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What’s New at Scholastic?

Lisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When I was a kid I waited with anticipation each year for the annual Scholastic (NASDAQ: SCHL) Book Fair held in my school’s library. Dozens of books would be on sale for reasonable prices. I enjoyed books like the Encyclopedia Brown series by Donald J. Sobol (I’m sorry to say he passed away this month, July 11, 2012). A search of the Scholastic website gave me 122 items related to Encyclopedia Brown which seems to illustrate its longevity and popularity for others as well. As a kid I also loved receiving my Weekly Reader, and as I was researching for this article I was excited to see that Scholastic still offers this product line at a reasonable price; a 32 issue subscription for a second grader is currently only $4.29. When I was a middle school teacher my students also benefited from Scholastic’s Book Clubs which allowed us to compile book orders and earn rewards in the form of free books and materials for our classroom. As I shifted to my role as instructional technologist I valued the quality software offered by Tom Snyder Productions which was acquired by Scholastic during FY 2002. While I’ve illustrated several sentimental reasons for liking Scholastic as a company, I recall a blog titled The Perils of Nostalgic Investing by William Bias that tells me that research is required to determine whether I like Scholastic as an investment. So, let’s take a closer look…

If you haven’t figured it out by now, Scholastic is at the top when it comes to Children’s Book Publishing and Distribution. This segment accounted for 48.4% of their revenue during FY 2011 (which ended May 31). During FY 2011 earnings from other company segments included: Educational Publishing (22.5%), Media, Licensing and Advertising (5.8%), and International (23.3%). As you can see in Figure 1 this distribution of revenue has been fairly consistent during the past four years (FY 2008 to FY 2011).

<img src="/media/images/user_13334/scholastic-figure1_1_large.jpg" />

Figure 1. Percentage of Revenue Earned by Segment (compiled from Annual Reports)

Scholastic released fourth quarter earnings on July 19 for FY 2012. Table 1 shows that earnings soared during the fourth quarter. As other Motley Fool bloggers have noted, this was expected and largely due to the success of The Hunger Games movie (from Lions Gate Entertainment) which boosted book sales of Suzanne Collins’ trilogy for Scholastic. Interestingly, a closer look by quarter actually shows marked improvements during each quarter of FY 2012 compared to FY 2011, so Scholastic was already having a pretty good year before the movie was released. I’ll talk more about other new things they are doing a little later.

Table 1. Revenue (in millions) by Quarter (compiled from annual and quarterly reports)

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Q1</strong></p> </td> <td> <p><strong>Q2</strong></p> </td> <td> <p><strong>Q3</strong></p> </td> <td> <p><strong>Q4</strong></p> </td> <td> <p><strong>Total</strong></p> </td> </tr> <tr> <td> <p><strong>FY 2008</strong></p> </td> <td> <p>520.1</p> </td> <td> <p>676.9</p> </td> <td> <p>437.7</p> </td> <td> <p>524.4</p> </td> <td> <p>2159.1</p> </td> </tr> <tr> <td> <p><strong>FY 2009</strong></p> </td> <td> <p>276.4</p> </td> <td> <p>653.3</p> </td> <td> <p>423.6</p> </td> <td> <p>496.0</p> </td> <td> <p>1849.3</p> </td> </tr> <tr> <td> <p><strong>FY 2010</strong></p> </td> <td> <p>315.6</p> </td> <td> <p>660.1</p> </td> <td> <p>398.8</p> </td> <td> <p>538.4</p> </td> <td> <p>1912.9</p> </td> </tr> <tr> <td> <p><strong>FY 2011</strong></p> </td> <td> <p>290.9</p> </td> <td> <p>675.7</p> </td> <td> <p>393.7</p> </td> <td> <p>545.8</p> </td> <td> <p>1906.1</p> </td> </tr> <tr> <td> <p><strong>FY 2012</strong></p> </td> <td> <p>318.0</p> </td> <td> <p>685.3</p> </td> <td> <p>467.0</p> </td> <td> <p>678.5</p> </td> <td> <p>2148.8</p> </td> </tr> </tbody> </table>

Of course, there is also a lot of expense involved in the book publishing and distribution business and just like our own pay checks it’s important to compare gross and net income before getting too excited. Table 2 shows Scholastic’s net income for each quarter from FY 2008 through FY 2012. Here, it’s important to note the seasonal shifts. The first quarter occurs during the summer months when school is out of session (June-August). Scholastic is in preparation mode during this time so expenses outweigh earnings. My dad always told me you have to spend money to make money, so that’s what we see at play here. By the second quarter (September-November) school is in full swing and we get a glimpse of whether “what’s new at scholastic” along with what’s tried and true is going to pay off. The third quarter includes holiday breaks and winter months (December-February) that contribute to things slowing down. Then, the fourth quarter makes or breaks the year as things pick up again during the final months of school (March-May).

Table 2. Net income (in millions) by Quarter (compiled from annual and quarterly reports)

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Q1</strong></p> </td> <td> <p><strong>Q2</strong></p> </td> <td> <p><strong>Q3</strong></p> </td> <td> <p><strong>Q4</strong></p> </td> <td> <p><strong>Total</strong></p> </td> </tr> <tr> <td> <p><strong>FY 2008</strong></p> </td> <td> <p>-2.8</p> </td> <td> <p>75.6</p> </td> <td> <p>-79.3</p> </td> <td> <p>-10.7</p> </td> <td> <p>-17.2</p> </td> </tr> <tr> <td> <p><strong>FY 2009</strong></p> </td> <td> <p>-49.1</p> </td> <td> <p>43.1</p> </td> <td> <p>-36.0</p> </td> <td> <p>27.7</p> </td> <td> <p>-14.3</p> </td> </tr> <tr> <td> <p><strong>FY 2010</strong></p> </td> <td> <p>-23.0</p> </td> <td> <p>55.5</p> </td> <td> <p>-5.6</p> </td> <td> <p>29.2</p> </td> <td> <p>56.1</p> </td> </tr> <tr> <td> <p><strong>FY 2011</strong></p> </td> <td> <p>-35.2</p> </td> <td> <p>74.9</p> </td> <td> <p>-25.1</p> </td> <td> <p>24.8</p> </td> <td> <p>39.4</p> </td> </tr> <tr> <td> <p><strong>FY 2012</strong></p> </td> <td> <p>-27.1</p> </td> <td> <p>82.8</p> </td> <td> <p>-3.2</p> </td> <td> <p>57.0</p> </td> <td> <p>109.5</p> </td> </tr> </tbody> </table>

As shown in Table 2, Scholastic more than doubled their fourth quarter net income (from $24.8 million to $57.0 million) and ended the year up $70.1 million (from $39.4 million during FY 2011 to $109.5 million during FY 2012). Drawing from their presentation, success during FY 2012 can be attributed to multiple factors in addition to The Hunger Games, including: increased segment and trade sales, growth in book fairs, sales from book club promotions, alignment of new Common Core State Standards with technology products, and international growth. Thinking about the future, with consideration for FY 2013 and FY 2014, Scholastic is looking to new book releases for its next best sellers following in the steps of The Hunger Games and Harry Potter. They anticipate “modest growth” in book fairs and in programs aligned with new Common Core State Standards. International growth is also expected to continue with the launch of “new curriculum programs for Asian and emerging markets.”

Perhaps my favorite, as far as what’s new at Scholastic, is their new eReader app called Storia which released during spring 2012. Storia comes with five free eBooks and is available for Windows PC and Apple’s (NASDAQ: AAPL) iPad with availability for the Android tablet listed as coming soon. The Scholastic store is said to contain more than 2,000 eBooks with 350 including interactive content by fall. A downside to this release, assuming timing is everything, is that Reading Rainbow released their new app for the iPad on June 20, 2012. For a monthly subscription price of $9.99, Reading Rainbow provides access to a library of 150 interactive books for ages 3-9. Storia eBooks are available for ages 3-14. With the overlap in market and goal, Reading Rainbow will be competition for Storia and may hurt some of the growth potential that Scholastic was betting on with their development of eBooks. Of course, both of these releases should be good for Apple, further strengthening their position as a provider of apps for Education. The Scholastic apps page shows their additional book apps and games available for mobile devices.

My least favorite “what’s new at scholastic” comes from googling the phrase and receiving top three results that go to various sections of Scholastic’s outdated blog site, where the most recent post was from October 7, 2011 and the most prominent was from April 29, 2009. While it may seem like a small thing, for me it’s a disappointment, especially since Scholastic is trying to use technology as a building block for future growth.

On the bright side, there are actually other new and coming things going on at Scholastic that I was able to find by browsing. For example, Weekly Reader is “rebuilding and improving” their online teacher center and will be providing “new interactive digital editions, videos, teacher’s guides, and more.” The Weekly Reader homepage promises to be back online soon and boasts a countdown clock that indicates to the second when they expect to return (12 D: 08 H: 37 M: 01 S from now as of 3:20 PM EST on July 19, 2012). The Book Clubs’ page is currently splashed with a note for teachers and parents promoting the availability of Storia and looking forward to August and the beginning of school. As mentioned previously, Scholastic also stands ready with resources aligned to the new Common Core State Standards for English Language Arts and Math and they are expecting continued growth especially in Asia. There will also be a few birthdays during FY 2013: Goosebumps turns 20 and Clifford the Big Red Dog turns 50. Related promotions should yield financial results.

From a philosophical standpoint I like Scholastic a lot. I like what they do and what they stand for. This company has a Global Literacy Campaign with a Reading Bill of Rights (launched as part of their 90th anniversary celebration during FY 2010). What’s not to like about that? However, from a financial standpoint I am hesitant. As noted by Chairman, President, and CEO Richard Robinson, Scholastic is striving to “strengthen” the business. They have managed to increase cash flow, improve long-term investments, and decrease debt, but Scholastic’s outlook for FY 2013 is expected to fall between FY 2011 and FY 2012 results (closer to FY 2011 in all likelihood). Further analysis of Scholastic’s Stock Price Performance Graph from the FY 2011 Annual Report shows that Scholastic has consistently underperformed the market for the last five years. In other words, $100.00 in Scholastic stock bought in May 2006 equaled $107.77 by May 2011. Similarly, $100 on the NASDAQ Composite Index would have grown to $130.13. During the same five years, results were mixed with Scholastic underperforming the Peer Group during three of the five years with the final result moving the Peer Group from $100.00 in May 2006 to $126.52 during May 2011. I don’t see anything that makes me think this trend is going to change significantly anytime soon, but I will keep watching. If you’re interested in Scholastic as an investment, consider tracking the success of their new eBook initiative. Results for the second quarter of FY 2013 should provide a glimpse at how that initiative is going.  


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