Published Online: March 12, 1997

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Scholastic Stock Tumbles After Sluggish Sales

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Enter almost any public school in the country, and it is not hard to see the presence of the Scholastic Corp.

In the classroom, students are ordering the latest Goosebumps or Animorphs books from one of the company's book clubs.

The teacher is handing out copies of Junior Scholastic or one of 33 other classroom magazines targeted at young people.

And in a growing number of schools, Scholastic's new literacy curriculum is replacing reading programs from other educational publishers. Teachers are going on line on the Scholastic Network to share tips with other educators or to send electronic mail to authors.

New York City-based Scholastic expects revenues to exceed $1 billion in its current fiscal year, which ends May 31.

But stockholders of the publicly traded company got a scare late last month, when an announcement about sluggish sales of some Goosebumps titles touched off a price drop in Scholastic's shares.

Scholastic said sales of its older Goosebumps titles had slowed "a bit sooner than we had planned," as Richard Robinson, its chairman and chief executive officer, put it.

Wall Street was spooked by the announcement, and Scholastic's stock took a dive on Feb. 20, declining more than 40 percent. It closed that day at $36.75, down $24.75 from the previous day's close of $61.50. The stock had traded as high as $78.50 over the past year on the Nasdaq market, but was trading near $32 last week.

Situation Debated

Analysts expressed concern about the slowdown in Goosebumps sales and about Scholastic's weak book club sales.

"Goosebumps peaked about a year earlier than [Scholastic] had anticipated," said Alexander Paris Jr., a vice president and senior investment analyst at the Chicago-based Barrington Research Associates Inc. "Because it peaked early, the company's costs are out of whack."

Scholastic said it was putting $13 million on reserve to cover unanticipated book returns. The company was expecting to post a loss for its fiscal third quarter, which ended Feb. 28.

Mr. Paris said the stock dive was so sharp because many analysts believed Scholastic was slow to report the expected bad news about soft book sales. The company had given no indication in December discussions with analysts that something was amiss.

"Because of the lateness of getting this news to [Wall Street], it leads us to believe they don't have good controls on their business," Mr. Paris said.

But company officials stress Scholastic's diversification and say the company is not dependent on a single hot product like the Goosebumps series, the scary novels for young people by R.L. Stine.

"With Goosebumps, we had a publishing phenomenon that no one could have predicted," Ernest B. Fleishman, Scholastic's senior vice president for education and corporate relations, said last week. "But we also know successful companies, over time, can't depend on one property."

Mr. Fleishman said Scholastic is on a solid financial footing and will be profitable for the year. Last year, it had net income of $32 million on revenues of $929 million.

"We are extremely profitable, and we expect a revenue increase in the vicinity of 8 percent to 10 percent," he said.

Books Over Magazines

Scholastic started in 1920 as a publisher of classroom magazines. But last year it derived just 9 percent of its revenues from magazine publishing, which includes not only classroom titles but also magazines for educators such as Scholastic Coach and Electronic Learning. (See box, this page.)

The company gets more than 70 percent of its revenues from children's book publishing, book clubs, and book fairs. The Goosebumps series, which includes 53 titles and more than 150 million copies in print, is sold not just in classrooms but in bookstores and other retail outlets as well.

Scholastic says new Goosebumps titles are still popular, spawning licensed merchandise and a popular weekly television show on the Fox network. Of course, some critics snipe at Mr. Stine, calling him a pulp fiction Stephen King for the middle school set.

And some parents have argued that the use of the books in schools is inappropriate.

The next biggest seller in Scholastic's line of children's books is the Animorphs--five youngsters who can turn into any animal they touch. "Animorphs is selling faster than Goosebumps did when it was launched in trade," Mr. Fleishman said.

New Place in School

One major new direction for Scholastic in recent years was its plunge into the competitive world of core instructional publishing.

The company entered the elementary market a few years ago with Science Place, a K-2 science program produced in partnership with science museums. And it has big expectations for its reading program, Literacy Place.

"Scholastic is known as a reading company, so it was time to enter the core instructional market," Mr. Fleishman said.

The company has invested more than $75 million in developing the reading program and has focused its initial sales on states such as California that are adopting new curricular materials in reading.

The series has been highly rated by state education officials in California and is said to be on the short list for adoption by a number of districts in that state.

Charles Emerson, the schools superintendent in Loomis, Calif., said the 2,000-student district adopted Literacy Place after evaluating it since last fall. "It has an extremely strong balance between skills such as phonics and phonemic awareness and the quality of its literature," he said.

The company is also making a big bet on its on-line service, the Scholastic Network. The computer service moved last fall from America Online to the Internet's World Wide Web, but it remains a subscription-based service. About 10,000 customers, either individuals or schools, are paying for access to classroom projects, games, and other learning tools.

Meanwhile, Scholastic has not abandoned its roots in publishing classroom magazines. Circulation for the company's titles is more than 7 million and growing, despite new forms of current-events media such as Channel One, the classroom television show owned by K-III Communications Corp., and Time Warner Corp.'s Time for Kids magazine.

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