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Scholastic Gets Poor Marks from Investors

Shares of the educational publisher fell Thursday after it posted disappointing third-quarter results

Scholastic (SCHL) managed to narrow its loss in its typically unprofitable fiscal third quarter -- but not as much as investors had hoped. The children and education book publisher's shares plunged in value on Mar. 22 after news of its quarterly results and full year forecast.

The company lost $7.7 million in the quarter ended Feb. 28, compared to a loss of $15.5 million in the prior year period. "Results in the third quarter were generally positive," CEO Richard Robinson said in a press release March 22.

But Robinson's company lost 18 cents per share, while the consensus forecast had been for 8 cents loss according to Thomson Financial. Investors sold the stock 12.9% in late trading on the Nasdaq March 22.

The company faces competition from higher-education publishers like John Wiley & Sons (JW.A) and The McGraw-Hill Companies (MHP; the parent company of While Scholastic has managed to reach its young customers through school-based fairs and clubs, most of the books sold through such channels are published by other companies. "The economics of Scholastic's business are not enticing," Morningstar analyst Michael Corty said in a research note Mar. 16.

Scholastic, which like other publishers must deal with costs such as royalty advances and preproduction, has been pushing to grow sales further by spending on promotions. And revenue did grow to $497.0 million during the February quarter, up 2% compared to the same period last year. This comes before J.K. Rowling's Harry Potter and the Deathly Hallows, the seventh and final book in the best-selling Harry Potter series, is up for release on July 21.

Scholastic hired Maureen O'Connell as chief administrative officer and CFO in mid-January, tasking her with the goals of improving profits and cutting costs.

But Wall Street players might have gotten their hopes up a little too high. Scholastic now expects fiscal year 2007 earnings between $1.40 and $1.60 per share on revenues of $2.1-$2.2 billion. The consensus estimate had been for $1.74 per share on $2.19 billion revenue, according to Thomson.

Standard & Poor's equity analyst James Peters cut his estimate on the company's earnings for fiscal 2007 (ending May) by 24 cents to $1.49 per share and his target price on the stock by $4 to $33. (S&P, like, is owned by The McGraw-Hill Cos.)

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