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Why Scholastic Could Be a Stunning Growth Stock

- By Robert Stephens, CFA

Publishing and media company Scholastic Corp. (SCHL) is making a number of changes to its business model that could lead to improving stock price performance.

The company, which publishes, sells and distributs books and educational materials to schools, teachers, parents and children, is investing in a range of innovative offerings, such as its literacy and reading programs, that could strengthen its competitive position and lead to expansion in new markets. Scholastic is also investing in its international growth prospects, while seeking to boost efficiency in response to rising costs.


Having underperformed the S&P 500 in the last year, with the stock falling 2% versus a 7% rise for the index, it could offer good value for investors due to its earnings growth potential.

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Investing for growth

The company's investment in the Scholastic Literacy program has the potential to develop its presence in the $1 billion-plus core reading market. At the moment, it has a relatively small share of the market, but it is developing a core curriculum reading program for kindergartners through sixth graders that builds on guided reading techniques and digital programs. It includes strong authors and tested curriculum applications, with feedback from the market being strong so far. Scholastic's sales team is set to focus on sales of the program, while also maintaining and expanding its position in the established supplementary business. This is expected to significantly enhance its sales and revenue over the medium term.

Along with its expansion into new areas, the company is also launching its annual Summer Reading Program, which engages a wide range of children, schools and retailers in independent reading. The goal of the program is to offset the "summer slide," which is a decline in academic progress when schools are not in session. As a result, it is receiving strong support from independent booksellers across the U.S., and could act as a catalyst on its financial performance.

Evolving strategy

The company's international growth prospects continue to be strong. Its international revenues have benefited from its multiple distribution centers in China that deliver English language learning to young children through franchise schools. It has also seen growth in sales of its print and digital books to local internet marketers. These areas, as well as its new digital products, are expected to drive international growth over the long run.

Scholastic is aiming to improve the efficiency of its salespeople through the use of predictive analytics following the successful integration of Salesforce (CRM) software. It has expanded the use of its point-of-sale device, which improves connectivity and allows a broader use of e-wallet to give parents greater flexibility in depositing money into their child's book fair account. Improved technology and a range of analytical tools are expected to improve the company's online sales growth. This contributed to 16% sales growth for its teacher online store in the most recent quarter, with further growth anticipated in the future.

Risks

In the company's most recent quarter, it reported a range of higher costs. Increased labor, product and fulfilment costs mean it expects earnings per share for fiscal 2019 to be at the lower end of the previous guidance of $1.60 to $1.70. It has also incurred unbudgeted administrative costs to develop effective and efficient marking programs. Increased costs have also extended to customer-facing technology that allows its book clubs to calculate and collect tax.

In response to higher costs, Scholastic is implementing a wide-ranging program to lower operating costs by driving efficiencies in a number of areas. It is aiming to cut costs in procurement, logistics and fulfilment. This incudes an investment in data and technology, which is expected to lead to a more efficient business over the medium term.

In addition, the company is upgrading its contact centers to a unified communications platform that is expected to reduce inbound call volumes and handling times. It will also better leverage its buying power and rationalize spend on travel and office supplies, as well as software and hardware expenditures.

Outlook

The strategy being implemented by Scholastic is expected to boost its financial performance. In fiscal 2020, earnings per share are forecasted to grow 15%, making its forward price-earnings ratio of 27 appealing, given that strong profit growth is expected over the medium term.

With international growth potential and an increasing focus on innovation, Scholastic appears to be in a solid position to deliver. Investments in its core reading market offering could enhance its performance, while an increasingly efficient business model may help it to overcome cost increases.

After underperforming the S&P 500 over the last year, the stock could deliver impressive returns versus the wider index over the long run.

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This article first appeared on GuruFocus.