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Operator
Good morning, ladies and gentlemen, and welcome to the Scholastic third quarter 2005 earnings release conference call.
At this time all participants have been placed on a listen-only mode and the floor will be open for your questions following today's presentation.
It is now my pleasure to introduce Kyle Good, Vice President of Corporate Communications.
Ma'am, you may begin.
- VP CC
Thank you and good morning.
Before we begin I would like to point out that the slides for this presentation are available for simultaneous viewing by going to our website, scholastic.com, clicking on Investor Relations and following the links on that page.
I would like to note also that this presentation contains certain forward-looking statements which are subject to various risks and uncertainties including the conditions of the children's book and educational materials markets and acceptance of the Company's products in those markets.
And other risks and factors identified from time to time in the Company's filings with the Securities and Exchange Commission.
Actual results could differ materially from those currently anticipated.
And now I would like to introduce Dick Robinson, Chairman, CEO and President of Scholastic to begin our presentation.
- Chairman, CEO & President
Thank you, Kyle, and welcome, everybody, to Scholastic's earnings call and presentation for fiscal 2005 third quarter.
I'm joined today by Chief Financial Officer Mary Winston who will speak after me and at the end of the call we will both be available for questions as will members of our executive team.
We continue to make progress toward the goal we established at the beginning of the year which is improving margins and free cash flow.
In the third quarter we achieved higher profits and margins in all operating segments and though the quarter is typically the second smallest of the year we were close to breakeven and significantly reduced our net loss from a year ago.
These results reflect growth in higher margin sales, lower returns and bad debt expense and improvements in operating efficiencies.
Revenues also rose modestly in the quarter on growth and education, international and Children's Book Publishing and Distribution.
In the latter solid revenue gains and trade and fairs were partially offset by lower continuity revenues which declined as a result of our strategy to focus on fewer, more productive customers and by 1 percent lower book club revenues.
Finally last quarter we generated positive free cash flow.
Higher profits in children's book publishing and distribution were led by trade which had higher net revenues and profits in the quarter.
By working closely with our retailers to adapt to their inventory management needs we saw returns decline significantly compared to a year ago.
Gross sales were also up last quarter particularly with best selling back list titles like In Car, Chasing Vermeer and, of course, Harry Potter, of which more later.
On the front list we've been pleased by sales of a number of titles including Patrick Carman's The Dark Hills Divide, New York Times best seller The Dragon Rider by Cornelia Funke, Klutz Knitting and the first title from our new graphic novels in print, Bone, Out From Boneville by Jeff Smith.
Improved product availability and merchandising drove higher revenue per fair in school book fairs in the third quarter which is typically the smallest of the -- second smallest of the year in that business.
Fair count also rose with a greater number of schools hosting second fairs.
After 15 percent revenue growth in school book clubs in fiscal 2004 our principal goal for clubs this year has been to improve profitability.
In particular, we have focused on pricing and cost control.
Last quarter we achieved higher revenue per item but this was offset by slightly lower order sizes resulting in a drop of 1 percent in revenues.
Based on this trend we now expect club revenues this year to hold approximately even with last year's very strong results and profitability to increase.
For next year we see a number of opportunities to drive top-line growth, especially in revised strategies and product selection and pricing.
As we've said before this month we begin rolling out Parent Cool or club ordering online, which should be available to -- through all teachers by this fall.
Parent cool allows parents to go online and place orders directly with their child's teacher.
Carefully applied this will open many opportunities to grow the club business and build relationships with families.
In continuities last quarter our targeted strategy improved the quality of our customer relationships.
Aggregate bad debt and returns were down as a percent of revenues while customer pay rates were up.
We are making progress stabilizing this business and customers are responding to our new formulation, value proposition and improved customer service.
Building on what we've learned we are testing new products to grow revenues once again.
First, we are extending some of our most popular product lines like our new Book of Knowledge Encyclopedia, second, we are adapting innovative products from our education business, for example, we recently began selling a newly packaged phonics based reading program.
Finally, we are strengthening our licensing, building on existing deals as the one with Disney for a new Finding Nemo program, as well as developing new deals.
With more productive customers and strong new products we believe Scholastic's continuity business is positioned for strong top and bottom line growth.
But given the long lead times in this business progress will take awhile to show up in our financials.
The educational publishing segment generated higher margins last quarter on growth in all major areas of this business including curriculum, library publishing, paperbacks and classroom magazines.
Sales of educational technology including Read 180, our scientifically based reading intervention program, were up almost 40 percent.
This was a principal factor driving higher profits as was higher circulation revenues from classroom magazines.
In international profits revenues and margins increased, in particular operating losses declined significantly in Australia and profits rose in our Canadian and export businesses.
In the third quarter we improved profitability and free cash flow and achieved better results in all operating segments.
Revenues were also up as strength in some core businesses offset planned declines in others.
Based on this we believe we can meat our plan for fiscal 2005 with further improvements in margins and cash flow.
Of course our fourth quarter is critical in this regard.
Finally a word about e-Scholastic, our Internet business and its growing impact on our businesses and customer relationships.
So far this fiscal year Internet orders are up 20 percent from last year and sales of Internet delivered product or product ordered through the Internet represent now more than 10 percent of the companies revenues and for the year they should reach $250 million.
To drive our Internet strategy further last week we announced the appointment of Seth Radwell as president of e-Scholastic.
Most recently Seth was responsible for editorial marketing, media and Internet functions at Bookspan, the major direct marketer of special interest book clubs.
With his impressive record building new print and electronic businesses we are very excited to have Seth as part of the management team.
Mary Winston will now discuss last quarters results and our outlook for the rest of the year in more detail.
- CFO
Thanks, Dick.
As Dick described, profitability improved again last quarter.
In a small revenue period we reduced our net loss by $0.13 to $0.02 per diluted share or 700,000 and improved operating margins by 170 basis points.
Total revenues rose 2 percent driven by growth in education and international.
Cost of goods sold as a percentage of revenue was flat last quarter compared to a year ago.
Demonstrating progress, managing overhead we reduced SG&A in absolute terms and as a percent of sales to 44 percent from 45 percent a year ago, despite increased costs related to our Sarbanes-Oxley 404 compliance preparations.
Finally, lower absolute bad debt and our continuities business contributed to a Company-wide improvement for the quarter, also benefiting operating margins.
Scholastic's balance sheet was stronger at the end of the third quarter with net debt 65 million lower than a year ago.
Net debt to capitalization was 35 percent compared to 40 percent a year ago.
Accounts receivable declined last quarter.
This was driven primarily from improvements in continuities as well as in trade, international and media licensing and advertising.
This was partly offset by increases in education on this year's strong growth.
As a result overall DSOs, or days sales outstanding, improved in the third quarter.
At the end of last quarter inventories were down 16 million from a year ago, as a result of our continued focus on improved inventory management.
Payables were lower last quarter partly because of lower inventories and the timing of certain payments.
Free cash flow in the third quarter improved to 37 million compared to 20 million a year ago.
This was the result of higher net cash from operations and favorable working capital management, partly offset by increases in prepublication and production spending, royalty advances and CapEx.
Looking at the operating results by business, we see the profits and margins were up in all segments.
In the Children's Book Publishing and Distribution segment profits rose significantly on a slight revenue increase, principally because of improved results in trade which benefited from higher growth sales and lower returns.
In Fairs revenues rose on approximately 6 percent higher revenue per fair and a 2 percent increase in fair count.
In Clubs, after a strong prior year, revenues were down slightly as we continue to focus on improving the profitability of this business.
In Continuities revenues declined 19 million as a result of the Company's strategy of focusing on its more productive customers.
In educational publishing revenues and profits grew significantly and operating margins rose even as we increased our investment in sales and service to strengthen our successful reading solution strategy.
In addition to growth across most areas of the business in particular these results reflect continued strength in educational technology sales which were up almost 40 percent in the quarter, partly from a large order for Read 180.
Higher circulation revenues in our classroom magazine business also generated incremental revenues and profit.
In international, profits and margins increased on higher revenues.
In local currencies revenues in the segment were up 1 percent.
Profits were up modestly in Media Licensing and Advertising, primarily from strong results in software clubs.
Revenues declined in the quarter because of lower production revenues and corresponding expenses compared to a year ago when we released Clifford's Really Big Movie in theaters.
Corporate overhead increased 2 million in the quarter primarily reflecting certain reversed expense accruals last year as well as Sarbanes-Oxley preparation expenses incurred this year.
As shown by the quarters improved results we continue to be very focused on margins and free cash flow.
And expect further year over year progress in the fourth quarter.
For the full year we continue to expect revenues of approximately 2.1 billion, with club revenue holding approximately level after last year's tremendous growth.
We continue to plan to earn between $1.50 and $1.70 per diluted share, excluding severance charges, and we still expect to generate between 40 and 50 million in free cash.
We will be presenting our plan for fiscal 2006 at our next meeting on July 21st.
We will continue to focus on improved profitability, higher margins, strong free cash flow and revenue growth.
And with that I will turn the call back over to Dick.
- Chairman, CEO & President
Thank you, Mary.
As you know we will be publishing Harry Potter and the Half-Blood Prince on July 16th, just before our next meeting.
We are well prepared for the publishing, printing and distribution of this much awaited Harry Potter number 6 and we're looking forward to building even more momentum behind this wonderful series.
Based on the enthusiasm we are already seeing in the media and among retailers it would appear that Harry is just as popular today as ever.
We will announce our first printing in the first few weeks and we will be presenting our marketing program in the month or so after that.
Meanwhile our book selling customers have been creating some wonderful retail marketing plans of their own.
Online the title is already number one based on preorders on both Amazon and Barnes & Noble.com.
We look forward to the summer and to next fiscal year while finishing this year strongly.
I will now moderate a question and answer period.
Barbara Marcus, President of Children's Book Publishing and Distribution, Judy Newman, President of Book Clubs and Scholastic at Home, Margery Mayer, President of Scholastic Education, Hugh Roome, President of Scholastic International, will join us.
We're now open for questions.
Operator
[Caller Instructions].
Our first question is coming from Peter Appert with Goldman Sachs.
Please go ahead.
- Chairman, CEO & President
Peter, where are you?
- Analyst
Sorry , here I am.
I may have missed this, Dick, did you talk about any of the operating metrics within the clubs in terms of revenue per order or number of orders?
- Chairman, CEO & President
We referred to them.
We're up in orders.
We are down slightly on revenue per order.
- Analyst
Okay.
And then what's driving the profit improvement in clubs in the context of somewhat disappointing revenue performance?
- Chairman, CEO & President
Well, I think our pricing strategy and our cost control, but let me ask Judy Newman to talk a little bit about this, Peter, so she can give more color on exactly what's happening in our club program, if that's all right with you.
- President Book Clubs & Scholastic at Home
As you know we've been pretty consistent in saying that coming off of last year's really strong 15 percent growth our goal this year was really just to focus on improving profit and margins.
So, yes, top-line revenues down slightly but we really believe we are on our plan, we are growing profit.
We are on tracked to that.
Yes, we've done some cost reductions as well as price increases and that is really yielding the profit results we were looking for.
- Analyst
And on a going forward basis should we assume that the club business and maybe even the fair business is relatively mature at this point and we should anticipate fairly nominal revenue growth?
- Chairman, CEO & President
I don't think so, Peter.
Obviously the book business in the United States is entering a mature phase in general.
But we believe the market is -- the retail market is only up about 2 or 3 percent.
Our channels are up over the last several years probably closer to 12, 12 percent.
And we believe that ongoing revenue growth in clubs and fairs can be in the mid to upper single-digits.
It's probably not going to go back into the double digits, at least for the near future.
But we've got so many opportunities to improve merchandising in the fairs.
We've got -- we keep on refining our strategies in the club business.
We really feel very confident that Parent Cool and Cool will open new ways for us to market clubs and get direct revenue from teachers themselves, ordering through the Internet on a somewhat personalized basis.
So there is a lot of still a lot of opportunity there.
- Analyst
And would that be a realistic target, Dick, do you think, this mid to high single-digit growth for fiscal '06?
- Chairman, CEO & President
I certainly mid, certainly mid, yes, for clubs and fairs, yes, absolutely.
- Analyst
And then last thing I'll ask is the earnings guidance range for the year seems quite wide in the context of how only having one quarter left.
Could you just talk to why you are not willing to maybe tighten it up a little bit because certainly the low end of the range would not seem all that optimistic for the front of the fourth quarter.
- Chairman, CEO & President
Mary will answer that, Peter, but bear in mind that we are getting some approvals from you and your colleagues for doing a little bit better job of forecasting and we've come off some fairly rough years in that regard.
So we are not -- we don't want to do anything to change our success record right at the moment.
But let Mary address that more directly.
- CFO
Well, I think what Dick said is absolutely right.
I mean I think we are comfortable keeping a wider range, that's typically been our history so even though we are at this stage in the year we are comfortable with that.
And the only other thing I will add is that clearly the fourth quarter is a critical quarter for us and it's a really big quarter for the Company.
So, you know, we will be watching the quarter closely.
We are confident that we are going to be within the guidance that we've put out there but we are also comfortable with the range that's out there.
- Analyst
And I lied before, this is really the last question.
The visibility in the fourth quarter in terms of trends and clubs and fairs, would it be similar to what we saw in the third quarter in terms of the revenue momentum?
- CFO
Yes, I think that it is.
I think the fundamentals in the business are stable.
There is nothing alarming that's going on in the business.
So the metrics, just as Dick had already discussed, are pretty much what we saw before.
- Chairman, CEO & President
And the continuity comps remain quite easy in the fourth quarter?
Last year we had a write-down, considerable write-down and the business didn't perform well on an operating basis either.
So that would be disappointing if we didn't -- if we didn't do better than last year, Peter.
- Analyst
Right, right.
Great.
Thank you.
Operator
Thank you.
Our next question is coming from William Bird with Smith Barney.
Please go ahead.
- Analyst
Thank you.
It looks like about 40 percent of your operating income in the quarter came from a 50 basis point reduction in reserve for bad debt.
I was just wondering if you could talk a little bit about what went into that decision and whether or not that change is sustainable.
Also you mentioned that you experienced lower returns in the quarter.
I was wondering if you could give us the reserve for returns in the quarter this year versus last.
Thanks.
- CFO
This is Mary.
I will start with the bad debt question.
The improvement in bad debt is largely driven by the strategies that we've put in place in our direct to home and our continuities business.
And as you know we put in place much more rigorous credit policies.
We are tracking that much more closely, being much more conscious of the type of customer that we sell to to begin with.
So consequently we are starting to see bad debt improvements.
Now from an accounting perspective clearly we do have a model that takes into consideration the long-term history.
So if we look at our shorter term improvement on pay rates and the fundamentals in the business we would even see more improvement than what we are seeing in the bad debt on the P&L.
So we are definitely comfortable with where our bad debt reserves are and what's behind that is the same calculations and accounting methodologies that have always been in place for looking at bad debt over a historical period of time.
In terms of your question around returns reserve, we don't have the details of that available right away but I will get that and I will get back to you.
But we did have lower returns in both our continuity business as well as our trade business.
- Analyst
Great.
Thank you.
Operator
Our next question is coming from Lauren Fine with Merrill Lynch.
Please go ahead.
- Analyst
Thank you, a couple of questions.
I guess going back to Pete'rs questions on the guidance, could you maybe share with us what would cause you to -- kind of in terms of big changes, what would cause you to come in towards the low-end versus the high-end?
And then I will have my follow-up questions after that.
- CFO
This is Mary.
There is nothing I can think of specific, I mean, that we see in the offing that would cause us to come in low-end versus high-end or any of that.
I think clearly it's a big quarter for us and there are unanticipated expenses around Sarbanes.
There is a new strategy in place in our continuities business so we continue to watch that closely.
It's a big quarter for both our clubs and our fairs business.
So the activity in the businesses will be large.
So there's just any number of things that, from the volume and the size of that quarter, that could move where we would end up in the range.
But there's no looming negative or positive that I would see putting us extremely on one end or the other.
- Analyst
And then I just want to go back to the club business because I'm not sure if I heard you correctly.
You raised prices and so the number of orders were down but the revenue per order up, it that correct?
- Chairman, CEO & President
No, it's revenue per item was up.
The order sizes were a bit down.
And the -- but the number of orders is about flat, but slightly up, number of orders is slightly up.
- Analyst
Do you worry at all that the pricing is not something you should do sustainably(ph) in terms of the impact it's having on the business.
- Chairman, CEO & President
I know that's been a concern of yours, Lauren.
It doesn't worry me for the following reasons and Judy may amplify this.
First. we typically like to keep our club pricing about 30 percent below retail.
It had been about 40 percent last year, last fiscal year '04.
So we felt we had some pricing flexibility compared to the retail market and our pricing increases were less than 10 percent.
The way we applied this we can learn something about, I think Judy was referencing that before.
And we think that in the second year we are going to be able to do naturally an even better job of applying our price increase strategy.
The other part of it is that we are also improving the template of how we are offering books and we are working hard on that.
So we've got things going on there that is sort of part of the learning process of having raised the prices, now we are thinking about how to make that work a little bit better for the customer and for us.
And also improving the structure of how we offer books on the club.
So I think there's lots of -- still lots of opportunity and bearing in mind that our clubs, parents support this in every kind of research, are still extremely efficiently priced from the parents' point of view.
- President Book Clubs & Scholastic at Home
I would just add that, as Dick said, that clubs are still about tremendous value and so we are still able to offer a lot of value in the books clubs even while we raised prices.
We have learned a lot this year both about pricing, what should the optimum pricing mix be, as well as product and we are already working on our plans for next year kind of incorporating those learnings.
And the strength of the teacher orders continues to show that the book clubs are a very important opportunity for teachers to get books and books at great value.
We are really not worried at all about the long run.
- Analyst
If I could another question.
Could you give us an update on, and Mary, I think this is directed to you, on the book fair warehouse consolidation that you've embarked upon and what the future plans for that might be and then if you've seen any impact on customer service?
- CFO
Actually I am going to let Barbara take that question.
Thanks.
- President Children's Book Publishing & Distribution
I believe we've said before that we are slowly decreasing the number of warehouses.
We did 5 this year and we have more planned for next year.
We are doing it slowly.
We are, as you intimated, learning as we go.
But we are finding that our customers, once they realize their service is not impacted at all, are quite satisfied.
And so this does look to be an opportunity.
We are going to slowly ratchet up the number each year but this again is something that we are, I wouldn't say feeling our way, we have a plan and we are on plan to continue to look at what services our customers best and allows us to best merchandise and customize our fairs at the same time as managing our expenses.
- Analyst
Great.
Thank you very much.
Operator
Our next question is coming from John Kristiano(ph) with UBS.
Please go ahead.
- Analyst
A question about education.
I think you mentioned that you had an increase, I guess, in the sales and service costs,.
Obviously there was nice improvement on top-line and nice improvement in profit.
I just thought there would be a little more leverage there considering the high growth of Read 180 as well -- and sort of the software nature of that product, if you can discuss what's going on.
- Chairman, CEO & President
John, I will ask Margery to answer that question.
It isn't a big quarter for education and so that may be the -- one of the reasons that the increased sales didn't create quite as much leverage as you might have expected.
But let's let Margery take that question and expand on the nature of the Read 180 market.
It is true that we have increased sales and service costs but I don't think that's not the reason for the profit issue.
There's not an issue.
The profits were up 25 percent.
But you were maybe looking for more.
Let Margery answer that.
- President Scholastic Education
Well, I think Dick said it, it's not a large quarter for us.
We feel that we had the best third quarter we've ever had and we think that we have good demand for our product.
We've eliminated or brought down a lot of traditional educational publishing expenses and we are reinvesting some of that in sales and service costs that will, we hope, provide a deeper, more effective relationship with our customer.
- Analyst
Then just one follow-up.
I think you mentioned that you having some pretty substantial success with Maya and Miguel and I believe you had mentioned before that books are going to begin to roll-out in the spring.
Is that still on plan and is, I guess, this whole program still working?
And then sort of related to that are there any other plans to try to roll-out any kind of other products this way where you lead in with the television and then follow-up with the books.
- Chairman, CEO & President
Maya and Miguel, we said in the release, is doing extremely well on PBS and is a strong, strong program.
It has 30 different licensees including some very prestigious clothing manufacturers and other supporters.
There's a special program in Target this spring and Barbara will mention the books which we are bringing out at this point.
- President Children's Book Publishing & Distribution
This is a sort of a traditional launch of books after a programming.
We do this -- this is sort of the normal progression, so that the books come out the season after the programming is traditional.
And we have seen great response.
We have clearly have them in all our proprietary channels, clubs and fairs, but we also have gotten -- and they are just on sale now, great pick up from the mass merchandisers as well as the traditional retailers.
We do have plan-a-gram placement in both Target and Wal-Mart as well as other retailers.
- Analyst
Great, thank you.
Operator
Our next question is coming from Steven Barlow with Prudential.
Please go ahead.
- Analyst
Thanks.
Mary, can you talk a little bit about capital spending this year and potential for next year?
And then you mentioned SG&A is down for a number of reasons.
I was just curious whether or not headcount was one of those reasons.
And then the last question would be, if you could tell us how many schools have 2 fairs a year scheduled this year versus last.
- CFO
Okay.
In terms of capital spending we are, even though in the quarter spending is higher than it was a year ago in the third quarter, on a year-to-date basis we were tracking at about a little less than 60 percent of our year-to-date budget.
So our spending is definitely under control for the quarter.
It was actually cash flow positive, so it's less than depreciation for the quarter.
We do expect to be on plan for CapEx and I think the guidance we gave on that was 50 to 60 million and that's where we expect to be.
So there's nothing unusual happening there.
As far as next year is concerned we are right in the process of starting our budget process and setting our plans and reviewing capital projects for the coming years.
So we have not set that yet.
We will be in a position to talk about that in July.
We are going through our new resource allocation process with capital as well as other investment decisions.
So we will be scrutinizing that on the appropriate metrics so we will be able to talk about that in July.
In terms of the SG&A, we do have some headcount reduction.
It's not -- not significant, so it's a modest headcount reduction.
And then it's just focusing on other overhead spending.
- Analyst
Then the fair count, please?
- CFO
Fair, the question was.
I will let Barbara answer that question.
But the question was the number of schools that have 2 fairs now compared to those that only have one.
- President Children's Book Publishing & Distribution
Right.
I think that we have about 60 percent of our schools have second fairs.
We are working that.
At the same time I think what's important to realize is that we have focused this quarter and will continue to focus on schools that truly can handle second fairs which is why you are seeing the smaller increase in fair count and the larger increase in revenue per fair.
Yes, we are going after second fair count but only when we believe that the school itself is ready, willing and able to handle a second fair.
- Analyst
And related to that what are your bookings then on the fourth quarter versus a year ago?
- President Children's Book Publishing & Distribution
We are on plan for the same kind of increase that you have seen this year.
And we are confident at this point that unless something happens weather-wise or something that we will achieve that increase in fair count.
- Analyst
Thank you.
Operator
Our next question is coming from Brandon Dobell with CSFB.
Please go ahead.
- Analyst
Good morning.
Mary, a couple of quick ones.
As you think about the balance sheet, maybe some target DSO or target inventory metrics, how much room you think might be there on the working capital management side?
And then more of a general question in fairs, and actually and perhaps clubs, as you look across the different programs how much variance do you see in the performance of kind of similar or like programs?
Is there areas where you think for some reason the region is doing quite well and those are using different products or different timing or different something like that, sort of a feel for how representative the average is of the entire business for both fairs and clubs.
- Chairman, CEO & President
Well the fair and club question is an interesting one, both are and both are part of our strategy.
There is variation in our fair business from region to region.
Some of this is management.
Some of it is product.
Some of it is weather.
But there is variation and there is quite a bit of economic stratification in the fair business and all of that is being focused on by the fair management who -- which is working quite nicely on segmentation as one of their key strategies for building the fairs.
Similarly we have 3 different brands of clubs, Brandon, as you know.
We've got the scholastic core clubs.
We have the Trumpet, which is a sort of higher end brand, and Troll Carnival, which is our mass market lower price brand.
So we've got kind of a stratification there built into the business.
But this is all very relevant to a strategy that I think everyone is pursuing.
But we are certainly pursuing it which is the segmentation identifying niches within the market and how to best serve those niches.
There are some -- obviously, both fairs and clubs are mass businesses.
So there is a cost and a management issue with segmentation.
But both of those are very much overcomable and we look forward to some improved results based on a segmentation strategy.
Your question on inventory is very welcome since this is one of our major strategies and we did show some progress this quarter.
So Mary will talk a little bit more about that.
- CFO
Okay.
Yes, Brandon, as it relates to inventory, as Dick just indicated, managing our inventory is definitely one of our biggest priorities.
So we've made it a priority across the Company, across all of our businesses.
We have put in place a team of people who is looking at that and managing it.
So it's a key priority.
In terms of setting specific targets, we will be doing that as part of our budget process so I don't have any specific targets that I can share with you at this point.
But just be assured that it's a high priority for us and we are looking at it across every business unit.
And the same goes for DSO.
That's something that we are looking at as well.
- Analyst
One follow-up on your comments, Dick, about the different segments or different club types.
Has there been any change in how the mix looks there as we think about that business last year versus this year and kind of how to think about a sustainable growth rate or a pricing situation?
How much -- has there been a change in the mix of core versus Troll, for example, and do you guys anticipate trying to use one club more than the other in different markets or something like that?
- Chairman, CEO & President
That's all relevant.
It's a very good question and really part of our strategy.
The Scholastic core clubs, and Judy can amplify this, are by far the largest and most profitable.
Those are the ones we really focus on the most.
Troll has done well and continues to show advances.
We're using these and I think we can use them even better to go after particular segments, economic segments, of the market and style segments of the market.
Judy will talk a little bit more about that.
- President Book Clubs & Scholastic at Home
Yes, one of our strategic objectives is to clearly differentiate the 3 brands, Trumpet, as Dick said, an upscale brand, and Troll, more a mass market; lower priced club.
We also find that teachers, because they have a community of students within a classroom, will use multiple clubs to serve the different needs of the different children.
So we have kind of an in place segmentation if you will.
Another opportunity for segmentation is our Scholastic special offers which are also used in conjunction with the core clubs and teachers can use those for curricular needs.
So, again, by different segments, higher demographics, people can use more and so on to really build their participation in the clubs.
- Analyst
Okay.
Thanks.
- Chairman, CEO & President
That help, Brandon?
Thank you.
Operator
Our next question is coming from Jim Peters with Standard & Poor's.
Please go ahead.
- Analyst
Thank you.
Switching gears for a minute, just wondered if you could comment on the timing of implementation of FAS 123?
And following on from that to what degree have you factored the impact of the options expensing into your goals of 10 percent operating margin.
Thank you.
- Chairman, CEO & President
Excellent question and one I will be delighted to have Mary answer .
The 10 percent margin, we have that as our goal, right?
- CFO
That's right.
As it relates to FAS 123, because we are a fiscal year Company with our year-end in May, we are just starting to look at that and it will come into effect for us clearly at some point in '06.
So we are just going through the process of evaluating how and exactly when we are going to implement that.
So, we'll have more to say about that later.
Then your margin question around the 9 to 10 percent.
We've always said that that was our long-term goal.
We're happy with the progress that we are making toward that goal and we feel that we are on track to achieve that in the time frame that we set out which was the 3 to 5 year timeline.
- Analyst
Would it be fair to say then that would incorporate the options expensing as well, that goal.
- CFO
Yes.
- Analyst
Great.
Thank you.
Operator
At this time I would like to turn the floor back over to Richard Robinson for any further closing remarks.
- Chairman, CEO & President
Thank you very much.
Thanks to everyone for their interest in our third quarter and for the excellent questions which were fun to answer and I hope we were responsive.
We are -- the fourth quarter, as Mary said, is important so we know we need to do well in this quarter.
We are looking forward to next year and we feel we are making progress in some of our fundamental goals.
So thank you for your attention and for your support of Scholastic.
Operator
Thank you.
This does conclude today's teleconference.
You may disconnect your lines at this time and have a wonderful day.