School Specialty Inc. (SCHS) posted better-than-expected fourth-quarter 2012 results on the back of effective cost management and margin improvement. However, budgetary constraints and a competitive pricing environment remain headwinds.
The company posted a loss of 92 cents a share, narrower than the Zacks Consensus Estimate of a loss of $1.00 but wider than a loss of 91 cents a share incurred in the comparable year-ago quarter. On a reported basis, including one-time items, the quarterly loss came in at $2.75 per share.
However, for the full fiscal year 2012, the company posted a loss of 70 cents a share, which missed the Zacks Consensus earnings estimate of 22 cents and widened substantially from a loss of 31 cents in fiscal 2011.
Let’s Unveil the Picture
Greenville, Wisconsin-based School Specialty’s total revenue decreased 6.3% year over year and 5.1% sequentially to $119.3 million in the fourth quarter of 2012, and fell short of the Zacks Consensus Estimate of $121 million. The fourth quarter of 2011 included an extra week, when an additional $8 million was earned. Excluding this impact, revenues would have been more or less consistent with the year-ago quarter.
For fiscal year 2012, total revenue fell 3.9% to $732 million from $762.1 millionin 2011. Moreover, total revenue for the fiscal year also missed the Zacks Consensus estimate of $734 million.
Despite a 6.6% decline in the cost of revenue, the gross profit for the quarter dropped 6% to $46 million due to a fall in the top line. However, the gross margin expanded 10 basis points to 38.6% on account of improvements in Education Resources segment, which compensated for the decline in Accelerated Learning segment.
The company reported adjusted EBITDA loss of $12.7 million for the quarter compared with a loss of $13.7 million in the comparable prior-year quarter.
School Specialty hinted that it remains committed to augmenting sales, improving margins and market position through cost containment efforts, effective working capital management and operating efficiencies.
Segment Discussion
Educational Resources revenue declined 5.4% to $96.4 million from $101.9 million in the fourth quarter of 2011. However, excluding the impact of the extra week in the year-ago quarter, revenue was up by about 2%. Gross profit for the segment came in at $35.5 million, down 2.2% from $36.3 million in the year-ago quarter. However, gross margin expanded by 120 basis points to 36.9%
School Specialty indicated that the Educational Resources segment has been portraying improvement this year, with gross margin improving sequentially as well as year over year. Further, the company intends to widen its multi-channel and multi-market approach to augment sales further.
Accelerated Learning revenue fell 10% to $22.8 million from $25.3 million in the year-ago quarter. Gross profit declined 16.9% to $22.8 million whereas gross margin contracted 380 basis points to 45.2%, due to lower revenue from the products carrying higher margin and increased amortization charges arising from product expansion.
The fall in revenue and margins was experienced as many districts opted to defer their purchasing as 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.
Other Financial Details
School Specialty ended fiscal 2012 with cash and cash equivalents of $0.5 million and total long-term debt of $289.7 million, reflecting a debt-to-capitalization ratio of 81.1%, and shareholders’ equity of $67.9 million. The company generated free cash flow of $5.8 million during fiscal 2012.
Guidance
The recent economic downturn has resulted in uncertainty related to state budget funding levels in the school districts, and in turn a cautious spending approach. Therefore, management estimates fiscal year 2013 to be almost in line with fiscal year 2012 with respect to revenue and EBITDA.
However, management assumes a steady recovery in the economy in the next 3-5 years beyond fiscal year 2013 and expects the organic growth rate to be in the mid-single digit range, leading to 10% or more EBIDTA margin growth.
Conclusion
School Specialty which competes with Office Depot Inc. (ODP) remains focused on their long-term investments, which will optimize their growth opportunities, driving improvement in EBITDA. Moreover, management is taking up initiatives to recognize and close down the product lines that are not performing well and are unable to provide sufficient returns to the company.
Further, the company believes that its long-term investments and strategic focus will help it withstand the economic pressures.
However, we believe that the company will take time to capitalize on their investments and initiatives undertaken and as a result the short-term outlook remains a bit gloomy.
Therefore, the stock carries a Zacks #4 Rank, which implies a Sell rating over the next 1-3 months. We also have a long-term Neutral recommendation on the shares.
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