABC declined 14% to $1.45 billion and Parks and Resorts revenue fell 4% to $2.67 billion. Cable Networks and Consumer Products grew 2% to $2.45 billion and 18% to $0.77 billion respectively. During the quarter, Disney separately reported revenues for the Interactive Media group, which will capture its video game and online unit. Over the year, this group grew 13% to $0.31 billion.

The weakening economy, coupled with consumer demand shifting to digital formats, were the primary reasons for such a dismal performance. President and CEO Bob Iger said that the “abundance of choices” for consumers is leading them to be more selective about not only the titles they choose, but also the formats they decide to possess. This “secular shift” in demand is not only impacting Disney’s broadcast television but also its DVD sales.

To counter the impact of reduced DVD sales, Disney is now looking at reducing production, marketing, and distribution expenses at its home video business. In the coming years, Disney will be making fewer films and will focus on improving the price to value in relationships. For instance, the company is finding that when it sells a Blu-ray DVD with both a standard DEP file and a downloadable file, it is able to offer a price that the customer views as delivering greater value. Disney will look for more such value-adds to DVDs at minimal additional cost to improve its revenue rate.

Advertising sales at ESPN and ABC continued to be weak in the quarter. Disney is looking at expense control at local TV stations while ensuring that these measures do not hurt local news brands, as the company is a market leader in that segment. Local stations gained ad revenue share despite a decrease in overall ad spend. The local ad market revenues declined over 15% in spite of higher political spending last quarter for the November elections.

The recession also hurt park attendance, with domestic park attendance decreasing 5% over the year. Occupancy levels in both Orlando (Disney World) and Anaheim (Disneyland) were also down by similar percentages, to 85%.

Disney is now carefully examining its investment options. In the previous year, it spent about $170 million on video game development. In the current year, the company is looking at spending about $40-$50 million on this segment. It will also see a slower pace of investment in Disney.com’s branding, CRM capabilities and ongoing mobile content and services initiatives.

The stock fell 8% to $19.05 with a market cap of $38.23 billion and is marginally above its 5-year low of $18.60 earlier in November.

2009, however, is a good time for Disney to buy some interesting online media properties at very attractive valuations. In the past, Disney has paid a lot for acquisitions such as Club Penguin. In the current market condition, many venture-funded entertainment and media companies are looking for exits, and Disney could have a field day filling up its portfolio to position itself for the time when the market comes back. Here is our analysis, Disney and Web 3.0, which offers more color on what to acquire.