Merrill Lynch Concerned About Retail Ad Revenues — Federated Pulling Back

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By: Jennifer Saba

There is fear among some in the investment community that Federated Department Stores — one of the largest newspaper advertisers — has started to shift its dollars to direct mail and TV.

According to a note issued this morning by Merrill Lynch’s Lauren Rich Fine, Federated’s transition to other media probably accounts for weak August results reported by the newspaper group. Retail ad revenues for August was down 1% to 2% compared with earlier this year, which was up 1% to 2%. Federated accounts for $900 million of newspaper ad spending or roughly 2% of overall ad revenues, said the note.

The drop-off does not take into account the recent Federated/May merger, which once that is factored in, “could create a double whammy.” The shift does not reflect the upcoming consolidation of brands, said the note: “As such, we think the newspaper industry could see further cuts by Federated beyond the shift in media mix.”

Although Merrill Lynch accounted for the impact of the merger in its 2005 and 2006 forecasts, the research firm said the latest results put its estimates at “risk.” Currently Merrill Lynch is projecting a 3% increase in newspaper retail ad revenue for 2005 and 2006: “Federated/May likely represents 4% of newspaper retail ad revenues, which in turn represent 45% of newspaper total ad revenues.”

Merrill maintains its “neutral” rating on the sector.

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