Educational Development Corporation (EDUC) Earnings

Management highlights

Turnaround Plan Progress - The fourth quarter focused on implementing a conservative, phased inventory purchasing plan to replenish out-of-stock best-selling items and add new titles; product lead time from purchase order to availability is 4-6 months. - Some replenishment inventory and new titles have already been received, generating renewed sales team excitement, with most new shipments expected in the weeks ahead ahead of the company's annual June convention. - A $3.6 million inventory reclassification was completed in Q4, moving inventory from current to long-term classification; this had no profit and loss impact, as all inventory remains sellable, and inventory will be reclassified back to current as sales volumes increase. - A one-time $1.5 million non-cash valuation allowance was recorded to offset net deferred tax assets, driven by historical pre-FY2026 losses and turnaround period operational expectations. - The company completed a strategic organizational restructuring at fiscal year end, including executive pay cuts, a small reduction in force, and additional overhead expense reductions, as part of the turnaround plan. Sales and Marketing Strategy - The top strategic priority for FY2027 is attracting, onboarding, and retaining new Paper Pie brand partners to drive sales and business growth, while engaging existing team leaders. - The March 2027 Join Special recruitment promotion generated strong engagement, adding almost 1,400 new brand partners, demonstrating unmet demand for the company's opportunity with strong messaging and product excitement. - The company is shifting away from excessive large-scale discounting that erodes brand value, instead limiting promotions to traditional, expected seasonal events to balance consumer demand for discounts with long-term brand health. - The company is positioned to benefit from the broader cultural shift toward intentional analog educational and learning experiences, with core products aligned to this trend. Technology and Operational Initiatives - The company is investing in platform enhancements to improve product discovery, streamline and personalize the customer journey, add functionality for brand partners and customers, and improve long-term retention. - IT updates are specifically designed to appeal to Gen Z prospective brand partners, who engage and shop differently, by making it easier to conduct business; these are incremental changes to the existing model, not an overhaul. - AI is being deployed to improve operational efficiency rather than replace employees; early efficiency gains have already been seen in coding and basic customer support ticket resolution, allowing the company to grow without proportional increases in headcount. Financing - After resolving debt with the company's previous bank, the company secured a new $2 million revolving line of credit with a new bank to fund growth opportunities; the company is not currently drawing on the line and has a higher cash balance than at year end. The new line has no financial covenants.

Guidance

Management framed the turnaround plan as a gradual, multi-quarter effort that will not produce immediate results, with core expectations for FY2027 as follows: - Management expects to build sales momentum throughout FY2027, driven by new product availability, growing brand partner counts, and improved gross margins as excessive discounting is eliminated. - Most new titles ordered in the initial phase of the turnaround purchasing plan are expected to arrive in the coming weeks, with sales impact expected to begin in the first quarter of FY2027. - Management expects cash flow from ongoing inventory reductions will be sufficient to fund core operations, with the new line of credit available to capture unplanned growth opportunities. - No specific quantitative financial guidance was provided for FY2027.

Segment performance

Educational Development Corporation operates two core sales channels: direct selling through Paper Pie brand partners and retail sales to third-party retailers. No separate segment-level financial results were disclosed. Aggregate results are as follows: - Q4 FY2026: Net revenues of $4.2 million, down from $6.6 million in Q4 FY2025. Pre-tax loss of $2.1 million, a $600,000 larger loss than the prior year quarter. Net loss totaled $3.1 million, a $1.8 million larger loss than Q4 FY2025. Diluted loss per share was $0.37, compared to a $0.16 loss per share in the prior year quarter. Average active Paper Pie brand partners totaled 4,500, down from 9,400 in Q4 FY2025. - Full year FY2026: Net revenues of $22.9 million, down from $34.2 million in FY2025. Average active Paper Pie brand partners totaled 5,800, down from 12,300 in FY2025. Excluding a $12.2 million gain from a building sale, pre-tax loss was $6.9 million. Net earnings totaled $2.3 million, or $0.27 diluted earnings per share, compared to a $0.63 diluted loss per share in FY2025. Inventory levels decreased $7 million from $44.7 million at the start of the fiscal year to $37.7 million at year end, generating $7 million in cash flow from inventory reductions. End-of-year cash on hand totaled approximately $1.3 million.

Risks & headwinds

• The company has recorded ongoing losses and declining active brand partner counts over the past two years, with continued sales weakness through the end of FY2026. • The turnaround plan depends on successful execution of recruitment and retention of new brand partners, a challenge across the direct selling industry for attracting the Gen Z demographic. • The company holds $37.7 million in total inventory, with a large portion classified as long-term inventory that will take multiple years to sell through at current sales volumes. • Q4 is historically one of the company's softest quarters for sales and cash flow, creating ongoing short-term liquidity pressure even with the new line of credit. • Historical pre-turnaround losses required a one-time valuation allowance that reduced reported net earnings in FY2026.

Analyst Q&A

• Q: How much unsellable or excess inventory does the company hold, and will you use liquidation channels to offload it?

  A: Management confirmed all 37.7 million in inventory is still considered sellable. The reclassification of inventory to long-term status is not a write-off, just a reflection of slower than historical sales velocity. Only roughly 500,000 in inventory is considered excess, and while the company explored liquidating via the remainder market, the low payout of only 2% of retail price makes this uneconomical. Management will instead pursue creative targeted marketing to move the small amount of excess inventory over time.

• Q: Will the active brand partner count for the current (first quarter FY2027) quarter be higher than the 4,500 reported for Q4 FY2026, after the strong March Join Special?

  A: The company always experiences natural churn of brand partners, with people joining and leaving the program consistently. Management noted it has focused heavily on retaining the 1,400 new brand partners added in the March promotion. Management stated it expects to see a net increase in active partners, with a shift to more new partners joining and staying than partners leaving the business.

• Q: What is the expected gross margin for new titles as the business returns to normal operations?

  A: Historically, when not running excessive deep discounting to generate cash for the previous bank, the company's core business model produces consistent gross margins across both sales channels. For a $10 retail average price book, the average landed cost is $2.50. In retail sales, the company sells to retailers for $5, leaving $2.50 gross profit per unit. Through the Paper Pie direct channel, the company collects the full $10 retail price, pays out $5 in commissions and leadership overrides, leaving the same $2.50 gross profit per unit. Moving forward, with discounting limited to 10-15% for routine seasonal promotions rather than the 40-60% discounting run in prior periods, margins will return to this traditional normal level.

• Q: Are there any restrictive covenants on the new $2 million line of credit that would block share buybacks or dividends if the business improves?

  A: Management confirmed that the new line of credit agreement has no covenants in place, so there are no existing restrictions on shareholder returns if the company generates sufficient excess cash flow after growing the business.