No goose bumps for
shareholders this time around.
The book publisher's shares have jumped about 40% over two months ahead of Saturday's widely heralded release of
Harry Potter and the Goblet of Fire
, approaching a 52-week high. The book is a guaranteed success, with 3 million copies ordered and eager buyers preparing to queue up at booksellers across the country.
But the really good news for investors is that Scholastic appears poised to avoid a repeat of 1997's
fiasco, which saw that long-running and highly successful series turn into an inventory nightmare that wiped out earnings and punished the once-highflying stock. This time around, the company's expanded product line and conservative retail management should help sustain the stock, which despite the Potter-inspired gains remains about 20% below its 1996 high.
Older and Wiser
Scholastic is "highly unlikely" to see a repeat of the
debacle, says Rudolph Hokanson, an analyst with
CIBC World Markets
who rates the stock a buy. "
are two different kinds of properties, and Scholastic is wiser," Hokanson says.
Scholastic executives have broadened the company, making it less of a one-product play. Scholastic is "more diversified," agrees Ellen Hazen, a research analyst for
Massachusetts Financial Services
, which holds Scholastic shares. That means that when the Potter craze dies down, the company should still be in good shape.
"I think that they know how to design a product or how to market products appropriately so that they develop a strong brand loyalty with their customer," says Hokanson, whose firm hasn't underwritten for Scholastic. "Scholastic understands who its customers are, what community they're in, and what context they're in."
While Scholastic's stock has risen recently, closing at 62 1/8 Tuesday, it still hasn't approached the high of 77 that it reached a few years ago. That's because everyone remembers
. It was a children's book series with "almost insatiable" demand in 1996, recalls Kevin McEnery, Scholastic's executive vice president and chief financial officer. Scholastic released a new book in the series every month.
But by the end of the year, consumer appetites unexpectedly turned elsewhere. Boatloads of books came back to Scholastic from swamped retailers. The company warned Wall Street in February 1997 that the returns would cause it to lose as much as 80 cents a share for its third quarter, more than reversing Wall Street's expected profit of 68 cents a share. Subsequently, the stock plunged 40% in a day.
In hindsight, McEnery says Scholastic shipped too many books, giving in to "very vocal" retailers who wanted more copies. The result: Scholastic effectively flooded the market. McEnery promises that won't happen again.
Side of Caution
Now, Scholastic vows it will irk retailers rather than send out too many books. "We have been very careful in the distribution of
, not just in the upcoming release, but also the first three novels," McEnery says. "There are times when it's a judgment call, and sometimes we've probably erred on the side of caution."
Up and Down
Hazen, at Massachusetts Financial Services, adds that Scholastic has "taken a lot of steps to ensure that they would not be caught blindsided. ... They're just keeping much closer track of their retail channel."
There are other differences, too. While
, aimed at kids, was a paperback series of more than 40 titles by 1996,
is a hardcover series in only its fourth title. The new book is selling for $25.95, and it's popular with adults as well as teens.
Meanwhile, there's more to Scholastic than one product, says Hokanson. Its recent $400 million acquisition of children's book and reference-products publisher
provides "an excellent opportunity" to cover the range of readers between 12 and 18 years old, he says. It also has developed successful new books including
. And it has cut costs and managed its book clubs, fairs and curriculum well.
Given all this, Hokanson expects that Scholastic will report July 18 that it earned $1.71 a share for the fourth quarter ended May 31, up from $1.27 a share last year. Hokanson predicts the company will earn $3.70 per share in fiscal 2001, excluding one-time items, up from an expected $3.21 a share this year. Analysts polled by
First Call/Thomson Financial
predict fiscal fourth-quarter earnings of $1.68 and fiscal 2001 earnings of $3.68.
Scholastic hopes that the publicity surrounding
will give it an opportunity to display that it is a company made up of wizards -- not just muggles.