Amid sluggish economic environment
) posted soft second-quarter 2012 results citing
lower-than-expected sales trends in the education industry with
school construction and modernization projects being either
cancelled or postponed. These compelled management to trim its
outlook for fiscal 2012.
The company delivered earnings of 47 cents a share, down 51%
from 96 cents earned in the prior-year quarter.
Revenue Falls, Margins under Pressure
Greenville, Wisconsin-based company's total revenue plunged
13.9% to $251.4 million in the second quarter of 2012. 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.
The recent economic downturn has resulted in an uncertainty
related to state budget funding levels in the school districts, and
a consequent 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 10.3% decline in cost of revenue, gross profit for the
quarter plummeted 19.1% to $95.1 million due to a fall in the top
line. Gross margin contracted 250 basis points to 37.8% on account
of a shift in product mix toward Educational Resources segment
coupled with products carrying lower gross margin 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
efficiencies. The company anticipates saving about $10 million
yearly through its cost reduction program.
EBITDA for the quarter tumbled 32.6% to $31.3 million, whereas
the EBITDA margin shriveled 340 basis points to 12.5%.
Educational Resources segment revenue fell 7.7% to $173.2
million. Segment gross profit dipped 9% to $53.5 million, whereas
gross margin contracted 40 basis points to 30.9%. However, School
Specialty remains optimistic about Educational Resources segment,
and expects revenue and gross margins to improve as it introduces
new products and models new price in the next selling period
commencing in January.
Accelerated Learning segment revenue dropped 25% to $78 million.
Gross profit declined 29.5% to $40.8 million, whereas gross margin
shrunk 340 basis points to 52.3%.
Other Financial Details
School Specialty ended the quarter with cash and cash
equivalents of $4.1 million, total long-term debt of $309.6
million, reflecting a debt-to-capitalization ratio of 58.1%, and
shareholders' equity of $223.2 million. The company generated
negative free cash flow of $14.2 million during first six months of
The company also intends to redeem the remaining convertible
subordinated notes of $42.5 million due 2026 by November end, using
its existing credit facility.
Strolling Through Guidance
School Specialty trimmed its fiscal 2012 guidance, reflecting
sluggish educational industry sales trends. Management now expects
loss per share between 50 cents and 65 cents, projected 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 company had earlier projected loss per share between 10
cents and 35 cents, revenue in the range of $755 million to $780
million and free cash flow between $5 million and $15 million for
fiscal 2012. EBITDA is projected between $53 million and $59
Currently, we have a long-term Outperform rating on the
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