What happened

Scholastic (SCHL -2.45%) saw its stock drop sharply on Friday, down 22.2% as of 10:55 a.m. ET, or about 19% year to date. It had been down as much as 26.2% in morning trading. The major indexes were down today as well, anywhere from 0.5% to 0.7% at 10:55 a.m. ET.

So what

Shares of the children's book publisher dropped after the company posted lackluster third-quarter earnings on Thursday after market close. It also revised its guidance for fiscal 2023 downward due to economic headwinds.

The company typically lags in this quarter, but sales were lower than usual as revenue was down 6% year over year to $325 million. It had a net loss of $19.2 million, or $0.57 per share, which was a worsening from a net loss of $15.3 million a year ago this quarter. The net loss on the basis of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was $5.4 million, down from net income of $5.9 million a year ago. The decline in revenue was due to a softening demand for children's books.

CEO Peter Warwick said, "Scholastic navigated short-term headwinds in domestic and international markets, which contributed to modest sales declines and higher losses in our seasonally small third quarter."

The book publishing and distribution segment posted a 1% year-over-year revenue increase, propelled by a 36% increase in book fair sales. That offset losses in trade sales and book club sales.

However, its education solutions segment, which provides instruction resources for teachers and students, saw revenue decline 9% year over year, due primarily to purchasing delays by school administrators, who are grappling with staffing shortages. This will likely push sales into the fiscal fourth quarter. The international segment, its smallest business with about $51 million in revenue, saw sales decline 23% year over year in the quarter.

Now what

The outlook is not great for Scholastic, as difficult market conditions are expected to persist into the fiscal fourth quarter.

Due to the lagging third-quarter numbers and expectations for a similarly challenging fourth quarter, the company revised its guidance for fiscal 2023. It now projects revenue growth of approximately 4%, down from the previous 8% to 10% guidance. The EBITDA outlook for the year was lowered to a range of $175 million to $185 million, from a previous range of $195 million to $205 million.

In light of these revised projections, Warwick said the company has adjusted its short-term spending to stay in line with revenue projections. But overall, this is a tough market for the stock right now, and its valuation is on the high side.