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School Specialty's Profit Drops - Analyst Blog
11/23/2011 2:00:00 PM
Amid sluggish economic environment School Specialty Inc. ( SCHS ) 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. ( ODP ).
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 fiscal 2012.
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 million.
Currently, we have a long-term Outperform rating on the stock.
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