Scholastic in Position for Rebound in Fiscal 2004

Net income at Scholastic fell 37.3% in the fiscal year ended May 31, to $58.6 million, completing what company chairman Dick Robinson called "a very difficult year." Revenue rose 2.1%, to $1.96 billion. Robinson blamed the weak results on a poor bookselling market during the winter and spring and on operating issues that Robinson said the company has already taken steps to correct. Earnings in particular were hurt by lower sales in the high-margin trade area and a $10.9-million severance charge. During the fourth quarter, Scholastic eliminated 400 jobs, a move that is expected to save the company $15 million this year.

Robinson is looking for significant improvement in fiscal 2004, projecting revenue to increase between 7% and 12% and earnings per share to be in the $1.95 to $2.35 range. Earnings per share were $1.46 in fiscal 2003. The major driver behind the gains will be the trade group, where revenue is projected to increase 40%—50% due to sales of Harry Potter and the Order of the Phoenix. Phoenix is expected to sell 10 million copies this year, netting the company $150 million to $175 million, most of that in the first quarter. In fiscal 2003, trade sales were "significantly below expectations," Robinson said, falling 3%, and reflected a $33-million decline in Potter backlist sales, which was partially offset by $31 million in sales from Klutz.

Robinson is also looking for better performances from the company's book club and book fair businesses in the current year. In fiscal 2003, sales in the book clubs fell 2% because of lower orders. Barbara Marcus, president of the children's book publishing and distribution group, said the company plans to turn around the clubs through better teacher incentives, a simplified selection procedure and more targeted mail campaigns. The company also plans to increase its presence in the value segment with a new Carnival/Troll club.

Book fair sales rose 5% last year with a modest decline in sales per fair, which Marcus said was caused in part by shortages of popular books. She said Scholastic has fixed that problem. Marcus acknowledged that the company is slowing the number of new fair openings and said the emphasis in fiscal 2004 will be on more revenue per fair. Marcus told analysts that she expects sales in both the club and fair divisions to increase by mid to upper single digits this year.

Continuity sales rose 7% last year, and Marcus is looking for a similar growth rate in fiscal 2004. Top priority is increasing enrollment. Total sales in the children's book publishing and distribution segment—trade, book clubs, book fairs, continuities—rose 1.8% last year, to $1.19 billion.

In the company's other segments, educational publishing sales rose 2.8%, to $325.9 million. The sales gain was due to $23 million in higher revenue from its Read 180 program, as well as sales from acquisitions. Library sales fell 11% in the year, and sales were also down in Scholastic Literary Place, a program that Scholastic has discontinued. Sales in the international segment increased 5.7%, to $319.0 million, due largely to a favorable currency exchange rate. Profits were down in the year, mainly because of $4 million in severance costs. (The children's book segment and educational publishing segment had severance costs of $2 million each, while the media and licensing division had $1 million in severance costs.) Sales in the media and licensing division fell 4.9% in the year, to $123.5 million, reflecting lower software and advertising revenue.

Because of the disappointing results, there will be no bonuses this year, Robinson said. And because the company was forced to revise its earnings estimates three times last year, he said Scholastic will "review our forecasting processes." He also told analysts and shareholders that "our first burden is to demonstrate that we can manage our business predictably and profitably."

Scholastic Sales by Segment, 2002-2003
($ in millions)