Poor ad market adds to Tribune, Times pressures.

A stubborn advertising slump at the Los Angeles Times continues to nag at parent company Tribune Co., eroding profitability despite a series of cost-cutting measures.

Last month, Chicago-based Tribune slashed its third-quarter profit forecast, citing advertising shortages at the Times among other problems.

The shortfall comes on top of a 58 percent decline in earnings in the second quarter--in response to which the company had already lopped 375 jobs, half of them at the Times.

Wall Street analysts said that the Times, which historically maintained high staffing levels that are into profits, has tarnished Tribune's image as a superior financial per former. The question is what Tribune executives do next.

"The L.A. Times has been a major disappointment almost from the moment Tribune acquired Times-Mirror four years ago," said Ed Atorino, a media analyst at Fulcrum Global Partners in New York. "Revenue has continued to decline more than expected and circulation isn't going very well, so they're revisiting the cost structure, tightening up content and getting rid of a lot of features."

The ongoing ad shortage highlights the tension between two vastly different corporate cultures.

Tribune, which owns 13 daily newspapers, more than two-dozen television stations and the Chicago Cubs baseball team, once boasted the highest profit margins in the newspaper industry, at 29.2 percent. The purchase of Times-Mirror Co. in 2000 brought the Times into the fold as its new flagship newspaper, providing 20 percent of Tribune's $5.6 billion in annual revenue.

The idea was for Tribune to cut costs at the Times, bringing profitability gradually into line with Tribune norms. Since their arrival, Times Publisher and Chief Executive John Puerner and Editor John Carroll have shuttered 17 community newspapers and the paper's Southern California Living section, expanded Calendar and launched the California section.

Advertising slump

But the ongoing ad slump has exacerbated Tribune's financial problems.

The Times' advertising linage--the amount of space taken up by ads--fell 9 percent in August from the like year-ago period. Since January, linage is down 5 percent. Three months ago, the Times shed 200 jobs through layoffs and voluntary buyouts.

And last month, the Sports section eliminated 14 pages of weekly content, including daily notes on USC and UCLA football teams and a host of box scores.

"It's painful, it's difficult, but it's not the end of the world," said Bill Dwyre, who has been the paper's sports editor for 24 years. "The economy will come back, and we'll get fat again."

Dwyre said the Sports section had managed to evade cuts up until now, and he believed these were the last reductions to be made in the latest round. "I was given a mandate as to what I had to do and we sat down, took out a calculator, and we just had to cut inches," he said, adding: "Quantity isn't everything. And now you can read the section faster."

Times spokesman David Garcia declined comment on any other editorial cuts that might be in the works.

Advertising executives acknowledge that the Los Angeles market has had a slower recovery than other parts of the country. However, a number of local newspapers have begun to post stronger results since June.

Tribune executives have cited a number of factors for the problems at the Times: an earlier date for the Academy Awards, which resulted in fewer studio "For Your Consideration" ads; the four-month long grocery strike which ended early this year: and consolidation among national retailers such as Federated Department Stores and Robinsons-May.

"The Times continues to see weakness in department stores," Jack Fuller, president of Tribune Publishing, stated in the company's second-quarter conference call on July 15.

Jerry Agema, chief financial officer of Tribune's Publishing Group, said the Times also took a hit because of fewer travel advertisements, particularly for short stints to Las Vegas.

Media analyst Paul Ginocchio at Deutsche Bank Securities suggests that the advertising downturn faced by the Los Angeles Times and many other newspapers is caused by a far bigger threat: Wal-Mart Stores Inc.

Though Wal-Mart faces roadblocks in opening more stores in Southern California, Ginocchio believes department stores have responded to competitive pressures by diverting ad spending to television, to the detriment of newspapers.

"It's not just a cliche--Wal-Mart really is the biggest factor undermining retail advertising growth for newspapers," he stated in a recent report, noting that Tribune, Washington Post Co., EW Scripps Co. and Gannett Co. have the greatest exposure to a downturn in department store advertising. Wal-Mart devotes just 3 percent of its advertising budget to newspapers.

Retail advertising represents between 35 percent and 40 percent of the Times total advertising revenue, which was flat in the second quarter.

More cuts sought

On Wall Street, analysts give credit to Tribune for addressing the Times' "overstaffing" issues, while saying the cuts haven't gone far enough.

"The Los Angeles Times brought Tribune's profit margins down about 10 points," said John Morton, a longtime newspaper analyst at MG Strategic Research Ltd. in Washington, D.C. "You don't get newspaper properties that are used to working at much lower margins to improve in a hurry."

Moreover, Tribune is grappling with another set of troubles.

The company expects to take combined charges of up to $95 million to negotiate settlements with advertisers for inflating circulation by 100,000 at Newsday, on New York's Long Island, and at the New York edition of Hoy, its Spanish-language daily. Tribune launched Hoy in L.A. in March.

For the first six months of 2004, the Chicago company's profits fell to $217.1 million, from $370.7 million a year earlier. Revenues in the first half rose 3 percent to $2.83 billion. Meanwhile, the company's shares have fallen 9.5 percent in the past year, to $41.15 on Sept. 30.

Tribune faces an even worse financial liability in the next year.

Under former Times Publisher Mark Willes. Times Mirror did not pay capital gains taxes on the sales of two businesses in 1998. Now the IRS wants Tribune to pay between $790 million and $1 billion in back taxes and interest for gains from the sale of legal publisher Matthew Bender & Co. and health sciences publisher Mosby Year Book Inc.

The company claimed both sales were tax-free reorganizations. A trial is scheduled for December at U.S. Tax Court in Los Angeles.