Scholastic (SCHL)

Educational publishing and media company Scholastic (NASDAQ:SCHL) missed Wall Street’s revenue expectations in Q1 CY2025 as sales rose 3.6% year on year to $335.4 million. Its GAAP loss of $0.13 per share was 83.3% above analysts’ consensus estimates.

Company Overview

Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ:SCHL) is an international company specializing in children's publishing, education, and media services.

The advent of the internet changed how shows, films, music, and overall information flow. As a result, many media companies now face secular headwinds as attention shifts online. Some have made concerted efforts to adapt by introducing digital subscriptions, podcasts, and streaming platforms. Time will tell if their strategies succeed and which companies will emerge as the long-term winners.

Competitors in the publishing industry include John Wiley & Sons (NYSE:JW.A), Disney (NYSE:DIS), and The New York Times (NYSE:NYT).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Scholastic struggled to consistently increase demand as its $1.59 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and suggests it’s a lower quality business.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Scholastic’s recent performance shows its demand remained suppressed as its revenue has declined by 2.9% annually over the last two years.

This quarter, Scholastic’s revenue grew by 3.6% year on year to $335.4 million, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 7.2% over the next 12 months. Although this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Scholastic’s operating margin has shrunk over the last 12 months and averaged 3% over the last two years. The company’s profitability was mediocre for a consumer discretionary business and shows it couldn’t pass its higher operating expenses onto its customers.

This quarter, Scholastic generated an operating profit margin of negative 6.3%, up 4.2 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Scholastic’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

In Q1, Scholastic reported EPS at negative $0.13, up from negative $0.91 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Scholastic’s full-year EPS of $0.60 to grow 187%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Scholastic has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.6%, lousy for a consumer discretionary business.

Scholastic burned through $30.7 million of cash in Q1, equivalent to a negative 9.2% margin. The company’s cash burn increased from $7.1 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Scholastic historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.6%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Scholastic’s ROIC averaged 2.4 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Scholastic reported $94.7 million of cash and $280.8 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $144.9 million of EBITDA over the last 12 months, we view Scholastic’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $11.4 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Scholastic blew past analysts’ EPS expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its revenue missed and its full-year EBITDA guidance fell short of Wall Street’s estimates. Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The stock remained flat at $18.67 immediately following the results.

Updated: May 16, 2025 at 11:03 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Scholastic isn’t a terrible business, but it doesn’t pass our quality test. For starters, its revenue growth was weak over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its operating margins reveal poor profitability compared to other consumer discretionary companies.

Scholastic’s P/E ratio based on the next 12 months is 10.5x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $35 on the company (compared to the current share price of $17.94).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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