Little girls and boys the globe over were enchanted once again this weekend by that fictional, bespectacled, and magical orphan, Harry Potter. The latest in the popular children-of-all-ages book series was released in a whirlwind of publicity Saturday. American children's and educational book publisher Scholastic (Nasdaq: SCHL), which is the sole stateside publisher for this British creation, hopes that the magic stays alive. Shareholders are hoping for the same thing.
Scholastic's recent success, and the stock's recent ascent, can be linked mostly to one thing: the continued popularity of Harry Potter and the wizardry he works on the kids (and the parents of those kids, in many cases) reading these J.K. Rowling works.
Harry's helping the top and bottom lines
In Scholastic's most recently completed and reported quarter (fiscal third quarter ended February 29, 2000), revenues were up 17%. Earnings per share came in at $0.11 a share, compared to $0.01 for the same quarter the year before, and almost double analyst estimates. Contributing to the bulk of the company's quarterly success were the first three Harry Potter books, as well as other hip offerings like Pokemon books. It seems likely that the company will report strong fourth-quarter and fiscal year-end results this month, buoyed again by Harry.
But this leads to two questions: How long will Harry be the most magical guy around, and how can investors know for sure that the company will not repeat its chilling Goosebumps over-stocking fiasco? Let's address the latter question first.
Will the company prevent another Goosebumps mistake?
Back in 1997, Goosebumps -- a series of short, spooky paperback books for children and young adults -- was the hottest thing going. Like the current Harry Potter books, each new installment was anxiously anticipated and sales grew with each successive book -- that is, until the fad began to die down. Scholastic flubbed by sending too many books to sellers and was forced to deal with lots of excess inventory as bookstores sent back loads of unsold books. The stock dove and so did earnings, as a result of the glut of inventory. Shares are still trading today below what they were pre-Goosebumps goof.
What evidence is there that Harry Potter won't turn out the same way? It's too soon to tell if we are dealing with the next Lord of the Rings-type series, or just another Goosebumps bump in the road. Scholastic claims, of course, that Harry Potter is "literature," and not a fad. It will take time for this difference to be borne out, though, and investors could be burned again if Scholastic is wrong.
There are seven books planned in the Harry Potter series, which means there are three more to go. Will the market reach Harry Potter saturation before then? Maybe.
How much Harry is too much Harry?
This leads back to the first question -- how long can Harry hold his spell? The Warner Brothers Harry Potter movie begins filming next year in England. Already, 46 (!!!) toy makers have been contracted to start churning out every imaginable incarnation of everything Harry, in concert with the movie. In a market already filled to the brim with the popularity of Harry Potter, the film and attendant publicity and promotional toys may be just enough to drive Harry over that edge into the land of overkill. The question with fads isn't whether they'll end, but when. And for Scholastic shareholders, the question becomes whether or not their company will be prepared for it.
Watch those inventory and "return" levels
While Scholastic certainly isn't a one-trick Potter pony (the company sells educational materials, too, for instance), there's no denying that the company's sales have been boosted by the books over the last year. Remembering the company's past troubles with overestimating the longevity of a fad should never be far from the minds of investors. Watch for inventory growth outpacing sales. As well, watch the publisher's "return" levels (the rate at which books are sent back to the publisher from book sellers). If these begin to rise above expected levels, all those Harry Potter books may not be flying out the door as planned. And if that happens, investors should think twice about just how magical Harry really is.
Your Turn:
Do you think Harry has the makings of a legend? Or are you unconvinced? Talk about it on the Scholastic discussion board.
Suggested Links:
Scholastic Foresees Strong Year, Fool News, 2/23/2000
Scholastic website
Scholastic discussion board
