School Specialty, Inc. (SCHS)
Interview with:
David J. Vander Zanden, President and CEO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
supplemental educational products to schools and teachers for pre-kindergarten through twelfth grade in the United States.

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School Specialty, Inc. is making an aggressive entry into new markets and expanding from K-12 in the United States to include Canada, pre-K and the day-care center marketplace

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Consumer Cyclical
Supplemental Educational Products

School Specialty, Inc.

W6313 Design Drive
Greenville, WI 54942
Phone: 888-388-3224

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David J. Vander Zanden
President and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
July 2003

David J. Vander Zanden
President & Chief Executive Officer
School Specialty, Inc.

David J. Vander Zanden joined School Specialty as President and Chief Operating Officer in March 1998.  He became interim Chief Executive Officer in March 2002 following the unexpected death of Dan Spalding, the company’s Chairman and Chief Executive Officer.  Mr. Vander Zanden became President and Chief Executive Officer of School Specialty in September 2002.  School Specialty is the largest direct marketer of supplemental educational products to schools and teachers for pre-kindergarten through twelfth grade in the United States.  School Specialty offers over 80,000 different products to more than 118,000 schools throughout the United States and Canada.  Sales for the fiscal year ending April 26, 2003, were $870 million.

From 1992 to March 1998, Mr. Vander Zanden served as CEO of Ariens Company, a manufacturer of outdoor lawn and garden equipment.

Mr. Vander Zanden has been a director of School Specialty since completion of the spin-off from U.S. Office Products in June 1998 and serves on the board and executive committee of the National School Supply and Equipment Association and is a member of the Education Industry Leadership Board.  He has also served on the boards of several local organizations including the executive board for the Boy Scouts of America, Bay-Lakes Council, where he has served as overall program chairman for both the “Friends of Scouting” and “Scouting for Food” fundraising campaigns on more than one occasion.

Company Profile:
School Specialty, Inc., (NASD: SCHS) the “Educator’s Marketplace,” is the largest direct marketer of supplemental educational products to schools and teachers for pre-kindergarten through twelfth grade in the United States. School Specialty offers over 80,000 different products to more than 118,000 schools throughout the United States and Canada. The company mails over 40 million catalogs annually to customers, and serves its customers through approximately 2,500 employees. School Specialty has a diversified approach to the market. The School Specialty brand focuses on serving administrators and procurement specialists through a national sales force. The company's nine specialty brands—ClassroomDirect, Childcraft, ABC School Supply, Sax Arts and Crafts, Frey Scientific, Brodhead Garrett, Teacher’s Video, Premier Agendas and Sportime—serve teachers and curriculum specialists.

CEOCFOinterviews: Mr. Vander Zanden, please tell us about the current changes at School Specialty and your efforts to expand the business.

Mr. Vander Zanden: “I think the biggest change at School Specialty is that we are making a more aggressive entry into new markets. We are expanding the scope of where we do business from K-12 in the United States to include Canada, pre-K and the day-care center marketplace. We have a number of new initiatives focused on new products and new catalogs to help expand the business.”

CEOCFOinterviews: Please tell us about the newer products.

Mr. Vander Zanden: “In the day-care marketplace we have introduced a number of catalogs with specific products for early learning centers and younger children. In some cases, those products are being offered in the public school systems. In Canada, we leveraged our entrance into that market a few years ago, relying on one of our divisions focused on student agendas. Premier Agendas has a 70% market share in Canada, a sales force and a couple of call centers.  We introduced all of our specialty companies into the K-12 education market in Canada. In that case, we have leveraged existing products. On the new product side of the business, we introduce several hundred new products a year to education. We are now developing somewhat different products for a younger student, and leveraging the products we already have.”

CEOCFOinterviews: Are there many differences between the Canadian and US markets?

Mr. Vander Zanden: “No, the Canadian marketplace is about 10% the size of the US, and the system itself, as far as funding and where dollars come from, operates a lot like the United States. There is a federal component, a provincial component, and the local community or local school district component. The percentages of where those dollars come from are very much like the States. The systems work the same way and grade levels are the same.”

CEOCFOinterviews: How do you reach customers?

Mr. Vander Zanden: “We have a business model called “Top Down, Bottom Up.” Top Down is where the traditional company operates. That side of the business represents about half of our revenues. We have a sales force of about 350 people who call on administrators at the building and the district level, and sell products that administrators buy, like furniture, and some of the general supply categories. We also have the “Specialty” or “Bottom Up” approach.  In that case, we send catalogs to the teachers, and we have product presentations in the catalog that teachers would buy for use in the classroom. In education today, almost every employee makes some decisions about what to buy. Almost everyone is a potential customer of ours. We come at them two ways; it depends on where they put the dollars.”

CEOCFOinterviews: How important is the sales rep? Is the personal component very meaningful?

Mr. Vander Zanden: “The personal component is very meaningful.  It is a relationship sale for us. Our traditional company people are selling aggregation and  delivery of 25,000 products. A school can select ten or twenty products and have them delivered in one box. We do a lot of value added around those products. Many companies can sell a pack of Crayola crayons but we get it there on time, complete with any number of additional products that the school desires. We can do it everyday, and get out of warehouses and distribution centers and offer online support and all kinds of things that help them spend more time teaching and not miss activities.”

CEOCFOinterviews: Do you need to maintain much inventory?

Mr. Vander Zanden: “We are seasonal; from June-August, about 60% of our products go out the door for the year. We will carry much more inventory that time of year. We have to serve the schools during the school year as well. Inventory turns for us about seven or eight times. We hold a lot of product, but we also drop-ship a lot of product directly from vendors. Probably about 35-40% of what we sell is drop-shipped.”

CEOCFOinterviews: Did you need to make many changes in your technology to manage all of this?

Mr. Vander Zanden: “On the Internet side a few years back, we made some large investments. Today it is in more of a maintenance mode. Our CAP-X budget, on an annual basis, is between ten and fifteen million dollars, so it is not a huge expenditure from year-to-year. We have some core technology that operates well to serve the customers, but nothing extraordinary.”

CEOCFOinterviews: You seem to be making acquisitions on a continual basis; please tell us about the strategy.

Mr. Vander Zanden: “The strategy goes back quite a few years. Many years ago, we decided to be the largest supplier to the schools in the supplemental products area and to develop that strategy, we had to buy companies that had product offerings that we didn’t have. We like to have the number-one or number-two brand in all of the different curriculum areas. In many cases, we are the largest already but there are still two or three other companies that we compete with, that would give us a lot of opportunity for integration and cost savings and a bigger market presence if we bought them. We sometimes buy a company that has an offering we don’t have and sometimes a company that will enhance an offering we already have.”

CEOCFOinterviews: Will you tell us a little about the industry in general?

Mr. Vander Zanden: “The industry is still fragmented. There are still one or two thousand small distributors out there that sell products. On the traditional side of our business, which is the supply furniture side, there are no national competitors. We compete with regional and small local players. On the specialty company side, many of the specialty companies in the market, because they use catalogs, consider themselves national players. Typically, what we find is that they are strong in a region or two. There are still many competitors, but on a smaller scale.”

CEOCFOinterviews: Is it difficult to get an audience with schools that are using other suppliers now?

Mr. Vander Zanden: “Not really, in fact with the budgetary issues in front of educators today, it is actually easier to talk to superintendents and get answers. Educators are looking for ways to save money and we provide a lot of that value added with our sales force. It is easier today to get in.”

CEOCFOinterviews: Does the fact that you are an established presence matter to the people in the early childhood and daycare market?

Mr. Vander Zanden: “Yes it does! When we sell to the large daycare chains like KinderCare Learning Centers Inc. (NASD: KCLC), it is important that they do business with a vendor that is stable and has a lot of capabilities and resources. As we get to the smaller daycare centers, it is a little like the specialty side of the business, which is more catalog based. As we go into public schools that are starting to offer locally or state funded four-year-old education to the public, it is important to have good stability there as well.”

CEOCFOinterviews: Does the education industry change much over time?

Mr. Vander Zanden: “It doesn’t change very much; education is a slow changing business. When you look at where the dollars are coming from, at the federal government level, they only fund about 8% of the budgets of education across the country. They put more of the money at the federal level, into early learning, zero to four-year-old level and head start programs. They tend to fund the disabilities area much more than are funded at the state or local level. There are many new dollars coming into both of those areas. Early childhood is a growing area right now because many states are looking at adding four-year-old education. There have been many studies done over the last eight to ten years, focusing on the brain development that occurs in a young child from 0-4 years. The states are recognizing that kids that end up in kindergarten that have some prior education, come from families with incomes over fifty thousand dollars who can afford to send them to a daycare center. So many kids are being left behind and when they start school, they are behind already. Therefore, it has been a consideration to spend more money on four-year-old education. There are states like Florida, which just passed a referendum in November to fund four-year-old education. Illinois is talking about it and Georgia has been doing it for years. Special education and early childhood are good growing areas right now.”

CEOCFOinterviews: You have had a good quarter; what is working for you and what do you need to improve?

Mr. Vander Zanden: “In the quarter of January, February and March this year, when our selling cycle begins, we introduced a lot of new products for the daycare marketplace and the Canadian market. In our traditional company, we also expanded the sales force and our student agenda business grew the sales force as well. I believe what you saw in the fourth quarter were some of the results of those efforts. It is early, our selling cycle runs all the way through July and the largest orders we receive come in July and August. The trend so far has looked good for us.”

CEOCFOinterviews: What does the student agenda business entail?

Mr. Vander Zanden: “In the old days, before technology, we all carried day planners.  That is where the agenda started for students in K-12. What we do at Premier Agendas is enhance the organizational skills that the kids can learn from using an agenda, with character education. We incorporate content from the ‘7 Habits of Highly Effective Teens’, into the student agenda. The kids learn how to build personal relationships, develop mission statements and things like that. It is a good and growing part of our business. In the United States, about fifty million kids are in school, and we distribute about twenty-four million student agendas. We have almost half the market. The competition sells about another ten million and there are still fifteen million kids that don’t carry an agenda yet. It is a great place to do business, a very good product and educators are looking for character education right now, and that is what comes with the agenda.”

CEOCFOinterviews: Will you tell us about the financial condition of the company?

Mr. Vander Zanden: “From an earnings standpoint, we had a very good year last year; earnings were up about 82% and continue to grow. This year, we hit a milestone. Five years ago when we went public, we set a goal to become a billion-dollar company with a hundred million dollars of EBITDA, and in fiscal 2003 we crossed that hundred-million mark to a hundred and one million. We have reset and our next goal is to be a 1.5 billion dollar company with a fifteen percent operating profit. Today we only have a fifteen percent market share, so there is still a long way for us to go. From a cash flow standpoint, we generated about fifty-five million dollars of cash flow. There are some opportunities again for integration to continue to work the balance sheet. We don’t have many capital expenditures, so we are generally able to generate some good cash.

Integration is part of our strategy with all the acquisitions. We are not a holding company, but a company that acquires other companies; we have a purpose in mind and we integrate the companies we acquire to create a larger one. If we buy a company today, the distribution centers, the IT systems, and purchasing departments, will all come together and be integrated. We generate quite a bit of cost savings and improve earnings that way. We get supplier benefits.  We become larger customers for suppliers and get better pricing. UPS contracts also work out better; we buy paper for catalogs at a cheaper rate, so it plays all the way around the income statement for us as we integrate."

CEOCFOinterviews: How do you increase your 15% market share?

Mr. Vander Zanden: “We develop many proprietary products in our specialty companies.  About 40% of what we sell today are proprietary products. They are all very good products and educators really like them, so that will continue to generate good organic growth. We are building our sales force in our traditional company, and we are also building our sales force in our student agenda business. Some of the smaller specialty companies have small sales forces as well. Right now we are not able to get to all the schools, so we will continue to grow by just adding more people so we can tell our story more times.  Then we have acquisitions that typically will target between seventy million and a hundred million dollars in new revenues from acquisitions every year.”

CEOCFOinterviews: You mentioned proprietary products; how do you decide what to do yourselves?

Mr. Vander Zanden: “Inside our Specialty Companies we have people that are experts in certain curricular areas. We talk to many vendors that resell products; they sell products to distributors, who sell to schools. We know what is in the market and we talk to many educators about what they would like to see. We have our in-house people that do the development work and make those kinds of decisions. As an example, physical education is much different than it was when I was in school.  Back in those days they got you outside and ran you around the track. Today physical education is about including all the kids in the activities regardless of skill level, and teaching them something at the same time.  Besides just getting physical exercise, the kids learn concepts. We developed many products in our Sportime division for physical educators that include all the kids and also do a multiple teaching process.”

CEOCFOinterviews: In closing, what should potential investors know about School Specialty?

Mr. Vander Zanden: “I think investors should know that we have had a good track record in our five years of being a public company. We have never missed our earnings numbers. We are a very conservative and predictable company. We are in the segment of the education market that is very reliable even when the funding environments get a little rough. We perform, and we are consistent. We have purchased over forty-five companies in the last ten years; there were a couple that didn’t fit us as well that we sold off. We are very good at integration, and we put the companies together and create new value. We are at 15% market share and we have a long way to grow; we are about seven or eight times larger than our next competitor. We trade at a relatively low P.E. today, and I think the stock is a good opportunity for investors right now.”

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