Profit Margins Improved in 2003

Publishers proved once again in 2003 to be adept at improving profits despite slow sales growth. Ten of the 14 publishers tracked by PW boosted operating margins in their most recent fiscal year, while margins fell at only four publishers. Among the bookstore chains, margins increased at Barnes & Noble and Books-A-Million, but dipped at Borders Group. Improved back-office operations and layoffs were the two most important factors in generating cost savings in the year, enabling companies to increase earnings at a faster rate than sales.

Although as a group educational and professional publishers were the most profitable publishers, it was a trade house, Harlequin, that had the highest operating margin in 2003, at 21.2%. The margin improvement was achieved despite a sales decline and was attributed mainly to unit gains in its North America retail operation.

Another trade house with an educational publisher—like margin was the specialty publisher Dover Publications, which had a 15.9% margin in the fiscal year ended September 27, 2003. The better than two percentage point increase in margins was attributed in part to moving more of Dover's printing to parent company Courier Corp. plus higher prices. The most dramatic improvement in margins came at Thomas Nelson, where margins jumped to 13.4% from 7.8%. Helped by higher sales from fewer titles, profits rose 77% on a 3% revenue increase, although Nelson chairman Sam Moore has advised that for fiscal 2005 margin improvement will depend on stronger sales gains.

Other trade houses that had double-digit margins last year included HarperCollins, which improved its margin from 11.4% to 12.4%. Penguin Group had a small improvement, with margins moving up to 10.8% from 10.4%. Sales and earnings in the year both increased by 2%. Educational Development Corp. also had a small gain, with margins increasing to 12.6% from 12.4%.

Scholastic, which incurred more write-downs in fiscal 2004, saw its margins fall to 5.1% from 6.1%. The strength of the dollar compared to the euro was cited as a major reason for the slight dip in margins at Random House from 8.4% in 2002 to 8.3% as operating EBIT (earnings before interest and taxes) fell from 168 million euros to 147 million euros. John Wiley's margin slipped to 14.0% from 14.1%, reflecting higher operating and administrative costs, partially offset by higher gross margins.

Four of the five educational/ professional publishers included by PW improved their margins last year. The exception was McGraw-Hill Education, where margins fell to 14.0% from 14.6%. During the year, sales rose 0.5%, but operating income fell 3.4%. Houghton Mifflin, which had an operating loss of $703 million in 2002 due largely to a $775 million goodwill charge, swung to profitability in 2003, although more one-time charges related to its change in ownership resulted in only a 3.9% margin.

Margins at Thomson Learning increased to 16.4% from 14.8% as sales rose 1% and earnings increased 12%. Higher sales from its Lifelong Learning businesses and one-time cost savings in 2003 combined with the absence of integration costs incurred in 2002 to boost Thomson's margins. Pearson Education's margins rose to 12.7% from 11.8% as improved profits in its school and higher education groups offset a decline in earnings in its professional group. Pearson Education also benefited from the FT Knowledge group breaking even in the year after posting a £12 million loss in 2002. The one percentage point improvement, to 19.4%, at Harcourt was driven by cost savings associated with the further integration of new acquisitions.

While many publishers, including trade houses, now post double-digit margins, bookstore margins still hover around 5%. Improved comparable store sales led to an increase in BAM's margins to 3.3% from 2.1% in 2002. B&N's margins benefited from the absence of a $25 million write-down recorded in 2002, but took a hit from losses associated with Barnes & Noble.com. (Results do not include Gamestop.) Modest gains in sales and earnings resulted in a dip in Borders's margin to 5.5%.

Operating Performance of Selected Publishing Industry Companies, 2002—2003
($ in Millions)