Schawk's Packages Deliver Less Revenue

Branding used to be relatively simple: press a red-hot iron into the hides of your cows so everyone would know whose they were. For purveyors in today's marketplace, Schawk (NYSE: SGK) produces the fancy packaging and in-store displays that are essential for brand differentiation.

Schawk sells its custom packaging and marketing services to some of the biggest retailers of consumer goods. Among the many that rely on Schawk's services are health-care giants Pfizer (NYSE: PFE) and Merck (NYSE: MRK), computer hardware firm Hewlett-Packard (NYSE: HPQ), and other biggies, including Coca-Cola (NYSE: KO), Procter & Gamble (NYSE: PG), and Johnson & Johnson (NYSE: JNJ).

However, a solid client base hasn't been enough lately. Schawk has been implementing a ruthless cost-cutting strategy in response to weakening consumer spending, and the resulting lower sales. Investors got a good look at the numbers when Schawk reported third-quarter financial results last week.

Revenues fell 4% to $124.2 million from the year-ago period, but that's not surprising. Spending on marketing is typically among the first places where companies cut costs during economic downturns. The real Schawk-er was the slew of one-time setbacks in the form of acquisition integration expenses, restructuring costs, asset impairment charges, unrealized foreign currency losses, and a hefty income tax provision it had to set aside for its foreign operations. After those outlays, Schawk's quarterly losses were $6.7 million, or about $0.25 per share. In the year-ago period, earnings were positive by about the same amount.

What a Fool believes
Through a combination of restructuring some existing operations and closing others, Schawk expects to decrease its expense base by $13 million to $15 million in 2009. Employee layoffs should account for roughly 87% of that; the rest should come from lower leasing and depreciation costs. While it may be no consolation to those losing their jobs, investors might find encouragement in the company's long-term prospects. With its operating cash flows and revolving line of credit, Schawk expects to stay sufficiently financed to continue paying dividends and repurchasing stock. But those watching may want to keep an eye on its leverage. Debt as a percentage of equity inched up to 40%, from 35%, after it borrowed on its credit line to buy back 636,000 shares last quarter.

Consumer-products packaging, Schawk's core business, didn't suffer as badly as its advertising/retail and entertainment segments, and much of the sales decline was concentrated in new design and innovation activities, where growth will most likely resume when the economy recovers. When that happens, Schawk could emerge a much leaner and meaner machine.