For the third time in approximately seven months Scholastic lowered its earnings forecast for the fiscal year that ended May 31. In the most recent warning, the company said it expects year-end earnings will be between $1.42 and $1.47 per share, down from estimates in February that projected earnings of $1.85 to $2.15 per share. Scholastic's original estimate for fiscal 2003 projected earnings to be about flat with the $2.38 per share earned in fiscal 2002.
The lower earnings estimate is the result of a fourth quarter that performed worse than expected, especially in the trade and school book fair segments. For the final quarter, Scholastic expects earnings to be between 68 cents and 73 cents; analysts had been looking for earnings in the $1.10 to $1.20 range. Revenues from Harry Potter sales were not recorded in the fourth quarter, but will appear in Scholastic's fiscal 2004 first period that ends August 31.
The lower forecast caught analysts by surprise. While Scholastic's book club business had been struggling, book fairs had been doing well through the third quarter. And while the trade segment had not met expectations in the third quarter, in March the company said it expected the trade group to meet its sales projections in the fourth quarter. The company said it would provide more details on the fourth quarter performance when it releases its year-end results July 15 and in a conference call on July 16.
Given the recent news, Goldman Sachs analyst Peter Appert downgraded Scholastic's stock to "inline" from "outperform." He explained that while he doesn't see dramatic downside risk in the stock, the downgrade reflects "the view that the shares may be in the 'penalty box' for an extended period given questions on management's ability to forecast revenue and manage costs." Scholastic's stock fell 4.8% following the warning/downgrade to close at $26.99 per share on July 8 and was at $27.04 on July 19.
