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Why Disney Is Sporting a Goofy Grin

Trust Walt Disney to orchestrate a happy ending after what began as a particularly dismal week. On Jan. 31, the company announced it was putting to rest its three-year effort to create a viable Internet portal with and taking a $790 million writedown. Yet on Feb. 6, at a meeting in Anaheim with analysts at the company's soon-to-open California Adventure theme park, Disney execs took great pains to look like they hailed from the Happiest Place on Earth.

Earnings for its first quarter, which were reported earlier in the day, are up 27% -- if you exclude the Internet numbers. The now Go-less online group will show profits by late 2002, the company swears. Meanwhile, Disney has plenty of initiatives intended to turn around its other underperforming unit, the $2.7 billion-a-year consumer-products division.

This is the unit that has received much of the company's attention in recent months. In 2000, the division's operating earnings fell 24%, to $455 million. And in the first quarter of 2001, they declined 13% more as revenues slipped 6%, with the company saying it had suffered along with other retailers and has now marked down products that failed to move.

LET'S MAKE A DEAL. The bad spell could all be over soon, at least according to Andy Mooney, Disney's new consumer-products chief, who told analysts gathered at Disney's Grand Californian hotel that he expects "meaningful" increases in second-quarter earnings, which he predicted would "contribute to Disney's overall growth." To achieve that goal, Mooney says Disney is in the process of closing 100 of its worst-performing stores -- a move that will reduce the total number of stores worldwide to around 600 within 12 months.

Perhaps even more important, the company announced that it was in the midst of negotiating with 15 retailers, and others, in an effort to target consumers it has had a hard time reaching in the past. The first of two such deals, a licensing agreement with Kmart, will give the Mouse House a retailer that can make and sell lower-price children's clothes based on Disney-brand merchandise. Disney's interactive group, which makes games, also announced that it would be creating an online interactive game with T&E Soft, maker of the hugely popular Final Fantasy series that has sold more than 30 million copies.

Disney executives swear more such deals will follow. Negotiations concerning one, with J.C. Penney, are in advanced stages and will allow the retailer to make licensed infant clothing under the Disney Small World label. As Disney executives explain it, they want to grab a bigger slice of the estimated $7 billion market for kids clothing, of which the company says it currently gets about 5%. The aim of these deals, and others likely to be announced soon, is to lift that figure to somewhere between 10% to 15% of the market.

RENOVATORS AT WORK. Mooney also says the company is having some success revamping its Disney Store chain, redoing the aisles, and loading the shelves with stocks of faster-moving merchandise to increase same-store sales. The company has two revamped stores -- one in Southern California, the other in New Jersey -- that are being used to test and fine-tune the new approach. It seems to be working, at least according to Mooney, who says sales are up as much as 25%. All Disney stores, he adds, will likely be redesigned and upgraded within the next year or so.

As for the ailing Disney Internet unit, Steve Bornstein, chief of the Disney interactive group, was quick to point out that's demise has freed Disney to focus on its much stronger ABC, Disney, and ESPN Web sites. That trio, he says, are growing, enjoy strong ties with major advertisers, and are likely to be profitable by the end of 2002. The three brands, he adds, have seen page views grow by more than 100% apiece in recent weeks.

On an even more cheerful note, Bornstein notes that sales of Disney merchandise are up 80% on the site, which turned a profit in the the first quarter. The company also sold planeloads of vacations via the Web to Disney destinations. Perhaps, if the newly announced initiatives are successful, the Happiest Place on Earth can keep wearing that smile a while longer. By Ronald Grover in Anaheim

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