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World Events Trim Reader's Digest Q2 Earnings

The Reader's Digest Association Inc. said yesterday that all of its businesses were hurt in the second quarter by the U.S. economy, the aftereffects of the Sept. 11 attacks and anthrax in the postal system.

The publisher of one of the world's most widely read magazines posted earnings of $78.8 million in its fiscal second quarter, which ended Dec. 31, compared with $103.8 million a year ago. Operating profits were $127 million, down from $156 million in the same fiscal 2001 quarter.

Thomas O. Ryder, Reader's Digest chairman/CEO, spoke in a conference call of how the anthrax scare hurt business.

“The anthrax effect was especially troublesome,” he said. “I frankly expected this event to be of very short duration, but it just went on and on, terrifying people about what may be in their mailbox. Unfortunately, our promotions were.”

The fears lasted throughout the quarter, he said, “and only now are they starting to ease.”

Ryder said the anthrax scare was far more damaging than he had expected, especially for the company's North America Books and Home Entertainment division, which saw revenue drop 14 percent to $211 million from $246 million in the year-ago period; and its U.S. Magazines division, with revenue of $243 million, down 8 percent from $265 million.

The company said direct mail promotions were delayed or canceled in these divisions, and those that ran produced lower-than-expected responses. A key subscription mailing for Reader's Digest magazine in the United States had to be repeated, costing more than $2 million.

“The first time, it landed right in the middle of the 9/11 event,” Ryder said. “The second time it landed right in the middle of the anthrax scare.”

General book and video mailing volumes were reduced by about half in the North America BHE division, he said.

That division was being retooled this quarter — becoming six business units built around entertainment, health, home, reading, trade publishing and young families – when the Sept. 11 attacks and the anthrax scare occurred, Ryder said.

“They were just beginning to reinvent their entire business in the United States when everything went crazy,” he said. “You can imagine how hard it has been to cast new products or new sweepstakes formats in this environment.”

In the quarter, Ryder said, the division invested in new promotions and marketing channels to build toward profitable growth, including the use of direct response TV, telemarketing and customer lists from outside sources for the promotion of a new, softcover version of its Select Editions books series.

“This generated about 600,000 new customer starts in the first half of the year, and we expect another [300,000] to 400,000 by year's end,” he said.

Ryder also said Reader's Digest marketed two new CD music packages by direct response TV this quarter, and “we plan to do more of that in the third and fourth quarters. We will also market a new affinity book in the home category, titled 'PCs Made Easy.' “

Reader's Digest also recently completed a small but strategic acquisition to support its Young Families book product line, Ryder said.

“We acquired the Child Development Toy program from a subsidiary of Agostini Publishing in Italy,” he said. “This is an early childhood product originally created by Johnson & Johnson that we plan to market to new mothers while they are still in the hospital.”

Ryder said the goal for North America BHE is to “approach break-even profitability by the fourth quarter and to have this business on a positive track for next year.”

There were other bright spots in the quarter. Reader's Digest's Books Are Fun division, a display marketer of books and gifts in North America, had double-digit increases in revenue and operating profit despite the cancellation of sales events after Sept. 11. In addition, the company increased free cash flow — cash flow before dividends, share repurchases and acquisitions — to $152 million, up 38 percent from the fiscal 2001 second quarter. This increase was driven mainly by improvements in working capital.

“We are pleased to report second-quarter fiscal 2002 earnings on the high end of the range we projected last October,” Ryder said. “Even though we had a variety of challenges, our cost trends continued to be favorable, and we had strong performances from Books Are Fun and most of our overseas markets.”

Ryder also said for fourth-quarter fiscal 2002, Reader's Digest “should begin to see some benefit from the investments we have been making in re-engineering, new products and promotions and new marketing channels.”

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