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School Specialty Inc.’s first quarter fiscal 2013 adjusted earnings of $1.16 a share surpassed the Zacks Consensus Estimate of 67 cents by 73% and the prior-year quarter results by 55%. However, the earnings beat for this leading provider of K-12 supplemental educational products and curriculum was largely aided by a lower tax provision that resulted in a gain of 46 cents.
However, School Specialty’s total revenue decreased 8.7% year over year to $252.1 million. Both the segments, Educational Resources and Accelerated Learning, witnessed revenue declines mainly due to constrained spending by schools, which eventually negatively impacted the total revenue. Revenues fell short of the Zacks Consensus Estimate of $268 million. The soft educational market continued its uneven pace of recovery.
Quarter in Detail
School Specialty is at the midst of its busiest selling season. The company enjoys significantly higher revenues and earnings during the first two quarters of its fiscal year, i.e. from June to October, which usually marks the start of each school year. Schools usually prefer their school supplies being delivered before or shortly after the commencement of the school year.
Gross profit in the quarter dropped 6.9% to $103.6 million due to a fall in the top line. However, gross margin expanded 80 basis points to 41.1% boosted by better gross margin in the Education Resources segment, which compensated for the decline in the Accelerated Learning segment.
Adjusted EBITDA declined 4% in the quarter. Adjusted selling, general & administrative (SG&A) expenses declined 8% due to the ongoing cost-savings program.
Educational Resources: Revenue at this educational supplies related segment declined 6.7% from the prior-year quarter to $173.7 million. Within this segment, the Supplies category saw order growth as schools are buying only those products that are absolutely essential. While furniture related bookings and sales showed signs of recovery as new school construction outlook improved, various specialty branded products such as physical education, special needs, and early childhood suffered weakness.
Gross profit for the segment came in at $60.6 million, up 0.2% year over year. Gross margin improved 240 basis points to 34.9% due to School Specialty’s inventory planning and supply chain initiatives.
Accelerated Learning: Revenue at this curriculum related segment fell 12.9% from the prior-year quarter to $78.3 million. While curriculum related sales in science division and the student planner business were soft, intervention related sales showed double-digit increase. Gross profit declined 14.5% to $42.9 million, while gross margin contracted 100 basis points to 54.8% due to lower volumes and an unfavorable product mix.
The company has witnessed significant revenue and margin declines in the last few fiscal years due to the cautious spending by schools. Strict state and local government budgets have limited the school spending. Approximately 47% of school funding is provided by states and 44% by local governments. Though state tax receipts show modest signs of recovery, local taxes conto be challenged. Given the cuts in state funding, school budgets and spending on products and instructional solutions are being severely affected.
School Specialty lowered its revenue expectations for fiscal 2013 due to a challenging market environment. Accordingly, the company is expecting fiscal 2013 revenues to decline in low-single digit from 2012 revenue of $732 million. The guidance was lowered from prior expectations of 2013 revenues remaining in line with 2012 level. However, management continues to expect its fiscal year 2013 EBITDA results to be almost in line with 2012 results of around $48 million, despite the anticipated revenue slip.
School Specialty’s strategic initiatives like cost containment efforts, effective working capital management and operating efficiencies are expected to help achieve the EBITDA levels despite the revenue shortfall.
We currently have a Neutral recommendation on School Specialty. The stock carries a Zacks #3 Rank (a short-term ‘Hold rating).
Consistent decline in the company’s top line and a challenging educational market create significant headwinds for School Specialty. However, the company’s diversified product and geographic mix, strategic and cost-control initiatives, and its product innovation efforts are the catalysts for long-term growth, once the school spending trends return to more normal levels.