Strayer Education, Inc.’s (STRA - Analyst Report) third-quarter 2013 results were mixed, beating the Zacks Consensus Estimate for earnings while meeting the same for revenues. However, what caught the investors’ eye was a bold restructuring plan – including job cuts and site closures – and an aggressive cut in tuition fees. The news negatively impacted the share price of this for-profit education company.
Third-quarter earnings of 30 cents per share beat the Zacks Consensus Estimate of 5 cents due to lower share count. However, earnings declined 17% year over year due to weak top-line performance and sluggish margins.
Total revenue in the quarter fell 11% from the comparable prior-year quarter to $110 million due to continued weak enrollment trends. Total revenue was in line with the Zacks Consensus Estimate of $110 million.
StrayerUniversity’s total enrollment declined 17% to 43,192 students for the fall term due to decline in both continuing student enrollments and new student enrollment. Continuing student enrollments went down 12% while new enrollments declined 23%. Apart from a difficult industry environment, enrollments this quarter were hurt by government shutdown. Strayer has been witnessing weak enrollment trends due to continued unemployment, overall economic downturn and subsequent decline in student demand. Total enrolments are expected to decline in double digits in fiscal 2014.
According to management, the weakness in the unaffiliated undergraduate segment is the primary factor behind the declining enrollments. In order to address the concern, the board of trustees approved an approximate 20% cut in Strayer’s undergraduate tuition costs. The initiative is expected to improve college affordability and its value proposition, and thus, attract cost-conscious students. The new tuition costs will be effective from Jan 1, 2014 and are expected to hurt revenue per student in 2014 though it might improve enrollments slightly.
Operating income in the quarter decreased 26% to $62.8 million. Despite lower costs in the quarter, operating margin contracted 370 basis points to 16.5% due to top-line weakness. Bad debt expense as a percentage of revenues was 4.5% in the third quarter, higher than 4.2% in the year-ago quarter.
Other Financial Details
Strayer Education ended the quarter with cash and cash equivalents of $85.2 million as of Sep 30, 2013 compared with $67.5 million as of Jun 30, 2013.
In the quarter, the company did not repurchase any stocks. As of Sep 30, 2013, the company had $70 million worth of stocks left under its share repurchase authorization which can now be bought back until Dec 31, 2014. In the past few quarters, the company has made significant share repurchases, resulting in a 7% decline in shares outstanding in the quarter.
New Cost Reduction Plan
In order to address its weak enrollment trends, the company announced an aggressive cost reduction plan. The plan includes closing down of 20 physical locations (mainly in Upper Midwest region) by the end of 2014 and reducing workforce by 20% (which would affect 5% of the student population). The plan will be implemented in the fourth quarter and will result in a one-time restructuring charge of $45 million–$55 million, to be recorded in the same quarter. Importantly, the initiatives are expected to result in annual cost savings of $50 million beginning 2014.
Other Stocks to Consider
Strayer currently carries a Zacks Rank #5 (Strong Sell). Better-placed stocks in the education sector include ITT Educational Services Inc. , New Oriental Education & Technology Group Inc. (EDU - Snapshot Report) and Xueda Education Group . All the companies carry a Zacks Rank #1 (Strong Buy).