The questions were pointed during last week's conference call, as analysts tried to determine the future of Scholastic after a poor third quarter prompted the company to lower its sales and earnings estimates for the fiscal year ending May 31, 2006. The company blamed the shortfall primarily on higher costs, particularly in the book club and book fair businesses, but some analysts also expressed concern that sales growth has stalled. In the quarter, sales rose 1%, to $487.7 million, and the company had a net loss of $15.5 million, compared to a loss of $800,000 in the third quarter of fiscal 2005.
In trying to allay analysts' worries, Scholastic chairman, CEO and president Dick Robinson sent mixed messages. The Troll and Trumpet book clubs, which will be shut down in September, accounted for 10% to 15% of total club revenue, Robinson said, but added that the company expects some of those sales to migrate to its core clubs, where sales increased 5% in the last quarter. Robinson said new products in the trade group should help boost sales of children's books, a segment that has the potential to increase sales in the mid-single-digit range. International growth, educational sales and sales over the Internet should also drive revenue, Robinson said, which should mean annual revenue increases in the low- to mid-single digits. For the current year, Scholastic is projecting revenue of $2.3 billion, up from just under $2.1 billion in fiscal 2005.
Still, Robinson said that for the immediate future the focus will be on improving profitability, rather than revenue gains. He said Scholastic remains committed to achieving operating margins of 9% to 10%. In fiscal 2005, the margin was 6.5%; for the first nine months of the current year the operating margin was 4.3%. Scholastic has identified more than $40 million in annual savings, most of which will occur in fiscal 2007. It was unclear how much of those savings will come from additional layoffs. Closing the Troll and Trumpet clubs eliminated 12 positions, while shutting the Danbury telemarketing call center cut 75 jobs. Scholastic will also continue to consolidate the number of warehouses it operates to support its book fairs; from a peak of 82 facilities there are now 65 warehouses, and more closings are in the works.
Perhaps the toughest question came toward the end of the session, when an analyst asked if Robinson and the board have had talks about succession. Robinson, who has been president since 1974 and chairman since 1982, said that while the subject has been discussed, he has no plans to step down. Robinson said he was "determined" to see that the actions the company has begun to improve margins are fulfilled.
One of the most intriguing lines in Scholastic's third-quarter balance sheet was for accrued royalties, which shot up from $57.1 million at the end of last year's nine-month period to $129.3 million at the close of the same span this year. Scholastic CFO Mary Winston attributed the increase to the publication of Harry Potter and the Half-Blood Prince in this year's first fiscal quarter; the royalties will be largely paid out in the current quarter. So does that mean Potter author J.K. Rowling has roughly $72 million coming from Scholastic? A company spokesperson said Scholastic doesn't "discuss the royalties of any of our authors."