Disney’s To Push Star Wars Merchandise, So As To Drive Double Digit Segment Growth Near Term

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Disney’s (NYSE:DIS) plans to aggressively push Star Wars merchandise points towards potential success. The media giant saw massive benefits from Frozen merchandise last year, which led to a double digit growth in the segment revenues. However, the dynamic with Star Wars will differ, despite its massive fan following. The reason is the target demographics. Frozen connected well with kids, but Star Wars is not that popular with the youngest generation who predate its blockbuster movies. Remember, the first movie in this series was released more than three decades ago. Disney realizes this issue and it is thus going to be aggressive in marketing  Star Wars merchandise and using different platforms, such as YouTube (Maker Studios) and ABC, to promote new toys. This is important for Disney as the merchandise will not only aid the consumer products revenue growth but also create more visibility and hype for the movie, which will release in December.

We currently estimate consumer products revenues of around $4.75 billion in 2015, also reflecting the contribution from the newly opened Shanghai store. In the coming years, we estimate revenues to be north of $7 billion, primarily reflecting the benefits of international expansion, Star Wars and Frozen 2, among other factors. The EBITDA margins associated with consumer products business are also higher at around 45%, according to our estimates. This will translate into EBITDA of $3.4 billion by the end of our forecast period, representing 12% of the company-wide EBITDA.

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Expect Solid Growth In Consumer Products Revenues In The Near Term

Disney acquired Maker Studios last year for $500 million and now it is putting it to use with various creators lined up to promote the new Star Wars merchandise. [1] This, among other benefits, is why Disney acquired Maker at first place – to cross-market its various products and services. While the event on YouTube will reveal different products on September 3rd, more than 1,000 stores will open the next midnight to sell the Star Wars products. If Disney succeeds in its attempts to create massive demand with the younger generation, it will be a significant achievement for the company. Firstly, it will create more hype and demand for the movie, which is scheduled to release around Christmas.  Secondly, it will go well with its plans for a new Star Wars attraction in its theme parks.   Thirdly, it will significantly boost the consumer products segment revenues.  Fianlly, we note it establishes a platform to be leveraged by subsequent movies lined up in this series.

The consumer products division is anyways trending well for Disney. Revenues have almost doubled in last five years to $4.25 billion in 2014, partly reflecting the benefits of Marvel acquisition. [2] The segment saw a solid growth last year with the success of Frozen merchandise. The stores were unable to meet the demand for Frozen merchandise and even restricted customers to buying a maximum of two items per order for some time. Stores across the U.S. were sold out on Frozen costumes for most of the first half last year. Frozen connected well with younger generation and that’s what Disney is now trying to do with Star Wars (also see – Disney Lowers FY 16 Guidance, Though Star Wars And Shanghai Are Key Factors To Driving Future Growth).

Apart from Star Wars, the segment will see revenue growth from its Playmation series in the near term. Playmation is a line of toys that combines wearable gadgets with role-play of various characters and it will hit the retail stores in October this year. Added to the benefits of Star Wars merchandise, Disney should be able to grow its consumer products revenues in 2015, despite a slower first half.

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Notes:
  1. Disney Is About to Flood the Market With Star Wars Toys, Bloomberg, Aug 26, 2015 []
  2. Disney’s SEC Filings []