We have maintained a Neutral recommendation on School Specialty Inc. (SCHS) following appraisal of first quarter fiscal 2013 results.
School Specialty’s first quarter fiscal 2013 adjusted earnings of $1.16 a share surpassed the Zacks Consensus Estimate by 73% and the prior-year quarter results by 55% largely due to a lower tax provision that resulted in a gain of 46 cents.
However, School Specialty’s total revenue decreased 8.7% year over year to $252.1 million. Both the segments, Educational Resources and Accelerated Learning, witnessed revenue declines mainly due to constrained spending by schools, which eventually negatively impacted the total revenue.
Revenues fell short of the Zacks Consensus Estimate of $268 million. The soft educational market continued its uneven pace of recovery. School Specialty lowered its revenue expectations for fiscal 2013 due to a challenging market environment.
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 growth.
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. The company is targeting investments that provide better growth opportunities and increase profitability. 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 costs. 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. All these initiatives bode well for long-term growth in revenue and profitability for the company.
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 some uneven recovery in state funding is being seen, we prefer to remain on the sidelines until we witness some substantial recovery.
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