Educational publisher and sometime Half-Blood Prince Scholastic
According to management, this loss was to be expected. After all, the vast majority of schools in the U.S. are closed during fiscal Q1, a.k.a. summer break. Closed schools mean few customers at Scholastic's School Book Fairs and Book Clubs businesses; few customers mean few sales to offset fixed costs -- and that pretty much guarantees a loss. The historical data supports this argument, by the way. Trawling through the vast archives at the Fool's data provider, Capital IQ, you'll be amazed at the remarkable consistency of the firm's GAAP accounting results -- every profitable quarter is followed by a money loser, which is turn followed by a moneymaker, all the way back to the happy days of fiscal Q3 2002, when the firm booked an uncharacteristic profit.
Turning from distant past to recent past, present, and future, you'll recall from last week's Foolish Forecast that CEO Richard Robinson's primary objective this year is to reduce operating costs. In the earnings press release, he confirms that Scholastic continues "to take steps to reduce overhead company-wide" and is currently "on track to meet our fiscal 2007 cost savings target," as well as to achieve its earnings target of $1.55 to $1.85 per share on $2.1 billion to $2.2 billion in sales for the year.
The numbers out of the way, I want to devote the rest of this column to quibbling with Scholastic's characterization of a couple of balance sheet items as changing in a "favorable" or "unfavorable" manner in comparison to last year. Specifically, Scholastic terms its:
- 39% decline in accounts receivable as an "unfavorable" development, but
- its 8% decline in accounts payable as "favorable."
Au contraire, mon frere!
I understand where Scholastic is coming from, of course. When accounts receivable decline, Scholastic sees this as a decline in assets (bad); conversely, it sees falling accounts payable and thinks -- fewer bills we need to pay later (good).
Fools, however, look at these things differently. Sure, when you demand swift payment from customers, or delay paying your suppliers, your balance sheet may look worse from an accounting standpoint. But from a practical perspective, "accounts receivable" is just a euphemism for "uncollected debt" -- something no creditor should want to see rise. Conversely, accounts payable are interest-free loans from suppliers -- you want those. For this reason, what Scholastic calls "unfavorable," we're actually thrilled to see. And the fact that the "unfavorable" decline in uncollected debt, and the "favorable" decline in accounts payable, helped reduce Scholastic's negative free cash flow in Q1 tells you why.
Get extra credit for reading the following Scholastic works:
- Book Value at Scholastic?
- Scholastic Dumbs It Down: Fool by Numbers
- Scholastic's Corporate Punishment