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Scholastic Corp (SCHL +7%) aims to turn the page today after delivering a decent sales lift in Q1 (Aug). Shares of the children's book publisher and distributor have been prone to violent gap-downs following past quarterly reports. In December, we warned that two consecutive gloomy quarters painted a rough picture ahead for SCHL. After steadily slipping thereafter, its Q4 (May) results in July sent shares toward 2022 lows before bottoming in August, a roughly 30% correction from December highs.

Given this context, it is clear that bearish sentiment has plagued SCHL, keeping expectations low ahead of Q1 numbers. As such, even though several developments from the quarter reflect shaky ground underneath SCHL, the company registered enough silver linings to rekindle buying support today.

• Revenue grew by 3.8% yr/yr to $237.2 mln, the first time SCHL registered yr/yr sales growth since 4Q23. Net losses also improved versus the year-ago period, with EPS of $(2.13) compared to $(2.20).
• However, the enthusiasm surrounding these numbers begins to fade when peeling back the layers. Revenue expanded primarily because of SCHL's $250 mln acquisition of 9 Story, which owns several kid's brands, like Clifford The Big Red Dog and Daniel Tiger's Neighborhood. Also, SCHL's net losses are still noticeably worse than the August quarters from before 2023. It would take going back to 2018 before net losses mirrored those posted in Q1.
• The current U.S. school environment remains challenging. In past quarters, SCHL has cited several factors making it harder to boost sales each year, from more polarized school boards to higher absenteeism rates. At the same time, the economy is producing outsized headwinds as inflationary pressures erode parents' purchasing power, particularly within SCHL's core middle-class demographic. Additionally, SCHL has endured increased churn amongst some higher-value fairs.
• These obstacles culminated in SCHL keeping its FY25 (May) guidance unchanged. The company continues to target a modest +4-6% bump in revs yr/yr and adjusted EBITDA of $140-150 mln. Given its dependence on the U.S. school schedule, the first and third quarters of each fiscal year are weak, given the summer and winter breaks. However, the second and fourth quarters tend to accompany profitability and sales growth.

SCHL's Q1 report was adequate. It grew revs during a typically quiet quarter, trimmed its net losses, and maintained confidence in its initial FY25 outlook. However, the demand environment remains troubling. SCHL has had to lower its full-year forecasts in the past due to the dynamic characteristics of a sour mixture of inflation, school-related challenges, and politics. Because of this, it is worth treading cautiously. SCHL may be in the early stages of a turnaround, but it has not delivered consistently sound quarterly numbers yet, keeping uncertainty elevated.