Budget cuts spell trouble for school suppliers

BANGALORE (Reuters) - School-products suppliers may bring home a disappointing report card this school year, as severe cuts to education budgets by many U.S. states and uncertainty about the distribution of federal stimulus funds could hurt results.

As the states' fiscal distress deepens, companies like School Specialty Inc SCHS.O and Scientific Learning Corp SCIL.O will be looking to woo school districts and local education agencies (LEAs) to direct stimulus dollars toward their products.

However, the distribution of dollars from the federal stimulus spending package, the American Recovery and Reinvestment Act of 2009 which includes about $100 billion in education spending, is still unclear, Robert W. Baird analyst Amy Junker said.

States are required to restore K-12 and higher education spending, but “they have some discretion in defining a baseline for determining restoration amounts,” said Cornelia Ashby, director of education issues at the U.S. Government Accountability Office.

“This affects the fund allocation between LEAs and institutions of higher education,” Ashby said.

The Government Accountability Office is an arm of the U.S. Congress that investigates how taxpayer dollars are spent.

A portion of the stimulus money known as the State Fiscal Stabilization Fund could be used primarily to preserve teacher jobs and improve student achievement.

The U.S. Department of Education will award governors about $48.6 billion under the stabilization program to help make up shortfalls in state and local government budgets.

“I don’t know if the school districts are going to see these funds as a windfall to spruce up their physical (infrastructure),” Hilary McLean, communications director for California State Superintendent of Public Instruction, told Reuters.

“They really need these funds to make sure the teachers are in the classroom, so when the students show up there is someone to teach them.”


A June 29 report by the Center on Budget and Policy Priorities based in Washington, D.C., said at least 24 states are cutting aid to K-12 schools and early education programs.

“The state budget situation is so severe in many cases that the stimulus money is simply back-filling against a lot of cuts, and that unfortunately seems to be shaping up to be the case,” Signal Hill Group analyst Trace Urdan told Reuters.

“There will be some states like California, where no matter how effective the vendors are by attracting the stimulus fund; they still will probably see an overall decrease.”

Last week, California lawmakers and Governor Arnold Schwarzenegger agreed to close a $26.3 billion deficit in the state’s budget, in a deal that includes a $9 billion cut in funding to public schools, colleges and universities.

In this environment, Baird’s Junker sees a strong possibility of schools and school districts becoming discretionary shoppers.

“Products like gym or art supplies, and maybe even science kits, could be considered more of a discretionary item in the current environment,” she said.

“I think you have to stand back and consider if schools really need more basketballs or if they can get away with using the old ones for one more year.”

And it’s not just gym coaches taking the hit either.

“(We) continue to reassess many purchases and in some cases, the purchase of new textbooks have been delayed,” Gayle Pollard-Terry, a spokeswoman for the Los Angeles Unified School District, said in an email.

The school district, the second largest in the United States, is facing more than $1 billion in budget cuts for the 2008-09 and 2009-10 school years, she said.


Scientific Learning Chief Executive Andy Myers told Reuters that many publishers have not yet seen the impact of education stimulus funds released to the states in April, and expectations of when school districts will receive and spend these vary widely from one state to the next.

Oakland, California-based Scientific Learning provides education software to K-12 schools and other educational institutions, while School Specialty distributes school supplies to pre-kindergarten through 12th grade.

“Though it is difficult to get a good read now, it is very likely that the top line of both School Specialty and Scientific Learning will get impacted this year,” Signal Hill’s Urdan said.

“Stimulus dollars could bring some strength to certain pockets, but overall, across all 50 states, I think most vendors will see increased pressure.”

Urdan has a “buy” rating on Greenville, Wisconsin-based School Specialty and a “hold” on Scientific Learning.

Baird’s Junker, who has a “neutral” rating on School Specialty, said she expects the issues to affect the company’s results in the current fiscal year.

School Specialty declined to discuss the tough market conditions. In an email, a spokesman said that any comments on budget cuts “would be providing a view of the company’s current business volume and that would not be appropriate from a fair disclosure standpoint.”

School Specialty’s stock is up 10 percent and Scientific Learning is up 13 percent, this year. Scientific Learning is scheduled to post second-quarter results Thursday, while School Specialty reports first-quarter results August 20.

Reporting by Renju Jose; Editing by Anthony Kurian