Scholastic's Q1 2026: Contradictions Emerge on Education Solutions Funding, Cost Cuts, and YouTube Strategy

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: $225.6M, down 5% YOY
• EPS: $-2.52 adjusted loss per diluted share, versus $-2.13 loss in the prior year

Guidance:

• FY26 revenue growth 2–4% affirmed.
• Adjusted EBITDA $160–$170M; FCF $30–$40M.
• Expect a strong Q2 driven by major trade releases (incl. Dogman) and higher Book Fair bookings/fair count.
• About $10M incremental tariff costs in FY26 COGS.
• SG&A optimization and $15–$20M cost reductions to support margins.
• Education to be back-half weighted with a fuller Q4 pipeline as funding uncertainty moderates.
• Real-estate sale-leasebacks (NYC HQ, Jefferson City DC) expected to conclude in fall; proceeds prioritized for debt reduction and share repurchases.

Business Commentary:

• First Quarter Fiscal 2026 Results:
• Scholastic reported revenue of $225.6 million in Q1, a 5% decrease year-over-year.

• The decline was due to the normal seasonality of the business during the quiet summer months and a challenging education spending environment.

• Children’s Book Publishing and Distribution:

• The segment's revenue increased by 4% to $109.4 million in Q1.

• Growth was driven by higher Scholastic dollar redemptions in Book Fairs, offsetting lower revenues in Book Clubs due to mailing timing.

• Scholastic Education and Tariff Impact:

• Segment revenue was $40.1 million in Q1, down from $55.7 million in the prior year.

• Sales were pressured by delays and cancellations of federal education grants and state budget impasses, with approximately $10 million in incremental tariff expenses impacting cost of product.

• Entertainment Segment and Digital Strategy:

• The segment's revenue decreased by $3 million to $13.6 million compared to the prior year.

• The decline was due to fewer episodic deliveries, but the segment remains encouraged by recent momentum and industry green lighting acceleration. The company's digital strategy, including YouTube, is expected to contribute to high-margin digital revenue streams in the future.

• Real Estate Monetization and Financial Discipline:

• Scholastic continued to make progress on its real estate monetization process, with significant investor interest in both SoHo headquarters and Jefferson City distribution center.
• The company is driving greater financial discipline and operational leverage across the organization, positioning it for profitable growth.

Sentiment Analysis:

• Guidance reaffirmed: “revenue growth of 2% to 4%, adjusted EBITDA of $160 to $170 million, and full-year free cash flow between $30 and $40 million.” Q2 expected to be strong. However, Q1 revenue fell 5% and the company posted a seasonal operating loss; Education “sales were pressured… by a volatile funding environment.” Monetization from digital/YouTube seen building over time rather than near term.

Q&A:

• Question from Brendan McCarthy (Sidoti & Company): Early feedback on new Education products and how they’re resonating?
  Response: Customer feedback is strong—especially for Knowledge Library—though sales remain constrained by delayed/canceled federal funds.

• Question from Brendan McCarthy (Sidoti & Company): What will turn Education spending trends around?
  Response: Greater funding certainty as paused federal grants resume; schools still need materials and should purchase more as certainty improves.

• Question from Brendan McCarthy (Sidoti & Company): When will YouTube/digital monetization show up in results and what’s the scale?
  Response: High-margin digital revenue will build gradually; broader platform expansion is planned, with meaningful upside more likely in 2027.

• Question from Brendan McCarthy (Sidoti & Company): Where are SG&A cuts coming from and how much more is possible?
  Response: Restructuring reduced spend across the org; guidance embeds most actions; $15–$20M cost reductions are already flowing through.

• Question from Brendan McCarthy (Sidoti & Company): Key variables for beating/missing the FY26 guide?
  Response: Consumer/school demand, Book Fairs revenue per fair, and tariffs (~$10M) are key; bookings and fair count are up and plan is on track.

• Question from Drew Crum (B. Riley Securities): Education outlook—should FY26 follow 1Q trajectory or improve?
  Response: Expect a more back-end weighted year with a strong Q4 pipeline; anticipate headwinds to moderate while tightly managing costs.

• Question from Drew Crum (B. Riley Securities): What drives the expected strength in fiscal 2Q?
  Response: Major Trade titles (incl. Dogman), higher Book Fair bookings/fair count, cost savings, and improving international trends.

• Question from Drew Crum (B. Riley Securities): What are the swing factors to achieve full-year free cash flow?
  Response: Heavier 2H receipts, lower capex versus last year, a different investment profile, and fewer large author payments support FCF.