Scholastic Corporation — Q1 FY2024 Form 10-Q
Reporting period: Three months ended August 31, 2023, compared with the three months ended August 31, 2022. Amounts are in millions of dollars unless otherwise stated. The interim statements are unaudited. Scholastic’s business is highly seasonal: school-based and many education revenues are typically low in the first fiscal quarter and higher in other quarters.
Key financial results
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Revenue | $228.5 | $262.9 |
| Gross profit / gross margin | $98.5 / 43.1% | $118.4 / 45.0% |
| Operating loss | $(99.1) | $(58.1) |
| Net loss attributable to Scholastic | $(74.2) | $(45.5) |
| Diluted loss per share | $(2.35) | $(1.33) |
| Cash used in operating activities | $(38.1) | $(60.3) |
| Cash used in investing activities | $(21.8) | $(16.2) |
| Cash from (used in) financing activities | $(39.3) | $1.6 |
Operating margin was approximately negative 43.4%, versus negative 22.1% a year earlier. Cost of goods sold was 56.9% of revenue, compared with 55.0%; SG&A rose to $184.2 from $162.8, including higher labor and equipment costs, restructuring-related severance, and continued Education Solutions investment. The effective tax rate was 24.3%, versus 21.6%.
Cash and cash equivalents were $125.8 at August 31, 2023, down from $224.5 at May 31, 2023 and $239.7 a year earlier. Total debt was $5.9, all current; there were no borrowings under the $300.0 U.S. revolving credit facility. The company reported $299.6 of availability under that facility and $25.4 of current availability under short-term credit facilities. Current assets were $784.7 and current liabilities $598.7.
Material changes and operating performance
- Revenue declined $34.4, or 13%. Children’s Book Publishing and Distribution revenue fell $21.9 (17.6%), Education Solutions fell $7.2 (9.8%), and International fell $7.8 (12.0%).
- U.S. and international trade sales were affected by retail-market softness and lower backlist sales. Education Solutions results reflected the timing of sponsored programs and summer-learning offerings, with management describing a shift in revenue toward the fourth fiscal quarter.
- Operating loss widened by $41.0. The Children’s Book segment’s loss increased to $41.5 from $30.1; Education Solutions’ to $18.7 from $4.3; International’s to $8.2 from $3.5; and unallocated overhead to $30.7 from $20.2.
- Management cited higher prepublication amortization, fulfillment and labor costs, increased book-fair staffing and equipment in preparation for more fairs, Education Solutions growth investment, and $6.3 of restructuring-related severance across the business. Lower inventory purchases helped reduce operating cash use year over year.
- Cash declined by $98.7 during the quarter. Financing cash use included $35.9 of common-stock repurchases and $6.5 of dividends. Scholastic repurchased $36.2 of stock, including excise tax, and had $85.7 remaining under its repurchase authorization at quarter-end.
Outlook, risks and unusual items
- Management set a back-to-school book-fair count goal of 90% of pre-pandemic levels and said the school reading-events reorganization was complete, with customer-focused initiatives underway. No quantified full-year revenue or earnings guidance is provided in the filing text.
- Management expects continued retail-market softness to weigh on trade sales, while identifying new releases in the Dog Man, Cat Kid Comic Club, Heartstopper, Harry Potter and Goosebumps properties as potential support. It expects Education Solutions revenue to remain weighted toward the fourth quarter and said increased growth investment is expected to continue during FY2024.
- Management stated that it expects sufficient liquidity for anticipated operating, investing and financing needs. Seasonal cash outflows from June through September are typical for the business.
- Key risks identified include demand and retail-market conditions, timing of education programs and title releases, inflationary labor and transportation costs, foreign-exchange and variable-rate interest exposure, and the inherent uncertainty of estimates, including returns, inventory and royalty reserves.
- Various ordinary-course claims and lawsuits are pending; the company does not expect reasonably possible losses to materially affect its financial position or results. Additional insurance recoveries related to a previously accrued intellectual-property settlement are possible, but the amount cannot yet be estimated reliably.
- On June 1, 2023, Scholastic acquired the remaining 5% of Make Believe Ideas Limited for $2.1, bringing ownership to 100%. On September 20, 2023, the board declared a $0.20-per-share quarterly dividend, payable December 15, 2023.
Important facts for investors to verify
- Whether the targeted fair count and reorganized school-reading-events strategy translate into revenue and improved segment economics, particularly given first-quarter seasonality.
- Whether Education Solutions revenue shifts into the fourth quarter as expected, and whether continued growth spending produces benefits sufficient to offset near-term costs.
- Progress in restoring margins amid retail softness, higher labor and fulfillment costs, and increased prepublication amortization.
- Cash conversion, seasonal working-capital needs, and the pace of repurchases and dividends relative to liquidity and operating requirements.
- Developments in legal, sales-tax and insurance-recovery matters; the filing does not provide a clear estimate of potential insurance recoveries.