Scholastic Hurt by 'Do Not Call' Fallout

Scholastic ( SCHL) will take a fourth-quarter charge of $25 million mostly as a result of an internal review initiated when earlier financial results were hurt by the government's ban of unsolicited telemarketer calls.

However, the charge will be offset by a gain of $8 million related to terminating a sublease in New York, resulting in a net pretax fourth-quarter charge of $17 million, or 28 cents a share, the company said in a statement late Monday.

Shares of Scholastic, which publishes the Harry Potter series in the U.S., were dropping 50 cents, or 1.8%, at $27.77 in Tuesday morning trading.

Review-related charges in the fourth quarter represent writedowns of inventory from discontinued programs, prepaid promotion costs, small increases in bad debt expense and provisions for returns and related severance.

As a result, Scholastic expects full-year 2004 earnings to be $1.40 to $1.50 a share, which is down from an initial guidance of $1.95 to $2.35 a share. The current guidance also includes special pretax severance charges mostly recorded in previous quarters totaling $3.3 million, or 5 cents a share. The company will release fourth-quarter and full-year results on July 21.

Looking to the first quarter, Scholastic expects to record a management severance charge of $2.3 million, or 4 cents a share.

The Wall Street consensus is for a profit of 85 cents a share in the fourth quarter and $1.79 a share in fiscal 2004, but for a loss of $1.16 a share in the first quarter of fiscal 2005.

In March, Scholastic announced that it would review its direct-to-home segment due to "challenges" in 2004 resulting from federal "Do Not Call" legislation. It said in a statement discussing third-quarter earnings that its direct-to-home continuity and trade businesses had lower response rates and margins.

At that time, the president of its direct-to-home business and the senior vice president of its trade business resigned. The company then lowered its full-year earnings guidance to below $1.95 a share.

Federal "Do Not Call" legislation prohibits telemarketers from calling people who choose not to be contacted. President Bush signed the bill last fall.

"We are adjusting our business model to strengthen our relationship with our most productive customers through product and service improvements," the company said in a Monday statement. "While we expect that reducing promotions to our less productive customers will temporarily reduce revenues, we believe these actions will improve customer retention, profitability and cash flow in this strategically important business."

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