Margins Shrank in 2006

The publishing business was a little less profitable in 2006 for most of the companies included on PW's annual look at industry operating margins. A combination of factors led to the overall slide: for trade publishers, the bankruptcy of Advanced Marketing Services resulted in writedowns that ate into earnings in the year, while elhi publishers dealt with lower sales in 2006 and higher costs associated with getting ready for this year's increase in state adoptions. New accounting rules tied to stock-based compensation also resulted in one-time charges at many companies.

Several companies also took one-time restructuring charges in 2006; the largest in the year came at Borders Group, which took total charges of $186.2 million in 2006—the major factor behind an operating loss of $136.8 million. At its competitors, Barnes & Noble's margin slipped slightly, but Books-A-Million's margin increased by more than one percentage point, helped by limiting increases in overhead costs, increased sales of proprietary products and lower promotional spending.

With the notable exception of Harlequin, margins at the trade houses rose or fell by less than one percentage point in 2006. The plunge at Harlequin, which typically posts the highest margins among all publishers, was the result of a large drop in sales, restructuring charges and the strengthening of the Canadian dollar.

Harcourt—which has now been sold by parent company Reed Elsevier—attributed its margin erosion to a weak performance by its assessment group and investment in sales and marketing to prepare for the 2007 adoption market. Part of the decline in McGraw-Hill Education's margin was a $16-million restructuring charge tied to consolidation in its school group. Even with the off year at some of the leading educational publishers, that segment continued to be the most profitable part of publishing in 2006.