Scholastic Corp (SCHL +7%) showed signs of recovery in Q1 (Aug) with a notable sales increase. The children's book publisher has experienced significant downturns after past quarterly reports. Following a warning in December about two consecutive dismal quarters, SCHL's Q4 (May) results in July pushed shares to 2022 lows before recovering in August, marking a 30% drop from December highs.
Bearish sentiment has kept expectations low for SCHL ahead of Q1 results. Despite several concerning developments, the company found enough positive aspects to attract buying support.
- Revenue grew by 3.8% year-over-year to $237.2 million, marking the first year-over-year sales growth since Q4 2023. Net losses improved, with EPS of $(2.13) compared to $(2.20) a year ago.
- The revenue boost was primarily due to SCHL's $250 million acquisition of 9 Story, which owns popular kids' brands like Clifford The Big Red Dog and Daniel Tiger's Neighborhood. However, net losses are still worse than pre-2023 August quarters, with 2018 being the last comparable period.
- The U.S. school environment remains challenging, with factors like polarized school boards and higher absenteeism rates affecting sales. Economic headwinds, such as inflation, are also impacting parents' purchasing power, especially within SCHL's core middle-class demographic. Additionally, SCHL has seen increased churn among higher-value fairs.
- These challenges led SCHL to maintain its FY25 (May) guidance, targeting a modest 4-6% revenue increase year-over-year and adjusted EBITDA of $140-150 million. Given its reliance on the U.S. school schedule, Q1 and Q3 are typically weak due to summer and winter breaks, while Q2 and Q4 usually see profitability and sales growth.
SCHL's Q1 report was adequate, showing revenue growth during a typically slow quarter, reduced net losses, and maintained FY25 outlook confidence. However, the demand environment remains concerning. SCHL has had to lower its full-year forecasts in the past due to inflation, school-related challenges, and political factors. Caution is advised as SCHL may be in the early stages of a turnaround, but consistent quarterly performance is yet to be seen, keeping uncertainty high.
