Saturday, July 02, 2005

Quiet 4th of July for Pixar

I guess the Incredibles aren't that incredible.

Lacklustre sales of the "Incredibles" caused Pixar to lower its earnings guidance for the second quarter.

Pixar reduced earnings guidance by $6 mln on Friday. issued the following report:
The announcement caught the market off guard since the company typically likes to under promise and over deliver. What magnified the downside was the fact the Pixar news was reminiscent of the DreamWorks (DWA) announcement seven weeks ago. DWA made the mistake of overestimating DVD sales assumptions for sales of "Shrek 2" resulting in a large miss in Q1. Clearly, Pixar's management did not want to make the same mistake. Considering the fact this was the first time Pixar has lowered guidance, all eyes will be watching its result on Aug 4th. Pixar certainly has a lot to live up to after exceeding expectations in every quarter dating back to 1999. The question is whether these recent events speak to overall slowing sales trend for computer generated animation films? What we do know, this has been one of the worst years for the movie industry.
A couple of things to note about companies like Pixar:

1. DVD sales are highly cyclical. Pixar doesn't release films in an orderly fashion so its hard for them to generate revenue streams.

2. Mass retailers like Target and Walmart fluctuate thier inventory levels according to their own perogatives.

Less product visibility translates to lower sales if these retailers decide to tighten inventory, as analysts like to say.

3. Like box office splashes, DVD sales are explosive at first, then gradually wane. Hard to put a number on something that eludes pattern recognition.

End result?

Volatile earnings.

Unfortuantely for Pixar, this 4th of July will be anything but explosive.

Update: Barrons reported this morning 2 things of note regarding Pixar's drop Friday:

A. DVD sales are getting slammed because of internet-driven piracy.

B. An SG Cowen analyst reported as I did that Pixar's unpredictable once-a-year movie release schedule is chaotic from an earnings reporting & following standpoint.

Nevertheless, that same analyst was bullish on Pixar because their profit-sharing deal with Disney expires in 2007. In addition, Pixar is aiming to speed up movie releases.

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