School Specialty Inc. (SCHS) recently posted third-quarter 2011 results. The company delivered a loss of $1.07 per share in the seasonally slow quarter that came better than the Zacks Consensus Estimate of a loss of $1.20, but was a sharp increase from a loss of 98 cents reported in the prior-year quarter.
Revenue Drops But Improves Sequentially, Margins Under Pressure
Greenville, Wisconsin-based company’s total revenue plunged 12.9% to $89.9 million from the year-ago quarter, and also fell short of the Zacks Consensus Estimate of $92 million. It is to be noted that the rate of decline in the top-line has decelerated from 15.7% in the second quarter and 23.4% in the first quarter of 2011, as the economy gradually improves.
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.
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).
The furniture market has been the worst hit by budget cuts, as school construction and modernization projects have been cancelled or postponed. Management hinted that although the furniture business continues to remain sluggish, it portrayed an improvement over the previous quarters.
During January 2011, School Specialty witnessed a rise in supplies orders. Moreover, the company’s improved pricing initiatives, product line-up, e-commerce systems, and sales endeavors would help in regaining lost market share.
Despite a 6.3% decline in cost of revenue, gross profit for the quarter fell 22.3% to $32.9 million, reflecting a fall in the top line, whereas gross margin contracted 440 basis points to 36.7%. The drop in gross margin was due to the increase in customer discounts at Educational Resources segment, on account of increasing competition.
Educational Resources segment revenue tumbled 14.9% to $69.8 million, reflecting an improvement over the decline of 21.8% experienced in second-quarter 2011, as order bookings stepped up throughout the quarter. Segment gross profit dipped 26.1% to $22.2 million, whereas gross margin contracted 480 basis points to 31.8%.
Accelerated Learning segment revenue declined 5.2% to $19.9 million due to sluggishness witnessed in the purchase of reading products and the timing of orders given. Gross profit fell 13.6% to $10.3 million, whereas gross margin shriveled 500 basis points to 51.6%.
Other Financial Details
School Specialty ended the quarter with cash and cash equivalents of $1.7 million, total long-term debt of $253.8 million, reflecting debt-to-capitalization ratio of 53.8%, and shareholders’ equity of $218.3 million. The company generated free cash flows of $9.3 million during the quarter.
Management Reiterated Guidance
School Specialty continues to expect loss per share between 30 cents and 60 cents for fiscal 2011. Management also reaffirmed its revenue guidance of $735 million to $770 million and free cash flows in the range of $50 million to $60 million.
Currently, we have a long-term Neutral rating on the stock. However, School Specialty holds a Zacks #1 Rank, which translates into a short-term Strong Buy rating.
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SCHOOL SPECIALT (SCHS): Free Stock Analysis Report
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