The Quarto Group posted a net profit of $2.9 million in 2019 despite a decline in revenue, which fell 9%, to $135.8 million. The profit, the first posted by the publisher since 2016, was attributed in part to the cost cutting initiatives begun in 2018, which took about $1.4 million in costs out of the business, Quarto said.
The return to profitability as well as a successful equity offering has improved the company’s balance sheet by, among other things, cutting its net debt by 16.4%, to $50.5 million, making Quarto better prepared to face a challenging 2020, CEO C.K. Lau said in a statement. The main issue this year is the negative impact Covid-19 is having on the worldwide economy. While Quarto said it is impossible to determine how long the pandemic will affect its business, it did acknowledge that in the last two months “the lockdown measures imposed across the globe have led to falling orders and revenues across all our businesses.”
In an attempt to get a better handle on what the impact of Covid-19 could mean for the company’s sales and cash flow forecasts in 2020, Quarto conducted a “downside scenario analysis.” In preparing this analysis, Quarto said, its directors “assumed that the lockdown effects of the Covid-19 virus will peak around the end of June and trading will normalise over the subsequent months, albeit attaining substantially lower levels of revenue than budgeted, for at least the rest of the current financial year.”
If that scenario plays out, Quarto would have a “material reduction” in “revenues and results for 2020,” the company said. Offsetting those declines, the director envisioned taking mitigation actions, including reductions in the investment in pre-publication costs, print volumes, and staffing. The directors also assumed Quarto would be eligible for government help, and indicated that “certain bank fees due to be paid in August 2020” could be deferred.
Though the Covid-19 outbreak is the most serious issuing facing Quarto (and all businesses), the company also pointed to two other industry-wide challenges—U.S. tariffs on Chinese imports, which Quarto said is has been successful in minimizing, and pressure on margins due to actions taken by both online and physical retailers. “We are looking for ways to counter this industry-wide trend of increasing discount, and we have had some initial success in pricing our books at the proper price points for the marketplace,” Quarto said.
Quarto said that, despite some negative trends, it is confident it is well-positioned to weather the challenges. “With a more sustainable balance sheet, we are a more resilient business that can quickly respond to the evolution of the book retailing environment, the consumer trends, and the challenge of the Covid-19 outbreak,” the company said.