American Greetings 2Q profit falls 73 pct on costs

PORTLAND — American Greetings Corp. said Friday that second-quarter profit dropped 73 percent on lower margins and higher costs as the greeting card company invested in products to drive sales growth.

Profit dropped to $2.3 million, or 5 cents per share, in the three months ended Aug. 29 from $8.4 million, or 15 cents per share, a year ago. Sales rose 2.2 percent to $385.8 million from $377.5 million a year earlier.

Analysts polled by Thomson Reuters had expected earnings of 10 cents per share for the period.

Chief Executive Zev Weiss said that changes to products over the last several years are boosting revenue growth, but said this has been costly.

"Increasing the quality of our product to achieve that revenue growth has come at a cost, especially in this time of inflation," Weiss said.

Material, labor and other production costs rose to $170.1 million from $163.1 million, and selling, distribution and marketing expenses rose to $154.4 million from $144.6 million. Some of those costs come as the company changes its product mix, such as the increasing number of music cards, which have added costs such as royalties.

Shares of American Greetings dropped fell 25 cents, or 1.5 percent, to $16.39 Friday.

The company, which is the second-largest U.S. greeting card maker behind privately held Hallmark, said the business is seasonal, and the majority of earnings are recorded in the second half of the year. Weiss warned, however, that a soft U.S. economy still poses a risk.

"The combination of both the challenging economic conditions and the risk inherent in a seasonal business could cause us to finish the year near the lower end of our earnings guidance," Weiss said.

Cleveland-based American Greetings said it plans to close 25 to 30 stores during the fiscal year.

The company backed its fiscal 2009 profit outlook from continuing operations between $1.60 and $1.85 per share but warned it could come in at the low end of the range. Analysts expect a profit of $1.43 a share for the year.

American Greetings leaders also warned that a previously announced deal to sell the product licenses of Strawberry Shortcake and the Care Bears to Cookie Jar Entertainment of Toronto may be delayed because of shakeups in the larger financial markets. The sale, at an $195 million, was scheduled to close Sept. 30 but the company said it will now close some time before the end of the year.

The company also executed another deal during the quarter to purchase a majority of distressed first lien debt of Recycled Paper Greetings for $44 million. Executives said they could not discuss the deal further as Recycled Paper Greetings is seeking to restructure its balance sheet.

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