Zacks_Analysts' Blog : School Specialty Upgraded - Analyst Blog

We recently upgraded our long-term recommendation on School Specialty Inc. (SCHS) to 'Outperform' with a price target of $16.00 following better-than-expected third-quarter 2011 results.

Earlier, we had a Neutral rating on the stock.

The company delivered a loss of $1.07 per share in the seasonally slow quarter, which fared better than the Zacks Consensus Estimate for a loss of $1.20.

Total revenue dropped 12.9% during the third quarter, following a decline of 15.7% in the second quarter and 23.4% in the first quarter of 2011. Although the top line fell, the rate of decline decelerated from previous quarters due to the gradual economic recovery.

The recent economic downturn resulted in uncertainty related to state budget funding levels in school districts, which led to a cautious spending approach. The furniture market has been the worst hit by budget cuts, as school construction and modernization projects have been cancelled or postponed.

Management hinted that although the furniture business remains sluggish, it improved from the previous quarters. During January 2011, School Specialty witnessed a rise in supplies orders. Moreover, we believe that the company’s improved pricing initiatives, product line-up, e-commerce systems, and sales endeavors will help regain the lost market share.

Moreover, management also reaffirmed its revenue guidance of $735 million to $770 million and free cash flow of $50 million to $60 million for fiscal 2011.

School Specialty is the leading provider of supplemental educational products for the PreK-12 market in the U.S. and Canada. The company leverages its strong distribution network to offer more than 75,000 items to approximately 91,000 schools in the U.S. This provides a competitive advantage to the company and fortifies its dominant position in the market.

The company’s selective acquisition strategy and disciplined integration approach have facilitated it to consolidate its leading position within the supplemental educational products and equipment industry, and improve its national marketing and distribution platform.

School Specialty, which competes with office product contract stationers and office supply superstores, such as Office Depot Inc. (ODP), holds a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ recommendation, and correlates with our long-term view.