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Disney's CFO Measures the Mouse

Walt Disney (DIS) has had its share of controversy lately: Sales and earnings are slumping, its ABC network is fourth in the ratings race, and several board members are after CEO Michael Eisner to turn around the company. Shareholders are clearly restless. The stock is down to $19.50, from a one-year high of about $30 in late June, 2001 (see BW Online, 6/24/02, "Is Disney "Unduly Beat Up"?).

The man charged with soothing investors is Tom Staggs, Disney's chief financial officer. Recently, he spoke with BusinessWeek Online's David Shook about how the company plans to get back on track in each of its businesses. Edited excerpts from their conversation follow:

Q: Disney's Media Networks, of which ABC is the biggest component, represents 38% of total sales. ABC is well behind CBS and NBC in the ratings. With nine new shows this fall on ABC, does the company see a quick turnaround? What will it take?

A: For ABC, at the end of the day, it's really about the appeal of the shows. There are lots of plans for how to get them launched and make them successful. They definitely have to be good. (See BW Online, 6/24/02, "Can Disney Regain the Old Magic?")

We'd like to have at least one night a week where we either grab first place in the ratings or move way up. Tuesday night is where people are handicapping us to win in the ratings. But it's not a one-shot deal. First, we need to focus on the ratings, then the financial rebound will follow.

Q: Theme parks, which represent 25% of company sales, have begun to see a pickup, after the slump that began following September 11. Can you explain what's happening financially with the parks and resorts so far this summer?

A: We've told folks to expect the third quarter to be off a bit, because the economy hasn't rebounded completely. The international parks are lagging the most. But we've seen continued improvement in domestic attendance, both at Disneyland and Disney World. We've said to expect the third quarter [ending June 30] to be down 6% to 9% vs. the prior year's third quarter.

The key now is to ease up on some of the promotions, and that will increase our [revenue per visitor], adding more fuel to the rebound. Overall, I'd say the direction the parks are headed in is a good one. We watch the people who [express] intentions of visiting our parks. We do this by talking to the marketplace and surveying customers. Those numbers, usually pretty reliable, are at a very high level right now -- indicating high demand for the fourth quarter [July through September].

Q: What about Disney stores and merchandising? This represents about 10% of Disney's sales, but closer to 15% of operating income. It has been a weak year so far for Disney Consumer Products. Operating income decreased 5%, to $86 million. What's being done to reverse the slide? And about this Winnie-the-Pooh lawsuit, is this a real risk?

A: Things have flattened out quite a bit with the economic downturn, but some merchandising programs we've done in conjunction with Kellogg's and Coca-Cola have been really successful lately. We've actually had very strong comparable sales at the Disney stores for seven to eight months now. That's absolutely a good sign. The margins on merchandising are immense when we really hit our stride.

As for the Pooh litigation, it is 10 years old, but we put that disclosure in the latest quarterly filing because we felt it was important to at least highlight the claim being made, and point out that it will soon be heard in court. The fact is, you never know what the outcome will be. The bottom line is that we think we are right and that we will prevail.

Q: Last, we've got the movie studios. They've done about as well as the other major Hollywood studios, but that's not saying much. What do you see happening there?

A: We've had a tough second quarter, but as you said, we're doing as well as anybody. We also expect a tough third quarter. Our new movie Bad Company didn't have a huge first weekend, so we're watching it to see how it holds up. Lilo and Stitch, the Disney animated film, opens June 21, and that's tracking well.

Q: There have been reports of board members getting a little restless and prodding your boss, Michael Eisner, to do more to stir growth. As CFO, I imagine you're getting some of the prodding from large investors, given the drop in share price over the past year. What are your big outside shareholders asking, and what are you telling them to expect?

A: We're having conversations just like this one. Certainly, they're not being strident with me. They see the underlying value and strength of our assets. They, like us, are not thrilled with the stock price, but I think that the good news is that shareholders seem to have a sense that Disney will rebound as the economy picks up again.

Q: What about long-term growth at Disney?

A: We're not making specific growth projections, and I'm not sure it's a good practice to do that anyway. The theme parks remain a huge contributor to cash flow. Our cable networks will continue to be strong for us. The turnaround at ABC continues, and we see more upside in consumer products.

If you look at how technology is affecting the movie business, we're seeing video-on-demand having much the same impact that DVD has already. There are more efficiencies in digital technology that are changing how we make movies, and we're seeing increasing competition in the film and video distribution industry, which is very good for a content company like ours.

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