Pearson Nine-Month Sales Decline on U.S. Courseware Slump

  • Education provider says retailers cautious on textbook buying
  • Stock drops after revenue in North America shrinks 9%

Pearson Plc, the world’s largest education company, reported a 7 percent decline in comparable sales for the first nine months of the year amid a bigger-than-expected slowdown in the key U.S. market for textbooks. The stock dropped.

Sales excluding the effect of currencies and one-time items declined because of falling testing revenue in the U.S. and U.K. and weaker demand for higher-education courseware in North America, the London-based company said in a statement on Monday. Revenue in North America shrank 9 percent.

“Sales in our largest business, U.S. higher education, are down due to cautious buying patterns from key retailers,” Pearson Chief Executive Officer John Fallon said on a conference call with reporters. “This is an industrywide issue” and is expected to be a temporary phenomenon over the next six to nine months, Fallon said.

Pearson gets almost all its profit from education after selling the Financial Times and its half of the Economist Group last year. The company announced a reorganization in January that includes 4,000 job cuts and higher investment in digital services and emerging markets, as it seeks to address sluggish demand for textbooks, dwindling U.S. college enrollments and declines in its testing business.

The stock lost as much as 11 percent, the biggest intraday drop since July 29, and was down 10 percent to 749.50 pence at 10:50 a.m. in London.

The decline in North American sales was bigger than what Pearson projected in June, Jonathan Helliwell, an analyst at Panmure Gordon & Co. in London, said in a research note. “Underlying trading is worse than expected,” Helliwell said.

College book stores are having to get more savvy with their inventory management as they face increasing competition from e-commerce retailers selling and renting books, as well as digital product offerings, Fallon said. Those trends, combined with open education resources accessed by students, are expected to be a modest negative drag on Pearson, he said.

Helping to offset that, students are increasingly buying directly from Pearson and the company is striking partnerships with universities for digital course offerings, Fallon said.

The swing factor is what happens to U.S. college enrollments, Fallon said. They have declined in the past five years, and typically fall when the country’s economy is doing well as there are more employment opportunities, according to the company. Fallon said he continues to expect enrollments to stabilize over the next few months and then to grow again.

While official U.S. data on enrollments won’t come out until December, anecdotal evidence suggests they will be little changed to down 1 percent in 2016, driven largely by pressure in the for-profit higher-education sector, Pearson Chief Financial Officer Coram Williams said on the call.

Pearson said trends in U.S. higher education started improving in September, and that has continued into October. The company reiterated its 2016 and 2018 earnings targets and said that if current exchange rates persist until the end of the year, it may boost its per-share guidance for 2016 by about 4.5 pence to a range of 54.5 pence to 59.5 pence.

The company said it is managing discretionary costs tightly in the face of challenging markets. It is also getting a boost from a stronger dollar, as about two-thirds of its revenues are priced in the U.S. currency.

Still, the shift to online learning is giving some analysts concerns that Pearson’s problems aren’t temporary.

“While earnings guidance has been reiterated, the continued weakness in top-line trends increasingly makes Pearson look like a newspaper-style story, prone to a de-rating,” Ian Whittaker, an analyst at Liberum Capital Ltd. in London, said in a research note.

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