Despite a 14% increase in sales, to $2.23 billion, net income at Scholastic slipped to $58.4 million in the fiscal year ended May 31, 2004, compared to net income of $58.6 million in fiscal 2003. The poor earnings performance was not unexpected; Scholastic had announced in March that earnings would not meet earlier estimates, and in a conference call with analysts July 22, company chairman Dick Robinson said the "primary cause" of the earnings shortfall was the dramatic decline in the continuities business. In addition, trade profits, despite $174 million in Harry Potter revenue, failed to meet expectations. Excluding Potter, trade sales were down 7%. The disappointing earnings in fiscal '04 marks the second year in a row of weak profits; earnings fell 13% in fiscal 2003 and, until the end of calendar 2003, Scholastic had been looking for a strong rebound in fiscal '04. The weak earnings performance, coupled with the increase in sales, resulted in a decline in operating margin to 5.1% in fiscal 2004, compared to 6.1% in fiscal 2003. Robinson said strengthening Scholastic's operating margins is "the primary objective" for fiscal 2005, and modest earnings improvement is expected for fiscal 2005. Scholastic said it expects earnings per share to be in the $1.50 to $1.70 per share range in the current fiscal year, compared to the $1.46 it earned in the last fiscal year. Sales are expected to decline in the year, with the company forecasting revenue of $2.10 billion to $2.20 billion.
In reviewing fiscal 2004, sales in the children's book publishing and distribution group rose 14%, to $1.36 billion, but operating profit dropped 15%, to $114.8 million, a figure that reflects $22.7 million in charges related to the overhaul of the company's continuities unit (News, July 19). The decline in continuity profits offset gains in the book clubs and trade divisions, although Robinson said profits in the trade group "did not meet our goals," which he attributed to weak backlist sales and higher returns. Total revenue in the trade unit jumped 54%, to $323 million, driven entirely by sales of Harry Potter and the Order of the Phoenix.
Book club sales increased 15% last year, to $404 million, helped in part by the inclusion of clubs acquired last July from Troll. Book fair revenue increased 5%, to $346 million, due primarily to higher revenue per fair. Continuity sales fell 5%, to $286 million, due in large part to a decline in orders resulting from the "Do Not Call" law.
Robinson said that to help turn around the continuity business, the company is adopting a customer-centric strategy that will use more target marketing to focus on its best customers, a move that should cut promotional costs while increasing pay rates. To improve its non—Harry Potter trade business, Robinson said, Scholastic will devote "more resources to our bread-and-butter mass market paperback business," increase its licensing business and improve the quality of its frontlist titles.
In Scholastic's other segments, sales in the educational publishing group rose 13%, to $369.1 million, and operating profit increased 27%, to $53.2 million. Sales of Read 180 rose 50% in the year and Scholastic will release an updated edition in fiscal 2005. Helped by $36 million in foreign-exchange gains, sales in the international segment increased 16%, to $369.7 million, and operating profit rose 26%, to $24.3 million. Sales were up in Canada and the U.K., and export sales benefited from a large Defense Department order. More growth in fiscal 2005 is predicted for the U.K., Canadian and Asian markets. In the media, licensing and advertising group, sales increased 10%, to $136.4 million, an increase that includes $17 million in sales from the Back to Basics catalogue business Scholastic purchased last August. The loss in the unit was cut to $2.5 million from $2.9 million.
In some companywide numbers, Robinson noted that sales via the Internet rose 50% last year, to $200 million. About 30% of book club orders come through the Internet and sales of Grolier Online were up. Robinson said Scholastic will continue to deliver more of its content online. Spanish-language sales were $30 million last year, and Robinson sees strong growth possibilities in this area.
Robinson closed the conference call by noting that despite the "quiet mood" of the meeting, "we don't have our heads down. We're committed to improving the financial characteristics of the business."
