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Disney Internal Review May Lead to Cuts At Studio

Disney cost-cutting review may lead to layoffs at studio and other units, sources tell Reuters

Walt Disney Co started an internal cost-cutting review several weeks ago that may include layoffs at its studio and other units, three people with knowledge of the effort told Reuters, in an early sign that big companies may not be finished tightening their belts.

Disney, whose empire spans TV, film, merchandise and theme parks, is exploring cutbacks in jobs it no longer needs because of improvements in technology, one of the people said.

Cuts are most likely at the studio, said two of the three sources, where the strategy has changed to focus on fewer films and rely more on outside producers such as Steven Spielberg's DreamWorks studio, which finances its own films and pays Disney a fee to market and distribute them.

It is also looking at redundant operations that could be eliminated following a string of major acquisitions over the past few years, said one of the sources.

The people did not want to be identified because Disney has not disclosed the internal review.

After years of repeated and sometimes severe cost cutting in the wake of the financial crisis, by last summer it looked as though Corporate America had trimmed all the fat and was back on the path of profits through operating growth. But news Disney is weighing cuts – on the heels of Eli Lilly and Co's warning last week that cost controls would drive earnings this year – could herald yet another wave of retrenchment.

Disney executives warned in November that the rising cost of sports rights and moribund home video sales would dampen growth.

"We are constantly looking at eliminating redundancies and creating greater efficiencies, especially with the rapid rise in new technology," said Disney spokeswoman Zenia Mucha.

In terms of profit margin, Disney's studio is the least profitable of the entertainment conglomerate's four major product divisions. The studio had a profit margin of 12.3 percent in 2012.

Its fifth division, the interactive unit that creates online games, lost $758 million over the last three years, according to the company's financial filings. The unit lost $216 million last year.

Disney could trim jobs at both the studio and interactive divisions as well as its music arm, said Tony Wible, an analyst with Janney Montgomery Scott, who has a neutral rating on the company's stock.

The media company is in what CEO Bob Iger calls a "transition year" after spending on projects such as the "Cars Land" expansion at the Disneyland Resort in California and a new cruise ship that launched last year.

"We invested a lot of money in our theme parks and resorts business," Disney Chief Financial Officer Jay Rasulo told a media conference in December. "We want to execute against delivering the returns that we've been promising all of you for the years that we've been making those investments. We really want to hunker down on it."

Staff cuts are not a certainty at this point, the source added, although the company has a history of streamlining operations through layoffs.

In 2011, the interactive group laid off about 200 people at its video games unit after what Disney executives said at the time was a shift away from console games to focus on online and mobile entertainment. In September, 50 employees at Disney Interactive were laid off in a restructuring of the money-losing unit, according to one of the sources.

The company also made cuts at its publishing unit last year, and cut workers at its studio in 2011.

"This is not necessarily a negative thing," said Michael Morris, an analyst with Davenport and Co who has a buy recommendation on the stock but was not aware of the review.

"It speaks to a fiscally responsible management."

If Disney does make some cuts, it would be the latest company to warn that costs still need to come under control.

Lilly said last week that sales this year would be flat to slightly higher, but said profit growth would exceed Wall Street estimates on the back of cost controls. In late December, book publisher Scholastic Corp said it too would look for cost savings in the current fiscal year.

Disney and Lilly are far from alone, though. Tech companies in particular are expected to have been hurt by the fourth-quarter uncertainty over the impending "fiscal cliff" of automatic tax increases and spending cuts which led corporate clients to slow or stop spending.

Congress agreed to a deal on January 1 that averted the cliff.

Fear of the cliff may have affected sales across a range of industries, further clouding the growth picture. Retailers are also expected to contend with the fallout of a lackluster holiday season, which could lead to cutbacks.

Thomson Reuters corporate earnings research analyst Greg Harrison said many of the themes that held true in 2012 — like cost cuts that helped earnings, even as sales stalled — were likely to carry over into this year.

"In the absence of any fresh catalysts for profits emerging, it may be reasonable to expect that current estimates for earnings growth in the low- to mid-single digits throughout 2013 may shrink, even though analysts believe that the slowest part of the earnings growth is now behind us," Harrison wrote in a preview of the fourth-quarter earnings season.

If a trend is emerging, it should begin to be clear as soon as the next two weeks, as companies start reporting 2012 results and offering up their 2013 outlooks.

The present review, headed by CFO Rasulo, has already identified areas to change in the company's travel policy, said one of the sources. It is also looking at a hiring freeze rather than layoffs, said a second source.

The film strategy shift began when Iger took over as CEO in late 2005. Under Iger, the company purchased "Toy Story" creator Pixar Animation and Marvel, which brought it characters such as "Thor" and "Iron Man" that featured in this summer's blockbuster hit "The Avengers."

Disney completed a $4.06 billion acquisition of "Star Wars" creator George Lucas' Lucasfilm in December, and has said that it will begin producing new installments of the lucrative franchise in 2015, and make a film every two to three years.

Shares in the company fell 2.3 percent on Monday to close at $50.97, sharply underperforming broader markets.