Newspapers Face Challenging Q3 as Ad Revenue Softens

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Newspaper publishers are facing a challenging road in the third quarter, as advertising revenue continues to soften.

Tribune Co., publisher of the Chicago Tribune and the Los Angeles Times, saw its August sales slip 1.6 percent on a continued decline in circulation revenues. Ad revenue fell 2.3 percent. Last month the company hired two financial advisers to help it explore strategic options. Tribune has come under shareholder pressure to improve its stock price and has said it is open to a broad restructuring.

In a shakeup at one of its primary properties, Los Angeles Times editor Dean Baquet told staffers Thursday that he was staying with the paper for now, after its publisher, Jeffrey M. Johnson, was forced out for refusing to make Tribune-ordered staff cuts.

Dow Jones & Co., publisher of the Wall Street Journal, cut its third-quarter profit forecast last month on weaker-than-expected September ad revenue. Chief Executive Richard Zannino said in a statement on Sept. 18 that despite a 6.3 percent gain in print ad revenue at the Journal in the first two months of the quarter, in line with company expectations, September revenue was running below the company’s forecasts and also below year-ago levels.

McClatchy Co. had a 1.1 percent drop in its August revenue, with ad sales edging down 0.3 percent.

One company that continues to fair well is E.W. Scripps Co., which saw its August revenue surge 17 percent. However, its biggest gains were in Scripps Networks, which contains HGTV, Food Network, DIY Network and other cable channels. Ad sales at the unit climbed 15 percent, with September ad revenue seen rising by about the same amount.

Analyst Steven N. Barlow of Prudential Equity Group LLC said in a Monday client note that McClatchy has been difficult for many analysts to assess this quarter, with earnings estimates in a wide range, as it is the first full quarter that the company has former Knight Ridder newspapers to account for.

“We think part of the discrepancy is due to share count and differences of opinion on how the new assets are performing as Knight Ridder newspapers have a history of underperforming the industry,” he said.

Barlow was upbeat on Scripps.

“Scripps’ diversified portfolio appears to be working well. Networks, interactive and television are doing very well, and a recent Food Network/Kohl’s licensing deal shows there are crossover positives,” he said.

Lauren Rich Fine, an analyst with Merrill Lynch, said in a Tuesday client note that Dow Jones’ September ad warning “cast a cloud over the stock, despite positive commentary on early fourth-quarter trends.”

She expects the company to post earnings growth next year on cost cutting efforts.

Rich Fine noted that Tribune’s move to evaluate its strategic options has “supported the shares, although we see limited upside in most scenarios.”

In a Thursday client note, Rich Fine forecast an 11.5 percent drop in third-quarter earnings for her portfolio and a 2 percent decline in ad revenues.

She lowered her full-year newspaper ad revenue growth prediction to flat from up 1.2 percent and 2007 estimate to down 1.5 percent from up 1.1 percent on lackluster newspaper ad sales in July and August.

Analyst Lisa N. Monaco of Morgan Stanley also lowered newspaper ad forecasts for this year and 2007. In a Tuesday client note, Monaco said she now expects full-year news ad revenue to be up 1 percent compared with a prior guidance of up 2.3 percent. Sales for 2007, including online, are seen climbing 1.4 percent versus a previous outlook of up 2.7 percent.

Deutsche Bank analyst Paul Ginocchio is still cautious on the sector, saying in a Sunday client note that weakness in real estate and help wanted classified advertising is likely to stunt ad growth in the next two to three quarters for his portfolio.

“As classified provided all the significant growth in 2005 and full-year 2006, declines in this category are a major concern for us,” he said.

While publishers are shifting more to online to slow the print ad slowdown, the benefits may not be realized immediately. Ginocchio predicts that it will probably take until 2008 before online revenue is big enough to start making a financial impact.

The sector’s earnings will get under way with Gannett Co., which reports on Wednesday.

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