Here is my April 2018 Value YYX presentation for School Specialty.
School Speciality sells the supplies, instructional materials, and furniture needed by over 13,000 school districts to equip schools with what they need. Arguably its a lousy business with highly cyclical summer sales, half of sales are commodity products, and its subject to the whims of public school budgets, yet those same characteristics keep competitors out of the space as well.
But at the right price, I don’t think its lousy. In fact, I’ll argue it even has a moat in the inefficiency of school districts purchasing rules. You don’t really think a school administrator can just click on Amazon, order 239 school desks that match the order placed three years ago and then route the same order through five levels of administrative signatures, do you? This too keeps competitors out. For me, the secret of School Speciality is that they sell school districts what they need, when they need it, the way they want to order it and you need all three abilities to close the sale. School district sales are not about efficiency, they are about selling what schools want to buy the way their purchasing departments are mandated by law to buy it. This may change in 20 years, but it’s not changing next week or next year.
School Speciality’s edge lies in its established history and relationships to work with school districts the way a school district works. School administrators with small needs can use purchasing cards to order direct from Office Depot or Amazon, but when you need 916 art supply kits to arrive in early August before school starts, you’re using School Speciality.
Do I like that half their sales are commodity items? No, but the commodity products are the sales bait that gets School Speciality in the door while the higher margin furniture and instructional materials are the sources of profit. Management understands this and is seeking more opportunities to drive growth over its existing network like its accretive acquisition last year of Triumph Learning’s instructional materials.
Did, I mention its cheap? How about an EV/EBITDA of 5? Its priced like Office Depot and Barnes and Noble which ignores its better products lines that deserve higher multiples more inline with content creators. Mark the company up to a 6 ratio and the market cap (and your stock price) will go up by 50%. (The company is leveraged so assuming debt and EBITDA remain constant, the benefits of a re-rating would all fall to the equity holders).
And what would attract this new investor interest, raise demand and get the stock priced closer to fair value? How about moving the stock from the pink sheets to NASDAQ. The company crossed the 300 registered share holders mark last month and began the process to up-list in early May after I wrote the April presentation. I expect increased visibility, liquidity and especially the ability of funds which do not buy OTC stocks to now increase the number of buyers for School Speciality once it is listed on a major exchange.