Despite a 21% decline in net income in the first quarter ended June 28, to $1.9 million, executives at Advanced Marketing Services remain optimistic about prospects for sales and earnings for fiscal 2004. The good feeling generated by the earnings announcement was tempered somewhat by news later on Wednesday that the company had received a subpoena related to its advertising activities.
Company president Michael Nicita said in a conference call with analysts that AMS "has more work to do to bring our expense structure in line," but he added that with the implementation of a new back-office system scheduled to be completed soon, he was confident costs will begin to drop and profits will increase, especially in the second half of the year. Completing the installation of its management system will help to lower selling, administrative and general costs, Nicita said, adding that some restructuring is coming as well. The company attributed the decline in first-quarter earnings in part to lower margins on sales of Harry Potter and the Order of the Phoenix as well as to increased returns from higher-margin customers. Overall, worldwide book returns fell to 23% from 24%.
Nicita's optimism for the year stemmed largely from strong sales in the first quarter—sales rose 33.7%, to $256.6 million—which have continued into July. In addition to sales of Phoenix, which were higher than expected, a number of other titles have continued to sell well, prompting Nicita to report that AMS hasn't seen the high number of replenishment orders it received in July for some 18 to 24 months. He noted that register sales "are "exceptionally strong" and he theorized that consumers "have a renewed interest in books."
Looking at results outside of its warehouse club business, AMS reported that sales at Publishers Group West increased 6.5% in the quarter, to $29.6 million. Sales to Borders were "up nicely," Nicita said. In response to a question, Nicita said AMS has not talked to Borders about handling fulfillment of its hardcovers, as it does for the chain's mass market paperbacks. He noted, however, that AMS is beginning to ship nonbook product to some of its customers.
Nicita told PW he was completely surprised when FBI agents showed up at company headquarters Wednesday with a subpoena and search warrant. He said the agents took some documents related to the company's advertising activities, and that AMS will continue to cooperate with the FBI. He said he has "no idea" what the agency is investigating. Based on AMS's own review of its advertising services, Nicita "believes it has not engaged in any wrongdoing." As part of its services to its accounts, AMS provides advertising and promotional support.