The combination of a sluggish economy and the delay in publication of the fifth volume in the Harry Potter series until fiscal 2004 (News, Dec. 23) will result in flat earnings per share for Scholastic's fiscal year ending May 30, 2003, said chairman Dick Robinson. Total company revenue is expected to increase 7% in the year. Robinson said that with the release of the Potter title next year, he is looking for "strong profit growth" in fiscal 2004.
Scholastic's conference call with analysts discussing second-quarter results was dominated by questions regarding Harry Potter. Company chief financial officer Kevin McEnery said that Potter sales of $25 million in the quarter were $10 million below expectations, and that the company had established a $9-million reserve to account for returns. In an attempt to keep returns to a minimum, said Barbara Marcus, president of the children's book publishing and distribution division, the company is offering accounts an extra 3% discount on all Potter inventory until the end of the fiscal year.
Marcus said she is sure the Potter titles are "modern-day classics" that will continue to sell for years to come. Potter sales in the second half of fiscal 2003 are expected to be in the $5 million to $8 million range. Marcus added that while she is confident Potter author J.K. Rowling is committed to writing seven volumes, she said she "wouldn't even begin to discuss" when volumes six and seven may be published. Robinson assured investors that the company was taking appropriate steps to diversify its business, noting that Scholastic is expanding its distribution, educational and international operations. He added that Potter's projected sales of roughly $45 million this year will account for only 2.5% of Scholastic's total revenue.
The company's recent niche acquisitions contributed about $16 million to revenue in the second quarter, with Klutz adding the most, at $10 million. Baby's First Book Club added $3 million to sales, while Tom Snyder Productions and Teacher's Friend Publications added $2 million and $1 million, respectively.
Marcus said that Scholastic is continuing to increase its business with mass merchants, which she estimated now account for 10%—15% of division revenue. The company is also working to shore up sales in its book club segment, which were down 2% in the quarter and which will likely finish fiscal 2003 even with fiscal 2002. Difficulty attracting new teachers to the club program was cited as the main reason for the lower-than-expected sales, Marcus said.
In its other divisions, revenue in the educational segment rose 3%, to $76.6 million, due to the success of the Read 180 program, which had sales of $15 million, compared to $8 million in last year's second quarter. The division had a "modest" decline in its library unit. Revenue in the media, licensing and advertising segment was flat, at $46.8 million, with an increase in Clifford the Big Red Dog licensing offsetting lower CD-ROM sales. The international division had a solid quarter with revenue up 10%, to $98.7 million. Improvement was seen in Canada, Mexico, Australia and the Far East markets.
