School Specialty Inc. (SCHS) recently posted first-quarter 2011 results. The quarterly earnings of 70 cents a share missed the Zacks Consensus Estimate of $1.16 dropping 53.6% from $1.51 earned in the prior-year quarter.
Revenue Still Falling, Margins under Pressure
Greenville, Wisconsin-based company’s total revenues plunged 23.4% to $253 million from the year-ago quarter, higher than the fall of 17% to 20% anticipated earlier by management. Quarterly revenues also missed the Zacks Consensus Revenue Estimate of $266 million. Educational Resources segment revenues tumbled 22% to $175.4 million whereas; Accelerated Learning segment revenues dipped 27.2% to $77.4 million.
The recent economic downturn has resulted in an uncertainty related to state budget funding levels in the school districts, which has led to a cautious spending approach. Consequently, School Specialty has been registering a sustained decline in the top-line. A continued softness in demand is being witnessed in both curriculum-based products and supplemental materials. Furthermore, the divestiture of the School Specialty Publishing impacted the top-line by 2%.
The furniture market has been the worst hit by budget cuts, as school construction and modernization projects have been cancelled or postponed. Revenues from furniture slipped 31% during the quarter. To mitigate this, School Specialty has launched new furniture product lines at compelling prices.
Management hinted that aggressive pricing for both furniture and consumable products will weigh upon gross margins in the upcoming quarters. However, management also cited that the gross margin for Accelerated Learning products is expected to improve moderately.
Despite the 22.7% decline in cost of revenues, gross profit for the quarter tumbled 24.3% to $108.1 million, reflecting fall in the top-line, whereas gross margin contracted 50 basis points to 42.7%. The drop in gross margin was due to increase in customer discounts at Educational Resources segment, partly offset by a favorable product mix. Operating income plunged 44.6% to $30.2 million, whereas operating margin shrunk 460 basis points to 11.9%.
Other Financial Details
School Specialty ended the quarter with cash and cash equivalents of $8.6 million, total long-term debt of $335.4 million, reflecting a decline of $68.9 million from the year-earlier quarter and shareholders’ equity of $562.1 million. The company generated negative free cash flows of $12.3 million during the quarter, portraying a sharp improvement of $15.2 million from the prior-year quarter. Following the end of the quarter under review the company paid off $132.9 million of its convertible debt through borrowings under its $350 million revolving credit facility.
Guidance Truncated
Concurrent with the earnings release, management trimmed its guidance for fiscal 2011. School Specialty now expects revenues in the range of $735 million to $770 million, down from $790 million to $825 million, previously anticipated. The company now expects to post earnings between 15 cents and 45 cents a share for the year, significantly down from $1.00 to $1.30 predicted earlier. Management expects to generate free cash flows in the range of $40 million to $50 million versus $60 million to $70 million forecasted earlier.
Revival Measures
School Specialty undertook various measures to revive its top-line growth, which includes a contract with U.S. Communities, a non-profit government purchasing cooperative, to provide a wide range of products and services for the education industry at the most compelling prices, new Accelerated Learning products, and a new consumer-oriented contract with Amazon.com, which will generate revenues in the second half of fiscal 2011.
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