Advo: So. Calif. Weekend Program Drags on Margins

By: E&P Staff Advo reported today that revenue for its fiscal Q2 grew 11.3%, to $338.8 million, compared with the same period last year. Diluted earnings per share were $0.33, down $0.05. Operating income was $18.5 million, down $0.5 million. The quarter included the expected additional distribution expense related to the company's new advertising program in Southern California.

The most significant driver of year-over-year margin declines in Q2 was the company's new Southern California weekend advertising program. In that market, revenues grew 15.5% over the prior year, with increased sales in both the mid-week and new weekend programs. However, given the new program's early stage of development, and fixed cost of postage, operating income in the Southern California market for Q2 was down $8.3 million.

"Although our investment in distribution costs for our new second in-home date in Southern California is significantly impacting our margins, we are making good progress with our revenue momentum and are strongly committed to the market," said CEO Scott Harding in a statement. "We set aggressive goals for the launch of our second in-home program, particularly in the second half of fiscal 2005. Southern California is the most competitive print market in the country, and we will be patient with our near-term expectations in order to ensure its long-term bottom-line success."

Harding also said that in Q3, the company will "realign the organization and focus our resources against our most significant business opportunities." The company expects to save $6 to $8 million on an annual basis and will incur a charge in Q3 of roughly $4 million, or $0.08 in EPS.

For the full fiscal year, the company expects total revenue growth versus prior year to be in the low-double digits, up slightly from previous guidance. Profit contribution in Southern California is also expected to fall short of expectations for the fiscal year. As a result the company is revising its EPS guidance for fiscal 2005 to be below prior year by a percentage in the low teens.