Mouse getting mauled: disappointing results of retail stores hurting Disney.

Have consumers gotten their fill of Mickey Mouse knick-knacks?

That's the megamillion-dollar question facing Walt Disney Co. as it scrambles to breathe new life into its slumping Disney Stores unit.

The Burbank-based company acknowledged that its 30 percent drop in net income for the second quarter ended March 31 was partially due to slumping retail sales.

"Merchandise associated with this year's film and television programming has fallen short of expectations, and difficult conditions in international markets continued to impact our licensing revenues," said Disney Chairman and CEO Michael Eisner, in a prepared statement.

It's yet another problem for a company that faces challenges on any number of fronts - from an embarrassing court case that has former executive Jeffrey Katzenberg battling Eisner over back pay, to continuing financial troubles involving its ABC network.

To buoy the stores unit, Disney has recently installed new management - including Disney veterans Thomas Park and Douglas Murphy.

"We saw the numbers and we're establishing new ways of doing business to take some corrective steps," said Sondra Haley, a Disney Stores spokeswoman. "We know we've been putting all our efforts into growing the company and now it's time for us to really re-examine all facets of the business and establish new ways of running the business."

Analysts offer up any number of explanations for the falloff - even including the possibility that Disney's cute, cuddly creatures are out of step with today's harder-edged youth.

"Disney is engaged in sheltering children from harsh realities of the world, and meanwhile kids are growing increasingly aware with the Internet and South Park,' "said Jonathan Margulies, a retail consulting associate with McMillan/Doolittle LLC in Chicago. "They're getting cynical and sarcastic at a much earlier age, and Disney's characters are out of touch with that - whereas Warner Bros.' characters have an edge, like 'Pinky and the Brain'."

Disney also faces stiff retail competition from other Hollywood studios.

"These stores definitely have their own lifetime; they don't last forever. It's easy when you're the only one, but it becomes more difficult when others copycat your format," said Robert Kahn, an independent retail consultant in Lafayette, Calif.

Added Michael Schroeder, chief investment officer at Wasmer, Schroeder & Co. in Naples, Fla.: "Retailing is a difficult business, even for Disney, with such a powerful name and brand. The jury is out on whether it will be a real growth segment, because a good product doesn't necessarily promise a good store."

Just four months ago, Viacom Inc. closed its flagship Entertainment Store on Chicago's posh Michigan Avenue. Last December, it also announced plans to close its 15 Nickelodeon stores, choosing instead to focus on licensing its characters to outside third-party merchandisers.

As for Disney, Haley insisted that its characters are not losing their appeal.

"There's always an appetite for Disney and the emotion generated from its characters, both for people who've grown up with Disney and children," she said. "And there's always an opportunity to satisfy their appetite for Disney through the store."

Whatever the explanation, Disney, which was the first to enter the retail arena when it launched its first store at the Glendale Galleria 12 years ago, is clearly scrambling.

While retail performance is not broken out, analysts said some same-store sales fell by as much as the high double digits. Even at stores that managed to post 1998 sales increases, the growth was only 4 percent to 5 percent, said Schroeder. "It's OK for a retailer, but for Disney, whose stockholders expect sizable growth rates, it's not very exciting," Schroeder said.

Locally, the results are mixed. Disney's original Glendale Galleria store continues to be one of the mall's top sales generators, according to Cindy Chong, general manager of the mall.

"We've been extremely happy with Disney's performance. They're consistently higher in productivity than the maws average (sales of $427 per square foot in 1998), and by far are one of our most essential tenants," said Chong.

But at Disney's Century City store, sales plunged 24 percent in January and 15 percent in February from year-earlier levels, according to one source.

A March 23 report from Credit Suisse First Boston provides further evidence of a slump.

The report projects that Disney Stores will generate 1999 operating profits of $86 million, an 11.3 percent drop from $97 million in 1998. Operating profits for Disney's domestic stores are projected to hit $101 million in 1999, down from $112 million last year, And Disney's foreign stores are performing even worse. Credit Suisse projects they will post a $15 million loss in 1999, identical to last year.

The performance comes at a time when Disney is investing heavily in its retail stores. The chain currently has 739 units worldwide, nearly four times the 177 stores it had in 1992, according to Credit Suisse. And the buildup continues: This year, Disney plans to open stores in Chicago, New York, Rome, Tokyo and London.

One potential opportunity is cyberspace. Since Disney launched its online store in 1996, the site's revenues have tripled each year, according to Chuck Davis, executive vice president of e-commerce for the Buena Vista Internet Group, Disney's Internet division.

"I've heard that the online stores bring in eight to 10 times more revenue than the brick-and-mortar outlets," said Linda Bannister, an analyst at Edward Jones.

But she added that Disney's e-commerce venture is not likely to displace its brick-and-mortar stores. "People, especially kids, still want to see and touch and play with the merchandise," Bannister said. "E-commerce is just another distribution channel that can serve that percent of the population which is busy."

Davis said the Disney site is not cannibalizing customers from the company's traditional stores. In fact, he said, it actually serves as a catalyst for brick-and-mortar sales. "Our research shows that a group of people use the online store to see what merchandise is there, and then go to the store itself to purchase the items," he said.