It's always amusing to see how companies try to sugarcoat poor earnings reports. American Greetings (NYSE: AM ) , which specializes in comforting greetings, thought it fitting to open its third-quarter earnings report with the headline, "Company declares 8 cent cash dividend." If you stopped reading there, you might just feel all warm and fuzzy. But the rest of the story is inside the card.
American Greetings' sales continue to be in a funk, declining 4.7% compared with the same period a year ago. And because of an impairment charge that amounted to $0.42 per share, for the quarter it earned $0.20 vs. $0.91 this time last year. The biggest drag on revenues was from weak international sales, specifically from Great Britain, and from "softness" in its gift-wrap unit. The company did highlight its online business as a source of strength.
Lagging sales should come as no surprise -- the company's growth hasn't exactly been on the fast track. What was a bit of surprise, however, is that management still identified its greetings card business as a source for potential growth. To capitalize on the perceived opportunity, the company will invest $70 million to $100 million over the next couple years to change the "design" and "display" of its cards. Perhaps there is a Festivus in store for future card shoppers. But current shareholders looking for a party anytime soon will be disappointed to hear that as a result of this effort, earnings next fiscal year will be significantly depressed.
Until its shop doors are finally closed, I'm hesitant to call any company non-salvageable. Apple (Nasdaq: AAPL ) went from being a longtime doormat of an investment into a Wall Street darling, so I am willing to hold out hope for American Greetings. But the emergence of e-cards and the accessibility to unique cards anywhere in the country, and sometimes around the world, through small business listings on Yahoo! (Nasdaq: YHOO ) and eBay (Nasdaq: EBAY ) are going to continue offering a formidable challenge. To survive, American Greetings will require some truly out-of-the-box thinking much like that of Apple's leadership.
In the meantime, my recommendation to Foolish investors is to let the company prove it. American Greetings is maintaining stable gross margins and a strong cash balance (albeit free cash flow remains negative year to date), but the primary problem remains growth. And until it can prove that it has found a successful strategy to kick-start its top line, my Foolish bottom line is to focus your investment efforts on the Apples of Wall Street.
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Fool contributor Jeremy MacNealy
does not own shares in any of the companies mentioned.
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