Ad Slump Hits Hard at Times As Cuts Loom
By PAT MAIO
A slowdown in retail advertising is at the center of poor results at the Los Angeles Times, which has prompted the newspaper’s parent company, Tribune Co., to institute cost-cutting measures over the next few weeks that include voluntary buyouts and perhaps layoffs.
Word of the budget cuts caught many on Wall Street and at the Times by surprise, although the advertising slump has been building for several weeks. For the month of May, department store ad revenues were down 25 percent and national and classified auto sales were down 5 percent and 10 percent, respectively, according to John Janedis, media analyst with Banc of America Securities.
The company as a whole has been underperforming for much of the year for reasons ranging from high newsprint costs to ratings declines at WB Television Network, in which Tribune has part ownership. Analysts generally expect an upturn in the coming months, although analyst Michael A. Kupinski at A.G. Edwards & Sons Inc. last week downgraded Tribune stock to “hold” from “buy.”
Tribune’s results were especially striking given the newspaper industry’s solid performance in the first quarter, particularly in the retail advertising area. It’s not clear whether the results at the Times are an early indicator of a broader national slump or specific to problems in Southern California. But for Chicago-based Tribune, which also owns the Chicago Tribune, the Baltimore Sun and Newsday, among others, L.A.’s results could easily impact company-wide numbers because the Times represents nearly 30 percent of total newspaper segment revenues.
Revenues at the Times fell 2 percent in May while they were up 4.1 percent in the division overall.
“Retail is pretty wild and wooly right now in Los Angeles,” said Jack Kyser, chief economist of the Economic Development Corp. of Los Angeles County, who has noted a pullback in the number of ads in the Times for Robinsons-May, Kohls and Mervyn’s.
In a June 8 memo to Times employees, Publisher John Puerner said that local advertising began softening in April because of market conditions “some unique to Southern California and some unique to the Los Angeles Times.” Noting that the situation “developed quickly,” Puerner pointed in particular to disposable income levels being impacted by soaring housing costs and gasoline prices.
“The biggest surprise for investors was how the softness translated to a decline in earnings in the face of an anticipated acceleration of ad growth over the full year at the company,” said Janedis.
Analysts said layoffs and buyouts at the Times could affect between 100 and 120 employees out of a total Tribune workforce of 20,000. About half of the local cuts are believed to involve editorial operations. Times employees interested in the buyout are being offered one week of pay for every six weeks of employment. All the cuts were expected to be completed by the end of the month.
The pending cuts brought a sudden slap of reality to a newsroom that for weeks has been basking in the glow of five Pulitzer Prizes this year and the resulting accolades from the media world about the paper’s improving content.
“It is our job to see that this proves to be a relatively minor event in the long-term building of a first-rate newspaper,” said Editor John Carroll in a memo to newsroom staff. Last week, Carroll cancelled a retreat in Laguna Beach that had been scheduled for senior editors before they knew of the financial problems.
The development also comes as the newspaper implements several changes in senior management, including the hiring of Michael Kinsley as editorial pages editor. Asked last week about the job cuts, Kinsley jokingly referred to it as “the curse of Kinsley,” noting that he has never worked at a financially successful publication. Kinsley was founding editor of Slate and previously senior editor with the New Republic.
Officials of Tribune, Times and Hoy, its Spanish-language daily that just launched in L.A., did not return calls seeking comment.
The news clobbered Tribune’s stock on June 8, pushing the price down $1.76, or 4 percent, to close at $46.92. Other newspaper group stocks got caught in the downdraft Tuesday after the Tribune disclosure the previous day. Knight-Ridder Inc. fell 67 cents to $76.02, Gannett Co. Inc. dropped 44 cents to $87.43 and Pulitzer Inc. lost 39 cents to $47.61.
Some analysts speculate that Knight-Ridder Inc., another California-based newspaper publisher susceptible to high energy costs, may be next to report a slowdown in advertising.
In its June 7 announcement, Tribune warned of weaker than expected 2004 sales because of a soft advertising market in some regions of its publishing empire particularly acute in Los Angeles. Another local factor is the slower-than-expected launch earlier this year of Hoy.
Wall Street isn’t happy having to digest the bad financial news at a time when newspaper stocks are supposed to be market plays amid signs of a strengthening economy.
Tribune said it would take a one-time pretax charge of $10 million to $15 million in its fiscal second quarter ending June 30 in order to cover cost savings initiatives across all its properties.
Banc of America Securities lowered its second quarter earnings per share estimate for the Tribune to 60 cents from 63 cents, and to $2.32 a share from $2.33 for the fiscal year ending Dec. 28, 2004. SG Cowen & Co., Goldman Sachs and Merrill Lynch also lowered estimates.
Tribune said the slower than anticipated growth within the publishing group will be offset by expense reductions, including layoffs, newsprint conservation programs and reduced spending levels in all departments.
Newsprint prices have soared throughout the industry because manufacturers idled some facilities in order to stem the flow of losses by passing along higher prices and running more efficiently in the process.
After bottoming out at an average $425 a ton almost two years ago, newsprint prices have jumped nearly 30 percent, to about $550, according to Ross Hay-Roe, a paper analyst with Equity Research Associates in Vancouver, British Columbia.
“Last year was the third consecutive year of declining newspaper consumption. I’ve never see it like this before,” said Hay-Roe, a 36-year veteran of the industry. “To see that this is probably going to be a fourth consecutive year of declining consumption is hard to imagine.”