Zacks_Analysts' Blog : School Specialty to Underperform - Analyst Blog

We expect School Specialty Inc. (SCHS), an education company offering supplemental educational products and equipment, to Underperform and set a price target of $11.00. Earlier, we had a Neutral recommendation on the stock.

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. Consequently, School Specialty has been registering a sustained decline in the top line. A continued softness in demand still persists for both curriculum-based products and supplemental materials.

Total revenue for second-quarter 2011 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. 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.

The furniture market has been the worst hit by budget cuts, as school construction and modernization projects have been cancelled or postponed. Revenue from furniture slipped 27% during the quarter. To mitigate this, School Specialty has launched new furniture product lines at compelling prices. We believe aggressive pricing for both furniture and consumable products will weigh upon gross margins.

Given the sustained pricing pressures and lower-than-expected second-quarter 2011 results, School Specialty now expects to deliver loss per share between 30 cents and 60 cents for the fiscal year, significantly down from the earnings of 15 cents to 45 cents predicted earlier.

School Specialty 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 includes office product contract stationers and office supply superstores, such as Office Depot Inc. (ODP). Consequently, the company is under severe stress to maintain profitability.

Consequently, we have an Underperform rating on School Specialty. The Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ recommendation, also correlates with our long-term view.