DreamWorks Animation SKG Inc. (DWA), the studio that made “Shrek” a household name more than a decade ago, releases the 3-D feature “The Croods” today trying to regain lost luster in a crowded market for family films.
The Glendale, California-based company took an $87 million writedown on its last picture, “Rise of the Guardians,” a loss that highlights the struggle to create fresh hits against blockbusters like “Marvel’s The Avengers,” 2012’s top film.
Success with “The Croods,” about a dysfunctional cave family, would boost confidence in founder and Chief Executive Officer Jeffrey Katzenberg as he cuts costs and tries to compete for family audiences. The studio, along with Walt Disney Co. (DIS:US)’s Pixar, once dominated computer animation. Now it competes with a host of rivals, while live-action films like “Iron Man” and “The Hobbit” also steal fans.
“The genre is not dominated by two giants anymore,” said Phil Contrino, vice president and analyst at Boxoffice.com. “The other major studios are very much in play.”
“The Croods” should generate a profit of about $58 million from theaters, home-video and television, according to Tony Wible, a Janney Montgomery Scott LLC analyst who recommends buying the stock. He forecasts a $45 million opening weekend in the U.S. and $531 million in cinema sales worldwide. Theater owners typically keep about half of ticket sales.
“If the company can get back to making hits, people will be more comfortable about the stock,” Wible said. “They can’t afford to have another repeat of ‘The Guardians,’ but I don’t expect that.”
Executives at DreamWorks Animation declined to discuss the film’s prospects, according to Shannon Olivas, a spokeswoman. The company said on a Feb. 26 conference call its two releases this year cost about $135 million each.
DreamWorks Animation became an early success in computer animation in the 1990s, along with the late Steve Jobs’s Pixar, now part of Disney. The studio’s “Shrek” and “Madagascar” films rank among the top animated pictures in sales, according to Box Office Mojo, an industry researcher.
Unlike Disney, which has bolstered its film studio in recent years by paying $15 billion for the owners of “Toy Story,” “Iron Man” and “Star Wars,” DreamWorks Animation doesn’t have as deep a reservoir of famous characters.
Meanwhile, other studios have caught up. News Corp. (NWSA)’s Twentieth Century Fox, the distributor for DreamWorks Animation, released the top animated picture last year with “Ice Age,” which collected $887 million in worldwide sales, according to Box Office Mojo. “Dr. Seuss’ The Lorax,” from Comcast Corp. (CMCSA:US)’s Universal Pictures, was a top domestic film.
“Rise of the Guardians” cost about $145 million to produce. After marketing outlays and a split of $303.3 million in worldwide ticket sales with theaters, the film failed to recoup that expense, leading to a writedown. By comparison, “Shrek 2” earned $920 million in cinema revenue, and 2012’s “Madagascar 3: Europe’s Most Wanted” took in $742 million.
In addition, DreamWorks Animation last month pulled “Me & My Shadow” from its 2014 schedule and put the film back in development, resulting in a $54 million charge that also contributed to a year-end loss for the studio.
DreamWorks Animation will issue “Mr. Peabody & Sherman” in March 2014 instead, narrowing its 2013 release schedule to two films, “The Croods” this weekend and “Turbo” on July 19. “Mr. Peabody” had been scheduled for Nov. 1.
With fewer releases and more competition, DreamWorks Animation is eliminating 350 jobs to cut costs. The studio is also deploying new technology that will lower its average film cost to $120 million by mid-2014.
“One of our primary goals over the coming months will be to meaningfully reduce our overall cost structure so that our business can perform at the best possible margins, even when our output level fluctuates as it is doing in 2013,” Katzenberg said on the call.
DreamWorks Animation gained 0.6 percent to $19.01 yesterday in New York. It has gained 14 percent since the company announced the writedown and outlined plans to reduce costs. The shares had fallen for three previous years. The company’s new pay-TV agreement with Netflix Inc. (NFLX:US) starts with 2013 releases, replacing one with Time Warner Inc.’s HBO.
Katzenberg is also taking steps to lessen the company’s dependence on its two to three yearly releases. DreamWorks Animation is developing entertainment districts and theme parks in China and Russia through joint ventures and licensing agreements. The company is also continuing to explore the possibility of a DreamWorks Animation branded TV channel.
Last year, DreamWorks Animation bought Classic Media in a $155 million transaction that gives it a deeper well of characters including Casper the Friendly Ghost, Lassie and the Lone Ranger. “Mr. Peabody & Sherman” is based on Classic Media characters.
Ben Mogil, a Stifel Nicolaus & Co. analyst, upgraded DreamWorks Animation to hold from sell last week, saying the loss, film writedowns and more competitive climate are largely factored into investors’ views.
“Most of these negative catalysts, which we have been speaking about for a number of years, are behind us,” Mogil said.
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