McGraw-Hill reported third quarter sales, with their education division dropping 11.6 percent to $1 billion compared, as operating profit fell 16 percent to $298 million. The decline came entirely from the K-12 line, which fell almost 20 percent, “in a 2009 state new adoption market that deteriorated all year as budgetary pressures led a growing number of school districts to postpone purchases.”
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Meanwhile, Barnes & Noble can’t catch a break from Wall Street analysts no matter what they do. On Friday Credit Suisse reduced their target price for the company to $16 per share (about two dollars below its current price), while Goldman Sachs downgraded their rating from neutral to sell. In contrast, Amazon’s shares rose 26 percent for the day following their better-than-expected earnings report.
BN’s stock has suffered a number of blows in the past months. First Wall Street looked down on the BN College acquisition as focused on the legacy print business, and in recent days the bestseller price war hasn’t helped. (The company is sitting this battle out–which protects margins, but may give up market share.)
Now with the announcement of nook, the company has been downgraded for what analysts see as a successful ebook strategy. Credit Suisse writes, “while we applaud management for these efforts and think it has the potential to be a major player in this business, the concern is whether being a player will ultimately sacrifice profitability. The risk, in our view, is that as the math currently works, each sale through a Nook is not just unprofitable but potentially replaces a higher margin sale at stores.” CS opines that “the eReader push will actually be incremental to sales in the near term,” but sees that success eroding in-store results over time.
It’s all a series of hypothetical extrapolations about the behavior of ebook readers in the coming years, and notably CS doesn’t make any projections for additive business for Barnes & Noble in selling to other devices (like iRex and Plastic Logic’s Que); taking a role as the leading vendor of EPUB books for multiple devices; driving ereading business in the college market; or sales of newspapers, magazines, blogs and other high-margin ereading materials. In other words, the numbers leave a lot of room for hypothesis–and interpretation.
But in a morning when the market is up broadly, BN shares started sliding again today–though not as much as Borders, which was down more than 5 percent.
On the same theme but from a different vantage point, Mike Shatzkin looks at financial and structural changes caused by the ereading transition as everyone adjusts to “a smaller print-book business”: “Publishers are going to have to rethink their operations. Sales staffs will probably contract; warehouse space will become redundant; investments in IT systems for the print operation will have to be more rigorously controlled. Publishers will likely combine, of course; the big houses now all gladly take competing publishers into their back office operations to help support them. But downward shifts in scale are not only inevitable, they will probably happen in more dramatic lurches than we’ve known in the past.
“Wholesalers and distributors will both win and lose in this shift, but the shape of their business will certainly change. On the one hand, they, like everybody else, will lose sales that they have today because accounts go under and publishers they distribute cease operating. On the other hand, they are in the business of converting fixed operating costs to variable ones, and the number of customers for that proposition will grow as the apparent costs of operations (as a percentage of sales) get out of control at many companies.”