School Specialty Earnings Preview

Feb.15.11 | About: School Specialty, (SCHS)

School Specialty Inc. (NASDAQ:SCHS), an education company offering supplemental educational products and equipment, is scheduled to report its third quarter 2011 financial results on February 17, 2011. The current Zacks Consensus Estimate for the quarter is a loss of $1.20 per share. For the quarter under review, revenue is $92 million, according to the Zacks Consensus Estimate.

Second Quarter 2011, a Synopsis

The quarterly earnings of 96 cents a share missed the Zacks Consensus Estimate of $1.23, and tumbled 38.9% from $1.57 earned in the prior-year quarter.

Total revenue plunged 15.7% to $291.9 million from the year-ago quarter, and also fell short of the Zacks Consensus Revenue Estimate of $293 million. Excluding prior-year quarter’s divestiture of School Specialty Publishing, total revenue dropped 14%. The fact that the rate of decline in the top-line has decelerated from 23.4% in the first quarter, as the economy gradually improves, is noteworthy.

Revenue from furniture slipped 27% during the quarter. Despite a 14.1% decline in cost of revenues, gross profit for the quarter fell 17.9% to $117.5 million, reflecting a fall in the top-line, whereas gross margin contracted 100 basis points to 40.3%.

Management Guided

School Specialty at its last earnings release trimmed its earnings guidance for fiscal 2011. Given the sustained pricing pressures, management now expects to deliver a loss per share between 30 cents and 60 cents for the year, significantly down from the earnings of 15 cents to 45 cents predicted earlier.

However, the company has reaffirmed its revenue guidance of $735 million to $770 million.

Third Quarter 2011 Zacks Consensus

Analysts considered by Zacks expect School Specialty to post a third quarter 2011 loss of $1.20 per share compared with a loss of 98 cents in the prior-year quarter. The current Zacks Consensus Estimate for the quarter ranges between a loss of $1.15 and $1.24 per share.

Zacks Agreement and Magnitude

Of the three analysts following the stock, none of the analysts have revised their estimates in the last 7 or 30 days, leaving the Zacks Consensus Estimate unchanged.

Mixed Earnings Surprise History

With respect to earnings surprises, School Specialty has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of positive 2.0% to negative 39.7%.

The average remained at negative 19.3%. This suggests that School Specialty has missed the Zacks Consensus Estimate by an average of 19.3% in the last four quarters. Given the past performance we expect the company to underperform the Zacks Consensus Estimate.

School Specialty in Neutral Lane

The recent downturn has resulted in an uncertainty in school districts related to state budget funding levels, which has led to a cautious spending approach. Consequently, School Specialty has been registering a sustained decline in the top-line.

In order to revive its top-line, the company has undertaken various measures, which includes a contract with U.S. Communities, new Accelerated Learning products and a consumer-oriented contract with (NASDAQ:AMZN).

The furniture market has been the worst hit by budget cuts, as school construction and modernization projects have been cancelled or postponed. To mitigate this, School Specialty has launched new furniture product lines at compelling prices.

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 (NASDAQ:ODP).

Currently, we have a long-term Neutral rating on the stock. Moreover, School Specialty holds a Zacks #3 Rank, which translates into a short-term Hold rating, correlating with our long-term recommendation.