Franklin Covey and School Specialty: Two Misunderstood Micro-Caps

Patrick Retzer of Retzer Capital Management presented his in-depth investment theses on Franklin Covey (US: FC) and School Specialty (US: SCOO) at Best Ideas 2019.

Thesis summaries:

Franklin Covey is a global company specializing in organizational performance improvement by providing training and consulting services in seven areas: leadership, execution, productivity, trust, sales performance, customer loyalty and education. They have consistently created shareholder value in a tax efficient manner, having bought back $62 million of stock in the past fifteen quarters and carry almost no net debt. The Company is a high gross margin, high FCF company that has completed the transition from a traditional sales revenue model to a subscription-based revenue model.

Pat presented Franklin Covey last year when the stock was $20.45 per share. It subsequently ran up to $31.20 per share in January after the company reported earnings. FC recently hit $21.45 per share, providing an opportunity as the company ramps up adjusted EBITDA, deferred revenue, and FCF. On the most recent earnings call, management reiterated an interest in restarting share buybacks.

School Specialty is a leading provider of supplies, furniture, technology products, supplemental learning products and curriculum solutions to the educational marketplace. SCOO serves, in some manner, 90+% of school districts and 70+% of schools in the U.S., with 100,000+ SKUs. The 21st Century Safe School value proposition looks to improve student outcomes by addressing the social, emotional, mental and physical well-being and safety of students on a cohesive and holistic basis. The Safety & Security and Guardian offerings address the needs of schools in the face of recent school shootings.

Pat presented SCOO last year when the stock price was $16.65 per share. It subsequently reached a high of $20.02 per share last June, but plunged after missing on their third quarter earnings. The miss was based on higher transportation costs, higher than normal employee turnover and the slippage of some high margin business into 2019. SCOO trades at ~5.5x enterprise value to lowered 2018 EBITDA guidance. With management’s view that 2019 could be the year they expected in 2018, the stock appears poised for material upside.

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About the instructor:

Patrick Retzer spent the first several years of his career in public accounting and then developing tax planning software all while earning a Master’s in Taxation. He moved into investment management in 1987, joining Heartland Advisors, manager of the Heartland family of mutual funds in Milwaukee, Wisconsin. While at Heartland, he was portfolio manager of the Heartland US Government Securities Fund (#1 General US Government Fund for the 5 years ended 12/31/93 according to Lipper), he started and managed the Heartland Wisconsin Tax Free Fund (Wisconsin’s first double tax free fund) was co-manager of the Heartland Value Plus Fund, and managed private accounts. In 2000, Pat left Heartland Advisors to start Retzer Capital Management, LLC and the Retzer Fund I, LP. Pat believes his 30+ years of experience in both fixed income and equity management as well as his background as a CPA and tax specialist give him a unique perspective on the financial markets.