Rough June for Newspapers Portends Worst Ahead in 2008

By: Jeremy Herron

Regional and national newspaper publishers, already staggering with a drop in ad revenue more severe than the industry has seen since the Great Depression, say the second half of 2008 may be even worse.

Three publishers — McClatchy Co., Lee Enterprises Inc. and E.W. Scripps Co. — reported Thursday that their profits had fallen by nearly half in the second quarter compared to last year.

They joined industry heavyweights New York Times Co. and Gannet Co., which reported earnings Wednesday and last week, in saying double-digit drops in ad revenue were most to blame for plunging profits, though rising costs played a role too.

All five publishers said ad revenue fell fastest in June, and most said July is looking as bad or worse.

“It really shows we haven’t yet reached a bottom for revenue declines,” said Mike Simonton, a media analyst with Fitch Ratings.

Also Thursday, new government unemployment figures and housing market data from the National Association of Realtors offered gloomier portraits of the economy than expected. All the reports buffeted an industry reeling from almost daily announcements of layoffs and other cost-cutting measures that continued this week.

Thursday afternoon, The Copley Press Inc., parent company of the San Diego Union-Tribune, where the work force was cut 10 percent this year, announced it was exploring a sale. Executives cited the impact of the housing slump and falling ad revenue as the two main factors in the company’s decision.

E.W. Scripps, the newspaper and broadcast TV company, which spun off its Internet and cable divisions on July 1, warned Thursday that its third-quarter earnings would fall short of analysts’ expectations. After it reviews the fair value of its assets, the company said, it may post a non-cash charge to reflect how far the value has fallen.

Rich Boehne, chief executive of E.W. Scripps, told analysts in a conference call the company was surprised at the severity of the economic downturn, especially in California and Florida. Those two states have been slammed by the housing slump, and national home sales data released Thursday showed the market worsened last month.

E.W. Scripps, in its final combined earnings report, said newspaper revenue fell 13 percent, to $144 million, and profits dropped to $16.3 million. It expects another 13 percent to 15 percent decline in newspaper revenue in the third-quarter.

In contrast, its online and cable operations, now separately known as Scripps Networks Interactive Inc., saw ad revenue rise 13 percent in the second quarter and profits rise nearly 10 percent.

McClatchy Co., whose papers include The Miami Herald and The Sacramento Bee, said Thursday the market for ad spending will not improve until the current economic slump abates.

“Whether revenues improve from recent trends depends upon the direction of the overall economy,” Chairman and Chief Executive Gary Pruitt said in a statement.

The Sacramento-based publisher’s second-quarter earnings tumbled 44 percent as ad revenue continued to shrink in the company’s key markets. Net income slid to $19.7 million. Adjusted to exclude one-time items, the profit fell to $17.3 million, or 21 cents per share, matching the average estimate of analysts surveyed by Thomson Financial.

Revenue dropped 16 percent to $489.7 million and missed Wall Street’s projection of $495 million. Advertising revenue fell 17 percent, circulation revenue 5 percent.

Ad sales “continued to be hurt by the weak economy and the secular shift in advertising to the internet,” Pruitt said.

The earnings decline was more pronounced at Lee Enterprises Inc., where profit tumbled 87 percent to $2.8 million, or 6 cents per share, in its fiscal third quarter. Excluding one-time charges, partly to write down the declining implied value of its newspaper brands, Lee earned $12.6 million, or 28 cents per share, down 44 percent from the third quarter of 2007. Revenue fell 8 percent to $256.4 million. Davenport, Iowa-based Lee counts the St. Louis Post-Dispatch among its 50 daily papers.

Each publisher reported the sharpest ad declines in classifieds, with job ads faring worst as employers cut hiring. Data released Thursday showed a bigger-than-expected increase in jobless claims for the last week.

While the economy is a major factor hurting advertising, the revenue won’t magically reappear when the economy recovers, analysts said.

“The pressure from the shift toward Internet advertising makes it unlikely that classified and other categories will rebound in an upturn,” Simonton said.

He praised McClatchy’s and Times Co.’s hikes in online ad revenue beyond 12 percent of total revenue. In addition to trimming costs, the publishers’ strategy, to varying degrees, has been to invest in increasing online ad sales.

But Simonton said even the best online ad growth rates seen so far won’t offset the decline in print advertising.

McClatchy is eliminating 1,400 jobs, or about 10 percent of its staff, and said Thursday that its board will review the company’s dividend policy when it meets this quarter.

The Times Co. announced 100 newsroom layoffs at its flagship paper this year. Smaller newspapers around the country, including most recently the Santa Fe New Mexican and Portland Press Herald, are also cutting scores of jobs, while The Los Angeles Times, owned by Chicago-based Tribune Co., is trimming 250.

It was Tribune CEO Sam Zell who — during a talk Tuesday with staffers nationwide — reportedly likened the current advertising downturn to the impact the industry felt from the Great Depression, though he implied that his company wouldn’t see many more cuts.

The major costs hitting publishers are in distribution and newsprint. Scores of papers have reduced their newsprint consumption, by trimming the number or size of pages they print, to offset prices that have jumped in the past year. Media General Corp. and McClatchy both said they expect still higher newsprint prices in the second half.

More papers are also seeking distribution agreements to help with rising fuel prices. The New York Post and New York Daily News, fierce tabloid rivals, said even they are exploring a cooperation agreement with The Wall Street Journal, which is owned by News Co., along with the Post.

“It is difficult to remove a commensurate level of costs to keep up with the pace of advertising revenue declines,” Simonton said. “There is enough uncertainty that we are pretty cautious about the rest of the year.”

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