Capital Investment Advisors

Should Investors Be Worried About The Performance Of Disney’s Weakest Business?

According to a certain iconic Disney song, “It’s a world of laughter, a world of tears; it’s a world of hope and a world of fears.”

But for The Walt Disney Company’s toymakers, it’s currently nothing but tears and fears. They are currently under scrutiny for some poorly timed underperformance.

In its third quarter, Disney’s revenue rose 7% year-over-year to $15.23 billion but missed estimates by $110 million. Adjusted earnings per share increased 18% to $1.87 but also fell short of expectations by eight cents.

Among the headwinds, Disney faces are the shrinking cable TV audience, which has cut into the company’s broadcast revenue, and concerns about Disney’s plan to launch a streaming service that will go up against category-owner Netflix.

Adding to those challenges was the dreadful numbers posted by Disney’s Consumer Products and Interactive Media (DCPI) division, which handles the company’s toy licensing, retailing, games, apps and publishing operations. DCPI saw its year-to-year fall 8% in the third quarter.

That slip was part of a downward trend that has plagued DCPI for several quarters.

This news is no doubt puzzling to any parent or grandparent who has been dragged into a Disney Store by a six-year-old and walked out carrying a Minnie Mouse t-shirt, a princess dress, a palm-sized stuffed animal and a receipt for $158.37.

Now, if you are even a bit geeky, you may be asking how an operation could be struggling when it owns such beloved and wildly popular brands as Frozen, The Avengers, Mickey Mouse, Spider-Man, Cars, and – oh, I almost forgot – STAR WARS!!!!

The movie buzz cycle certainly presents a big challenge. A blockbuster movie can send merchandise flying off the shelves for a year, generating sales numbers that simply can’t be matched by following years that lack a mega-hit. Stars Wars toys are a perfect example. The original licensee, Kenner, sold billions of Jedi-inspired playthings during the years when the first three Star Wars films dominated pop culture. But, just a few years after Return of the Jedi was released, Kenner actually stopped manufacturing Star Wars toys.

Remember, too, that DCPI’s revenue is heavily dependent on the creativity and marketing ability of its licensing partners. If Hasbro doesn’t come up with a hot new action figure, or if digital game maker EA fails to light up the gaming universe with its latest Star Wars game, DCPI suffers.

Disney used to produce a lot of its own toys, games, and books. Over the years, those operations were outsourced to licensees so Disney could focus on its movie, media, and theme park businesses. With Disney poised to launch its video streaming service and preparing for its takeover of Twenty-First Century Fox, it’s not unreasonable to think The Mouse might just sell off its entire consumer products division.

While it’s not clear what such a spin-off would mean for investors, one thing is certain – Disney branded products will continue to command a premium – either in dollars paid, or tears shed.

It’s your choice, mom, and dad.

Previous ArticleNext Article