Harlequin's Parent Releases 1st Qtr Results

Yesterday, Torstar Corporation--parent of Harlequin--released its results for the first quarter ended March 31st.

When the president and CEO of a company says something like, "This is a quarter where you have to look through the reported results to the trends in our underlying businesses," it's a safe bet that the results he's talking about aren't great.

Robert Prichard, Torstar's head honcho, went on to say, "In addition, there were three significant factors which reduced our reported profits--the non-recurrence of the significant gain from our 2005 U.S. dollar hedge, currency movements and restructuring costs. The drop in reported profits arising from these factors should not detract from the steady progress at Harlequin and the strength of our newspaper franchise."

Don't let the verbiage distract you from the important phrase: reduced our reported profits.

Note: All numbers are in Canadian dollars. The material below are direct quotes from the press release:

"Reported Book Publishing operating profit was down $9.5 million in the quarter ($6.1 million after tax), all as a result of the strengthening Canadian dollar and the non-recurrence of the significant gain on the 2005 U.S. dollar hedge. The underlying operating profits for Book Publishing were flat in the quarter." Again, I've bolded the important information.

"Harlequin publishes women's fiction around the world, selling books through the retail channel and directly to the consumer by mail and the Internet. Harlequin's women's fiction publishing operations are comprised of three divisions: North American Retail, North American Direct-to-Consumer and Overseas."

"Book Publishing operating profits were flat in the first quarter excluding the impact of foreign exchange. North American Retail was up $.7 million, North American Direct-to-Consumer was down $1.1 million and Overseas was up $.4 million." Please note that retail sales were up both in North America and overseas while the losses at the famous book clubs ate up those profits.

"North American Retail single title unit sales were higher in the first quarter as was anticipated. Series units were stable during the first quarter of 2006 with a slight improvement in the net sale rate." Series units refers to the category romances, which go on the shelves in bookstores for one month before being replaced by the next month's offering. Those category romances are also mailed out to book club members each month.

"North American Direct-to-Consumer (the book clubs again) were up year over year from higher sales volumes. However, the revenue gains were offset by higher product, advertising and promotional costs." In other words, the higher revenue was chewed up by higher expenses.

"The Overseas revenue growth was primarily in the U.K. and Japan with stability in the series unit sales in both markets and some growth in single title sales in the U.K. Overseas operating profits were up $.4 million in the quarter with the improvement in the U.K. and Japan offset by lower results in Germany and Italy where unit sales declined."

Under the section entitled "Outlook," the projection was: "For Book Publishing it appears that the North American retail market may have stabilized from the significant declines of two years ago. In Overseas, there are several markets where declining unit sales continue to be a challenge."

Yesterday's Publishers Lunch (PL) summed it up this way: "Actual profit from book publishing was down 9.5 million (CA) from last year--though last year they made money from smart dollar hedging rather than smart publishing."

PL went on to say: "'Underlying' book profits were flat. Actual book sales declined to $118 million from $127 million a year ago."

Harlequin has been taking action to re-position itself in the market. They've dropped unprofitable lines and opened new lines (erotic romance among them). They've signed contracts to do audio books and virtual books. They're marketing manga in both Japan and North America.

For years, the Harlequin empire was built on formulas. When you picked up a category romance, you knew whether to expect an Alpha or Beta hero. You could almost predict the story line because the formulas were very tight (some might say rigid). I believe this is working against Harlequin in the 21st century when authors (and readers) are coloring outside the lines more and more.

Publishers Weekly said today: "Speaking at Torstar's annual meeting yesterday, CEO Bob Pritchard said that having stabilized Harlequin in 2005, 'we need to sell more books and grow our profits in future years.'"