Best-Selling Titles Pace Scholastic's Results During a Seasonal Lull

Children's education, publishing, and media giant Scholastic Corporation (NASDAQ: SCHL) recorded moderate revenue improvement in its traditionally loss-generating fiscal third quarter, as results released on March 21 revealed. Scholastic was able to decrease its year-over-year operating loss while launching a promising new product extension during the last three months. As we walk through these and other salient details of the quarter directly below, note that all comparative numbers are presented against the prior-year quarter (the fiscal third quarter of 2018).

Scholastic: The raw numbers

What happened this quarter?

  • Scholastic's top line received a slight lift due to the adoption of new accounting standard ASC 606 in the current fiscal year. Under the previous revenue recognition standard, revenue for the quarter would have improved just 2%.
  • The company's largest segment, its children's book publishing and distribution business, enjoyed revenue expansion of 8% as both new best-sellers and a strong backlist exhibited sales strength.
  • Management cited best-selling book series for the boost in segment revenue. These included new Harry Potter-related material coinciding with the 20th anniversary of the first Harry Potter novel published in the U.S., the Dog Man book series by Dav Pilkey, and evergreen Clifford the Big Red Dog titles. The positive effect of school book fairs held near the end of the quarter also contributed to higher revenue.
  • Scholastic's international segment recorded a 2% drop in revenue, due to 3 percentage points of unfavorable currency translation, which offset higher trade publishing sales in the U.K., the Australia/New Zealand region, and Asian markets.
  • Education segment revenue increased $0.8 million to $60.3 million, led by sales of the in-class, small-group reading platform Scholastic Edge.
  • The company began collecting sales tax on book club sales due to the Supreme Court's decision on the Wayfair online sales tax case. Costs to implement sales tax collection weighed on net income slightly in the third quarter, according to management.
  • Scholastic introduced its new comprehensive K-6 literacy program, Scholastic Literacy. Management appears confident that this new curriculum platform will materially benefit revenue. A February launch marked the beginning of a rather long sales cycle for this product; the company expects to realize its first revenue from Scholastic Literacy in 2020.
  • In what is typically a loss quarter, as it coincides with the school winter break period, Scholastic generated an operating loss of $21.4 million -- a slight improvement over the prior-year quarter's $23.7 million loss. While gross margin slipped roughly 1 percentage point to 50.8%, the organization largely controlled overhead expenses, leading to the slimmer loss.
  • The wide difference in net earnings between periods shown in the table above stems from a $40 million charge to the company's defined benefit pension plan, which it booked in the fiscal third quarter of 2018.

What management had to say

In the company's earnings conference call, CEO Richard Robinson discussed one of Scholastic's most vibrant opportunities: licensing its content to streaming platforms. Expanding partnerships with streaming powerhouses may provide a key to faster expansion for this moderate-growth company, as Robinson hinted:

Looking forward

Scholastic affirmed its previous full-year fiscal 2019 revenue guidance of $1.65 billion to $1.70 billion. However, the effects of the sales tax implementation, and higher labor, fulfillment, paper, and printing costs are expected to pressure the bottom line in the final quarter of the year. As Scholastic heads into its traditionally busy fourth quarter, management anticipates that fiscal 2019 diluted earnings per share, with the exclusion of one-time items, will land at the low end of the previously projected range of $1.60-$1.70.

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