American Greetings posts lower quarterly results, eyes stock buybacks, convertibles replacement

By Rebecca Melvin

Princeton, N.J., Dec. 22 - After posting "disappointing" fiscal third-quarter results, American Greetings Corp. said it planned to complete the last $50 million of its $200 million share repurchasing program and to replace its convertible bond issue when it matures in July 2006.

In addition, the Cleveland-based greeting-card company said it plans to invest $75 million to $100 million in its card business to kick start top line progress in organic sales growth.

During a conference call, chief financial officer Michael Merriman called the quarter "disappointing" and said poor results were due mostly to shortfalls in international operations and its promotional gift wrap business, and included a $33 million after-tax goodwill impairment charge.

Soft sales hit parts of its international business including the United Kingdom and the gift wrap business, which also struggled with inefficiencies related to lower volume, Merriman said.

Among actions expected to stem the tide of lower revenue will be closings of underperforming stores, such as those in malls where foot traffic has fallen due to changing consumer purchasing patterns, company officials said.

For the quarter ended Nov. 30, net income from continuing operations fell to $10.3 million, or 16 cents per share, from $40.3 million, or 51 cents per share, in the prior year.

Excluding a goodwill impairment charge, which involved an Australian operating unit and the company's retail operations segment, earnings for the just concluded quarter would have matched estimates that were guided lower earlier this month.

On Dec. 8, American Greeting said weak U.K. operations and disappointing Christmas shipments of domestic promotional gift wrap were to blame for the lower results. Prior to the warning, analysts had been expecting earnings of 71 cents per share.

Included in the prior year's quarter were charges that reduced pre-tax income from continuing operations by $37.8 million.

Revenue was off 5% to $558.6 million, compared with the prior year's third quarter of $586.2 million. The company also announced an 8 cent per share cash dividend.

Ideal capital structure

The company forecast that it will end its fiscal year with $400 million of cash on its balance sheet, offset by $400 million of debt, including $175 million of convertible debt.

So there is no leverage on the balance sheet, company officials said, acknowledging that optimal total capitalization would be a debt level of 20% to 25%. Over the last several years, the company has reduced its net debt level by $1 billion, they said.

The company said that it would replace its convertibles but didn't specify the nature of its plans.

"We are considering a more aggressive share repurchase program and several other changes to our capital structure, including replacing our convertible bond which matures in July 2006," chief executive Zev Weiss said.

Prior to that statement he said, "We have also considered many other ways to wisely deploy the outstanding cash flow of the last few years and have concluded that in addition to an investment in cards, we should also invest in our own shares when we believe they are trading at a discount to intrinsic value."

When an analyst suggested during the conference call that the company should -while tendering for the convertibles in July - do a Dutch tender at the same time, company officials said it is one option among several being considered.

In the meantime, the company will continue and complete its share repurchase program. During the fiscal third quarter, it spent $53 million to repurchase 2.1 million shares in the third quarter. That puts the total buyback to date at $149.1 million, for 5.59 million shares, at an average cost of $25.05 per share.

Since the end of the quarter, the greeting card company has continued to be in the market repurchasing shares on a daily basis, company officials said.

Full-year outlook

As for its outlook, the company said fiscal fourth-quarter earnings should reach 44 cents to 59 cents a diluted share, with full-year earnings, excluding the goodwill impairment charge, of $1.45 to $1.60 per share.

This outlook assumes completion of the $200 million share repurchase program and possible further possible weakness in international operations and uncertainty related to the strength of the Christmas season

Nevertheless, company officials said they were dissatisfied with top line progress in organic sales growth and that they planned to invest $75 million to $100 million in its card business in the next couple of years to enable growth in its mature market.

The exact nature of the investment wasn't disclosed, but it will include increases in scan-based trading and inventory reductions at the retail level.

Most of the investment will come in 2007, which will hamper results that year, but it wasn't known yet by how much. It should become clearer by its earnings conference call in April, they said.

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