September 26, 2019 / 6:30 AM / 2 months ago

Britain's Pearson punished for U.S. textbook slump warning

LONDON (Reuters) - Pearson (PSON.L) warned that a 20% drop in demand for U.S. college textbooks would hit its profit and jeopardize a return to sales growth next year, triggering an 18% share price fall.

FILE PHOTO: The company logo is displayed outside the Pearson offices in London, Britain August 4, 2017. REUTERS/Neil Hall/File Photo

In an echo of Pearson’s past profit warnings, the world’s biggest education company said on Thursday that while 75% of its sales continued to grow, U.S. higher education courseware revenue was set to fall as much as 12% in 2019.

This compared with a forecast 5% drop from the British education company, which has cut 16,000 jobs and restructured over six years to sell textbooks and courseware online, after a rapid move to digital sales sparked repeated profit warnings.

“We thought that textbook sales would be down 10% this year, it looks like now they’re going to be down 20%,” Chief Executive John Fallon told reporters. “That is painful for this year’s guidance but what it means is we’re just getting to the future state of this business more quickly.”

Such is the rate of the decline that Fallon said he would wait to see how the business performed before he set the 2020 outlook. In February Pearson forecast a return to sales growth for the first time in more than five years.

“We need to take a step back and make sure we know what is going on,” said Fallon.

The update would reignite speculation about Fallon’s future, analyst Neil Campling at Mirabaud Securities said in a note, adding it was likely to create a ‘red mist’ among shareholders.

Adjusted operating profit is now forecast at the bottom of Pearson’s guidance range of 590 million pounds ($728 million) to 640 million pounds.

STEADY RECOVERY

Thursday’s announcement brings a halt to the steady recovery Pearson had been making, helped by years of cost cuts.

Although a setback, “it doesn’t change our view of where we want the company to be, and how we get there,” Fallon said.

The former owner of The Economist magazine and the Financial Times newspaper, has invested in new digital programs to counter students in the United States buying more books second hand and using cheaper digital products.

Finance director Coram Williams said Pearson had seen a “very significant industry wide” acceleration in print attrition as retailers and students turned away from print products more quickly than expected.

“Some of this volume has ended up in the secondary market, and some of it will have meant that students don’t buy a print component at all,” he said.

The division was also hurt by delivery issues, a sales force reorganization and changes to some courses that affected what products students bought.

Analysts at Citi said the warning was likely to stoke the markets’ existing concerns about the structural challenges.

For the first nine months of the year, Pearson expects underlying revenue to be broadly flat with its core markets up 5%, growth markets up 3% and North America down 3%.

The group said it was still on track to deliver more than 330 million pounds in annualized cost savings, with the full benefits accruing from the end of 2019 onwards. It forecast year-end net debt to be broadly in line with 2018.

Reporting by James Davey; editing by Guy Faulconbridge, Jason Neely, Jan Harvey and Alexander Smith

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