Educational publisher Scholastic (NASDAQ:SCHL) reports its fiscal Q1 2007 earnings bright and early Thursday morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Seven analysts follow Scholastic, which garners one each for buy and sell ratings, plus five holds.
  • Revenues. On average, they expect to see sales fall 35% to $325.4 million.
  • Earnings. And for the firm's quarterly loss to more than double to $1.19 per share.

What management says:
Last quarter marked the end of a pretty bad year for Scholastic, one in which the firm was able to transform 10% sales growth into just 7% greater profits (on the plus side, at least the firm posted free cash flow in excess of reported profits). CEO Richard Robinson placed the blame for the weak year on weak sales, especially in the firm's School Book Clubs segment, along with higher operating costs.

Although you wouldn't know it from the analysts' expectations, reflected above, Robinson sees a much brighter fiscal 2007, however. Noting that School Book Fairs (as opposed to "Clubs") is experiencing "healthy growth," and that Trade Publishing has been doing particularly well, he predicted that "we will see stronger results in these businesses in fiscal 2007."

What management does:
Although Scholastic's gross margins aren't any worse (on a rolling basis, at least) than they were back in August 2005, the above-mentioned higher operating costs have pinched both the firm's operating margin and gross margins.

Margins %

2/05

5/05

8/05

11/05

2/06

5/06

Gross

53

52.9

51.8

52.2

52

51.8

Op.

6.2

6.7

8

7.6

6.5

6.3

Net

2.1

3.1

4.2

3.9

3.2

3
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In the last six months of fiscal 2006, Scholastic saw its selling, general, and administrative (SG&A) costs rise nearly 8% against a sales increase of just over 1%. Not good. Little wonder, therefore, that Robinson has made reducing costs his "top near-term priority." Parsing the firm's four-step program to accomplish this, here's what I get:

  • First, Scholastic aims to reduce "overhead spending by $40 million annually by fiscal 2008." My guess is that even if the firm accomplishes this goal, this will happen over the course of fiscal 2007, so don't expect to see SG&A drop $10 million this quarter, or the next, or the next.
  • Second, Scholastic aims to "simplify" its troublesome School Book Clubs business by, among other things, reducing the level of "promotion spending." This sounds good in theory, but I have to wonder whether such actions will lose the firm sales even as they reduce costs.
  • Third, the firm aims to improve product selection at its School Book Fairs business. Considering that Robinson already says this business is doing well, I'd expect we'll see the best results here on Thursday.
  • Fourth and finally, Scholastic aims to "tightly integrate editorial and marketing functions." My translation: Get ready for layoffs.

Competitors:

  • Educate (NASDAQ:EEEE)
  • LeapFrog (NYSE:LF)
  • Reader's Digest (NYSE:RDA)
  • Reed Elsevier (NYSE:ENL)

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Fool contributor Rich Smith does not own shares of any company named above.