We have maintained a Neutral recommendation on
School Specialty Inc.
) following appraisal of first quarter fiscal 2013 results.
School Specialty's first quarter fiscal 2013 adjusted earnings
of $1.16 a share surpassed the Zacks Consensus Estimate by 73%
and the prior-year quarter results by 55% largely due to a lower
tax provision that resulted in a gain of 46 cents.
However, School Specialty's total revenue decreased 8.7% year
over year to $252.1 million. Both the segments, Educational
Resources and Accelerated Learning, witnessed revenue declines
mainly due to constrained spending by schools, which eventually
negatively impacted the total revenue.
Revenues fell short of the Zacks Consensus Estimate of $268
million. The soft educational market continued its uneven pace of
recovery. School Specialty lowered its revenue expectations for
fiscal 2013 due to a challenging market environment.
School Specialty is a leading provider of supplemental
educational products and equipment having some of the most
powerful brands in the industry. School Specialty's product mix
is also highly diversified, supplying the broadest range of basic
school supplies, supplemental learning products, classroom
equipment and furniture. Its extensive geographic reach also
reduces exposure to any one school district, state, product or
The company also regularly develops new curriculum,
supplemental learning and technology solutions in response to
industry trends and educator needs, which could place it in a
strong position once the currently constrained school spending
trends return to more normal levels. The company is also seeking
new channels of growth.
It is actively pursuing partnering opportunities for content
development and distribution. Further, it has invested heavily in
the development of e-commerce websites as more school districts
and teachers go online to order supplies.
The company is shifting focus from an 'acquire and integrate'
model to one that focuses on growing organically or through
partnerships. The company is targeting investments that provide
better growth opportunities and increase profitability. School
Speciality is aggressively reviewing its product lines and
businesses to determine the underperforming products with
The company is looking into potential low-cost outsourcing
relationships, which can help reduce costs. The company is also
evaluating its overall spending needs. Further, the company is
looking for cost effective ways to enter international markets
like Latin America. All these initiatives bode well for long-term
growth in revenue and profitability for the company.
However, School Specialty has witnessed significant revenue
and margin declines in the last few fiscal years due to cautious
spending by schools resulting from tight state and local
government budgets. Approximately 47% of school funding is
provided by states and 44% by local governments. Though state tax
receipts are showing modest signs of recovery, local taxes
continue to be challenged.
Given the cuts in state funding, school budgets and spending
on products and instructional solutions are being severely
affected. Further, in response to competitive pricing in
the market, the company had to give higher discounts, which put
pressure on margins. Though some uneven recovery in state funding
is being seen, we prefer to remain on the sidelines until we
witness some substantial recovery.
SCHOOL SPECIALT (SCHS): Free Stock Analysis
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