Scholastic's earnings will not meet expectations for the year ending May 31, 2004, despite a double-digit sales increase that will bring revenue up to $2.2 billion. The earnings shortfall was disclosed last week when Scholastic released results for the third quarter in which sales rose 9%, to $472 million, but the company posted a net loss of $6 million compared to a loss of $500,000 in last year's third period. The loss was greater than analysts anticipated, and the company's stock fell 7% the day after the news was announced. For the full year, earnings per share will be below $1.95, the low end of estimates provided by the company in July when it predicted earnings per share of $1.95 to $2.35. EPS was $1.46 in fiscal 2003.
Company chairman Dick Robinson said he was "disappointed in the quarter and the full-year forecast," but said he is "determined to get the business back on track." The two trouble spots at the company are the trade division and the direct-to-home continuity program. Trade sales fell 31% in the quarter, to $25.6 million, and continuity sales were down 8%. In trade, sales and earnings were hurt by lower backlist sales and higher returns; Harry Potter and the Order of the Phoenix contributed little to the quarter. Barbara Marcus, president of the children's book publishing and distribution group, told analysts in a conference call that Scholastic does not plan to ship many new titles to tie in to the spring release of Harry Potter and the Prisoner of Azkaban.
In the continuities business, the Do Not Call legislation had a "bigger impact" than expected, Robinson said, noting that with fewer potential customers to contact, new orders were down while attrition increased. He said the continuity program is a "viable" business and that Scholastic has taken steps to turn around the unit. The major initiative to date has been to replace George Saul, who had headed the division, with Judy Newman, a Scholastic v-p who helped fix Scholastic's book clubs.
A change in leadership is also part of the answer to improve results in the trade division. Marcus is devoting her full attention to the trade and fair groups and in essence is taking over many of the duties from Michael Jacobs, who resigned in February. Marcus said she plans on repackaging and repromoting some of Scholastic's backlist properties, while also doing more license publishing. She also hopes to inject more bestsellers into the company's frontlist.
Problems in the trade and continuity divisions overshadowed improvements in other areas. In the quarter, book fair sales rose 4%, to $68.6 million, and book club sales increased 18%, to $111.1 million. In all, sales in the children's book publishing and distribution group rose 1%, to $271.5 million, but operating profit plunged 50%, to $11.4 million.
The company's educational publishing division exceeded plan, led by its READ 180 intervention program. Sales in the quarter rose 7%, to $69.4 million, and the unit had operating profit of $3.3 million. International sales increased 25%, to $87.6 million, helped by gains in Canada, higher exports and currency fluctuations. Revenue in the media, licensing and advertising division jumped 49%, to $43.5 million, led by the addition of the recently acquired Back to Basics Toys catalogue business and the release of Clifford's Really Big Movie.
For the first nine months of the year, net income at the company increased 20%, to $35.9 million, on an 18% increase in sales, to $1.65 billion. At the close of a no-nonsense conference call with analysts, Robinson promised to improve the company's forecasting, profits and cash flow.
