Thursday, July 30, 2009

Newspaper rally? Curb your enthusiasm

After some notable newspaper publishers this month reported better-than-expected gains in their second-quarter net profits, Wall Street responded by bidding up their battered shares. But let’s not get carried away.

The improved earnings reflect one-off events that for the most part cannot be replicated if sagging ad sales fail to rebound really hard, really fast and really soon. In other words, publishers are running out of magic at a time when there is scant evidence that ad sales are headed for the sort of dramatic turnaround that would restore the industry to its former vigor.

Things certainly looked encouraging when some of the leading companies reported their second-quarter earnings. Gannett swung to a net after-tax profit of 30 cents a share from a loss of $10.03 per share in 2008; McClatchy more than doubled its earnings to 50 cents a share, and the net at the New York Times Co. leaped 85% to 27 cents.

The performance boosted the depressed shares of the companies to some of their highest levels this year. Gannett closed Wednesday at $6.26 per share but still well below its 52-week high of $21.68, McClatchy closed at $2.27 vs. a 52-week high of $4.90 and NYT closed at $7.52 vs. a 52-week high of $16.75.

But a closer look at the operating performance of the three companies shows that none was able to cut its expenses deeply enough in the first half of the year to stay ahead of the catastrophic revenue declines eroding their operating margins.

Gannett in the first six months of 2009 reduced expenses by only 10.1% as sales fell 17.8%; McClatchy pared expenses by 20.6% as revenues dropped 25.3% and NYT trimmed spending 15.3% as sales slid 19.9%.

Consequently, the earnings of the companies before interest, taxes, depreciation and amortization fell by respectively 41.6%, 35.5% and 64.6% from the first half of 2008. This put EBITDA in the first six months of this year for Gannett at 17.3% vs. 24.3% in 2008, McClatchy at 15.3% vs. 17.7% and NYT at 4.1% vs. 9.4%.

The improved after-tax earnings of the companies that grabbed he headlines, as the publishers forthrightly explained in each of their financial reports, resulted from such singular events as debt restructurings, tax credits, the disposition of non-core assets and other legitimate – but non-recurring – adjustments.

The performance of Gannett and McClatchy compared favorably to the prior year, because they were not required in 2009 to take sort of heavy losses on overpriced assets that accounting rules required in 2008.

Battling to trim expenses as sales plunged by double-digit levels in the worst economy since World War II, publishers have resorted to heretofore unthinkable cost cutting.

They pared staffs, throttled newsprint consumption, outsourced customer-service operations and consolidated production facilities. The full extent of the savings in some cases will not be revealed until future periods, when lingering shutdown costs and severance payments no longer affect earnings.

As much as these measures helped bolster profits, they are one-time expediencies that cannot be repeated if sales continue to fall in the future at anything like the rate they have been dropping in recent years.

It is impossible to fire an employee who already has been fired, to eliminate a weekend supplement that already has been discontinued or to idle a press line that already has been scrapped. That’s not to mention such unrepeatable maneuvers as eliminating print production on certain days of the week, migrating to web-only publication or shutting a paper altogether.

To be sure, there are those who believe the expense reductions will position newspapers to prosper if ad sales perk up as the economy recovers.

“With all the cost cutting, you just have to have some reasonable growth in revenue and you’ll have spectacular earnings growth,” said John Rogers Jr., the chief executive officer of Ariel Investments, in an interview with Bloomberg News. “This economy is going to recover and people are going to advertise again.”

Rogers has put his money where his mouth is. Though he rode the shares of a number of newspaper companies down from all-time highs to record lows, he remains today the largest stockholder in Gannett and the second-biggest shareholder at McClatchy.

It would be nice if he were right. But he may be underestimating the challenges the newspaper industry faces as it seeks to recover from an accelerating decline in sales that began in April, 2006 – well before the economy unraveled.

When the economy turns around, a good number of traditional newspaper advertisers – bankrupt retailers, de-franchised auto dealers, out-of-business employers and belly-up real estate agents – won’t be there to join in the recovery.

So, you have to wonder not only when advertising will come back but also how much of it will.

You also have to worry about whether the extreme cost cutting has irreversibly damaged the appeal of newspapers.

As Ken Doctor noted in this excellent analysis at his Content Bridges blog, perhaps 828,000 stories per year are not being produced by American’s down-sized newspaper industry.

Newspaper readers, who by definition are among the most thoughtful members of society, are perceptive enough to know they are paying more today for newspapers that deliver far less news and advertising than ever before. They are doing so, to the extent they are doing so, in the hopes they can help the industry survive.

But their patience will not be infinite. If newspapers can’t find a way to do better by their readers, they are in danger of slashing themselves to oblivion.


Anonymous Anonymous said...

Let's just try and hope, for the sake of decent journalism in this country, that the newspapers will one day bounce back to their former glory.

5:45 AM  
Blogger Matthew Terenzio said...

Well put. Especially the concern on how much advertising will return with the economy.

Unfortunately, my bet is that a larger chunk of the dollars that do return to advertising will not return to traditional marketing but to online.

While this isn't a bad thing, newspaper sites will only catch a percentage of that do to all the hyper-competition in the online marketing spaces.

End result being that only piece of a piece of a piece will return.

6:12 AM  
Anonymous Anonymous said...

John may be underestimating newspaper profits going forward, but his last big block purchase of GCI, at less than $4 a share, has been a home run. It's currently trading above $6.60. That's a handsome gain over a few months, should he cash in his chips now.

8:26 AM  
Anonymous Pat said...

I suspect advertisers are getting smarter by necessity AND they are learning to live thrifty.

If I'm right, it seems that the smart and thrifty advertisers will continue to funnel a greater % of their $'s to media where it is easier to track ROI. In other words, they'll be more willing to "pay-by-the-drink" b/c they know what they're getting. With CPM & other on-line payment schemes, the advertiser knows what he gets. 'Hard to know what you get with a newspaper ad, no? Thoughts?

10:54 AM  
Anonymous Anonymous said...

Very troubled times are ahead for newspapers. The length of this recession -- 24 months versus the usual 8 months -- has given buisness leaders a lot of time to consider and put in places changes to ad spending patterns that are likely to be permanent. So I am inclined to believe there will be no "bounce back" after this recession as there were from others. Economists also are forecasting a very shallow recovery, which if it comes true, will just drag out continuing pain.

12:04 PM  
Anonymous Anonymous said...

Two questions, Alan:

1. Do you stand to make more money from your consulting and promotion efforts if newspapers are thought to be in precipitous decline?

2. What's your investment record like compare with Rodgers?

12:52 PM  
Anonymous Anonymous said...

So here comes John Rogers Jr. whistling past the graveyard, and it makes you wonder. What else would he tell Bloomberg? That he made some bad investments and is really sorry?

Rogers is probably correct in assuming that advertising dollars are going to be coming back but wrong if he assumes they're going to be spent for the same product as in the past. So far, what we're seeing is an almost complete lack of innovation on the part of news publishers to go beyond the old model. Moving, for example, into advertising as marketing services.

Here's a question: It's common to hear a collective whine about how Craigslist has trashed newspaper ad revenue, but when have you ever heard a publisher talk about how to build a platform to beat Craig Newmark at his own game? Until such questions are asked and answered, people like John Rogers Jr. are doing little more than playing Wall Street casino.

3:22 PM  
Anonymous Social Media Commando said...

You Missed a Spot...

What about digital revenues? I'm curious what Gannet and McClatchey's plans are for turning into 'New Media' organizations.

Our local daily here in Burlington, VT is putting together a full court press to influence the digital dollars of local advertisers.


By establishing a 'digital consulting' arm to essentially farm out digital work to a cadre of experienced local freelancers and Web specialists (along with an in-house team).

It's an interesting path to take, and for darn sure better than pinning your hopes on the printed product alone.

However with major brands like Southern Comfort abandoning their entire print/TV budget to go completely well can the papers position themselves to compete?

Hit me up on Twitter if you'd like to discuss:


5:36 PM  
Blogger Unknown said...

Social Media Commando makes a good point. I heard a marketing firm owner say recently that advertising on the Internet is like hitting golf balls in the ocean. Too fractured; too difficult to target an audience. That does not mean retailers will return, in droves, to print during a recovery, but it does raise the question of whether newspapers can do a better job of capitalizing on their print brands on-line.

8:16 AM  
Anonymous Anonymous said...

I'm sick of people who say the death of newspapers is the death of journalism. Please get it: newspapers are NOT news..they are a delivery mechanism...THAT'S IT! The internet is a delivery mechanim as is mobile...THAT'S it EXCEPT that mobile and the internet is a much more efficient, real time, and richer delivery mechanism. Newspapers will survive where people don't have access to wireless or where they don't bring a mobile device.

8:25 AM  
Anonymous Walter Dnes said...

Many people are asking the wrong question. It's *NOT* "will the advertisers return", but rather "will the readers return". If a medium can show a big audience, advertisers will flock to it. Even if advertisers do return, current collapsing circulation numbers mean that advertisers will be willing to pay far less for the same ad.

The internet, particularly the web, is the first medium that can seriously compete with newspapers.

* You have to listen to TV or radio news when it's on, whereas you could put off reading newspapers to a convenient time. I can go to a news website at a convenient time, so newspapers have lost that advantage.

* Not only is the web as convenient as a newspaper, it's better in many cases. I can go to the national MLS website, and select part of town, number of bedrooms/bathrooms, price range, etc, and get back a couple of dozen results that I can check over in a few minutes. Beats the daylights out of plowing through newspaper "Houses for sale" ads. Ditto for jobhunting. Oh yeah, did I mention that the MLS website is free, whilst the newspaper costs money.

* For most people, their internet connection is a necessity. Newspapers are an expensive extra. The current recession is forcing ordinary people to make deep cuts. The newspaper will usually be dropped long before the internet connection. When people realize they've survived a year or so without a paper, why should they go back?

10:25 PM  

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