Actors in Storm Trooper costumes take part in the European Premiere of Star Wars Rogue One at the Tate Modern in London. REUTERS
Actors in Storm Trooper costumes take part in the European Premiere of Star Wars Rogue One at the Tate Modern in London. REUTERS

Los Angeles — Walt Disney Company is going to spend its way out of its problems.

The world’s largest entertainment company, which reported lower profit on Thursday, is already working on a new series of Star Wars films — movies that can cost $250m to make. The company will spend $1bn more on its theme parks in the new financial year and plans to start making movies and TV shows for a new streaming service that will launch in 2019.

California-based Disney is trying to adapt to upheaval in the TV and film industries triggered by entertainment options like the Netflix streaming service. Viewers are spending less time with conventional media, whether it’s televised sports, DVDs or feature films on the big screen, and that’s forcing companies like Disney to reach out to them directly. All those costs will weigh on profit, the company said.

"They reminded investors that they have these great brands and they’re putting their resources behind them, they’re addressing this head on," said Robin Diedrich, an analyst at Edward Jones & Co. "The longer-term investor will be comfortable with a couple of years of investing, and a flatish type of earnings." A wicked hurricane season, falling advertising sales and a cancelled movie sapped fourth-quarter profit at Disney, the company said, leading to the first drop in annual results since the financial crisis almost a decade ago. The downdraft from bad weather, lower advertising sales and a tough year for movies was too powerful even for Disney, which counts on TV, theme parks, consumer products and its famous studio to fuel growth.

CEO Bob Iger warned a year ago that financial 2017 would be an "anomaly" and followed up by saying earnings would be "roughly in line" with the year before. His forecast was almost spot on.

Fourth-quarter profit at Disney’s cable TV unit, the company’s single biggest profit contributor, slumped 1.2% to $1.24bn, hurt by weak advertising sales and higher programming costs for baseball and football at ESPN. Affiliate fees rose even as subscribers declined. ESPN plans to fire about 100 employees in a new round of job cuts, according to a person with knowledge of the matter who asked not to be named.

In recent quarters, the company’s theme-park division came to the rescue with strong earnings, driven by higher ticket prices and guest spending, along with new attractions that boosted attendance. Although profit rose, Hurricane Irma forced Disney to close its four Orlando, Florida, parks for two days and cancel three cruises. Domestic resort profits fell.

Capital spending in the current year will rise by about $1bn, driven particularly by parks and resorts, Iger said. The company has Star Wars lands under construction in both California and Florida, and Toy Story Lands being built in Orlando and Shanghai. Capital spending totalled $3.63bn in the year just ended.

"No other company in entertainment today is better equipped to meet the challenges of a changing world or better positioned for continued growth thanks to our collection of brands," Iger said on the call.

Shares of Disney rose as much as 1.9% in extended trading, reversing an initial decline. The stock, once a high-flier, is down 1.5% in 2017 after a flat 2016, the worst back-to-back years since 2007-08.

Disney faced other headwinds in 2017, including a light release schedule of just eight films from its movie division, a drop from past years, and the ongoing challenge of finding consumer products to match the bonanzas generated by Frozen and Star Wars: The Force Awakens. Last quarter, the company took a write-off on an unreleased animated film, Gigantic.

Disney said Thursday it was already working on a new Star Wars trilogy to follow the series that’s scheduled to wrap up in December 2019. Rian Johnson, director of The Last Jedi installment that opens in December, is already at work on the project. The company also plans to create a Star Wars TV show for its new streaming service.

The first picture in Disney’s Star Wars revival, The Force Awakens, cost $245m to produce and went on to deliver $2.07bn in box-office sales, according to Box Office Mojo.

For the quarter ended September 30, Disney reported earnings of $1.07 a share, excluding some items, missing the $1.14 average of analysts’ estimates. Sales slipped to $12.8bn, compared with projections of $13.3bn. For the year, profit and revenue both slumped 1%.

To adapt to shrinking cable TV audiences, Iger is introducing direct-to-consumer subscription services based on ESPN and the company’s rich library of children’s programming. But start-up costs, along with the potential loss of sales to third parties such as Netflix, have added to investor worries.

The company reported a $140m drop in income from investments, citing higher losses at BAMTech, its streaming unit, and Hulu, as well as lower earnings from A+E Television.

That may explain Disney’s interest in acquiring large parts of 21st Century Fox, including its film studio, some cable channels and stake in consumer TV services such as Sky and Hulu. Iger is due to retire in July 2019, potentially making a deal for the $54bn Fox a crowning achievement in his long, successful career.

On the call Thursday, executives declined to comment on the Fox reports.

Bloomberg

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