If you have a child younger than high-school age, then you know about Scholastic Corporation (NASDAQ: SCHL), the world's largest publisher of children's literature and educational material, and the sponsor of the annual school book fair.
Not incidentally, Scholastic also is Harry Potter's publisher, which one would think would be a fairly lucrative revenue stream. Apparently not. Ellie Berger has been named President of Trade for Scholastic in part to figure out how to turn over a new (and hopefully profitable) leaf for Scholastic. Despite record-setting revenue in 1Q FY 2008, which included the release of Harry Potter and the Deathly Hallows, Scholastic still managed to post a loss. On revenues of $587 million, a 75% increase, Scholastic posted a net loss of $2.8 million for the quarter. But this loss is a huge improvement over the $47 million net loss a year earlier.
Harry Potter revenue alone amounted to $240 million in the quarter, part of $342.5 million in children's book publishing revenue. This represents a 200% increase. In many other businesses, I would wager that a 200% increase in revenue would generate at least a modest profit. Educational publishing recorded revenues of just under $128 million. International revenue totaled $100 million, up 26%, good but still not enough to cover a small operating loss of $2.7 million. Scholastic is working hard to reduce corporate overhead and inventory levels, and is having a measure of success.
So what is dragging down earnings? Might it be the fact that Scholastic increased its debt load by almost $91 million during the past year in order to accelerate its $200 million share repurchase program? Is this really the best use of funds?
Scholastic is sticking with its fiscal year guidance of total revenues in the $2.3-2.5 billion range, with earnings of $2.35-2.85. Don't know how much to read into that forecast.
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