Pearson cuts earnings guidance as sales fall 4% in third quarter

Underlying sales fell 4% at Pearson in the third quarter and the education group has reduced its earnings guidance range for the full year by 5p to 70p-75p.

The FTSE 100 group said some of its largest markets were weakened by "cyclical and policy related factors", in particular, including lower college enrolments in the US and lower textbook purchasing in certain South Africa provinces.

As all business verticals slunk below forecast, third-quarter sales declined 2% in headline terms, 5% at constant exchange rates (CER) and down 4% in underlying terms. This means for the nine months of the year so far, sales are up 2% in headline terms and down 2% at CER and in underlying terms.

"The key cyclical and policy-related factors which have been hurting our markets for some years have yet to improve," said chief executive John Fallon, who assured that the group continued to manage costs tightly and gain market share in many areas of the business.

However, the fall in sales added to the disposal of PowerSchool, the Financial Times and The Economist, as well as movements in exchange rates is expected to impinge on full year earnings, hence the 5p cut from July's guidance.

Furthermore, management believes the outturn will be "around the bottom" of the guided range due to the persistent nature of the challenging market conditions.

Delving into the results by area, North America enjoyed a 7% increase revenues in headline terms, with online and professional both strong, but the strong dollar saw this reduced to a 1% at both CER and in underlying terms.

Revenues in the core European business declined by 8% in headline terms, and by 5% at both CER and in underlying terms as strong Italian growth was more than offset by the impact of UK policy changes on school accountability measures and declines in Western Europe

In growth markets, sales slipped 3% in headline terms due to sterling's strength and declined by 1% at CER and in underlying terms, with growth in China and the Middle East and stability Brazil counterbalanced by continued South African weakness.

Analysts at Investec said the trading update was "a new painful negative as we thought things had bottomed" and said they would now review their forecasts as the new guidance implied a circa 5-6% EPS downgrade, "with danger that we need to change FY16E more given a lower base".