Why Scholastic Earnings Could Be Scary

Scholastic (SCHL 0.27%) will release its quarterly report on Thursday, and investors are preparing for substantial losses from the publisher of children's books and educational materials this quarter. But for those with a longer time horizon, Scholastic earnings could end up looking a lot better in the near future if the company can execute on its long-term strategy.

Scholastic is a well-known company within school, providing a wide variety of books, magazines, learning materials, and technology. It also has a media unit that produces programming and digital content for distribution via television, video, and the Internet. Let's take an early look at what's been happening with Scholastic over the past quarter and what we're likely to see in its report.

Stats on Scholastic

Source: Yahoo! Finance.

Will Scholastic earnings cut their losses this quarter?
Analysts have had mixed views in recent months about Scholastic earnings. They've narrowed their loss estimates for the August quarter by about 10%, but they've slashed their full-year fiscal 2014 projections by more than 20%. The stock hasn't moved much, rising about 4% since mid-June.

Scholastic has been riding on a pretty big wave in recent years, as the company has benefited first from having U.S. publishing rights to the prominent Harry Potter books and then from the blockbuster Hunger Games trilogy. Although Lions Gate (LGF-A -2.70%) has profited from its first Hunger Games movie and hopes future installments will be equally successful, Scholastic also expects to boost sales of books each time a new film gets released in the next few years. Yet as slowing growth in its most recent earnings release showed, those boosts can't keep Scholastic going forever.

More generally, Scholastic is dealing with the same trends that have hurt other publishers. As digital media replace printed books, magazines, and newspapers, Scholastic has to defend itself against the trend toward disintermediation and direct delivery of content. At the same time, though, Scholastic has tried to find partners to help it adapt. In August, Netflix (NFLX -1.56%) and Scholastic announced a distribution agreement to allow Netflix to stream Scholastic programming in the U.S., Canada, the U.K., Ireland, and Latin America.

Scholastic is also relatively small within its industry. Behemoth Pearson (PSO -1.56%) also operates in the educational publishing and media arena and has substantial financial resources with which to go up against Scholastic and their industry peers. Pearson has also done a good job of adapting to the opportunities from online learning, putting Scholastic in a position to have to respond even more aggressively to retain its current position in the industry.

In the Scholastic earnings report, watch to see how much the company seems dependent on its blockbuster hits and how well it's doing coming up with a future pipeline of similar successes. Even though red ink this quarter shouldn't worry investors too much, longer-term trends could turn uglier if Scholastic isn't able to keep innovating.

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