We recently downgraded our recommendation on
School Specialty Inc.
(
SCHS
) to Neutral with a price target of $3.35. Earlier, the education
company, offering supplemental educational products and equipment,
had been enjoying an Outperform rating.
Where lies the Weakness
The recent economic downturn has resulted in an uncertainty
related to state budget funding levels in the school districts,
which has led to a cautious spending approach. A continued softness
in demand still persists for both curriculum-based products and
supplemental materials.
Many districts opted to defer their purchasing as states delayed
their traditional adoption cycles for a new curriculum, indicating
ambiguity in the marketplace about the school budgets and the
alteration in common-core standards.
School Specialty has been witnessing a decline in the top-line.
Total revenue decreased 5.1% year over year to $85.3 million in the
third quarter of 2012, following a decline of 13.9% in the second
quarter, and fell short of the Zacks Consensus Estimate of $97
million.
Looking back, School Specialty registered an increase of 9.1% in
the first quarter of 2012 and 8.8% in the fourth quarter of 2011.
But it had registered declines of 12.9% in the third quarter, 15.7%
in the second quarter and 23.4% in the first quarter of 2011.
Management hinted that the third quarter reflects the smallest
volume in terms of revenue, in the year.
On the other hand, the company's bottom line is also suffering.
After posting earnings decline of 51% during the second quarter of
2012, the company incurred a loss of 86 cents a share in the third
quarter. However, it fared better than the Zacks Consensus Estimate
of 91 cents loss per share and also substantially narrowed from a
loss of $1.07 delivered in the third quarter of 2011 on the back of
effective cost management. But we still remain cautious about the
company's performance going forward.
Competition a Threat
The company operates in a highly fragmented industry with more
than 3,000 smaller companies offering supplemental educational
products and equipment. Moreover, School Specialty also competes
with alternate channel marketers, which include office product
contract stationers and office supply superstores, such as
Office Depot Inc.
(
ODP
).
Strength in Store
School Specialty is the leading provider of supplemental
educational products for the PreK-12 market in the U.S. and Canada.
The company leverages its strong distribution network to offer more
than 75,000 items to approximately 91,000 schools in the U.S. This
provides a competitive advantage to the company and bolsters its
dominant position in the market.
The company remains committed to augment sales through
multi-channel and multi-market approach as well as improve margins
and market position through cost-containment efforts, effective
working capital management, product line-ups and e-commerce
systems. The company anticipates saving about $10 million yearly
through its cost reduction program.
The company's selective acquisition strategy and disciplined
integration approach have facilitated it to consolidate its leading
position within the supplemental educational products and equipment
industry, and improve its national marketing and distribution
platform.
Consequently, management reiterated its fiscal 2012 guidance,
and continues to project loss per share in the range of 50 cents to
65 cents and revenues between $730 million and $740 million.
Zacks Rank Defining Neutral Stance
Currently, School Specialty holds a Zacks #3 Rank that
translates into a short-term 'Hold' rating and correlates with our
long-term recommendation.
OFFICE DEPOT (
ODP
): Free Stock Analysis Report
SCHOOL SPECIALT (
SCHS
): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research