For children's book and education publisher Scholastic (SCHL), the first quarter of 2010 was a mix of good and bad news. On the positive side, the rising sales of Suzanne Collins' Hunger Games trilogy -- and especially the Aug. 24 release of the third and final book, Mockingjay, which sold 450,000 copies in its first week -- spurred big gains in the company's trade book publishing division.

The bad news is that the publishing house's overall performance dropped significantly across the board, a disappointment after ending its fiscal 2009 on a fairly high note.

Total sales for the period ending Aug. 31 were $290.9 million, an 8% drop from the $315.6 million in total revenue Scholastic reported a year ago. The company also reported an overall net loss of $46.8 million (or 95 cents a share), which was 33% higher than the loss reported at this time 12 months before. Scholastic explained the decline by saying it generally reports a seasonal loss in its fiscal first quarter, when most schools are not in session and its school book clubs and fairs generate minimal revenue.

The news stayed gloomy when breaking out performance by specific divisions. Scholastic's children's book publishing and distribution division reported sales of $72.8 million, down 3.4% from last year, with an operating loss of $51.6 million. Those numbers are particularly significant because the performance of the Collins books, as well as the 10th book in the successful multimedia-oriented 39 Clues series and a new book from Dav Pilkey (of Captain Underpants fame) managed to spur the trade side to a 9% gain from last year, but couldn't overcome the division's overall declining fortunes. Scholastic explained the operating loss as due to "the planned increase in spending on digital initiatives."

CEO Shrugs Off Performance

Meanwhile, revenue in Scholastic's Education division also fell, from $148.7 a year ago to $118.6 million, in large part because last year the company "benefited significantly from the initial disbursement of federal stimulus." This year, however, federal money from Race to the Top and School Improvement grants were delayed, which also played a significant role in both the division and the company's overall decline.

In a statement, chairman, president and CEO Richard Robinson shrugged off the numbers as befitting a "solid" first quarter and stressed the company "is on plan to sustain last year's strong performance. We are accelerating investment in educational technology, e-commerce and e-books, as we use the Company's strong free cash flow and balance sheet to increase long-term shareholder returns."

Looking ahead to the next quarter and 2011 as a whole, Scholastic expects
total revenue of approximately $1.9 to $2.0 billion and earnings per diluted share from continuing operations in the range of $1.95 to $2.20. In a separate release, Scholastic announced there would be a modified "Dutch Auction" tender offer to repurchase up to $150 million of its common stock.

This post has been amended to include additional information about delays in federal funding that contributed to Scholastic's first quarter earnings performance.

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