Scholastic Corp Q1 FY2026 Earnings Call

Good day, and thank you for joining us. Welcome to Scholastic's First Quarter Fiscal Year 2026 Results. I will now turn the conference over to Jeffrey Matthews, Executive Vice President and Chief Growth Officer.

Hello, and welcome, everyone, to Scholastic's Fiscal 2026 First Quarter Earnings Call. Today on the call, I'm joined by Peter Warwick, our President and Chief Executive Officer; and Haji Glover, our Chief Financial Officer and Executive Vice President. As usual, we posted this call's investor presentation on our IR website at investor.scholastic.com, which you may download now if you've not already done so. We would like to point out that certain statements made today will be forward-looking. These forward-looking statements, by their nature, are subject to various risks and uncertainties and actual results may differ materially from those currently anticipated. In addition, we will be discussing some non-GAAP financial measures, as defined in Regulation G. The reconciliations of those measures to the most directly comparable GAAP measures may be found in the company's earnings release and accompanying financial tables, filed this afternoon on a Form 8-K. This earnings release has also been posted to our Investor Relations website. We encourage you to review the disclaimers in the release and investor presentation and to review the risk factors disclosed in the company's annual and quarterly reports, filed with the SEC. Should you have any questions, after today's call, please send them directly to our IR e-mail address.

Thank you, Jeff, and good afternoon, everyone. Scholastic had a productive summer, as we prepared for the back-to-school season and advanced important initiatives. As expected, our first quarter reflected the normal seasonality of our business, with an operating loss in line with previous years. We continue to make strong progress on our previously announced real estate monetization process, with significant investor interest in both our SoHo headquarters and our Jefferson City distribution center. We remain on track with the timeline we outlined in July. Haji will share further details in his remarks. At the same time, we're driving greater financial discipline and operational leverage across the company, while affirming our full year guidance. These actions position us well for profitable growth in the quarters and years ahead. In our Children's Book Publishing and Distribution segment last quarter, trade sales were solid, with strong continued demand for our global franchises driving unit sales in excess of the overall growth in the children's and young adult markets. Suzanne Collins: Sunrise on the Reaping has now sold 3.7 million copies worldwide since its March release. Looking ahead, in October, we're excited to release the 25th title in Lauren Tarshis's I Survived series, another middle-grade best seller along with the illustrated edition of Catching Fire and the interactive illustrated edition of Harry Potter and the Goblet of Fire. In November, we will publish a collector's edition of Sunrise on the Reaping to sustain momentum ahead of Lionsgate's feature film adaptation in 2026. We're also building towards another major global release, with Dave Pilkey's Dog Man: Big Jim Believes. Preorders are tracking in line with the last Dog Man, positioning this newest title for a strong on-sale. The Dog Man franchise has more than 70 million copies in print, across 48 languages. And next spring, Dave Pilkey's Captain Underpants returns in an entirely new format, with the first Epic Manga, illustrated by Motojero. In book fairs, quarter 1 represents only a small portion of annual revenue, given the school summer vacations, but early indicators are encouraging. Fall bookings are strong and ahead of last year's bookings. Redemption of Scholastic dollars, our reward currency in book fairs, is high, indicating good engagement with book fair hosts. We're also making progress in booking more larger fairs and reducing churn. In book clubs, quarter 1 also represents a small portion of annual revenue with year-over-year change reflecting the timing of mailings. With the integration of trade fairs and clubs into the new Children's Book group, we now have one aligned organization coordinating editorial, merchandising, marketing, and distribution to maximize the reach and value of our publishing across both our proprietary and retail channels. Our initial priority has been streamlining operations and infrastructure, enhancing data analytics, optimizing inventory and overhead, and driving early cost savings while building a foundation for long-term profitable growth. Turning to Scholastic Entertainment, we're positioned for renewed growth as industry greenlighting accelerates and our 360-degree IP strategy gains traction. Now with the capabilities and assets of 9-story Media Group fully integrated into our strategy and organization. We're using YouTube as a launch pad for new properties after integrating all 9 story branded channels under the Scholastic banner. Clifford remains a cornerstone franchise, both in traditional linear and on digital platforms. We expect to surpass 10 million monthly views by calendar year-end of classic Clifford content on YouTube, and we're supporting this with new publishing consumer products and promotional partnerships to lay the groundwork for Clifford's next phase of growth. The trailer for Paris Hilton's Paris & Pups dropped on all social media platforms and has been viewed more than 1.8 million times. The Series YouTube launch is coming September 23, with episodes releasing weekly and toys launching in fall 2026 with Playmates Toys, as they announced this morning. Scholastic holds global publishing rights with tie-in books also scheduled for fall 2026. This approach, pairing digital-first content with publishing, is central to our strategy. It not only expands the reach of our IP but also builds brand affinity that flows back into book sales. As just announced, we've also launched the first-ever Scholastic branded streaming app, in partnership with Future Today. The app offers families a free, safe, and trusted destination to enjoy beloved Scholastic programming on demand, with nearly 400 half hours of content and will scale to more than 1,300 half hours by fiscal 2027. A significant marketing campaign begins this month to build awareness and adoption. Together, these initiatives are expanding the reach of Scholastic's IP, creating high-margin digital revenue streams and strengthening our position at the intersection of publishing and media. In Scholastic Education, sales were pressured in the quarter by a volatile funding environment, reflecting the delay of some federal education grants and cancellation of others. Further, several states are facing budget impasses. In this challenging environment, we continue to take steps to strengthen this business for the long term. Under new leadership, the team is refocusing our go-to-market functions on our core strengths, rationalizing the product portfolio, and prioritizing investments in high-impact offerings, like Knowledge Library. While near-term results remain constrained by the market, education continues to be central to Scholastic's mission, and we remain confident in its long-term potential. International results reflected continued portfolio rationalization and a focus on margin improvement. We see growth opportunities in expanding English as a second language programs and in growing markets like India and the Philippines. Overall, Scholastic delivered a solid start to fiscal 2026. We advanced our strategy, including recent reorganizations, investing in some of our strongest franchises and IP, made progress on our potential real estate monetization, and prepared for the important back-to-school season. With these actions, we're affirming our full year guidance and remain confident in our ability to deliver meaningful profit growth while continuing to create long-term value for our shareholders and lasting impact for children worldwide. Thank you. And I'll now turn it over to Haji.

Thank you, Peter, and good afternoon, everyone. As usual, I will refer to our adjusted results for the first quarter, excluding one-time items unless otherwise indicated. Please refer to our press release tables and SEC filings for a complete discussion of one-time items. As Peter discussed earlier, our first quarter reflected the normal seasonality of our business during the quiet summer months. I'm proud of our team's hard work, preparing for the back-to-school season, and we are well positioned to achieve our plan this fiscal year and beyond. Beginning with our consolidated financial results and our typically small summer first quarter, when our school reading events division had minimum sales, revenues decreased 5% to $225.6 million. Our seasonally adjusted operating loss improved to $81.9 million from $85.6 million in the prior year period. Reflecting cost-saving initiatives, adjusted EBITDA was a loss of $55.7 million, an improvement from a loss of $60.5 million a year ago. Net loss was $63.3 million compared to $60.3 million in the prior year period. On a per diluted share basis, adjusted loss increased to $2.52 compared to a loss of $2.13 last year, primarily reflecting lower shares outstanding due to share buybacks. As a reminder, Scholastic results are highly seasonal. In addition to the first quarter, we also generally recorded an operating loss in our third quarter with profitable second and fourth quarters. Turning to our segment results. In Children's Book Publishing and Distribution, revenues for the first quarter increased 4% to $109.4 million, reflecting growth in school book fairs. Segment adjusted operating loss improved to $34.3 million from $36.6 million in the prior year period. Book fair revenues were $34.1 million in the quarter, an increase of 18%, driven by higher Scholastic dollar redemptions. Book Clubs revenue was $1.8 million in the quarter compared to $2.7 million a year ago, reflecting the timing of mailings, as Peter discussed. In our Trade Publishing division, revenues were $73.5 million in the first quarter, essentially flat with prior year period, reflecting continued strong demand for Hunger Games and Harry Potter titles. We are optimistic in our publishing plan for this fiscal year, which features many exciting new titles in upcoming quarters. Turning to Scholastic Education, segment revenues were $40.1 million in the first quarter versus $55.7 million in the prior year period, reflecting lower spending on supplemental curriculum products and the timing of state-sponsored program revenues. Segment adjusted operating loss was $21.2 million in the first quarter compared to a loss of $17 million in the prior year period, reflecting lower gross profit, partly offset by cost cuts and careful expense control. Turning to our Entertainment segment. Revenues decreased by $3 million to $13.6 million compared to $16.6 million in the prior year, primarily driven by fewer episodic deliveries as anticipated. Segment adjusted operating loss was $4 million, a decline of $5.2 million from the prior year quarter. The current year period includes $700,000 in incremental amortization expense on intangible assets related to the timing of the acquisition in the prior year period. As Peter discussed, we remain encouraged by recent momentum and are positioned for renewed growth as industry greenlighting accelerates. International segment revenues were $59.4 million in the first quarter, up from $56.8 million a year ago. Excluding the $0.2 million year-over-year impact of favorable foreign currency exchange, segment revenues were up $2.4 million, primarily driven by higher revenues in Australia, the U.K., and Asia. Segment adjusted operating results improved to a loss of $4.1 million compared to a loss of $8.3 million in the prior year period, reflecting higher revenues and continued optimization of this business. Unallocated overhead costs decreased by $6.6 million to $18.3 million in the first quarter, primarily driven by lower employee expenses from cost reduction initiatives. Now turning to cash flow and the balance sheet. In the quarter, seasonal net cash used by operating activities was $81.8 million compared to net cash used of $41.9 million in the prior year period. This increase in cash use was primarily driven by fluctuations in net working capital with higher inventory purchases, including tariff charges, the timing of general operating expense payments, and higher interest, partially offset by higher customer remittance. Severance payments were also higher as part of the cost-saving initiatives. Free cash used in the first quarter was $100.2 million compared to $68.7 million in the prior year period, reflecting lower cash flow from operations, partially offset by lower capital expenditures. At quarter end, the company had borrowings of $325 million under its unsecured revolving credit facility. Net debt was $242.8 million compared to net debt of $136.6 million at the end of fiscal 2025, which was due to the working capital requirements. In the first quarter, we continued to return excess cash to shareholders through our regular dividends of $5.2 million. We currently have $70 million remaining on our share buyback authorization. The company expects to continue purchasing shares from time to time as conditions allow, on the open market or in negotiated private transactions for the foreseeable future. As we previously announced, the company retained Newmark Group to identify investment partners for potential sale-leaseback transactions of all or part of its office and retail real estate in New York City and its Jefferson City distribution centers. These processes have generated significant interest and are progressing. We expect both to conclude this fall. While there can be no guarantees of transactions of either or both properties, we remain optimistic about both in the context of our capital allocation priorities, which include debt reduction and share repurchases. Now for our outlook for the remainder of the year. Our strategic efforts to align spending with long-term goals are driving favorable operating margins, supported by our ongoing SG&A optimization. Our goal for these actions is to sustainably lower our cost structure, especially with respect to non-revenue generating and consulting expenses. As for the impact of tariffs, we are closely following changes in policy and continue to expect approximately $10 million of incremental tariff expenses this fiscal year in our cost of product. We expect a strong second quarter benefiting from major trade releases. As Peter previously indicated, we are affirming our fiscal year 2026 guidance for revenue growth of 2% to 4%, adjusted EBITDA of $160 million to $170 million, and full year free cash flow between $30 million and $40 million.

Thank you, Haji. In conclusion, after a solid start to the fiscal year and the return of students to schools, Scholastic is positioned well to continue its momentum and execute its plan for substantial earnings growth in fiscal 2026. As I laid out in July, our plan is focused on building Scholastic's long-term opportunity as a global leader in the children's publishing, media, and education spaces, meeting kids, families, and schools' essential needs to educate, inform, and engage kids. In support of that, we continue to reduce costs, strengthen our organization, return capital to shareholders, and take steps to optimize our capital structure and balance sheet. We look forward to providing our next update in December after a big second quarter.

Thank you, Peter. With that, we will open the call for questions. Operator?

Our first question comes from Brendan McCarthy with Sidoti.

I just wanted to start off looking at the Education Solutions business. I know we just wrapped up the summer months. But I'm curious if you've had any early feedback on some of the new products that you brought to the market and maybe how they've been resonating with schools or students.

Brendan, this is Jeff here. I'll step in as the interim head of this business. Look, we were getting great feedback from customers around some of the new products. Of course, it's a difficult selling situation. As Peter described, there are some delays and cancellations of some federal funds. So I think in that environment, we are very encouraged by what we're hearing, particularly with Knowledge Library, as well as our core products, our classroom libraries and our classroom magazines.

I appreciate the insight, Jeff. Given the current pause in spending from states and school districts, what key factors do you believe will influence a reversal of this trend?

That's a good question. It's important to note that schools are still spending money. However, in an environment where there is low certainty about future funds, they tend to hold back on anything other than essential purchases. Our strategy focuses on helping customers understand how Scholastic's products meet their critical needs. As funding becomes more certain, particularly with the federal programs and grants that were released in late August, we anticipate that school leaders will be more willing and confident in making purchases. Schools still require materials in the classroom, and many have invested significantly in their core curricula over the past year or two. Now is the time for them to enhance their classrooms with additional materials to support teachers and students. Overall, the cycle is favorable; we just need to navigate through this period of uncertainty largely caused by volatility in Washington.

That makes sense. Jeff, that's certainly something to keep an eye on. I wanted to shift focus to the Entertainment segment. I know your priority has really been on getting content onto YouTube, where there's an advertising revenue share model. When can we expect to see that reflected in the financial statements and the P&L? From a long-term perspective, what does success look like for the 9-story media business?

It's Peter here, Brendan. The digital model we currently have and the digital income we are generating is high-margin and will continue to grow. This is a very positive development for us. We will see significant benefits progressively in the future, rather than experiencing any sudden changes this quarter or next. What’s happening is that our initiatives, like those on YouTube, are not only providing high-value revenue but also enhancing our brand visibility, encouraging children to purchase books like those about Clifford. We now have 1.2 million subscribers to Scholastic channels on YouTube, which is a significant increase. We are confident that, over time, this will become a substantial source of high-margin revenue due to the advertising revenue share. This is also part of our comprehensive strategy that integrates our publishing and media efforts, allowing us to leverage the interconnections between the two and gain advantages from both our media and book properties.

Right. That makes sense. Peter. I guess just in terms of scale, are you able to maybe quantify what the revenue opportunity might look like as it relates to 9-story? And I guess, strictly speaking from the perspective of monetizing the digital content side.

This is Haji. We're currently in the early stages of this and have the potential to expand from two platforms to six or seven more. This presents an opportunity to showcase our content to new audiences while building on our existing success. However, it will take us a few months to quantify the impact as we observe the growth in viewership. Additionally, we are collaborating with a partner on this, which means we will be sharing the revenue. We anticipate seeing significant potential from this opportunity around 2027.

I have a question regarding the cost structure, specifically concerning SG&A. I'm interested in knowing where you are eliminating costs in the business and if you see any further opportunities for reducing expenses.

We have thoroughly examined the restructuring of our organization during the early part of this fiscal year, and we are identifying areas where we can reduce spending. We conducted a comprehensive analysis before providing our guidance, which reflects the majority of our spending reductions. We announced cost reductions in the range of $15 million to $20 million, and we are currently seeing the positive impact of these changes in our financial results.

Got it. Got it. One more question for me just on the guidance affirmation. I guess at this point, I know we're only at the start of the school year. But at this point, what variables might cause a material underperformance or outperformance of the full year fiscal guide?

For us, it's all about understanding where the retail market is. As you know, we're experiencing a lot of things in the marketplace. Consumer and school spending is somewhat in question. But we feel very confident in the plan we put out from an organization perspective. I don't foresee any major concerns from my side on what's going on. But there could potentially be some upside and downside, and we're going to manage it as an organization. And that's why we leave the opportunity to be very conservative on how we approach things. But at the end of the day, we want to continue to invest in growth, which is in our revenue side of the business and fall back on things that do not generate revenue. And the most important thing for us is the concerns of tariffs as it reflects our business because we are a retail business. And those expenses, which we've already planned for, which is about $10 million this year, we're continuing to monitor all the things that are going on with the government down in D.C.

I think, Brendan, the other thing to mention is that the number of school book fairs we have is increasing. It's still too early to determine specific metrics, but revenues per fair are crucial to us. We haven't hosted enough fairs yet to calculate that. However, I believe we will have a clearer picture moving forward. There's no reason to think we aren't on track with our plans, and it’s encouraging to see an increase in the number of fairs booked, which is a positive sign.

Our next question comes from someone at B. Riley Securities.

I want to go back to the Education Solutions business. You flagged the funding uncertainty as an impact on spending for supplemental materials. I think in the recent past, you've also indicated you expect market conditions to get better over the next 12 to 24 months. How do we reconcile those two? Should we anticipate a similar trajectory for the business as we observed in 1Q as you move through fiscal '26? Or do you think things stabilize as an opportunity to improve profitability as you move through the year?

Drew, this is Jeff again. We are expecting that this year will be more back-end loaded than before, based on current patterns. We have realigned our selling year with our fiscal year, which means we'll enter Q4 with a very full pipeline. Last summer, we started with an empty pipeline. Additionally, we've noticed that federal education policy changes and delays over the summer and spring have significantly impacted us, especially given the long lead times associated with purchases. These delays were particularly challenging during the summer, but we are hopeful that these challenges will ease over the fall and into the spring. We are taking all necessary steps to position ourselves well in the market to utilize available funding and ensure we are prepared for a substantial selling season in the spring.

Also on top of that, Drew, just to be clear that we are very diligent about our frugality and what we spend and how we continue to look at our expenses within that business. So I just want to make sure you're clear on that.

Okay. All right. Helpful. Maybe looking at fiscal 2Q, Peter, I think you characterized your expectations for the quarter or that it will be big. I'm curious as if you can expound upon that and kind of what the puts and takes are for the quarter.

Well, first of all, if we examine the segments, trade publishing is looking strong in the second quarter. We're excited about some upcoming releases, including a new Dog Man, and early sales indicators suggest that our performance will be significantly better than in the second quarter of last year. Overall, we feel optimistic about the year. In addition, the number of book fairs in our second quarter is expected to surpass last year's count, and bookings are up, which looks promising. However, I can't share too many details until more fairs are finalized. I can say that the team is feeling positive about their progress. Regarding our costs, while education revenue showed a notable year-over-year decline, the drop in revenues was offset by a smaller decrease in operating income due to our cost-saving measures. We’ve also seen reductions in operating expenses due to initiatives taken earlier this year, along with benefits from cost savings in the second half of the last financial year coming through now. International markets are performing well, particularly in the U.K., Australia, and New Zealand. The school book fair season in Australia is active, contributing positively compared to the first quarter. Additionally, our book offerings, especially popular titles like Sunrise on the Reaping, the Hunger Games series by Suzanne Collins, and Dog Man, are doing very well in the U.K. These factors give me confidence about the second quarter, affirming that we're on track with our guidance for the year. Our internal expectations were met in the first quarter, and our targeting strategies are working effectively.

Great. And then maybe one last one for me for Haji. You outlined the drivers behind the negative variance for cash flow and free cash flow, specifically in your preamble versus the year-ago period. It sounds like you believe you can make that up over the balance of the fiscal year. What are the swing factors to achieving that?

The majority of our focus is on our revenue and how we project it for the year. We expect receipts to be stronger in the second half compared to the first half. Additionally, we are closely monitoring our capital spending, which has a different outlook than last year. We made significant investments last year in our One Scholastic fulfillment center, and those expenses will decrease year-on-year. Our investment strategy for growth this year also differs from last year. I am very excited about our current position. Furthermore, last year we incurred costs for both Dave Pilkey and Suzanne Collins, but this year we only need to pay for new titles from Dave Pilkey. This gives me added confidence about our capital situation and our spending plans for this year.

And this concludes our Q&A. I will pass the call back to management for any closing remarks.

Well, thank you very much. And also thank you to our authors and illustrators, educators, and employees. It's their hard work and creativity that drives our success. And I'd also like to thank our shareholders and all who joined us this afternoon live or on the recorded call later. We appreciate very much your support. Bye.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.