Studio Swings to Loss in Quarter

DreamWorks Animation SKG Inc. posted a $3.67-million loss in the second quarter Thursday as DVD sales for “Shark Tale” and “Shrek 2” slackened, but results weren’t as bad as expected.

The Glendale-based computer animation studio swung to a loss from a profit of $146.1 million, or $1.89 a share, a year earlier.

The deficit of 4 cents a share, partly offset by a $2-million net tax benefit, was smaller than the 7 cents a share that analysts polled by Thomson Financial had expected. Revenue in the quarter declined to $35.4 million, down 88% from a year earlier.

For the full year, DreamWorks reaffirmed its expectation of 80 cents to 90 cents a share.

“The good news is it’s not getting any worse,” said analyst Richard Greenfield of Fulcrum Global Partners. “The bad news is it’s not getting any better.”

DreamWorks had braced Wall Street for the bad news by twice warning of shortfalls in its DVD sales. The company bolstered financial reserves to cover movies returned by retailers.

Released last year, “Shrek 2” became a top DVD title, with more than 35 million copies sold. Nonetheless, sales slowed faster than expected.

That softening comes as retailers are increasingly clearing older titles from their shelves and returning them to studios to make room for the freshest DVDs available. Many consumers also aren’t buying as many DVDs, as their libraries fill up.

The shift has challenged DreamWorks and other studios. Rival Pixar Animation Studios also revised its second-quarter earnings downward, citing slower DVD sales for its hit “The Incredibles.”

Changes in the retail market “did catch us and a whole lot of other people by surprise,” DreamWorks Animation Chairman Roger Enrico said in an interview.

He said the studio was working more closely with its distribution partner, Universal Pictures International, to more closely track home video sales.

Wall Street has punished DreamWorks for the earlier disclosures because investors don’t like earnings surprises.

DreamWorks shares have declined 43% from a high of $41.98 in December. Shares on Thursday rose 33 cents to $24.11.

Chief Executive Jeffrey Katzenberg defended the company Thursday.

“I don’t think there’s ever been a time in which we have not been making best efforts to communicate with investors and to the street,” he said in an interview. “We take it very seriously.”

DreamWorks said its latest computer-animated release, “Madagascar,” earned $432 million in worldwide box-office sales. Its next release, “Wallace & Gromit: The Curse of the Were-Rabbit,” is set for Oct. 7.