School Specialty Posts a Loss

School Specialty Inc. (SCHS - Analyst Report) recently posted fourth-quarter 2011 results. The company delivered a loss of 91 cents a share in the seasonally weak quarter that broadened from a loss of 73 cents reported in the prior-year quarter.

On a reported basis, including one-time items, the company delivered a loss of $1.20 per share compared with a loss of 73 cents in the year-ago quarter.

Revenue Rises, Margins Still under Pressure

Greenville, Wisconsin-based School Specialty’s total revenue rose 8.8% to $127.4 million in the fourth quarter, after posting a decline of 12.9% in the third quarter, 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. However, management believes the education budget to become more stable due to better-than-expected state income and sales tax revenue collections.

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 - Analyst Report).

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 the furniture business portrayed an improvement over the previous quarters.

School Specialty witnessed a step-up in 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 high-single digit rise in the top-line, gross profit for the quarter fell 3.7% to $49 million, reflecting an increase of 18.4% in cost of revenues, whereas gross margin contracted 490 basis points to 38.5%. The drop in gross margin was due to one-time credits recognized in fiscal 2010 and increase in customer discounts in consumables and furniture.

Pricing pressure adversely impacted consumable margins. However, furniture margins registered an improvement during the quarter, and management expects the improvement to sustain in the coming periods.

Educational Resources segment revenue jumped 8.1% to $101.9 million. Segment gross profit dipped 3% to $36.3 million, whereas gross margin contracted 410 basis points to 35.7%.

Accelerated Learning segment revenue climbed 11.9% to $25.3 million. Gross profit fell marginally by 0.9% to $12.4 million, whereas gross margin shriveled 630 basis points to 49%.

Other Financial Details

School Specialty ended the quarter with cash and cash equivalents of $9.8 million, total long-term debt of $296.3 million, reflecting debt-to-capitalization ratio of 59.5%, and shareholders’ equity of $201.6 million. The company generated free cash flows of $35.2 million during fiscal 2011.

Management Reiterated Guidance

School Specialty continues to expect a loss between 10 cents - 35 cents per share for fiscal 2012. Management projected revenue between $755 million and $780 million and free cash flows in the range of $5 million to $15 million.

Currently, we have a long-term Outperform rating on the stock.

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