Operating Margins Showed Improvement in 2002

Despite the wailing about how bad business was in 2002, more publishers than not had an increase in their operating margins last year compared to 2001. Margins rose at eight publishers and fell at four in the year, although two of the big three bookstore chains reported a decline in margins. A number of publishers benefited from restructuring efforts in 2001, which improved efficiencies in 2002 while also lowering profits in 2001. Margin gains came at both trade and educational publishers.

Harlequin reported operating margins of 19.3% in 2002, up from 16.7% in 2001. The company attributed the margin improvement to strong results in its North American retail business, reduced spending on continuity programs and the Internet, as well as favorable foreign exchange rates.

Other trade houses that had double-digit margins in 2002 were HarperCollins, Educational Development Corp. and Penguin Group. HC boosted its operating margin to 11.4% in the fiscal year ended June 30, 2003, up from 10.9% in fiscal 2002. EDC's operating margins continued to climb higher in the fiscal year ended February 28, 2003, rising to 13.1%. Penguin managed to increase its operating margin in 2002 to 10.4%, despite a £10-million investment in a new back-office system.

At John Wiley & Sons, which now publishes a mix of trade, educational and professional texts, margins rose to 14.1% for the fiscal year ended April 30, 2003. The 12% margin in fiscal 2002 included $12.3 million in charges associated with moving the company's headquarters.

A decline in earnings compounded by one-time charges of $12.8 million resulted in a drop in Scholastic's operating margin for the fiscal year ended May 31, 2003, to 6.1% from 9.7% in fiscal 2002. A slight decline in sales and an 8.1% drop in operating income in Thomas Nelson's publishing group resulted in an operating margin of 7.8% for the fiscal year ended March 31, 2003, down from 8.5% in the previous year. Millbrook Press had a $528,000 operating loss for the fiscal year ended July 31, 2002, and sales fell 14%. The decline in results was due in part to Millbrook discontinuing its agreement to distribute the Snappy product line.

Three of the four major educational publishers tracked by PW had improved margins last year. The exception was Houghton Mifflin, which had an operating loss of $703.5 million in 2002, due mainly to a $775 million goodwill charge taken by its new owners in connection with their purchase of the company.

McGraw-Hill Education's operating margin increased to 14.1% in 2002 from 11.3% in 2001; the 2001 margin was negatively affected by a $62.1 million charge related to a company reorganization that year. The operating margin at Pearson Education rose to 11.8% last year largely due to a £52-million reduction in Internet losses, which was partially offset by a £20-million investment in back-office systems. The margin at Pearson's core businesses—school, higher education and professional—fell to 13.4% from 14.7% in 2001. Higher sales from its Harcourt acquisition plus the completion of integration initiatives helped drive up the operating margin at Thomson Learning to 15.4% in 2002.

Slim Store Margins

A look at the profit results from the nation's major bookstore chains shows why B&N is so eager to increase its publishing program—publishing is more profitable than bookselling.

The operating profit at B& N's bookstore segment fell to 4.5% in the year ended Feb. 1, 2003, down from 5.6% in fiscal 2002. Earnings were negatively affected by a $25-million write-down on certain investments. (Results do not include B&N's Gamestop division.) Despite only a slight increase in sales, cost containment initiatives resulted in Borders Group's operating margin rising to 5.6%. Flat sales and higher costs led to a 21.5% decline in operating profits at Books-A-Million last year, and resulted in an operating margin of 1.9%, down from 2.4%.

Operating Performance of Selected Publishing
2002 Operating Data Industry Companies, 2001—2002 ($ in Millions)