Grading Varsity on the Curve
Friday August 12, 1:15 pm ET
By Rich Smith
Shareholders of school-textbook retailer Varsity Group (Nasdaq: VSTY - News) are likely heading into this weekend full of trepidation, knowing that their company will be releasing its earnings numbers for the first half of the fiscal year on Monday evening. Worse, if they've checked out the Fool's analyst estimates page, they know that Varsity is expected to post a sizeable loss on Monday of $0.09 per share.
As for how that loss came about, the answer is a bit complex. First, you've got your fixed costs. Varsity's business is a bit like running a restaurant. Just as a restaurant takes in most of its money around breakfast, lunch, and dinner, and then bleeds cash off to the electric company, the landlord, and the cleaning staff during the hours when customers dwindle, so too goes the school textbook business. The summer quarter -- the one we're coming off, consists in large part of hours when the shop is essentially closed for business. The small amount of business the company sees in the summer is kind of like the breakfast crowd shuffling in, anteing up for $0.50 cups of coffee and the $1.99 pancake special. There's just not a lot of money to be made off summer school.
Varsity makes most of its cash during lunch and dinner -- or as the school systems call them, the fall and spring semesters. That's the reason that, although the company should report a loss on Monday, it's nonetheless expected to be pretty profitable for the year. The single analyst following Varsity expects it to report a hefty $0.43 next quarter when it opens its doors to the dinner crowd, which with any luck will order a full plate of books for the fall semester.
That, however, is just the seasonal side of the business. Fools can expect to see two other factors at play on Monday: First, the company is continuing to build up its inventory of used books, purchased from last year's students at a steep discount, for resale to incoming classes. Second, the company will be incurring some costs related to its acquisition of school-uniform retailer Campus Outfitters, a deal that was announced back in May. Combined, those two factors will likely weigh on Varsity's income statement.
To figure out a fair curve for grading this business, you'll need to bear in mind both its seasonal nature, and the reasons for the inventory increase.
Fool contributor Rich Smith owns shares of Varsity Group. The Motley Fool has a disclosure policy.
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