With all three of its operating groups taking a hit on their bottom lines, Scholastic reported a net loss of $19.3 million in the third quarter ended February 28, 2023, compared to a loss of $15.1 million a year ago. Revenue declined 5.5%, to $324.9 million.

In speaking to analysts in a conference call, CEO Peter Warwick cited broader economic conditions for the decline rather than any weakness in Scholastic’s business. He said that the near-term retail bookselling environment, especially for children's books, “continues to be challenging compared to a year ago. Consumer demand and confidence have fallen in the face of ongoing inflation and economic uncertainty.” That uncertainty has hampered results in not only the U.S. but in Canada, the U.K., Australia, and New Zealand, Warwick said.

Warwick speculated that “some of the year-over-year decline in the third quarter may reflect a one-time return to pre-pandemic purchasing patterns by our retail partners and then customers. After stocking up due to supply chain uncertainty and challenges during the pandemic, retailers and wholesalers are resuming more normal inventory management policies,” he said.

Sales in the company’s educational publishing group were hurt, Warwick added, by ongoing staff shortages at schools that have “lengthened selling cycles for instructional materials across the industry. This is delaying sales even as federal and state funding for U.S. schools remains at historically high levels.” Warwick said this was the main factor behind the 9% drop in revenue, to $70.0 million, in Scholastic's education solutions segment in the quarter.

The third factor impinging results, particularly on the bottom line, was higher costs for paper, manufacturing, and freight and shipping. “These costs are now fully reflected in the inventory we're currently selling, impacting margins across our business,” Warwick said. “We are, however, beginning to see improvements in these areas, especially in freight and shipping costs, which should create tailwinds in coming quarters as they flow through into our margins.”

In addition, Scholastic should see a boost from price increases on the books now being sold. “Importantly, I'd like to emphasize that we believe all of these trends are short term and not the new normal,” Warwick said.

The children’s book publishing and distribution segment, Scholastic’s largest group, was the only one to post a sales increase, albeit a small one of 1%, to $204.0 million. The group’s book fairs business saw a 36% sales gain, to $103.5 million, as they continued to rebound from the lows caused when Covid resulted in the closure of schools. Scholastic attributed the improvement primarily to the increased number of fairs, and to higher revenue per fair.

Trade revenue decreased 14%, to $72.8 million, which the company said reflected softness in the retail market, and good sales on new titles were offset by declines in backlist sales. Book club revenue decreased 32%, to $27.7 million, impacted by lower new orders and abnormally high sales last year that reflected filling backlogged shipments.

Sales in Scholastic’s international segment fell 23%, to $50.9 million, primarily related to lower revenues in Canada and the U.K. , Scholastic reported. Segment revenues were also impacted by $4.7 million due to the exit of the unprofitable direct-to-consumer business in Asia and an unfavorable foreign currency translation of $3.5 million.

The disappointing quarter coupled with expectations that the tough market conditions will continue into the fourth quarter prompted Scholastic to lowered its financial forecast for the full fiscal year, which ends May 31. It expects adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $175 million to $185 million, compared to a previous range of $195 to $205 million. Revenue is expected to grow approximately 4% compared to a earlier forecast range of 8% to 10%.

Scholastic is the second publicly-traded publisher to lower its forecast for its fiscal year this month. In early March, Wiley reduced its financial forecast for the year ending in April, citing a weaker-than-expected quarter ended January 31.