School Specialty Upgraded - Analyst Blog

We recently upgraded our recommendation on School Specialty Inc. (SCHS) to Neutral with a target price of $14.00. Earlier, we had an Underperform rating on the stock.

School Specialty is the leading provider of supplemental educational products for the PreK-12 market in the U.S. and Canada. The company leverages its strong distribution network to offer more than 75,000 items to approximately 91,000 schools in the U.S. This provides a competitive advantage to the company and strengthens its position in the market.

However, the recent economic downturn has resulted in an uncertainty in the level of funding from the state 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.

Greenville, Wisconsin-based School Specialty’s first quarter 2011 total revenue plunged 23.4% to $253 million from the year-ago quarter, higher than the 17% to 20% fall expected earlier. The quarterly revenues also missed the Zacks Consensus Revenue Estimate of $266 million.

In order to revive its top line, School Specialty has undertaken various measures, which include 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 consumer-oriented contract with Amazon.com Inc. (AMZN).

The furniture market has also 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.

The company has also been strengthening its balance sheet by concentrating on lowering debt levels and improving its cash balance.

Given the pros and cons, we prefer to be Neutral at this stage.