Lower than expected profit growth in the second quarter ended November 30, 2023, in Scholastic's school reading events division—formed this spring by combining book fairs and book clubs—led the publisher to lower its predictions for its financial results for the fiscal year ending May 31, 2024. Executives attributed the slower growth to a host of “external factors,” including a “complex” school environment.
In a conference call, CEO Peter Warwick explained that today’s more challenging school environment reflected “growing polarization in U.S. society and politicized schools and school boards, higher rates of absenteeism, and chronic teacher shortages. Together, these factors have put greater demands on schools and teachers, including through expanded restrictions on educators, parents, and kids’ ability to choose books.” In addition, Warwick continued, the polarization has resulted in mandates “changing how kids are taught, especially with respect to literacy instruction.”
Earlier this fall, Scholastic tried to thread the needle over the conflict about what is acceptable to be read in schools by creating a diverse stories offering for its book fairs called "Share Every Story, Celebrate Every Voice," which librarians and school officials hosting fairs were required to decide whether to offer or not. The company said that it created the collection as a way to continue providing diverse books, as a number of states and localities pursue legislation or other policies around content selection that could put librarians and school officials in jeopardy.
The move quickly raised a social media storm, with critics accusing Scholastic of censorship. The company apologized, acknowledging “that the separate nature of the collection has caused confusion and feelings of exclusion,” and said that it would have a new approach to fairs ready for the spring. In the conference call, Warwick said Scholastic is “improving the book fair host experience with new tools like our updated online fare preview and improved online restart process.”
In reporting results for the most recent quarter, book fair revenue rose 1% over a year ago, to $242.1 million, primarily due to an increase in the number of fairs. But, Warwick explained, while revenue per fair rose, the growth rate was below expectations, resulting in lower-than-expected profits for the segment in the quarter.
The problems with the fairs complicated Scholastic’s efforts to get the new school reading events division off the ground. As part of its plan to create a smaller, more profitable book club unit, Scholastic reduced its promotion spending on unprofitable offers, and as a result, revenue in the quarter fell 44%, to $32.4 million.
Scholastic said that it expects lower than expected school and teacher participation and spending in the school reading events division to continue for the remainder of this school year. That revised forecast led the company to drop its prediction that total sales would increase between 3% to 5% in fiscal 2024 to a forecast of revenue being flat with fiscal 2023 or down slightly. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is now expected to be in the range of $165 million to $175 million, compared to its previous forecast of EBITDA between $190 million and $200 million.
The news of the lower financial forecast was not welcomed by investors. As a result, Scholastic’s stock was down about 9% in Friday morning trading.
For the entire company, second quarter sales fell 4%, to $562.6 million. Lower costs resulted in a 1% increase in operating income, to $101.3 million.
In Scholastic's trade group, revenue fell 1%, to $118.3 million, due to lower production by Scholastic Entertainment. Excluding the entertainment arm, group sales rose 3%, driven by a number of frontlist bestsellers, including Cat Kid Comic Club: Influencers by Dav Pilkey, the interactive edition of Harry Potter and the Prisoner of Azkaban, The Harry Potter Wizarding Almanac, and the new paperback edition of The Ballad of Songbirds and Snakes by Suzanne Collins.
Despite the current challenges, Warwick said that the long term outlook for Scholastic’s offerings remains promising. ”It's clear that reading, literacy, and learning are acute priorities that families, educators and leaders all agree on independent of geography or party affiliation,” he said.
