Strayer Education, Inc.’s (STRA) fourth-quarter 2013 adjusted earnings of $1.32 per share surpassed the Zacks Consensus Estimate of 98 cents by 34.7%. We believe that the earnings beat was due to lower share count resulting from the significant share repurchases from the prior quarters. However, earnings declined 10.2% from the year-ago level of $1.47 due to weak top-line performance and sluggish margins.
Total revenue in the quarter fell 13% from the comparable prior-year quarter to $124.1 million due to continued weak enrollment trends, partially offset by increase in revenue per student. Total revenue beat the Zacks Consensus Estimate of $119 million by 4.1%.
Revenue per student increased 5% during the quarter, owing to higher student retention rate and phasing out of the previous scholarships program. However, the company expects revenue per students to decline in each of the quarters of 2014, as more undergraduate students enroll in lower tuition programs.
Enrollment Discussion
Strayer University’s total enrollment declined 14% to 41,098 students for the winter term due to a decline in both continuing student enrollments and new student enrollment.
Continuing student enrollments went down 17% while new enrollments declined 2%. Enrollment of new undergraduate students declined 7% while graduate enrollments rose 15% year over year.
Strayer has been witnessing weak enrollment trends due to continued unemployment, overall economic downturn and subsequent decline in student demand. Total enrollments are expected to decline in double digits in fiscal 2014.
Adjusted operating income in the quarter was $24.6 million. Despite lower costs in the quarter, operating margin contracted 40 basis points to 19.8% due to top-line weakness. Bad debt expense as a percentage of revenues was 4.8% in the fourth quarter, higher than 4.5% in the year-ago quarter.
Other Financial Details
Strayer Education ended the quarter with cash and cash equivalents of $47.5 million as of Dec 31, 2013, compared with $85.2 million as of Sep 30, 2013.
In the fourth quarter of 2013, the company did not repurchase any shares. As of Dec 31, 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, however, the company 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 implemented an aggressive cost reduction plan during the quarter. The company closed down 20 physical locations (mainly in the Upper Midwest region) and reduced its workforce (which would affect 5% of the student population) in the quarter. The plan resulted in a one-time restructuring charge of $55 million. 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 #3 (Hold). Some better-ranked stocks in the education sector include Apollo Educational Group Inc. (APOL), New Oriental Education & Technology Group Inc. (EDU) and Xueda Education Group (XUE). All the companies have a Zacks Rank #2 (Buy).
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