Pearson Takes a Hit in North America

Publisher Pearson updated the market yesterday, calling out weakness in its educational division along with cost concerns.

Jan 24, 2014 at 9:11AM

If you happen to be the head of Pearson (NYSE:PSO) investor relations, let me just say two things. First, maybe don't do updates anymore -- that didn't seem to go well. Second, sorry for the rough day. Pearson released a trading update yesterday, and the market was none too pleased. Shares were down 8% during the day as investors fled like rats from -- well, from anything but a grain silo, I guess. The update called out weakness in the company's U.S. educational publishing segment, the bedrock of the business.

Bad sales for Pearson is bad news
In addition to the sales margin issues, Pearson tacked on an increase in its costs as it struggled to make a dent in the digital market. Restructuring costs are a large chunk of the spending, with the company spending $216 million net on turning the business around. That restructuring has focused largely on getting the company's digital business running smoothly -- a goal that is not yet complete.

On the sales front, Pearson called out the Common Core standards and lower higher-education enrollment as anchors on the company's North American business. In addition to the sales pressure, investments in the North American side of the business put pressure on margins. In short, things are looking rough.

Competitors take advantage -- kind of
Companies like Scholastic (NASDAQ:SCHL) haven't had great runs either, but recently, there've been some new strengths that have come to light. In December, Scholastic announced its second-quarter results, sending the stock straight up. The company's educational technology and classroom materials divisions both saw increases in revenue and operating margin. 

If Scholastic can keep up the good work, it could have a much better 2014 compared to its 2013. For both companies, the new Common Core framework offers an opportunity to sell new material to states. Unfortunately, continuing budget pressure, as called out by Pearson, will make that a harder sell. Still, in the long run, educational sales should pick back up.

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