We have maintained a Neutral recommendation on
School Specialty Inc.
) following appraisal of fourth quarter 2012 results.
School Specialty's fourth quarter loss of 92 cents a share was
narrower than the Zacks Consensus Estimate of a loss of $1.00 but
wider than a loss of 91 cents a share incurred in the comparable
year-ago quarter. The top-line shortfall was partially offset by
better margins to lead to the narrower loss. Total revenue
decreased 6.3% year over year as both the segments witnessed
revenue declines mainly due to constrained spending by schools.
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 supplier.
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
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. School Speciality is aggressively reviewing its
product lines and businesses to determine the underperforming
products with inadequate profitability. The company is looking into
potential low-cost outsourcing relationships which can help reduce
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. Further, in response to
reduced school spending and uncertainty around education funding,
the company launched a cost reduction plan, in fiscal 2010, in
order to better align costs with lower revenue.
The cost reduction plan involved facility closures, department
consolidations, product categories consolidation, workforce
reductions, elimination of redundant expenses and negotiation of
favorable supplier terms and conditions. All these initiatives bode
well for long-term growth in revenue and profitability for the
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 an uneven recovery in state funding is being seen,
we prefer to remain on the sidelines until we witness some
SCHOOL SPECIALT (SCHS): Free Stock Analysis
To read this article on Zacks.com click here.