Shareholders of Scholastic (NYSE:SCHL), the world's largest publisher of children's books and related educational materials, have grown accustomed to disappointing first-quarter results. The company's fiscal year begins in the summer, so it's not exactly surprising that the period is seasonally weak. This year's first quarter is no exception, as earnings (or should I say losses) released this morning doubled to $50.3 million from $24.8 million the year before, on revenues that plummeted 32% to $323.7 million.
Those numbers, though, which reflect pre-tax severance charges of $3.6 million and $2 million, respectively, are not as bad as they might seem. Last year's revenues received a $170 million boost from the June release of Harry Potter and the Order of the Phoenix. Excluding the magic of Hogwarts, sales actually would have risen by 6%.
The educational publishing segment, which was a bright spot last quarter, again led the charge. Strong demand for the Read 180 learning program, designed to assist struggling readers, helped lift curriculum revenues by 25%, which in turn drove segment revenues 12% higher to $118.2 million. The division was the only one to finish the quarter in the black, with operating income that surged 43% to $22.2 million.
The results elsewhere were somewhat less encouraging. Without Harry Potter, children's book publishing revenues sank to $121.8 million, and losses widened to $65 million from $16.6 million. Sales in the international segment rose 10% to $71.8 million, thanks to favorable currency translation, offsetting a $4.5 million (27%) drop in media, advertising, and licensing revenues.
Scholastic's marketing efforts took a direct hit with the imposition of the federal Do Not Call List, which threatens the viability of the company's Direct-to-Home business. This sales channel represents roughly one-fifth of Scholastic's children's book sales. Other income sources, however, continue to thrive. Revenues from book fairs grew 5% last year, and book clubs had a banner year, with a 15% spike in sales.
Though Scholastic has done a good job of growing the top line, the company's 5.1% operating margins trail competitors such as McGraw-Hill (NYSE:MHP) and Pearson (NYSE:PSO) and are less than half of the publishing industry's 12.8%. Furthermore, management is forecasting that revenues, earnings, and free cash flow will decline this year. Against that backdrop, it is difficult to get excited about Scholastic's stock, at least not until Harry Potter and the Half-Blood Prince is released.
Make your predictions for next year's Quidditch Cup, and share your thoughts on what's in store for Harry next, in Sirius Black's Muggle Friends discussion board.
Fool contributor Nathan Slaughter owns none of the companies mentioned.
