Lower sales of its high margin educational technology programs, higher investment in digital initiatives and school funding cuts combined to increase Scholastic’s operating loss in the third quarter ended February 28 to $31.9 million from $500,000 in the comparable period in fiscal 2010. The loss in the most recent quarter includes a $3.5 million bad debt expense associated with Borders’s bankruptcy. Revenue slipped from $398.8 million to $393.7 million. Due to school funding pressures and higher digital investment, Scholastic lowered its sales and earnings forecast for the fourth quarter and full year. Chairman Richard Robinson called the quarterly results disappointing, but said he remained optimistic about future opportunities.

In its business segments, sales in children’s book publishing and distribution rose slightly, to $193 million, from $192.1 million. The increase came entirely from the trade unit where sales rose 21%, to $43.5 million, due to strong sales in the Harry Potter and Hunger Games series. Book club sales fell 6%, to $74.3 million, reflecting lower revenue per order, while book cub sales declined 2%, to $75.2 million, due mainly to bad weather that caused schools to reschedule fairs to the spring. During the quarter, Scholastic upped its investment in its e-book and e-commerce initiatives from $20 million to $30 million for the full year. The company said it plans to open its children's e-bookstore and downloadable e-reader application in fiscal 2012 (which begins in June). It began beta testing the e-reader last week.The $3.5 million charge for Borders covers all debt associated with the chain, Scholastic said. The chain accounted for about 3% of children's distribution revenue, roughly $20 million annually.

In the education publishing segment, sales fell 8%, to $81.3 million, due to lower sales of Read 180 which last year benefited from stimulus funding. Scholastic is preparing to introduce a new version of Read 180 this spring. Sales in the classroom and library group also declined.

The international group posted a 7% sales increase, to $95.1 million, benefitting from favorable currency exchange. Among its overseas markets, Australia had the strongest performance. Media/licensing/advertising revenue fell 19%, to $24.3 million, due to lower sales of toys and interactive products and the timing of ad revenue.

For the nine month period, revenue for all of Scholastic was virtually flat at $1.37 billion and operating income fell to $50 million from $69.8 million. Scholastic now expects full year sales to be about 1.9 billion and earnings per share from continuing operations of $1.25 to $1.40 before the impact of one-time items. Scholastic had been expect sales between $1.9 billion and $1.95 billion with eps between $1.80 and $2.05