When greeting card and present purveyor American Greetings (NYSE:AM) reports its fiscal Q3 2006 numbers tomorrow, investors are more likely to consider the news a condolence than a congratulation.
It may be only the third quarter, but thanks to an earnings warning issued two weeks ago, this company's year is pretty much over, at least as far as hopes of meeting estimates go. Three months ago, American Greetings had been expecting to earn $0.70 to $0.75 per diluted share this quarter -- a belief that analysts shared, by the way -- but on Dec. 8, the company dropped a bombshell: It wouldn't come anywhere near making either of those numbers.
In a Form 8-K filing with the SEC, American Greetings blamed three factors as primary contributors to its disappointing quarter. First and foremost is a sizable, but non-cash, goodwill charge that the company is taking on its Australian operating unit and its retail operations business. The goodwill charge, amounting to $33 million after tax, works out to roughly $0.50 per share to be sliced from the company's previously hoped-for numbers. That's reason No. 1, and it accounts for about 90% of the fact that American Greetings now expects to net only $0.15 to $0.17 for the quarter.
Reasons Nos. 2 and 3 for the earnings warning were weaknesses discovered in both its U.K. operations and its promotional gift-wrapping business. Working backwards from the profits expectation recantation, these two disappointments seem to have contributed only $0.05 to $0.08, combined, toward the rollback in profits.
Analysts quickly baked these new numbers into the bitter earnings estimate pie and now predict the company will earn $0.58 for the year. As for how they came up with that number -- your guess is as good as mine. It's far too high to be "excluding" the goodwill charge to come up with a "core earnings" number, and a bit too low to be considering the U.K. and gift-wrapping disappointments as somehow constituting one-time events that also deserve exclusion.
Personally, my advice to you tomorrow is to focus on the company's free cash flow situation. Historically, the fiscal third quarter has been a rough one for American Greetings. Negative free cash flow totaled $25 million in last year's Q3, $9 million the year before. Investors can at least be on the lookout for improvement of some sort in those numbers tomorrow as a hint that this business might be able to "get well" (eventually).
For further glad (and not so glad) tidings on American Greetings, open up these cards:
Fools, now is the time to open your hearts and wallets to worthy causes! Please support our five Foolish charities at www.foolanthropy.com.
Fool contributor Rich Smith has no position, short or long, in any company named above.
