Harte-Hanks Hit Hard as Direct Mail Marketing Demand Declines ...

In a?a filing with?the SEC this week Harte-Hanks, provided an indication that the slowdown in Standard Mail volume and revenue that the Postal Service has recently has hit a major provider of direct mail services particularly hard. ? The filing included three significant announcements.? First, Harte-Hanks lowered its earnings guidance.? Second, it announced that? smply that declines in direct mail marketing has hit its business hard.?? Harte Hanks announced that Gary Skidmore, Executive Vice President and President, Direct Marketing would be leaving the firm.? Third, Harte-Hanks announce that it will write off all or nearly all of the goodwill associated with its shoppers business that is on its books.?? Since Harte Hanks made the announcement, its stock has lost nearly 24% of its market value.

Harte-Hanks announced projected 2nd Quarter 2012 earnings of between $0.10 to $0.12 excluding goodwill impairment charges.? Its projection was 25% and 37.5% below the estimates of analysts prior to the announcement.? The statement that accoumpanied the earnings announcement highlights the weakness in Harte-Hanks? business that requires Postal Service delivery.

Larry Franklin, Chairman, President and Chief Executive Officer, said, ?We are obviously disappointed with these preliminary results. The percentage decline of our Direct Marketing revenues was greater in the second quarter than it was in the 2012 first quarter due to revenue weakness with our high tech, pharmaceutical and financial services customers. Our second quarter Shoppers revenue percentage decrease was slightly worse compared to our 2012 first quarter revenue decrease. This revenue performance is not where we want it.?

Departure of President of Harte-Hanks Direct Marketing

Gary Skidmore, Executive Vice President and President, Direct Marketing will leave Harte-Hanks on July 31, 2012. Mr. Skidmore has been with Harte-Hanks since it purchased his company, Select Marketing, in 1994, and served as President, Direct Marketing, since 2007. The Direct Marketing segment of Harte Hanks business that generates 72% of the company?s revenue and nearly all of its profits.? It generates revenue from a range of direct marketing services including direct mail, sample fulfillment, database and data analysis, direct marketing software and? call centers. At a June Stephens 2012 Spring Investment Conference, Harte Hanks indicated the digital portion of its direct marketing business was growing faster than its traditional direct mail business.

Larry Franklin, Chairman and CEO of Harte-Hanks will be assuming responsibility for the direct marketing business.

The departure of Mr. Skidmore appears linked to the weak financial response as the press release does not indicate that Mr. Skidmore is taking another position and its release coincided with the earnings pre-announcement.? The decision to have Mr. Franklin take over his responsibility suggests that Harte-Hanks felt it needed to cut management and overhead to attempt to improve profitability.

Writedown of Goodwill of Harte-Hanks Shoppers Business

Harte-Hanks?s Shoppers business publishes numerous free advertising tabloids that contain a combination of classified and display adds using the Pennysaver or? the Flyer brand name.? Most of these tabloids are distributed by the Postal Service but they are also distributed in racks in stores in the community that a particular shopper targets.? The classified advertising in shoppers compete with Craigslist and while like Craigslist Shopper publications do not carge for classifieds, the immediacy of online classifieds has put Shopper publications at a disadvantage.?? The Shoppers division generates revenue from display advertising from local businesses interested in targeting the tight geographic markets that an individual shopper is delivered to.? In general, an individual Harte-Hanks Shopper is delivered to 12,000 households, although it is possible for an advertiser with a broader reach to advertise in publications that are delivered to adjoining communities

The statement on

As a result of continuing revenue declines in Shoppers and in conjunction with management?s evaluation of the business, the company determined that an interim impairment test of Shoppers was warranted in connection with the preparation of its financial statements for the second quarter of 2012. Because the estimated fair value of Shoppers was less than its related carrying value of $177 million, management determined that the goodwill balance with respect to this reporting unit was impaired. Management presented its conclusions to the Audit Committee and Board of Directors in connection with the preparation of the company?s financial statements for the second quarter, and on July 16, 2012, the company determined that it will be required under generally accepted accounting principles to record a second quarter non-cash pre-tax charge in the range of $150 million to $177 million with respect to the impairment of goodwill and other long-lived assets related to Shoppers. Final calculation of the amount of the charge has not yet been made and is dependent upon evaluations which are ongoing.

The decision by Harte-Hanks management to write down all or nearly all of the goodwill value of its shoppers business suggests that management no longer believes that the business has much value as a profit generator going forward.? Part of the problem is that Shoppers publications both serve smaller businesses that have been hit hard by on-line retailing and the anemic recovery. ? Another problem is that Craiglist.org and deal websites such as Group-On and Living Social, and other web-based advertising are poaching advertising dollars that may have been spent? on ads in Shopper publications that Harte-Hanks publishes.

The write off of the much of the value of the shoppers business also provides Harte-Hanks investors about the future direction of the company.?? The write off makes it easier to sell the Shoppers business off as it lowers the price that a potential buyer would pay for the business.?? If that happens, Harte-Hanks will become more clearly identified as a multi-modal, full-service direct marketing company focused on digital solutions that can also provide physical delivery options when that is the best way to target existing or potential customers.

Source: http://cepobserver.com/2012/07/harte-hanks-hit-hard-as-direct-mail-marketing-demand-declines/

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