The decline in DVD sales across the UK has had a negative impact on Entertainment One’s (ETO) earnings. The media group has suffered a £57m impairment charge relating to home entertainment assets, accounting for the bulk of the difference between reported and adjusted half-year pre-tax earnings.
The charge is broken down into various chunks. Some of its physical DVD inventory stored in warehouses is now worth less; certain library assets no longer have any value at all; and it has had to write off some money owed by retailers which are experiencing trading problems.
Chief financial Joe Sparacio says some of the affected DVDs may be picked up by sub-distribution networks, recycled or sold for scrap.
‘Many people presume that being a film maker and distributor equates to soaring profits amid growing public appetite to consume media via digital streaming platforms. However, Entertainment One’s results are an unhappy reminder that certain types of media inevitably go out of fashion,’ says Russ Mould, investment director at AJ Bell.
Entertainment One reported a £42m adjusted pre-tax profit (a 7% rise year-on-year) versus an unadjusted £40.1m pre-tax loss. The difference relates to the aforementioned £57m impairment charge, plus share-based payment charges and joint venture tax and finance costs, among other items.
While some investors would argue many of those elements are the normal costs of doing business and aren’t one-off items, Sparacio says they are treated this way to ensure consistency in how the company reports its numbers.
The Family and Brands division was the standout performed in the half-year reporting period with Peppa Pig continuing to be strong from a licence and merchandising revenue perspective. PJ Masks is also growing very fast and should benefit from a wider merchandising plan in China.
Entertainment One has reduced its guidance for film releases in the full financial year from 140 to 120 titles. Chief executive Darren Throop says the company is moving away from distribution to own-produced and multi-territory releases.
He says some broadcasters now want shorter-run TV series in the region of six to 10 episodes rather than the previous model of 20+. Throop insists that appetite for new content remains strong despite this industry shift.
The CEO shrugs off the suggestion that increased industry competition for providing content would result in reduced prices.
Stockbroker Numis forecasts that Entertainment One will achieve £157.2m pre-tax profit in the year ending March 2019 (2018: £144.4m), rising to £175.8m in the year after.
Shares in Entertainment One dipped 0.7% to 381.6p on the half-year results announcement.
