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We reiterate our long-term Neutral recommendation on School Specialty Inc. with a price target of $3.20. The education company, which offers supplemental educational products and equipment, has its own strengths and weaknesses that neutralize each other and compel us to be on the sidelines.
Strength in Store
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 fortifies its dominance in the market.
The company remains committed to augment sales through a multi-channel and multi-market approach as well as improve margins and market position through cost-containment efforts, effective working capital management, product line-up and e-commerce systems. The company anticipates saving about $10 million yearly through its cost reduction program.
The company’s selective acquisition strategy and disciplined integration approach have facilitated it to consolidate its leading position within the supplemental educational products and equipment industry, and improve its national marketing and distribution platform.
Consequently, management reiterated its fiscal 2012 guidance despite posting dismal third quarter results, and continues to project loss per share in the range of 50 cents to 65 cents and revenues between $730 million and $740 million.
Where the Weakness Lies
The recent economic downturn has resulted in uncertainty related to state budget funding levels in the school districts, which has led to a cautious spending approach. A continued softness in demand still persists for both curriculum-based products and supplemental materials.
Many districts opted to defer their purchasing as the states delayed their traditional adoption cycles for a new curriculum, indicating ambiguity in the marketplace about the school budgets and the alteration in common-core standards.
School Specialty has been witnessing a decline in the top line. Total revenue decreased 5.1% year over year to $85.3 million in the third quarter of 2012, following a decline of 13.9% in the second quarter, and fell short of the Zacks Consensus Estimate of $97 million.
Looking back, School Specialty registered an increase of 9.1% in the first quarter of 2012 and 8.8% in the fourth quarter of 2011. But it had registered declines of 12.9% in the third quarter, 15.7% in the second quarter and 23.4% in the first quarter of 2011. Management hinted that the third quarter reflects the smallest volume in terms of revenue for the year.
On the other hand, the company’s bottom line is also suffering. After posting an earnings decline of 51% during the second quarter of 2012, the company incurred a loss of 86 cents a share in the third quarter.
However, it fared better than the Zacks Consensus Estimate of 91 cents loss per share and also substantially narrowed from a loss of $1.07 delivered in the third quarter of 2011 on the back of effective cost management. But we remain cautious about the company’s performance going forward.
Competition a Threat
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).
Zacks Rank Defining Neutral Stance
Currently, School Specialty holds a Zacks #3 Rank that translates into a short-term Hold rating and correlates with our long-term recommendation.