Harry Potter learned many tricks at Hogwarts. One that's missing from his repertoire is a formula to help his ailing American publisher, Scholastic.
It's not that he hasn't tried. Since 1998, when the first “Harry Potter” book came out in America, the publisher Scholastic earned $600 million in revenue from it. In fiscal 2001, the Potter peak for Scholastic, sales from the series reached $200 million, or 10 percent of annual revenue and 30 percent of Scholastic's earnings.
But since then, the company has missed earnings, its margins narrowed and stock got whacked. Management had to get a grip on reality and start the publisher chugging again. “Harry Potter is a decreasingly important part of the story,” says Peter Appert, analyst with Goldman Sachs Group. “I look at it as a windfall from the cash flow and earnings standpoints, something that's not sustainable on an ongoing basis. The Harry Potter franchise doesn't go away, but it's past its peak from the revenue and earnings perspective.”
Make no mistake, Scholastic has not written off the boy wizard's magic. On July 16, it will release book No. 6 in the series, “Harry Potter and the Half-Blood Prince”. The book will have possibly the largest print run in the history of publishing, 10.8 million copies. That's over 50 percent more than book No. 5, “Harry Potter and the Order of Phoenix”, which had a print run of 6.8 million and sold five million books on its release day in June 2003. “We wanted enough books out there so every single fan could get a book when they wanted it,” said Kyle Good, Scholastic's spokeswoman, of the current print run. “This was the number we came up with in collaboration with the retailers.”
Scholastic may be too optimistic, though. Figures from Nielsen BookScan, which tracks book sales at most, though not all, of the big booksellers and book clubs like Barnes & Noble, Amazon.com and Costco Wholesale, show that total hardcover sales for book No. 5 reached just 8.3 million, and paperback only 550,000. “I guess we'll know after the weekend,” says Good. “We'll see what happens.”
Don't bank on movies to boost book sales either. The three Warner Brothers films released so far have grossed over $3 billion worldwide, including DVD and video sales. But that boon didn't translate into a page-turner for the book business. In 2004, when the movie based on book No. 3, “Harry Potter and the Prisoner of Azkaban”, came out, the book version sold a paltry 60,000 hardcover copies — 100,000 less than this book sold in 2003.
So despite all the media hoopla and midnight release parties, Scholastic is smartly trying to look beyond young Mr. Potter's magic. “Of course [the brand] means a lot to us in terms of just raising the visibility of the company, but it's just one piece of what we do,” says Good.
Rather, the company has lately been trying to fix up its financial performance and focus on steady growth. It needed to, as over the last three years the company has missed earnings, its stock has lost 50 percent of its value and operating margins have dropped to 6.4 percent from 9 percent. Scholastic has been working hard to revamp its financials through cost cutting, hiring a new chief financial officer, improving its core children's publishing business and focusing on fundamentals like meeting earnings forecasts.
It has worked. Over the last 12 months, the company's stock moved up by 38 percent, beating the S&P over the same period by 29 percent, and has done so without a new Potter release. Appert projects that the company will report flat operating margin at 6.4 percent when it releases its annual report next week. He says that the sign of a solid turnaround would be stable margins in the vicinity of 9 percent to 10 percent.
Appert predicts that for fiscal 2005, Harry Potter will represent just 1 percent of revenue and 2 percent of earnings. “You don't ignore the Harry Potter earnings,” he says. “It's real cash flow. But you want to value the company on some sort of normalized basis of profitability.”