Scholastic Shares Fall as Lower Sales Break the Spell of Harry Potter's Success

Book publisher misses on earnings, revenue

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Sep 21, 2017
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Well-known children’s book publisher Scholastic Corp. (SCHL, Financial) reported results for the first quarter of fiscal 2018 before the opening bell on Sept. 21.

The New York-based company posted an adjusted loss per share of $1.67, wider than the expected loss of $1.34 per share. Revenue of $189.2 million missed expectations of $208.3 million and declined from $282.7 million in the year-ago quarter.

Following the announcement, shares fell 5% in premarket trading to open at $34.56.

The trend in the book publisher’s revenue growth over the past decade is illustrated in the graph below.

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Scholastic said it was expecting a loss in its children’s book publishing and international segments as it could not match the success of J.K. Rowling’s “Harry Potter and the Cursed Child, Parts One and Two,” which was published in July 2016 and was the best-selling book in North America last year. A new paperback version of the book was released during the quarter. In addition, the company announced earlier this month “Harry Potter: A Journey Through a History of Magic,” a companion book to an exhibition in London, will be published on Oct. 20.

The company also noted it normally records a loss in the first quarter as most U.S. schools are not in session.

Despite the loss from Harry Potter, Scholastic said strong performance from other titles partially offset the decline, including Dav Pilkey’s “Dog Man: A Tale of Two Kitties,” Lauren Tarshis' “I Survived the American Revolution, 1776” and Aaron Blabey's “The Bad Guys in Attack of the Zittens.”

In a statement, Chairman, President and CEO Richard Robinson commented on the company’s dynamic with its authors.

“The tremendous success of Dav Pilkey's ‘Dog Man’ underscores again Scholastic's ability to work with our authors to build franchises that find audiences for generations,” he said. “On the 20th anniversary of Dav's ‘Captain Underpants’ series, he has found a new creative direction with ‘Dog Man’ that is reaching millions of readers in our trade and school channels. This is the power of Scholastic and what differentiates us from other publishers.”

He went on to say the company’s titles are on best-seller lists around the world and expects to continue their success through new Harry Potter titles leading up to the franchise’s 20th anniversary in the U.S.

Scholastic, which was founded in 1920, will be celebrating its 100th anniversary in 2020. As a result, Robinson introduced the Scholastic 2020 plan, which is intended to drive profitability and sales growth over the next three years.

"Scholastic 2020 is a performance management structure that will leverage our ongoing strategic technology investments to provide more comprehensive customer data to improve sales and marketing efficiency, as well as better information in our manufacturing, inventory management, supply chain and transportation areas of the business to drive process improvements and reduce distribution costs,” Robinson said.

As part of this initiative, the company will implement Oracle enterprise resource planning (ERP) software in January 2018, install an Oracle Transportation Management system over the course of the year and introduce a new customer relationship management (CRM) system next June.

“Most important, Scholastic 2020 provides a framework for identifying and scheduling the specific tasks needed each week, month and quarter to reach our goals for improved profitability over the three-year period," Robinson said.

In regard to fiscal 2018 guidance, the company reiterated its outlook of $1.65 billion to $1.7 billion in revenue and EPS from operations between $1.20 and $1.30.

Among the gurus invested in Scholastic, Chuck Royce (Trades, Portfolio) has the largest holding with 6.13% of outstanding shares. Barrow, Hanley, Mewhinney & Strauss, Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) are also shareholders.

Disclosure: I do not own any stocks mentioned.