Scholastic's Q2 2026: Contradictions Emerge on Educational Solutions Performance, Revenue Growth, and Debt Strategy Priorities

Date of Call: December 18, 2025

Financials Results

• Revenue: $551.1M, up 1% YOY
• EPS: $2.57 per diluted share (adjusted), up from $1.82 a year ago
• Operating Margin: Operating income $95.0M, up from $78.9M a year ago

Guidance:

• Fiscal 2026 revenues expected to be level with or slightly above prior year.
• Adjusted EBITDA outlook affirmed; now $146M–$156M (includes ~ $14M partial-year impact from sale-leasebacks).
• Fiscal 2026 free cash flow now expected to exceed $430M (reflects sale-leaseback proceeds; prior range was $30–$40M).
• Anticipate a higher seasonal operating loss in Q3 followed by profitable Q4.
• Expect growth in School Reading Events and Entertainment; modest YoY declines in Trade and International.
• Target ~92,000 book fairs (vs ~90,000 prior year) and expect ~$10M incremental tariff expense.
• Proceeds to be used to pay down the revolver and return capital via share repurchases (board authorized $150M).

Business Commentary:

• Strong Financial Performance:
• Scholastic reported adjusted EBITDA growth of 13% in the second quarter and affirmed its FY '26 earnings guidance after adjustments for sale leasebacks.

• This growth was driven by strategic initiatives and a focus on core businesses, including strong book fair performance and major global franchises.

• Book Fair and Franchise Strength:

• Book fair revenues increased by 5%, reaching $242 million in the second quarter, with a higher fair count and increased revenue per fair.

• Growth was driven by effective marketing and efficient operations, as well as strong brand recognition and engagement with students and families.

• Impact of Sale-Leaseback Transactions:

• The company completed two sale-leaseback transactions, unlocking over $400 million in net proceeds, with the Board increasing the open market share repurchase authorization to $150 million.
• This reflects Scholastic's disciplined shareholder-focused capital allocation strategy, prioritizing share repurchases to create value for shareholders.

• Education Solutions Challenges and Cost Management:
• Education Solutions revenues were down year-over-year, impacted by funding volatility and delayed federal disbursements.
• Despite this, segment adjusted operating loss improved year-over-year due to cost reductions and operational efficiencies, with improved sales pipeline expected in the second half.

Sentiment Analysis:

Overall Tone: Positive

• Management reported '13% adjusted EBITDA growth in the second quarter', affirmed FY'26 adjusted EBITDA outlook, and closed two sale-leasebacks unlocking over $400M. CFO: 'free cash flow ... now forecast to exceed $430 million.' CEO: 'operating from a position of strength' and Board expanded buyback authorization to $150M.

Q&A:

• Question from Brendan Michael McCarthy (Sidoti & Company, LLC): Can you provide any color or timing around how we can think about that $80 million increase in the buyback authorization... What might that look like going forward?
  Response: Board increased open-market buyback authorization to $150M as a first step; company will enter the market, views shares as undervalued, and is evaluating additional shareholder-return options.

• Question from Brendan Michael McCarthy (Sidoti & Company, LLC): I believe you mentioned you are targeting paying down a large portion of the credit facility?
  Response: Yes — plan is to pay down the revolver using proceeds to move toward more moderate leverage and retain facility flexibility if needed.

• Question from Brendan Michael McCarthy (Sidoti & Company, LLC): As far as debt-to-EBITDA target, what's the moderate level of leverage?
  Response: Historically targeted around ~1.75x net debt-to-EBITDA.

• Question from Brendan Michael McCarthy (Sidoti & Company, LLC): On the new guidance, specifically the top line revenue, can you walk us through the changes there... Are there any other changes baked into that lower revenue number?
  Response: Top-line outlook reflects Education softness from delayed funding; fairs growth (projected ~92k fairs vs ~90k last year) and higher revenue-per-fair offset declines with expected second-half uplift as funds disburse.

• Question from Brendan Michael McCarthy (Sidoti & Company, LLC): Regarding trade channel sales, is it still expected to be flat to moderately lower for fiscal '26?
  Response: Trade is expected to be in line with last year (flat), noting timing differences in publishing schedule versus fiscal '25.

• Question from Brendan Michael McCarthy (Sidoti & Company, LLC): Were you surprised at all to see the strong results in book fairs or any consumer spending concerns for the rest of the year?
  Response: Book fairs trends mirror last year: bookings strong, cancellations down, fewer buyers but higher spend per buyer, and management is encouraged about spring.

• Question from Brendan Michael McCarthy (Sidoti & Company, LLC): In Education Solutions you've taken costs out — do you still see much more room to take cost out of that segment?
  Response: Significant cost reductions already executed to rightsize the business; focus now is preparing to regrow as market funding recovers, which should improve margins.

• Question from Brendan Michael McCarthy (Sidoti & Company, LLC): With the fall season behind us, are you more optimistic heading into the spring season?
  Response: Yes — business is stabilized, management expects seasonal spring spending and federal fund disbursements to improve sales in the second half.

• Question from Andrew Crum (B. Riley Securities, Inc., Research Division): Can you address how dividends play into that? Any color around special dividends vs buybacks?
  Response: Dividend policy remains consistent (~$0.20 per share; ≈$20M/year); priority is returning capital efficiently, with emphasis on share repurchases.

• Question from Andrew Crum (B. Riley Securities, Inc., Research Division): If I back out the sale-leaseback transactions, the midpoint of adjusted EBITDA would suggest a decline year-on-year — is that correct and what's driving it?
  Response: No — when prior-year adjustments are applied, adjusted EBITDA still shows growth versus fiscal '25; the company directs readers to the press release reconciliation for details.

Contradiction Point 1

Educational Solutions Segment Performance and Outlook

It involves differing perspectives on the performance and outlook of the Educational Solutions segment, which could impact investor expectations and strategic decision-making.

What's considered moderate leverage? - Unknown Analyst (B. Riley Securities)

2026Q2: I mean, historically, we've been right around 1.75, roughly. - Haji Glover(CFO)

Can you elaborate on the positive outlook for Q2? - Unknown Analyst (B. Riley Securities)

2026Q1: We are seeing our Education Solutions business as more back-end loaded this year with a full pipeline expected by Q4. Headwinds from federal grant delays are anticipated to moderate over the fall and into the spring, setting up a strong selling season. - Jeffrey Mathews(Interim President of Scholastic Education)

Contradiction Point 2

Revenue Growth Expectations

It involves differing expectations for revenue growth in key segments, which could impact investor expectations and operational planning.

How will we reconcile uncertain funding impacting spending with expected market improvement over the next 12-24 months? - Unknown Analyst (B. Riley Securities)

2026Q2: We're actually -- the book fair people are feeling pretty good about the spring. So that's very encouraging. - Peter Warwick(CEO)

Can you share early feedback on the Education Solutions business and how the new products are resonating with schools and students? - Brendan Michael McCarthy (Sidoti & Company, LLC)

2026Q1: We're getting great feedback from customers around some of our new products. Despite a challenging environment with delays and cancellations of federal funds, we're encouraged by the interest in products like Knowledge Library and core offerings like classroom libraries and magazines. - Jeffrey Mathews(Interim President of Scholastic Education)

Contradiction Point 3

Debt Reduction and Shareholder Returns

It highlights differing priorities and strategies regarding debt reduction and shareholder returns, which are crucial for financial planning and investor expectations.

Are you targeting paying down a large portion of the credit facility? - [Questioner's Name]([Questioner's Company])

2026Q2: Yes. I mean -- yes, exactly since it is an open line of credit for us, we can pay that down. We have to -- it's repriced every month, so we'll probably most likely pay that down. And then if we need it, we'll definitely continue to do what we need to do as an organization from a short-term repayment. Our goal is to return to more moderate levels of debt or moderate levels of leverage like we've done over the last few years. - Haji Glover(CFO)

Can you explain your dividend strategy, particularly the lack of special dividends and the flat quarterly payout over recent years? - [Questioner's Name]([Questioner's Company])

2025Q4: Our goal is to return capital as efficiently as possible. And as you mentioned, the dividend, yes we have been consistent with our dividend payout, which is about $0.20 per share over the last few years. On an average quarter, that's about $5 million, so around an average of $20 million per year. We're continuing to build more value from the organization. But ultimately, it's about investing in our shares. - Haji Glover(CFO)

Contradiction Point 4

Education Solutions Segment Performance and Outlook

It involves differing perspectives on the performance and outlook for the Education Solutions segment, which is a significant part of the company's revenue and profitability.

Despite the revenue decline, Education Solutions' adjusted EBITDA remained flat YoY in Q2. Given the successful cost reductions, do you see further room to cut costs in this segment? - [Questioner's Name]([Questioner's Company])

2026Q2: Well, we've taken significant costs out, which really is reflective of what the current state of the market is. What we now need to be able to do is to prepare for regrowing that business to the size that it has been in the past. That's something which almost all educational publishers and especially those who are involved in supplementary publishing like ourselves are having to do. I mean I think we've done a really good job, I think, and very quickly adjusting to what we can do. And I think as the market recovers, what it means is that more of the -- more cents per dollar is actually going to land on our bottom line. - Peter Warwick(CEO)

What factors are driving the flat revenue expectation in the Education Solutions business for fiscal '26? - Brendan Michael McCarthy (Sidoti & Company, LLC)

2025Q4: The cycle is expected to improve. Efforts are focused on growth in more profitable segments and operating efficiently. - Peter Warwick(CEO)

Contradiction Point 5

Education Solutions Strategic Review and Funding Trends

It involves differing perspectives on the strategic direction and funding trends within the Education Solutions segment, which could impact investment decisions and market positioning.

Are you more optimistic heading into the spring season? How should we think about the education season resuming? - [Questioner's Name]([Questioner's Company])

2026Q2: We've taken significant costs out, which really is reflective of what the current state of the market is. What we now need to be able to do is to prepare for regrowing that business to the size that it has been in the past. - Peter Warwick(CEO)

Regarding the strategic review of the Education Solutions business, can you elaborate on the scope? Are you considering a sale or an internally led option? - Brendan McCarthy (Sidoti)

2025Q3: Strategic review is internally led, aiming to optimize resources and improve performance. The goal is to win in the supplemental market, utilizing Scholastic's strong brand. - Peter Warwick