American Greetings falls after earnings miss
Will the card giant be able to reinvent itself in 2012?
American Greetings (AM) shares plunged Thursday after the company said that third-quarter earnings fell almost 40% as sales and marketing costs rose. With those expenses eating into the bottom line, the company sharply cut its forecast for 2012.
Quarterly profit of 50 cents a share severely missed analyst estimates of 81 cents a share. The company further irritated investors by refusing to answer many analyst questions on its conference call, instead opting for "no comment" responses.
The earnings and guidance numbers show mixed results compared to a year earlier. Profit was a sharp falloff from last year's 78 cents a share, while revenue increased slightly to $463.6 million from $430.1 million last year.
But the most startling revelation was the company's lower forecast for 2012. It now expects $90 million to $110 million in operating cash flow, a much lower figure than its previous estimate of $125 million to $145 million. Lastly, the company announced that it had bought back 2 million shares during the quarter at a cost of about $34.5 million.
American Greetings has been under fire over the last quarter, beginning in October when Apple (AAPL) announced its own greeting card program for the iPhone and iPad. The sheer simplicity of the idea -- creating a card from your device and having it automatically mailed to the recipient -- made investors nervous about American Greetings' business prospects. Another concern: Consumers' ongoing efforts to cut unnecessary expenses could potentially make $3 and $4 greeting cards obsolete.
A recent study by Roy Morgan Research indicated that most greeting card buyers believe that the American economy is improving and feel financially stable. Buyers are also predominantly women, from the Midwest and have traditional values. Instead of making the same cards that consumers have seen for decades, American Greetings could utilize specific consumer data to improve card content and product offerings.
The company's earnings call featured a number of analyst questions about shrinking margin performance. Operating margin fell to 7.2% from 13% a year earlier, and the company refused to elaborate on the decline.
The company attempted to put a more positive spin on the earnings report. "I am delighted with our revenue growth this quarter in both our domestic and international businesses," said CEO Zev Weiss. "With our strong revenue growth this quarter, we feel more confident regarding our ability to hit or surpass the full-year revenue growth target of 3%."
American Greetings targets consumer needs that may not exist anymore. Digital greeting cards and a lack of disposable income have hurt many consumers, and it remains to be seen whether they will return.
Traders who believe that American Greetings can reverse the negative trend in sales should consider these trades:
- Purchase shares in American Greetings. The company has fallen significantly in the past quarter and could see its highs again if it can generate revenue growth next year.
- Short shares of Shutterfly (SFLY), which closed up 9% Thursday to $25.10. Success for American Greetings could hurt Shutterfly.
Traders who believe that American Greetings's negative trend will continue should consider these trades:
- Go short American Greetings. The company faces significant challenges with both its consumer base and increasing competition and could struggle to recover lost sales.
- Go long Shutterfly. Consumers may look to purchase more personalized greeting cards in the future, and Shutterfly's ability to add photos may work to their advantage.
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John Stumpf acknowledges that growth has been slow, but he says he's still optimistic.
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