12:08PM Scholastic Corp. (SCHL) 26.44 -7.22: Perhaps Professor Snape has cast a spell over this leading publisher of children's books, as company issued yet another profit warning after yesterday's close. Citing weakness in its Trade and School Book Clubs business; concern that state budgetary pressures would impact school spending on textbooks; and uncertainty over the economic and geopolitical environments, SCHL slashed its Q303 estimate to break-even. This compares to the consensus estimate of $0.31, which also happened to be what the company earned in the year-ago period.
Naturally, Scholastic also had to bring down its FY03 estimate. Company now sees earnings in the range of $1.85 to $2.15. Doing some quick math, that translates into Q4 earnings guidance of $1.11 to $1.41. The Multex consensus estimates for Q4 and FY03 were $1.40 and $2.49, respectively.
As if the scope of last night's warning weren't bad enough, Briefing.com reminds investors that this is the second such warning in a matter of months. Back in December the company lowered its FY03 guidance from the $2.65 to $2.95 range it saw in September to about $2.50. So in less than two months, SCHL has slashed its guidance by between 19% to 37%. Not the kind of action which breeds confidence in management. Reflecting the company's earnings woes, Scholastic's share price has plunged by 46% since early November (half of that decline has come today). Stock is now trading at its lowest level since mid-2000 (see chart) -- giving Moaning Myrtle plenty of company among shareholders.
Though additional losses are likely given the growing lack of confidence in the company's earnings outlook, one has to wonder whether Harry Potter will swoop in and eventually rescue the stock. Alongside its earnings warning, SCHL announced that J.K. Rowling's "Harry Potter and the Order of the Phoenix" will have an unprecedented first printing of 6.8 mln copies. Much-awaited book is due to be released on June 21, 2003. Company set a suggested retail price of $29.99. Note that the last book in the Harry Potter series - "Harry Potter and the Goblet of Fire" has sold over 16 mln copies, 3 mln of which were sold in the first 48 hours. All four of the Harry Potter books published by Scholastic in the US (hardcover and paperback) have sold nearly 80 mln copies.
Unfortunately, Potter and his mates can't do anything to save the balance of FY03. But Briefing.com contends that much of that bad news is already reflected in the share price. SCHL currently trading at 14.3x the low-end of its guidance, or well below its peers and the marketplace. Company's p/s ratio is also discounted to the industry and the market.
Investors will want to wait for the dust to settle before considering (re)entering the long-side, but in "Harry Potter and the Order of the Phoenix" there's certainly an upcoming catalyst to reignite buying interest. Meanwhile, SCHL is enjoying modest growth in its International unit and is busy cutting costs to offset disappointing sells elsewhere. In other words the ingredients are in place for a strong rebound in FY04. So while it may take a few weeks for investors to get over the shock of the earnings warning, and the resulting plunge in the stock price, Briefing.com expects traders to start nibbling at the stock near current levels in anticipation of a Potter-related bounce. Note the stock more than doubled in price around the release of the most recent Potter book in July of 2000. -- Robert Walberg, Briefing.com |
