Goblets of Value Gained on Potter Magic

Harry Potter won’t hit store shelves until Saturday but the youthful wizard is already working his magic on Wall Street.

Shares of Scholastic Corp., Jakks Pacific Inc. and Enesco Group Inc. have risen as sharply as the hype surrounding the release of the fourth book about an orphan who attends a school for witches and wizards, “Harry Potter and the Goblet of Fire.” All have a piece of the Potter franchise.

Scholastic, the U.S. publisher of the series by British author J.K. Rowling, has seen its shares climb 42% from a recent low of $44.06 in early May. The New York-based children’s and educational book publisher rose another 63 cents Thursday in Nasdaq trading to settle at $62.75.

In distributing 3.8 million copies of the new book, Scholastic has set a U.S. record for a first printing. All told, the publisher has sold 20.9 million copies of the the first three Potter books. Scholastic will sell about $100 million in Harry Potter books this year in the U.S., about 5% of its business, according to analyst Marta Nichols of Donaldson Lufkin & Jenrette in San Francisco.

“All of us have heard from many parents about how a Harry Potter book was the first time they could get their child excited about reading a book,” said Lorenzo diBonaventura, president of worldwide production for Burbank-based Warner Bros.

Although Scholastic has the U.S. publishing rights to the series, author Rowling has signed a deal with Time Warner’s Warner Bros. to produce movies based on the first two books and to oversee licensing agreements.

The jump in value for Scholastic’s shares pales in comparison to Enesco, the Itasca, Ill., maker of gifts and collectibles. Its shares have more than doubled over the past five days, rising $2.25 Thursday to close at $9 on the New York Stock Exchange. On Wednesday, Enesco said it had won the Warner Bros. license to make gifts and collectibles based on the books and the upcoming movie, scheduled to be released in November 2001.

(Enesco’s best-known product is the Precious Moments series of religious figurines sold in gift and card shops. Some religious groups have objected to the Harry Potter books in the belief that they romanticize witchcraft.)

Enesco plans to have the first of its Harry Potter gift ware line on store shelves in October, in time for Halloween and Christmas.

Shares of Jakks, the Malibu-based toy company, jumped 18% Thursday to close up $2.75 at $17.75 in Nasdaq trading, based on the attention it has received for winning Warner Bros. licenses to produce arts and crafts kits based on the Potter characters.

“The stock has been dead money for a while, but now it is getting quite a pop,” said Robert DeLean of Morgan Keegan & Co. in Memphis, Tenn.

El Segundo-based Mattel Inc. has the rights to make toys based on the character. Hasbro Inc. of Pawtucket, R.I., will produce the Harry Potter games and trading cards.

But the Harry Potter craze has yet to power stock gains for these larger companies because it makes up a much smaller percentage of their overall business. Jakks, by comparison, has told analysts that its Potter line will generate anywhere from $10 million to more than $100 million in revenue. A number anywhere in that range would be significant for the toy company, which had $184 million in sales last year.

Time Warner shares have risen 9% in the last week though analysts cautioned the rise is more likely spurred by the company’s pending merger with America Online rather than Harry Potter. Time Warner closed at $80.34, up $2.16 on the NYSE on Thursday.

Unless the Potter franchise becomes a “Lion King,” which garnered more than $1 billion in box office receipts and merchandising revenue for Walt Disney Co., sales generated by Harry and his friends will be just a tiny slice of the massive America Online/Time Warner’s revenues.

DiBonaventura, the studio executive, said that Warner Bros. focused on making a good movie, cognizant that merchandising can never drive a story. But the studio also knows that it has what many people consider a treasure in its hands. The Potter books have already become “trusted classics” akin to the “Wizard of Oz” books, he said.

“There are great expectations attached to this license, but whether it will translate into winning toys is yet to be determined,” said Jill Krutick, an analyst with Salomon Smith Barney in New York.

Although great movies or books don’t always turn into great licensing deals, Krutick said the Potter publishing phenomenon, especially its ability to attract both young and adult readers improves the chances of the Potter characters becoming more of a critical success.

Krutick estimates that the toy license for a typical Disney animated film generates $100 million to $150 million of revenue for a company such as Mattel, the No. 1 toy company. While that’s a nice chunk of business, it is dwarfed by other movie tie-ins, including “Star Wars,” which brought $650 million in revenue to Hasbro last year, and “Pokemon,” which looks to be an even larger winner for Hasbro this year.

But even when a license agreement is a success, Wall Street remains nervous, DeLean said, because of the fickle nature of consumers. Interest in toys and cards associated with Pokemon, the Japanese cartoon characters, is already beginning to fade.

“Wall Street looks for recurring revenue, not one-time shots,” he said. “The value of the Potter licenses really depends on whether it becomes an evergreen. But this could be longer lived than other licenses because of the best-selling books.”

In a typical license agreement, the holder wins the right to manufacture a certain product or category of products in return for a minimum fee or percentage of sales, which ever is larger. DeLean said most license agreements require royalty payments of 5% to 8% of sales, but in some industries such as video games, that can climb as high as 12%.

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The Potter Effect

The Harry Potter books have enriched more than booksellers. Shares of companies that have a piece of the Harry Potter franchise are rising as fast as the Firebolt broomstick Potter rides in his adventures.

... and are expected to spend $20.7 billion this year.

Harry Facts

* An estimated 20.9 million copies of the first three books in the series are in print in the United States. Four out of 10 are purchased by adults for adults.

* The first printing of Harry Potter IV will be 3.8 million copies. The third book, “Harry Potter and the Prisoner of Azkaban” had a first printing of 900,000 copies in 1999.

* “Prisoner” caused a 92% jump in hardcover book sales from April to June 1999.

* Author J.K. (Joanne) Rowling earned $22 million in 1999, making her Britain’s third-highest-paid woman.

Thursday:

$62.75, up 63 centsThursday:

$17.75, up $2.75Thursday:

$9.00,

up $2.25