By: Jennifer Saba
The weak May advertising revenue results and the cost-saving program announced by McClatchy on Monday may point to more challenging months of double-digit revenue declines, according to industry analysts.
John Janedis, senior analyst at Wachovia, thinks the restructuring plan — which effectively reduces McClatchy’s workforce by 10% — should help mitigate future downturns in advertising revenue.
There is evidence, Janedis wrote, that the real estate crisis disproportionately affecting California and Florida has spread to other McClatchy markets in Texas and the Northwest, putting pressure on retail and help-wanted advertising revenue. Nor does he think that California and Florida have seen the bottom.
“While the cost cuts are above what we would have expected, we think they are also symptomatic of McClatchy’s view of future ad revenues,” Janedis wrote to investors on Monday afternoon.
Janedis noted that in the past McClatchy’s executives have signaled that over five years, the plan for the company is to contract with a greater focus online but with fewer employees. “The current economic/advertising environment has caused McClatchy to move more quickly in these efforts,” he wrote.
Wachovia lowered its ad forecast for Q3, Q4 and 2009 to -14.4%, -11.5%, and -7.9%, versus the prior -12.5%, -10.7%, and -7.0%.
Alexia Quadrani at JP Morgan also zeroed in on California and Florida, and pointed out in a note to investors that the two states represent 35% of McClatchy’s advertising revenue (in 2007) but accounted for 62% of its decline. She expects this trend to continue and that McClatchy will post “below-average” results compared to its peers in the upcoming quarters.
Also weighing on McClatchy is its debt situation — clearly the main reason for the restructuring program. At the end of Q1, McClatchy’s debt was $2.49 billion with a debt-to-EBITDA ratio of 4.4x — “modestly” above the JP Morgan’s group average, Quadrani wrote.
The high leverage is preventing the company from making other moves, like buying back its stock — McClatchy shares are down 28% year-to-date as of May 23. “We do note, however, that the company has projected it will lower its debt levels to $2 billion by Q4 2008 (aided by asset sales and a tax rebate), which may allow more shareholder-friendly uses of cash or possible strategic changes longer term,” she wrote.
Both JP Morgan and Wachovia maintained its rating on McClatchy as “underweight” and “underperfom,” respectively.
Investors have responded wanly to McClatchy’s cost cutting measure. As of late morning, McClatchy shares were trading down 13 cents to $7.91 on light volumes, after also falling on Monday.