Better Finish to Tough Year at Reader's Digest

Both Reader's Digest and its North American Books and Home Entertainment division improved operating results in the fourth quarter, compared to the rest of fiscal 2002, which ended June 30. "It was a positive end to a difficult year," said RD chairman Thomas O. Ryder.

Revenues in the BHE group fell 6% in the fourth quarter, to $142.2 million, compared to an 11% decline, to $670.3 million, for the full year. The operating loss was cut to $600,000 in the most recent quarter from $4.3 million in fiscal 2001's final quarter. For the full year, operating profits fell 74%, to $14.3 million.

The improvement in the fourth quarter at BHE was due to a "significantly scaled-back" U.S. BHE operation, which included lower overhead costs and a reduction in promotional mailings, as well as the elimination of unprofitable product lines, Ryder said. Improved response rates and a 14% sales increase at Books Are Fun also aided the fourth-quarter performance. Ryder said he was particularly pleased to see that the BHE group business had become more "predictable" in the fourth quarter, finishing closer to internal forecasts than at any time in the last 18 months.

Despite some positive trends, Ryder acknowledged that BHE "was not out of the woods yet," noting that revenues in the U.S. declined 30% and operating profits fell by $45 million in fiscal 2002. A bright spot was Books Are Fun, which had a 13% sales gain in the year, and Ryder said RD has some "bodacious ideas" for expanding BAF. The division has already added jewelry and art fairs to its book operations.

BAF will be one of three "profit drivers" in the near term for RD, along with the recently acquired Reiman Publications and the QSP division, Ryder said, adding that he was "hopeful" the children's book group would have solid growth in fiscal 2003 as well. Ryder told analysts in a conference call that as part of the BHE group's effort to diversify its marketing campaigns away from sweepstakes, the company will be selling more books through Books Are Fun. He also predicted that the most profitable book in the domestic BHE unit in the year will be a medical title that will be sold "through nonsweepstakes direct mail." But Ryder remained cautious on the overall outlook for BHE, forecasting modest long-term growth in its core operations.