PW: Chapters Has Difficult Year

Fiscal 2000, which ended April 1, was "a challenging transition for Chapters Inc.," acknowledged Chapters CEO Larry Stevenson, adding that while the company's retail operations performed satisfactorily, Chapters "is not getting value" out of its ownership of Pegasus Wholesale and Chapters Online. In an effort to improve shareholder value, Harry Yanowitz, president of Chapters Inc., has hired Merrill Lynch to examine Chapters' options for its stake in Pegasus. Chapters has an 82% ownership position in Pegasus and a 70% stake in Chapters Online.

Why Chapters is concerned with its online and wholesale operation is evident in the year-end results. Chapters Online lost $25 million in fiscal 2000 on sales of $38.7 million, compared to a net loss of $2.4 million on sales of $2.0 million in fiscal 1999. The results for the first year of operations of Pegasus produced a net loss of $9.5 million on sales of $76.8 million.

Pegasus's problems stem in part from the length of time it took to sign agreements with Canada's publishers and distributors; its last agreement with a major Canadian publisher, Random House, was only finalized in April. Dennis Zook, president of Pegasus, said the company "is six to 12 months behind in achieving our potential operating results," but added that now that the company is "on track," results will improve.

The company's retail division had problems of its own, as net income fell to $9.1 million from $12.7 million in fiscal 1999 despite an 8.0% increase in revenues to $621.5 million. Sales at Chapters' superstores rose 26.7%, to $376.3 million, in the year, although comparable-store sales were down 3.1%. The company attributed the drop to its strategy of clustering stores in the same market, which it expects to result in improved efficiencies in fiscal 2001. The company opened 16 new superstores in fiscal 2000 and finished the year with 70. It plans to open six to eight new Chapters outlets this year. Sales at its traditional Coles/SmithBooks division decreased 14.0% in the year, to $217.7 million. Comparable-store sales were off 4.0%, and the company reduced the number of outlets to 231 from 261. It expects to open five to six Coles/SmithBooks in the year.