Despite reporting a 32% increase in operating income in the fiscal year ended May 31, 2017, from the previous year, Scholastic still had an operating margin of only 5.1%. That is one reason the publisher announced the launch of a new three-year effort to drive up operating income when it released its results for fiscal 2017 last week. Scholastic posted revenue of $1.74 billion and operating income of $88.9 million ($109.1 million, excluding one-time items), giving the company one of the lowest margins in the industry.

To boost earnings, Scholastic has started Scholastic 2020, a companywide initiative through which the publisher aims to reduce operating costs by simplifying business processes, expand revenue opportunities with more targeted marketing and sales initiatives, lower technology costs through unified systems, and improve real-time visibility to product movement, leading to operations and fulfillment savings. As explained by Scholastic chairman Dick Robinson, much of the upgrade will center on the company’s book fairs and book clubs, which, he said, are “labor- and freight-intensive.”

Scholastic does not expect to see the benefits from Scholastic 2020 until fiscal 2019. In fact, investments associated with Scholastic 2020—along with lower sales (due in part to the absence of new Harry Potter titles)—will result in a decline in revenue (to $1.65 billion–$1.7 billion) and lower operating earnings in the current fiscal year. Robinson promised, however, that operating income will begin a three-year run of double-digit increases starting in 2019. Asked by analysts if Scholastic had an operating margin target, Robinson said it does, but he declined to disclose it.

Looking back on fiscal 2017, Scholastic’s children’s book publishing and distribution group had a 5% increase in sales from fiscal 2016, with revenue topping $1 billion. The increase was led by the trade division, where sales jumped 45% thanks to strong performances by J.K. Rowling’s Harry Potter and the Cursed Child and Fantastic Beasts and Where to Find Them. Other titles that sold well in the year included books in the Dog Man and Captain Underpants series. The Captain Underpants series did particularly well in the fourth quarter, ahead of the June release of the movie based on it.

The strong gains in trade offset declines in both book club sales (down 12%) and book fair sales (down 2%). Robinson said he expects these to increase in fiscal 2018. He attributed the drop in fair revenue to an intentional 9% reduction in the number of events, part of Scholastic’s plan to focus on generating more revenue per fair rather than relying on the sheer number of fairs. Robinson said he expects that strategy to lift sales this year. The book club business should see sales growth from new product, pricing, and merchandising strategies. Though overall sales in the trade division will fall in the year, Robinson said that, excluding Harry Potter titles, trade sales could increase in the mid-single digits.

Revenue in the education group increased 4% to $312.7 million, largely due to higher sales of literacy programs and classroom magazines. Sales in the international group rose 1% from fiscal 2016, to $376.8 million. While Scholastic saw gains from sales of new Harry Potter content in Canada and strong results from business in Asia, Australia, Canada, and the U.K., the company took a hit after discontinuing its software distribution business in Australia. It also had a soft overall performance in the Philippines and Thailand.

Scholastic Results by Segment, Fiscal 2016–2017

($ in millions)

Segment 2016 2017 Change
Children’s Book Publishing and Distribution $1,000.9 $1,052.1 5%
Book Clubs $268.0 $235.0 -12%
Book Fairs $520.0 $508.0 -2%
Trade $211.0 $307.0 45%
Education $299.0 $312.0 4%
International $372.0 $376.0 1%
Total Sales $1,672.8 $1,741.6 4%
Operating Income $67.6 $88.9 32%
Operating Margin 4.0% 5.1%