The education and publishing company is cutting costs, expanding its website content in response to school closures and is increasing its presence in international markets.
Scholastic recently released content on its websit which supports learning at home while U.S. schools are closed due to coronavirus. The educational material has resonated with parents and teachers, according to its third-quarter results. They are currently highly reliant on Scholastic’s online resources to educate children from home during what may prove to be an extended period of time.
The company’s increasing use of online content could strengthen its position in the home learning market, help diversify its operations and reduce its overall risk. Scholastic’s long-term market position could also be strengthened by its willingness to aid parents and teachers during a challenging period for the education industry. This may widen its economic moat through boosting its levels of customer loyalty.
Scholastic plans to increase its presence in international markets such as Asia. For example, it currently offers teacher training across 200 franchised English language schools in China and Korea, as well as online learning across the continent. This could increase the diversity of the business and reduce its reliance on its main market.
The company reported a slowdown in sales of its educational books in Asia due to the spread of coronavirus in the third quarter. However, it experienced a marked improvement in its sales performance in the region in the latter part of the quarter as the number of coronavirus cases in Asia moderated significantly. This may lead to an improvement in Scholastic’s operations in Asia in upcoming quarters, which could catalyze its financial performance.
The company is using an increasing amount of data on its customers’ past transactions to make personalized recommendations to them. This could increase the amount that its customers spend on average.
In addition, Scholastic reported that it experienced high demand for its books and education resources. For example, its books recorded a 17% increase in sales compared to the prior-year quarter. It expects this trend to continue once schools reopen later in the year, which could strengthen its financial outlook.
The Covid-19 pandemic has caused schools in many parts of the U.S. to close. This could negatively affect Scholastic’s near-term financial outlook, since its book clubs and book fairs would normally operate at between 30,000 and 40,000 schools during its fiscal fourth quarter. School closures have taken place in the company’s most profitable quarter of the year, which may mean they have a large impact on its bottom line.
In response, the business is seeking to reduce costs. For example, it has ended all non-essential business travel and functions among its employees. It is also reducing its staffing costs through hiring freezes and furloughs. In addition, the company is deferring non-essential investment, delaying its long-term projects wherever possible and managing its inventory more efficiently. These measures could help to offset a portion of its anticipated sales decling in the fourth quarter.
Scholastic has $265 million in cash and access to loans of up to $375 million should they be required. Its interest coverage ratio of 25.8 and debt-to-equity ratio of 8% suggest the business is in a strong financial position to overcome the challenges posed by the coronavirus.
Market analysts expect the company to produce a 31% increase in its earnings per share in fiscal 2021. Its forward price-earnings ratio of 25.3 suggests it offers a margin of safety given its growth potential.
Disclosure: The author has no positions in any stocks mentioned.
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