Lifetime Learning Revision of gross profit projection.
Due to the new information made available at the stockholders meeting, I am revising the gross profit projection for LL made in post #30182. The split to TSIG is $4.25 instead of the $5.00 originally reported. All other assumptions are the same.
The following information is based on Dave Gore's report of his conversation with Robert Gordon in post #30164. In that conversation, DG and RG go through a super-conservative projection of card and CD revenues and another projection using average assumptions. Before summarizing the two different projections, I will state the basic assumptions and their sources.
Per Lifetime Learning: 50,000,000 kids, average participation of 30%, average sale per kid is $40
Per research alluded to by RG: 30% of cards will buy 3-4 CD's apiece
Previous information from TSIG: profit margin on $10.99 CD is $1.00 or 9%
***Super-Conservative Projection***
Assume 10% participation or 5,000,000 kids
2 cards sold per kid or $20 sale per kid or 10,000,000 cards
Total card revenue is $100,000,000 with $42,500,000 going to TSIG
Of the 10,000,000 cards sold, assume 10% or 1,000,000 cards are actually used
Assume each person buys only 1 CD for a total sale of 1,000,000 CD's
Gross profit on 1,000,000 CD's is $1,000,000
Total gross profit is $43,500,000
Reasons to think this is a low-ball figure: the assumed participation level of 10% is 1/3 of the average according to Lifetime Learning. LL has been in the business for 70 years, and would probably have a good handle on their statistics. Preliminary response has been very good according to the company and LL. Thus there is reason to think participation level will come in nearer the average of 30%. Assuming only 10% of the cards are going to be used and then used for only 1 CD is off-the-map low-balling IMO. The averages alluded to by RG of 30% of the cards are used to buy 3-4 CD's sound much more realistic to me.
***Average Projection***
Assume 30% participation or 15,000,000 kids
4 cards sold per kid or $40 sale per kid or 60,000,000 cards
Total card revenue is $600,000,000 with $255,000,000 going to TSIG
Of the 60,000,000 cards sold, assume 30% are used or 18,000,000 cards used
Assume each person buys 4 CD's for a total sale of 72,000,000 CD's
Gross profit on 72,000,000 CD's is $72,000,000
Total gross profit is $327,000,000
Comments on the term "gross profit": "Gross profit" is very different from "net profit." Dave Gore clearly differentiated between the $300 million of high-margined card revenue and the $720 million of low-margined CD revenue. Because the CD revenue is low-margined, I think it would be instructive for our purposes here to use the gross profit figure when analyzing CD revenue. Essentially we are subtracting "cost of sales" from the revenue figure. In order to get to "net profit" we must subtract all the expenses. Getting a handle on our expenses is worth another post.
Regards, Suzanne
|
