American Greetings Corp. (NYSE:AM), along with privately-held Hallmark, sell greeting cards and related "social expression products." The industry has been on a secular decline, which was further illustrated by American Greetings second quarter results. A couple of tuck-in acquisitions have so far failed to stem the sales decline, though profit growth has been decent over the past couple of years.
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Second-Quarter Review
Total sales fell 3.8% to $342.8 million. The decline was attributed to "an erratic recovery in the economy," negative currency fluctuations on overseas sales and the loss of party goods revenue.

The sales decline coupled with a big jump in general and administrative expenses and sent operating income down nearly 39% to $23.5 million. Higher interest expense and a decline in interest income pushed net income down 63.1% to $8.5 million, or 21 cents per diluted share. This fell quite a bit below analyst expectations.

For the full year, analysts expect a modest decline in sales to $1.6 billion and earnings of $2.50 per share, which would represent a year-over-year increase of more than 20%. Management projects free cash flow of $125 million, or more than $3 per diluted share, though this would represent a decline from the more than $170 million in free cash flow reported last year.

Bottom Line
American Greetings is still in the process of integrating the acquisitions of Papyrus and Recycled Paper Greetings card brands, but so far they have been unable to stem a steady slide in sales. The top line has declined for more than a decade now. Profits have fallen at a slower rate over this period and have perked up over the past three years, but cash flow trends have been erratic.

Investors may be drawn to the dividend yield of 3% and single-digit P/E ratio, but the shares will likely remain flat until sales visibility improves. This will be tough, as greeting cards continue to lose share to digital e-greetings and other forms of online communication, including email and social networks. This means that firms including Yahoo (Nasdaq:YHOO), Google (Nasdaq:GOOG), the Knot (Nasdaq:KNOT) and IAC/InterActiveCorp's (Nasdaq:IACI) service will continue to gain share at American Greeting's expense. (To learn more about dividend yields, see Investment Valuation Ratios: Dividend Yield.)

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