School Specialty Inc.
) posted better-than-expected third-quarter 2012 results on the
back of effective cost management and margin improvement. However,
budgetary constraint and a competitive pricing environment remain
The company posted a loss of 86 cents a share that bettered the
Zacks Consensus Estimate of 91 cents loss and substantially
narrowed from a loss of $1.07 incurred in the year-ago quarter. On
a reported basis, including one-time items, quarterly loss came in
at $5.54 per share.
Let's Unveil the Picture
Greenville, Wisconsin-based School Specialty's 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 a smallest volume in terms
of revenue, in the year.
The recent economic downturn has resulted in an uncertainty
related to state budget funding levels in the school districts, and
in turn a cautious spending approach.
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.
Despite a 4% decline in the cost of revenue, gross profit for
the quarter dropped 7% to $30.6 million due to a fall in the top
line. Gross margin contracted 80 basis points to 35.9% on account
of change in the sales mix, reflecting a decrease in comparable
sales in the Accelerated Learning segment.
School Specialty hinted that it remains committed to augment
sales, improve margins and market position through cost containment
efforts, effective working capital management and operating
The company reported adjusted EBITDA loss of $10.2 million for
the quarter compared with EBITDA loss of $18.4 million in the
segment revenue inched up 0.9% to $70.4 million, reflecting
improvement across the Furniture division with new orders or
bookings up approximately 10%, and Web-based initiatives primarily
related to supplies that also contributed to the segment's sales.
Segment gross profit grew 6.9% to $23.7 million, whereas gross
margin expanded 190 basis points to 33.7%.
School Specialty indicated that the Educational Resources
segment has been portraying improvement in the current fiscal year,
with gross margin improving sequentially as well as year over year.
Further, the company in order to augment sales intends to widen its
multi-channel and multi-market approach.
segment revenue plunged 28.1% to $14.3 million due to a fall in
curriculum sales in Science and Reading. 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
Gross profit declined 37.8% to $6.4 million, whereas gross
margin shriveled 700 basis points to 44.6% attributable to lower
revenue from the products carrying higher margin and increased
amortization charges due to product expansion.
Other Financial Details
School Specialty ended the quarter with cash and cash
equivalents of $975,000 and total long-term debt of $266.1 million,
reflecting a debt-to-capitalization ratio of 69.2%, and
shareholders' equity of $118.5 million. The company generated free
cash flow of $28.5 million during first-nine month of fiscal
Strolling Through Guidance
School Specialty reiterated its fiscal 2012 guidance. Management
continues to project loss per share between 50 cents and 65 cents,
revenue between $730 million and $740 million and free cash flow in
the range of $0 million to $10 million. EBITDA is projected in the
range of $48 million to $52 million. The current Zacks Consensus
Estimate for the year is 52 cents loss per share.
Currently, we have a long-term Outperform recommendation on the
stock. However, the stock holds a Zacks #3 Rank that translates
into a short-term 'Hold' rating.
OFFICE DEPOT (
): Free Stock Analysis Report
SCHOOL SPECIALT (
): Free Stock Analysis Report
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