Sales Flat, Earnings Up at Scholastic

Despite flat revenues of $433 million for the third quarter ended February 28, net income at Scholastic jumped 222% to $11.9 million. The company attributed the earnings improvement to cost controls that saved about $11 million in the period and are expected to save a total of $45 million for the fiscal year ending May 31.

Revenues in the children's book publishing and distribution segment, the company's largest, inched ahead to $268.9 million from $266.4 million in last year's comparable quarter. The group was led by an 8% increase in book club revenues as well as higher book fair sales. The new Club Ordering On Line service generated about 7% of club orders by the end of the quarter, and the company estimated that the service could account for 10% to 20% of orders in fiscal 2003.

Sales in the segment's continuity line fell by $11 million in the quarter as Scholastic worked to reduce less profitable programs in both the school and home markets. Revenues in the company's trade operations declined by $8 million, although at $17 million sales were slightly higher than expected. Trade sales benefited from continued solid sales of the Potter titles, plus strong sales of Captain Underpants, Clifford, I Spy, Scooby- Doo and Star Wars titles.

Children's book publishing and distribution segment president Barbara Marcus said she expects the group to do well with new Star Wars titles that are set to be published to coincide with the release of the new Star Wars movie due for a spring release. Interest in Potter should receive another boost when Sorcerer's Stone debuts on video in May and again in November when the Chamber of Secrets movie is released. Marcus could not say for sure when Harry Potter five, tentatively titled Harry Potter and the Order of the Phoenix, will be published, although the company expects the title to be released in fiscal 2003, which will end May 31, 2003. Marcus added that Scholastic will most likely be the publisher for the sixth and seventh volumes in the series. Marcus also told analysts that she plans to introduce the newly acquired Klutz products to international markets and to develop book-plus items for the school market.

Revenues in the educational publishing segment rose 3% in the quarter, to $60.9 million, due to higher sales of its supplemental reading materials, which offset lower sales of Scholastic Literacy Place, which the company is phasing out. Revenues in the media, licensing and advertising group fell to $32.5 million from $35.6 million because of the delivery of fewer Clifford television shows. Scholastic is developing more new episodes for both Clifford and I Spy. In the international markets, revenues dipped to $70.4 million from $71.6 million. A strong dollar and a decline in the U.K. offset growth in Canada and Australia.

Executives said they expect Scholastic to finish the year with revenues of $1.9 billion and an operating margin of 9.5%. The company is looking for a better than 10% growth rate in sales in fiscal '03, with earnings per share up 15% to 20% and operating margins of 10.5%.