At first blush, there didn't seem to be a lot of glad tidings in American Greetings' (NYSE:AM) fiscal second-quarter earnings release on Thursday. Growth remains stalled, and it's not clear when it will start back up again. Nevertheless, the greeting card specialist's management appears to be making the best of a difficult environment.
American Greetings reported that its net sales for the quarter declined by about 1.2% to $387.6 million, while earnings per share from continuing operations came in at $0.05, versus $0.09 in 2004's second quarter. Despite the declining top and bottom lines, Wall Street had bid up the firm's stock by 10.3% by the close of trading Thursday.
The reason for such exuberance? American Greetings managed to outpace low expectations -- analysts had been expecting a loss of $0.03 per share. Further, the company's showing was actually better than the EPS figure suggests. For a variety of reasons, its effective tax rate shot up to 61% in the quarter; as a result, pre-tax earnings were down 13.9% from the same period last fiscal year, to $8.3 million.
In addition, the earnings decline obscures some praiseworthy developments. Management's main goal is to increase sales of higher-margin products, and the top brass is making progress. Although the company closed seven stores during the quarter, the retail segment still improved earnings by $300,000 year over year, thanks to a better product mix and a reduction in markdowns. Further, the lucrative licensing area (American Greetings owns the rights to the Strawberry Shortcake and Care Bears characters, among others) provided pre-tax earnings of $3.7 million, versus $0.9 million during the second quarter of last year. Unfortunately, these gains were offset by softness on the international side, particularly declining sales in the U.K.
As Fool contributor Timothy Otte has pointed out, American Greetings has been in a rut as far as earnings growth is concerned. This quarter's results didn't provide a strong indication that the company is breaking out of its funk. Still, company executives are steering this business toward the best opportunities in a difficult environment, and if they can stay the course, American Greetings may yet have many happy returns ahead.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
