Apparently, Disney (NYSE:DIS) studios' summertime blues will continue into the fall.
Chief Financial Officer Thomas Staggs said this week he expects the studio segment to lose upwards of $300 million in the fourth quarter. Ouch. Although Staggs blamed the red ink on Disney's recent box-office portfolio, the situation is a bit more complex. Miramax bigwigs Bob and Harvey Weinstein decided to part ways with Disney, and a bunch of their films were released quickly to bring closure to that relationship. So marketing expenses may have been stretched thin and not brought in the sales the company was expecting.
Make no mistake, however: The demand for Disney movies has been weak. A look back at earnings for the third quarter ended July 2 shows a loss of $34 million for the studio business; for the nine-month reporting period, operating income for the studio dropped 14% to $552 million. There were disappointing results for flicks like Herbie: Fully Loaded,Dark Water, and The Hitchhiker's Guide to the Galaxy. And let's not forget the not-so-valiantValiant and the grim Brothers Grimm features. The studio division is an important driver of value, so Disney must find a way to produce better movies.
Yet there was one other thing that Staggs mentioned that made me pause: problems with the DVD model. Sales of direct-to-video projects were below projections. With Pixar (NASDAQ:PIXR) and DreamWorks Animation (NYSE:DWA) oversupplying the marketplace with DVDs, investors should be concerned about softness in monetizing Disney's treasured video brands.
Thankfully, however, Disney has other divisions -- theme parks, cruise lines, merchandise, and cable channels -- that can help ameliorate problems in one area. Diversified revenue streams are one reason for owning a conglomerate. Sure, Viacom (NYSE:VIA) may have given up on synergy. But for now, it's helping Disney as Staggs still believes that earnings growth will remain robust this fiscal year given the good performances expected in businesses like ESPN and ABC.
To try to turn the studio ship around and increase box-office revenues, Disney is looking to Chicken Little and The Chronicles of Narnia. And keep in mind that Staggs mentioned that next summer it will offer Pixar's and Disney's Cars cartoon, as well as the next Pirates of the Caribbean entry.
Disney really is a frustrating stock at times; sometimes the product is steaming, and sometimes it's cooling. Nevertheless, Disney did manage to turn ABC around. So if Bob Iger can rally the creative types over at the studio to give customers what they want, then perhaps customers will give shareholders what they want -- better profits at the studio division. For now, however, patient shareholders must accept any selling pressure on the stock caused by the loss that the studio division will incur.
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Fool contributor Steven Mallas owns shares of Disney. The Fool has a disclosure policy.
