January 18, 2017 / 11:37 AM / a year ago

Pearson chief Fallon gets an F

LONDON (Reuters Breakingviews) - Pearson boss John Fallon’s latest profit warning earns him an F. It is time for him to go.

Penguin books are seen in a used bookshop in central London October 29, 2012. REUTERS/Stefan Wermuth

The UK publisher’s shares fell almost 30 pct on Wednesday after Fallon said a hit to U.S. textbook sales meant operating profit won’t hit his previous target of 800 million pounds in 2018. Net revenue fell 30 percent during the final quarter of 2016 in the firm’s key North American higher education courseware market, leading to an “unprecedented” 18 percent decline for the full year. The drop was in part down to lower enrollment rates and students using more rented textbooks, but mostly because retailers turned out to have too many books in stock.

Fallon isn’t accountable for the quicker-than-expected deflation of the U.S. higher education bubble. But Pearson read a crucial market wrongly. Its October interim statement said trends looked to be improving from September and into October. Given that retail inventories build up over time, and declining college enrollment is hardly new in North America, it’s hard to see why management was caught so short in this case. This is the fifth profit warning in four years.

Pearson has a plan: to reduce rental e-book prices by up to 50 percent across 2,000 titles, and pilot its own print rental programme with an initial group of 50 titles. It will also sell its stake in Penguin Random House, which Investec analysts estimate could raise around 1 billion pounds.

But it’s hard to argue that Fallon should be the person to carry out this strategy, which amounts to trying to squeeze more money out of a structurally shrinking market. During his four-year tenure, total shareholder return at Pearson has been minus 42 percent, equivalent to a decline of almost 12 percent a year. The UK publishing sector, by contrast, is up almost 18 percent over the same period, with the FTSE 100 and rival John Wiley & Sons both up around 45 percent. Pearson has also lost 35 percent of its market value under Fallon. This class needs a new tutor.


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