Soft Retail Market Punishes AMS

Advanced Marketing Services is the latest major company involved in the retail market to report disappointing holiday sales. Although the company reported an increase in total revenue of 10.4%, to $294.8 million, for the third quarter ended December 28, 2002, the gain was due entirely to the inclusion of $31.4 million in sales from Publishers Group West, which AMS bought last January, and to a 23% increase in international sales. Sales to AMS's largest customers, domestic warehouse clubs, fell 3.5% in the quarter, which company president Mike Nicita attributed to a "particularly weak [holiday] selling season."

The lower sales to the warehouse clubs combined with a number of higher costs to drive down net income in the quarter by 33.8%, to $8.8 million. Among the higher costs was a $1.5 million increase on marked-down goods that AMS bought on a nonreturnable basis. Returns skyrocketed in the period, rising to 24% from 16%, forcing AMS to spend more money to process the returns. Another major contributor to the higher expenses were costs associated with the implementation of two new computer systems across its businesses, which Nicita said was proving to be "more challenging" than anticipated.

In a conference call, Nicita said he was "obviously disappointed" in the third quarter, noting that sales were soft at all of AMS's warehouse club accounts and that even PGW did not hit internal forecasts. Nicita also estimated that the cancellation of Oprah Winfrey's book club cost the company about $10 million in sales this year. As a result of the weak third quarter, AMS is expecting earnings for the full year ending March 31 to be lower than expected.

Chairman Charles Tillinghast defended AMS's strategy of combining wholesaling, distributing and publishing as "fundamentally sound." He said the near-term challenge is to reduce distribution and adminstrative costs associated with implemententing its new operating systems. The company will continue to invest in its distribution infrastructure, Tillinghast said, particularly in its Indianapolis facility, to create a retuns center that is scheduled to open in April 2004.

Tillinghast offered some preliminary forecasts for fiscal 2004, predicting that total revenue would increase 10%-20%, to between $1 billion and $1.1 billion. Sales to domestic warehouse clubs will be between $775 million to $815 million; PGW sales will range from $130 million to $160 million, and international sales will be between $100 million to $120 million.