No Pixie Dust for Scholastic as Company Endures Bad Day on Wall Street
by Jim Milliot and Steven Zeitchik, PW NewsLine -- Publishers Weekly, 2/11/2003
Not even 6.8 million wizards could ward off Scholastic's stock tumble yesterday, as a gloomy earnings report sent the company's shares on a 23% broom-ride.On a day when the company's biggest news was the announcement of an explosively large Harry Potter run, the bigger business story lay with tepid performance in a lot of the areas that have nothing to do with the magic series.
In an earnings call, the company warned that sales and earnings for the fiscal year ending May 31 will not meet expectations. It was the second time in less than two months that the company lowered its financial forecasts. The company now expects revenue to increase 3% to 5% while earnings per share will be between $1.85 and $2.15, a double-digit decline from year's earnings of $2.38 per share. (In late December, the company was looking for flat earnings and a 7% sales increase.) This factor helped dropped the stock to $25.95, a dip of 22.9%
Among some of the others: The company cited extremely weak January trade sales -- "disappointing across the board" was how Barbara Marcus, president of the children's book publishing and distribution division, described them. She said that while business has picked up in recent weeks, it will not be enough to recover the sales lost in January. Book club sales are projected to fall in the mid-single digits for the year due primarily to a decline in Scholastic's Firefly (pre-k to k) and Lucky (grades 2-3) clubs.
Company chairman Dick Robinson said the publisher was also concerned about the possible negative impact state budget pressures will have on the purchase of materials by school libraries in the fourth quarter. In addition, a war with Iraq could disrupt Scholastic's export business, including sales to Department of Defense schools.
To bring spending in line with revenue, Scholastic is "exercising tight control over headcount," and is reducing spending on such discretionary items as travel and entertainment, conventions and consultants, Robinson said. Scholastic denied that the company has instituted a hiring freeze, instead characterizing its policy as "giving headcount a high degree of scrutiny."
No doubt the announcement of The Order of the Phoenix run was meant to serve as a talisman to Wall Street's leaden expectations. It looked like the right strategy -- 6.8 million seems about as high as you can go to court investors without looking like you're trying too hard.
That said, the number was actually, amazingly, on the low side when you consider the sales history of previous books in the Potter series. Harry IV sold close to twice the 6.8 mil figure in hardcover -- about 10.2 million -- in the two-and-a-half years since it came out (and nearly 8 million in the first six months), according to numbers supplied by the publisher.
Of course, a falloff is always a concern, but, based on the print-run figures at least, the trend would seem to run the other way: The first Harry sequel quadrupled the run of the first title; the next book nearly tripled the run of the sequel; Harry IV octupled the run for Harry III -- and all those books went back to press many times. The run for Phoenix, meanwhile, is less than double the amount printed for Harry IV . In fact, one expert reacted to the new number with mild surprise that it wasn't as high as 10 million..
The company's stock seem to be moving with the same swiftness, but judging by some indicators, it may need Harry to start them going again in the right direction.
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