Educational publisher Scholastic (NASDAQ:SCHL) reports its fiscal Q2 2007 earnings bright and early Tuesday 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? Eight analysts now follow Scholastic, which garners a pair of buy ratings, five holds, and a sell.

  • Revenues. On average, they expect to see sales rise 3% to $703 million.

  • Earnings. Profits are predicted to climb 7.5% to $1.71 per share.

What management says:
As we discussed in last quarter's Foolish Forecast, CEO Richard Robinson is on a mission to cut costs at Scholastic by reducing overhead, slashing promotional spending at School Book Clubs, and "integrating" editorial and marketing functions (whatever that means). In the subsequent fiscal Q1 2007 earnings report, Robinson reported that these efforts are on track.

Based on progress achieved so far, the company is predicting that by fiscal year-end, it will have generated $2.1 billion to $2.2 billion worth of revenue, earned $1.55 to $1.85 per share in profits, and generated $75 million to $85 million in free cash flow. Last quarter's weak results shouldn't be taken as much of an indication of how well Scholastic is progressing towards these targets, however, given the ultra-seasonal nature of this business. (Case in point: It's hard for the company to generate school book fair revenue when schools are closed in the summer.)

What management does:
Seasonal though the business is, a Fool can't help but notice that the firm's rolling results are not yet showing any improvement whatsoever. Despite expanding its gross margins last quarter, the firm's rolling operating and net margins continue to tumble.

Margins %

5/05

8/05

11/05

2/06

5/06

8/06

Gross

52.9

51.4

52.2

52.0

51.8

53.8

Op.

6.7

8.0

7.6

6.5

6.3

4.8

Net

3.1

4.2

3.9

3.2

3.0

2.0

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:
With no new Harry Potter book to help boost sales, Scholastic saw its sales tumble 14% on average over the last six months. Fortunately, cost of goods sold fell even farther, down 22%. Regardless, operating costs continued to rise, albeit just 1%. That inability to reduce costs in tandem with lower sales created the operating and net margin declines you see above.

Over on the balance sheet, we saw a similar story. Accounts receivable declined in tandem with sales (i.e. 14%). Here, the problem was with inventories, which -- like operating costs on the income statement -- defied the sales slide and rose a modest 2%.

So what to look for Tuesday becomes pretty easy to identify: With sales expected to rise, we'd like to see Robinson's promised operating efficiencies kick in and contribute a slower-than-sales increase in expenses. We'd also like to see progress on inventories, and watch those hoped-for sales begin to pull some books off the shelves and put them in the hands of paying customers.

Competitors:

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

What did we expect to see out of Scholastic last quarter, and what did it produce? Find out in:

Got an opinion on Scholastic? Don't keep it to yourself! Come on over to CAPS, the Fool's new, free community-intelligence stock-rating service, and let more than 17,000 fellow investors know how you feel.

Fool contributorRich Smithdoes not own shares of any company named above. The Fool's disclosure policy used to love those Scholastic book fairs.