When Disney (NYSE:DIS) announced that it's handing over its Disney Store retail chain to kid apparel specialist Children's Place (NASDAQ:PLCE), skepticism came easily. If Disney couldn't make the chain work on its own, how could a third party get a decent return on its investment by selling Disney's licensed goods? How can a morsel that couldn't satisfy one feed two?
We're still a few quarters away from giving Children's Place a passing grade on the venture, but you can already see what Children's Place thinks of Disney -- it's venturing into Disney markdowns. The company announced that it will open a few Disney Store Outlet locations around the country this year.
Disney closeouts aren't new. For years, Disney has used its small Character Premiere and Disney's Character Warehouse chains at outlet malls to move overstocked items from its theme parks and beyond. But if the first strategic shift by Children's Place is to provide a shopping experience that emphasizes marked-down Disney goods, isn't Children's Place going to cheapen the Disney brand?
Wallet Disney World
A cynic would argue that Disney can do a fine job of cheapening its brand without third-party assistance, while an avid shopper would point out that quality brands like Nike (NYSE:NKE) and Nordstrom (NYSE:JWN) have off-price factory outlets and concepts in place and are no worse off.
But with Bob Iger ready to become CEO of the world's most recognized family entertainment giant, the Disney Store Outlet move is symbolic of what's likely to be his first true test. Will he be taking over Disney or Disney Outlet?
Think about all that has been good at Disney lately. The company's saving grace in theatrical animation has been its take in Pixar's (NASDAQ:PIXR) creations, but that partnership ends next summer. Its only in-house animated blockbuster on this side of the millennium has been Lilo & Stitch. In live action, its one ticket to choice seats at the Oscars over the past few years has been its Miramax division, but Bob and Harvey Weinstein are leaving come September. Its ABC network has put in a dramatic turnaround on the strength of Lost and Desperate Housewives, but the company has let go of some of the people responsible for landing those hit shows while retaining those who passed on eventual winners elsewhere, like American Idol and The Apprentice.
Disney shouldn't be in panic mode yet. But with many of the company's allies about to become adversaries, Iger will have a crisis on his hands if he lets the favorable tailwind of 2005 coast him too far along into 2006 unchecked.
I keep thinking back to a sweaty Steve Ballmer trying to rally his troops by chanting "developers" over and over again. Sure, he looked wacky doing so. And his appearance at that conference no doubt put an end to the fashion combo of soaked denim shirts and khaki pants. Still, the message was clear: Microsoft (NASDAQ:MSFT) understood that developers were its lifeblood. So if Iger's first public appearance as CEO entails little more than rattling off the word "quality" a few dozen times before leaving the podium, I would be tickled something fierce.
You can't cheat quality
Four years ago, before quality-control concerns made Disney-bashing fashionable late into Michael Eisner's term, I took Disney to task for cutting corners. The cracks have been visible for some time. Iger will have to deal with a remodeling process made even more difficult with the absence of Pixar and the Weinsteins.
Earlier this month, I argued that Iger's legacy won't be his ability to repair the critical relationships that Eisner frayed as much as it will be weaning Disney from the reliance on those associations. In other words, Disney doesn't need new friends as much as it needs to inspire new artistic freedom from within.
Over the past few years, Disney has focused on appeasing shareholders by whittling down cost expenditures. But was this move simply perceptive? With the stock trading one-third lower from when it peaked at the end of the cash-intensive Disney Decade, the adage that you have to spend money to make money takes on more meaning, especially when it comes to branded entertainment. A rich catalog is vital. It's a huge accomplishment to be able to move a million copies of Bambi in a single day 63 years after the movies' original release, but Disney also has to keep processing fresh meat. After all, the Warner Bros. store concept faltered because you can't milk the same cast of characters forever. How will Children's Place fill the character void once Pixar sets up camp elsewhere?
That's why Iger's main objective should be to plant new exclamation points in all of Disney's operating divisions. Even though the theme parks will get a boost from the chainwide Disneyland anniversary celebration this year, he needs to sprinkle around some pixie dust like it's brown sugar at a churro cart. Offer more e-tickets. Create more quality family attractions. Flesh out the two newest Disney domestic theme parks into full-day locations. Double the fleet of Disney's two cruise ships -- which are pure class -- and take advantage of the growing number of available ports.
How about the studio? Disney can't replace the genius of Pixar or the Weinsteins, but it still has to try. Rebuilding the animation studio is critical, especially now that so many other companies are doing it so lucratively well. Developers. Developers. Developers. Developers. Animators. Animators. Animators. Animators.
Consumer products? You're kidding, right? It's not a coincidence that consumer products -- and the Disney Stores -- started to struggle once Disney relinquished the theatrical-animation throne. Merchandising and licensing opportunities are nothing without fresh content.
Networks? Sure, this is Iger's stronghold. But that doesn't mean the ESPN brand can't be used even more effectively or that ABC can rest on its recent laurels. ABC landed just one show in the Nielsen Top 20 two weeks ago. That should be a cold splash of reality that the network still has a long way to go before it can be considered dominant.
Put Iger to the test the first time he takes the stage as Disney's new CEO. Count the Qs. I would never trust a CEO of any branded-entertainment company that would use the word "quantity" more than "quality," so I'll be counting. I'll even prepare a free written statement, should Iger decide to use it:
Quality. Quality. Quality. Quality.
Some other recent Disney-related headlines:
- When it comes to Pixar, Iger has little choice but to break it off and move on.
- The 2001 "You Can't Cheat Quality" column generated a fair deal of feedback.
- Disneyland looks to enjoy a great year during its 50th anniversary.
Longtime Fool contributor Rick Munarriz has owned shares of Disney since the 1980s and is at the parks often. He also owns shares of Pixar. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
