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Summer Smash: Pixar Brings the Pain

Updated from June 30

In a scene eerily reminiscent of the Dreamworks (DWA - Get Report) earnings wreck last quarter, Pixar (PIXR) lowered its second-quarter forecast, saying that following a review of the most current domestic and international home video sales data for The Incredibles, it is increasing its reserves for returns.

As a result, Pixar now expects to earn about 10 cents a share for the quarter ending July 2, down from its previous projection of 15 cents, which equates to a roughly $6 million difference in net income.

The stock, which closed at $50.05 Thursday, was recently trading at $44.40 on the Instinet premarket session, down 11.3%.

" The Incredibles is the best-selling home video title of 2005 to date, and we continue to expect it to generate home video revenues similar to Monsters, Inc.," Pixar CEO Steve Jobs said in a press release. "But based on the most recent sell-through information, we have opted to be more cautious with respect to our second-quarter home video reserves."

On average, analysts polled by Thomson First Call expect the maker of computer-animated films to earn 19 cents a share in the second quarter.

Based on discussions with its distribution partner Disney (DIS - Get Report), the company said it is expecting sales of "Incredibles" DVDs to be 7% below earlier estimates.

The current Pixar warning raises questions regarding the difficulty of tracking DVD sales, especially where hits are concerned. "Of course we're disappointed to miss our guidance," Jobs said on a conference call.

Rival animation studio Dreamworks has been taking it on the chin since DVD sales on its smash hit Shrek2 fell short of expectations when the company overestimated first-quarter sales and subsequently faced a slew of returns.

A spate of lawsuits related to why Dreamworks didn't warn of a potential shortfall, along with a leak of the information to the press, has left investors jittery, and the company's stock has since receded to pre-IPO levels.

Asked about the hot topic of a renewed distribution agreement with Disney, Jobs said that the companies continue to have positive talks about a distribution deal, but for the last week or 10 days, they've been focused on issues surrounding the announcement about The Incredibles.

The current agreement between the two companies is scheduled to come to an end after the release of Pixar's next feature Cars, due next spring.

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