Disney's Best Business Is the One Everybody Is Still Ignoring

By Markets Fool.com

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WeLoveFine is one of many to license Star Wars and other Disney brands for merchandising. Credit: StarWars.com.

When thinking of Disney , most think of Marvel movies and spectacular theme parks. Others think of ABC and ESPN. Very few of us think of the mall. And yet, if you look at the numbers, that's where a growing portion of the Magic Kingdom's profits are made.

According to S&P Capital IQ, Disney Consumer Products had the second-best operating margin (34.03%) among the company's six segments. Only cable (42.8%) did better. Look even closer and you'll see that growth is actually accelerating. Operating margin improved to 37.28% in the March quarter versus 30.96% in last year's fiscal Q2.

Why the gains? Disney has taken aggressive steps to market and monetize every new brand with expanded licensing deals. Many of the finished products show up on the shelves at your local Disney store.

Mickey Mouse: a licensing lion
Chances are a Disney store isn't far from you. A global network of 320 locations covers North America, Japan, and Europe. Each store is helping the House of Mouse ring the register for its own imprints, which accounted for an estimated $45.2 billion in 2014 retail sales. Industry trade magazine License Global says 11 Disney brands generate at least $1 billion at the register every year.

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You'll find most of Disney's branded items on sale at the company's network of Disney stores, including this one in Yokohama, Japan. Credit: Disney.

Numbers like that are why Hasbro agreed to over $300 million in guaranteed royalties from sales of Marvel and Star Wars themed toys in 2013. Nothing sells like Disney brands, especially when there are movies out to support the new toy lines. As CEO Brian Goldner put itduring the most recent earnings conference call: "The Marvel business is performing incredibly well in the first quarter. Star Wars [point of sale] is up significantly in the first quarter behind both action figures and role play." The message? Kids and collectors want what Hasbro is doing with Disney's biggest toy brands.

Mattel, on the other hand, sits at fifth on License Global'slist of licencors with $9 billion in imprint sales last year.Barbiemerchandise accounted for much of that, which is half what number twoPVH Corp. imprints produced for licencors in 2014. Disney Consumer Products continues to grow at a brisk pace despite being more than twice as large as its nearest competitor.

Meaning between the margins
For investors, that's good news. Every new licensing win means more retail opportunity, which means more licensing deals and higher margins. Over time, those higher margins lead to more cash flow. Disney has seen its cash flow from operations jump nearly 50% from fiscal 2010 to fiscal 2014.

Consumer Products hasn't contributed all those gains, of course. But it is a potential source of catalysts, if only because its inventory is unlike any other. Every new character that makes its way to TV or the movies -- from minor Marvel heroes to Star Wars spin-offs to new Disney princesses -- offers billions in potential retail sales.

You'll find the lucky ones at the mall, hanging out with the other timeless brands that print money for the House of Mouse -- and for the investors lucky enough to be in the stock as of this writing. Do you agree? Disagree? Weigh in using the comments section below.

The article Disney's Best Business Is the One Everybody Is Still Ignoring originally appeared on Fool.com.

Tim Beyersignores spam as often as possible. He's also a member of theMotley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission and owned shares of Apple and Walt Disneyat the time of publication. Check out Tim'sweb homeandportfolio holdingsor connect with him onGoogle+,Tumblr, or Twitter, where he goes by@milehighfool.The Motley Fool recommends Apple, Hasbro, and Walt Disney. The Motley Fool owns shares of Apple, Hasbro, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.