The Walt Disney Co(NYSE:DIS)has been performing exceptionally well over the last few years, most recently posting a 24% gain in 2014 and up another 15% year-to-date. Still, analysts were worried heading into recent fiscal second quarter earnings (reported May 5th) that results would look weak due to the waning popularity of Frozen (released Nov. 2013). Yet once again, Disney beat expectations posting a 10% year-over-year increase in earnings for the quarter.
Surprisingly, it was one of Disney's smallest segments, consumer products, that helped drive that outperformance. Here is how Disney toys are paving the way for future growth.
Toys lead the way
Disney has had major success in recent years with its film empires like Marvel, Pixar, and of course, the most successful animated film of all time, Frozen. Those movies are essential in telling the stories of characters that ultimately spur growth for the rest of the business. Yet studio entertainment, the segment responsible for movie production, actually saw earnings decline 10% year-over-year.
However, its consumer products segment that produces toys, apparel, and books easily made up the difference. During the quarter, the consumer products segment increased revenue 10% year-over-year while raising the bottom line an incredible 32%.
While Frozen products have led the way, do not assume that as the Frozen craze fades, so will growth in the consumer products segment. Disney has multiple movies slated that could each lead to big wins for this business, including Inside Out in mid-June, Star Wars in December, and of course, Frozen 2 (starting production but without a set release date). And on June 1st, Disney announced its biggest new consumer products development: the "Playmation" line of toys and gadgets.
Playmation: Imagination Made Real
Disney is calling Playmation the "evolution of play" -- it allows users to experience the characters and stories more in depth than ever before with technology that is drawing closer and closer to virtual reality. With interactive toys, wearables, and other technology, kids (or adults -- I will be a first user when Playmation comes out in August) can control their toys and experience the magic of being a hero in their favorite stories.
Disney actually conducted a study to find out just how to make this technology successful and found that parents wanted their kids to play in ways similar to how they did growing up, with actual physical activity mixed with imagination. That is what Playmation aims to do, with the new technology to make it magical.
According to Leslie Ferraro, the new director of consumer products:
Playmation takes the best the digital world has to offer and uses it to create supercharged, real world play. This is play updated for today's kids -- bringing their imaginations to life as they go on active adventures alongside their favorite characters.
Becoming bigger than the movies themselves
Consumer products is the fourth largest of its five divisions by revenue, behind media networks, theme parks, and studio entertainment. Studio entertainment, the segment of the company responsible for making movies, makes up about 12% of total earnings, compared to about 10% from consumer products.
If these growth rates for the segments continue on a similar trajectory, the consumer products segment will outpace studio entertainment by this time next year. For long-term Disney investors, growth lies far beyond just the blockbuster movies it produces. With new products like Playmation, the company has yet another lever to continue driving that growth into the future.
Bradley Seth McNew owns shares of Apple and Walt Disney. The Motley Fool recommends Apple and Walt Disney. The Motley Fool owns shares of Apple and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.