Harry Potter Can’t Fix Scholastic’s Bottom Line

J.K. Rowling's Harry Potter franchise is the hottest bit of literature in history. The Harry Potter books have sold more than any other copyrighted book ever (the Bible is in the public domain). In addition to making reading fun for a gazillion kids, the Potter books bring in money by the bucketful. Yet Harry’s American publisher Scholastic is struggling to right itself.

In the past twelve months, without a Potter release, the company has cut costs, hired a new CFO and sunk a great deal of time and effort into its core business, children’s literature. As a result the stock is up 38%, while the S&P managed just 9% over the same period. But that ignores the fact that over the last three years, which would include the Prisoner of Azkaban revenues, the company has missed earnings estimates, seen its stock price halved (despite the recent bounce) and operating margins have slimmed to 6.4% from 9%.

The truth is that a single franchise, even Potter, can’t make a success out of a publisher these days. It takes more than a few blockbuster novels. Frankly, management at Scholastic didn’t deal with Wall Street expectations as well as it might. There was some hot money that ran into “those guys who publish the Potter books.” The stock price was not justified by the business, and when the Potter fad on Wall Street ended, the money went elsewhere, resulting in the 50% dip.

While managing the more mundane titles is the key to the business, Scholastic may have bitten off too much with the Half Blood Prince. The company has asked for 10.8 million copies – the largest print run in history, dwarfing the 6.8 million it did for the Prisoner of Azkaban. But Nielsen Bookscan, which tracks this sort of thing, shows the major distributors on-line and in brick-and-mortar operations have orders for 8.3 million hardcover and another 550,000 in paperback when it comes out. Which means, unless there is huge purchasing that Nielsen misses, Scholastic may wind up eating 2 million copies. That’s a big mistake, if indeed it occurs.

Scholastic, which trades on the NASDAQ under the ticker symbol “SCHL”, is due to release its fiscal year-end figures on Thursday, and it looks like it will be a pretty good year. There will be more than a few questions on the conference call with investors that involve the Potter book, but one doubts anyone will ask if they made a mistake by printing too many. Only time will tell, but it could be that the company got caught up in the excitement and made fiscal 2006 tougher than it should be.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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