At the end of 2004, the Booksource was on track to do $20 million in sales through its retail book wholesaling unit. But faced with the loss of the Hudson Group, which accounted for half of those sales, the wholesaler decided to take the potentially risky step of exiting its primary business. In the process, it closed a newly opened California warehouse; shed about $5 million worth of adult titles and 32 employees; and consolidated its warehousing in its 67,000-sq.-ft. facility in St. Louis, where the company is headquartered.

A little more than two years later, Booksource founder and chairman Sandy Jaffe and his son and current president, Neil Jaffe, said the move was the right one. By leaving the retail market behind, the Booksource sacrificed revenue, but got out of its lowest-margin business. "Even with the lower total dollar sales, profitability is higher and more consistent than it was prior to our exit from sales to retail stores," explained Neil Jaffe. The company's largest business now is its educational wholesale operation, through which the Booksource sells trade titles from about 150 publishers to the k—12 market for classroom use. The division, which had revenue of approximately $15 million in 2004, has seen double-digit growth in each of the past two years, and its gross profit margins have climbed steadily, from 25% in 2004 to 30% in 2006. The company's gross margins in the retail business were usually around 8%.

Profit increases are due in part to the company's decision to buy books nonreturnable for higher discounts. "It was impossible for us to be nonreturnable when we were in retail," said Neil Jaffe. So far, nonreturnable inventory has not been a problem. The Booksource sells off slower-moving titles through clearance sales to RIF and through teachers' shopping days.

Last spring the Booksource extended its educational reach into the Michigan school market by acquiring Keith Distributors in Flint, and now services 100 school districts, up from 87 in 2005. The company also has a significant presence in Missouri, New York and Florida. It uses 38 independent rep groups to sell to schools, and earlier this month Neil Jaffe took on the added responsibility of overseeing national sales.

It's not just the Booksource's educational division that is experiencing solid growth, however. So are its other two units: San Val, a library bindery with plants in Steelville and Farmington, Mo., which produce 2.5 million books a year; and Peaceable Kingdom Press, a greeting card and gift business in Berkeley, Calif. The latter, which the Booksource acquired in 2000, has begun changing its product mix. "We had some products for adults and we realized our main focus is on children," said Neil Jaffe. Over the past year, the adult products have been phased out, and the company is expanding both its cards and gifts for kids. For the holidays, for example, it will offer photo ornament cards with ribbons and stickers featuring Dr. Seuss, Curious George and other licensed characters.

Currently the Booksource has 155 people working at its binderies and another 75 on the school side and at Peaceable Kingdom. As for diversifying further, Jaffe said, "we're always interested in new products and new acquisitions. That's what allowed us to exit the one we were founded on."