Walt Disney Co. (DIS:US) is eliminating perks including executive car allowances as the world’s biggest entertainment company looks to further boost profitability.
“We’re phasing them out,” Chief Financial Officer Jay Rasulo said of the car allowances in an interview at last week’s Allen & Co. conference in Sun Valley, Idaho.
Disney has been reducing costs by firing hundreds of workers, closing offices and outsourcing duties like video-game development as it looks to widen profit margins (DIS:US) and extend a more than doubling of the stock price in the past five years. Rasulo, who has been conducting a company-wide review of expenses, said he’s seeking to modernize operations at Burbank, California-based Disney.
“We looked at the way technology is changing our businesses,” said Rasulo, who didn’t discuss specifics. “We’re removing vestigial parts.”
Chairman and Chief Executive Officer Robert Iger has focused on efficiency since becoming CEO in 2005, said Robin Diedrich, an analyst with Edward Jones in St. Louis who recommends the stock.
Operating margin (DIS:US), a measure of profitability, widened to 21 percent of sales in the most recent fiscal year from 13 percent in fiscal 2005, according to data compiled by Bloomberg. Net income has more than doubled to $5.68 billion, outpacing the 35 percent gain in sales.
“He’s wielding a scalpel, not a meat cleaver,” Diedrich said in an interview.
In recent years, a monthly car allowance amounted to $900 for one mid-level former Disney executive who didn’t want to discuss the amount publicly. In addition to phasing out that perk, some Disney units have eliminated a half-day Friday policy during the summer, according to another person.
A Disney spokesman declined to comment.
Disney’s actions are in line with other entertainment companies that have lowered costs in recent years, according to William Simon, an executive recruiter at Korn/Ferry International (KFY:US) in Los Angeles. Some studios used to wash executives’ cars and refill gas tanks for free, he said. Many have also reduced the maximum severance an executive could get to six months.
“It’s a message, a symbol, that ‘we’re tightening things up,’” Simon said. “It’s part of an overall effort to rein in costs.”
In May, Disney licensed its “Star Wars” video-game development to Electronic Arts Inc. (EA:US) That followed the April decision to eliminate about 200 jobs at the newly purchased LucasArts, the game unit of Lucasfilm Ltd. In January, Disney closed a video-game studio in Austin, Texas. The company has been making more mobile games and not as many for consoles.
The ESPN division eliminated 300 to 400 positions in May. The sports channel consolidated sales functions, closed its Denver office and stopped doing work on 3-D broadcasts, John Skipper, co-chairman of Disney’s media networks group, told the Hollywood Reporter this month.
“We had not for a long time looked at our organization with an eye toward making sure that our resources, our people, our money was spent against things that make a difference,” he said.
ESPN, a major driver of profit at Disney, will have a new competitor in August with 21st Century Fox Inc. (FOXA:US)’s Fox Sports 1. Fox’s entry could increase programming costs and bite into ESPN’s advertising, said David Bank, an analyst at RBC Capital Markets who recommends the stock.
“That’s why they’re cutting costs,” Bank said on Bloomberg Television on May 28 after the ESPN moves were announced.
More than 120 workers at Disney’s film unit have lost their jobs this year, according to Disney filings with the state of California. Steve Hulett, a business representative at the Animation Guild, a union representing Disney workers in Burbank, said those let go included employees specializing in hand-drawn animation, because the company is focusing on computer-generated cartoons.
Disney reduced the pay for some union members and has hired others on a daily basis, Hulett said.
“It’s all in the service of profit margins,” Hulett said.
Disney beat Wall Street estimates in May with a 32 percent increase in net income to $1.51 billion for the second quarter ended March 30. The company reports results for the just-ended third quarter on Aug. 6.
Rasulo, speaking at an investor conference on May 30, tempered third-quarter earnings expectations. The film division incurred significant marketing costs for “The Lone Ranger” before seeing revenue from theaters, Rasulo said at the time.
In addition, ESPN will recognize about $73 million less in deferred revenue in the period than a year earlier, while the parks division won’t see the same earnings bump it got in 2012, when the Fantasy cruise ship was just launched.
Disney added (DIS:US) 0.7 percent to $65.82 at the close in New York. The shares have gained 32 percent this year, compared with a 19 percent advance for the Dow Jones Industrial Average.
The company had 166,000 employees at its September 2012 year end, according to regulatory filings, an increase from the 156,000 in fiscal 2011.
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