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Why Scholastic Has Turnaround Potential

Scholastic Corp. (NASDAQ:SCHL) could offer recovery potential after its 13% underperformance of the S&P 500 over the past year.

The company, which provides books and educational materials to teachers and students, is focusing on reducing costs and improving its sales performance through a variety of growth initiatives, which could strengthen its financial outlook.

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Efficiency

The company's focus on reducing its costs could also improve its competitive position. For example, in fiscal 2019, the business realized $10.8 million in sustainable savings.

Further savings could be ahead for the company as it plans to make continued investments in new technology and utilizing its data in order to improve the integration of its logistics and manufacturing operations.

Scholastic plans to upgrade its infrastructure to include integrated analytics and enterprise resource planning deployment, which could improve its productivity and widen its economic moat versus industry peers.

According to the company's full-year results, it is targeting an even higher net bottom line benefit from its efficiency efforts in fiscal 2020 when compared to its savings in 2019.

Growth strategies

Scholastic is investing in improving its U.S. school distribution channels. For example, it is broadening the availability of features, such as its eWallet, at its Book Fair reading events through its improved point-of-sale device that offers greater connectivity for consumers. The eWallet allows parents to deposit money directly into their children's book fair account, which could lead to greater participation at its events.

In addition, the business is increasing the amount of personalized support it provides to volunteers that host book fairs. This may attract a larger number of volunteers, while the company's ongoing attempts to streamline its book fairs may allow them to be set up in less time. This may stimulate the number of fairs the company delivers each year, with its plans to ramp up promotional activities likely to strengthen its market position.

Ongoing expansion

The company's international operations could benefit from increasing demand for English language learning programs among middle-class consumers in Asia. Scholastic plans to adapt its products to local markets across Asia, while aiming to leverage its new Scholastic Asia shared services operation in order to improve its efficiency across the region. This could reduce its reliance on the U.S. market and increase its market share in a fast-growing Asian market.

Possible threats

Scholastic's recent financial performance has been disappointing. For example, in the fourth quarter of 2019, its operating income declined 40% when compared to the prior-year quarter

This was due to a combination of factors, including its increased costs for paper printing and labor, as well as the impact of state sales tax collection efforts in its book clubs and book fairs business. The company also decided to increase incentives for its customers in order to counter competition from a new national book fair provider.

Scholastic said in its fiscal 2019 results that it expects the impact of a revised tax collection system to abate as the new process becomes increasingly familiar to its customers. Evidence of this can be seen in its fiscal 2020 first-quarter update, where Scholastic recorded a 7% increase in revenue from the year-ago quarter.

The business could benefit from its planned new releases in 2020. For instance, its sales could be catalyzed by the release of the new novel in "The Hunger Games" series next May, while a range of highly anticipated titles across multiple age groups could strengthen its position within the children's book publishing segment.

Outlook

Scholastic is forecasted to record 2% earnings per share growth in fiscal 2021. Its forward price-earnings ratio of 29 may not be low, but its growth strategy could deliver a successful stock price recovery following its 10% decline over the past year.

Disclosure: the author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.