School Specialty Inc. (SCHS) recently posted first-quarter 2012 results. The company delivered earnings of 77 cents a share, up 10% from 70 cents earned in the prior-year quarter.
On a reported basis, including one-time items, the quarterly earnings came in at 72 cents a share, reflecting a substantial improvement from a loss of $17.58 posted in the year-ago quarter.
Revenue Rises, Margins Still Under Pressure
Greenville, Wisconsin-based company’s total revenue further jumped by 9.1% to $276.1 million in the first quarter of 2012, after posting an increase of 8.8% in the fourth quarter of 2011, and declines of 12.9% in the third quarter, 15.7% in the second quarter and 23.4% in the first quarter.
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 that the education budget would stabilize due to better 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).
Despite a 13.7% increase in cost of revenue, gross profit for the quarter climbed 3% to $111.3 million due to a high-single digit rise in the top-line. However, gross margin contracted 240 basis points to 40.3% due to pricing discounts and rise in product and freight expenses within the Educational Resources segment, which were partly offset by a positive product mix.
School Specialty hinted that it remains committed to improving gross margins through effective cost management and operating efficiencies.
EBITDA for the quarter jumped 4.1% to $40.3 million, whereas EBITDA margin dropped 70 basis points to 14.6%.
Educational Resources segment revenue jumped 6.1% to $186.1 million. Segment gross profit dipped 2.7% to $60.4 million, whereas gross margin contracted 290 basis points to 32.5%.
Accelerated Learning segment revenue surged 16.1% to $89.9 million. Gross profit soared 10.7% to $50.2 million, whereas gross margin shrunk 270 basis points to 55.8%.
Other Financial Details
School Specialty ended the quarter with cash and cash equivalents of $3.9 million, total long-term debt of $349.7 million, reflecting a debt-to-capitalization ratio of 61.8%, and shareholders’ equity of $216 million. The company generated negative free cash flow of $57 million during the quarter.
Management Reiterated Guidance
School Specialty continues to expect loss per share between 10 cents and 35 cents for fiscal 2012. Management projected revenue between $755 million and $780 million and free cash flow in the range of $5 million to $15 million. EBITDA is projected in the range of $53 million to $59 million, reflecting an EBITDA margin of 7% to 7.5%.
Currently, we have a long-term Outperform rating on the stock.
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