Reader's Digest Outlines Plans to Sell, Buy and Cut

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Struggling Reader's Digest Association Inc. put an estimated $100 million worth of art up for auction last week and announced it will acquire two companies, cut its direct mail by 20 to 25 percent, add direct response TV and radio, and reduce its work force by several hundred employees over the next three years.


The company also will reduce its quarterly dividend from 22.5 cents to 5 cents, saying that will improve the company's cash flow by $75 million a year. The moves are the second major announcement from Thomas O. Ryder since he took over as chairman/CEO in April to turn the company around.


Analysts are bullish with the actions so far.


"Ryder is off to a very fast start," said Doug Arthur, an analyst with Morgan Stanley, New York. "He's doing everything he said he was going to do. He's doing everything the market was asking him to do. The only missing part of the puzzle is the revenue growth story, which he doesn't intend to address right away."


However, there are risks in increasing profits by cutting marginally performing mail, said Trace Urdin, an associate analyst with BT Alex. Brown, San Francisco.


"It's much easier to control cost cutting [by eliminating fixed costs] than it is to control revenue management," Urdin said. "It's too soon to say, 'All is well now.' "


Reader's Digest wouldn't disclose how many pieces it mails each year or how much it plans to cut.


Meanwhile, 39 works of Reader's Digest's art collection will go on the auction block Nov. 16 at Sotheby's, New York, including works by Monet, Van Gogh, Matisse, Giacometti, Chagall, Renoir and Modigliani. They are part of an 8,000-piece collection begun in the 1940s by Reader's Digest founders Lila and DeWitt Wallace. Sotheby's estimates that pieces will bring $100 million.


"Our art collection is truly part of the heritage of our company," Ryder said in a prepared statement. "However, we can put the value of these works to better and more effective use by investing in growth opportunities for the company."


Along with the art collection, the company will sell its building in the Canary Wharf complex in London and relocate staff from a New York City facility to the Pleasantville, NY, headquarters and sublet that property.


It also announced it will acquire Good Catalog Co., Portland, OR, and Emmaus, PA-based Rodale Press Inc.'s Woodworking Group, which includes American Woodworker magazine.


The acquisitions are "small illustrations of the kind of growth we are looking for," Ryder said. "These companies fit well with our existing business and leverage our core skills and also help us to develop skills in complementary areas."


American Woodworker magazine publishes seven times a year and has 325,000 subscribers. The Woodworking Group publishes about three new titles a year. Good Catalog publishes nine titles, including The Kensington Collection, Good Expressions, Somerset, Westbury and GoodKids. Its sales are about $30 million a year from products sold mainly on consignment and advertising sold in its books -- an attractive business model, said Jim Steffensen, vice president and general manager of the catalog division.


"There is very minimal risk of an inventory write-off," he said, adding the company thinks it can use its advertising-sales expertise to grow Good Catalog. Through direct mail tests, Reader's Digest has found that its house file responds well to Good Catalog offers, Steffensen said.


"Simultaneously, a lot of our customers are not existing customers for Good Catalog," he said. Responders to the tests were primarily women in their mid-40s whose average order was "significantly higher" than the company's usual average order size. The average Reader's Digest subscriber is just over 47 and its database includes 100 million households worldwide.


Officials hope to turn Good Catalog into a $60-million company in three years and are eyeing much larger acquisitions, Steffensen said.


Barbara Todd, president of Good Catalog, declined to comment.


In other cost-cutting moves, Reader's Digest said it will:


* Cut children's publishing in the United States and Britain and focus more on its direct mail Young Families business.


* Kill the "Today's Best Nonfiction" book series in the United States and most foreign markets.


* Re-examine proprietary publishing in Norway, Sweden, Finland, Belgium, Luxembourg, The Netherlands, Italy and South Africa.
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