| To: spiny norman who wrote (5449) | 5/26/1998 7:13:00 AM | | From: Kory | of 14266 | | |
<A/R generally correlates closely to sales, it is ultimately a function of sales, so what's your point?>
Many of the sales that THQ made in the last two quarters have already been collected (i.e. $97 million of sales and only $34 million of receivables outstanding at 3/98). A much more realistic way of analyzing for bad debts (other than an aging) is to view the reserve as a percentage of outstanding receivables - not sales which have already been collected.
Here is the domestic reserve as a percentage of the domestic receivables at quarter-end dates:
Dec-96 - 20.6%
Mar-97 - 28.0%
Jun-97 - 29.3%
Sep-97 - 24.4%
Dec-97 - 23.0%
Mar-98 - 31.7%
As of March-98, THQ has a greater percentage of domestic receivables reserved than anytime in the past 18 months. The only problem with this is the reserve is both for bad debts and an allowance for returns. IMO, the reserve has little to do with bad debts. It has a lot more to do with allowance for returns. I admitted that the reserve should probably be higher for returns given increased sales. However, given that most of the sales were WCW, and THQ's printed returns policy, $10.9 million seems very high.
<If you've ever aged receivables, you'd realize that the above statement is not necessarily true. Knowing the amount of AR tells you nothing about its composition. The AR could all be > 180 days for all you know.>
I have aged many receivables in my lifetime. While it is true that it is theoretically possible that THQ collects all new sales on day 1 and the entire $34 million is 180 days old, I would find that a miracle up there with the parting of the Red Sea.
My final guess on the issue: The $10.9 million is probably about 25% for bad debts and 75% for returns and allowances. The 75% for returns and allowances is essentially a bargaining chip for THQ, as they have little legal obligation to refund money. Therefore that 75% can either be put into the P&L as profit as time passes, or can be used in negotiations for "accommodations" to increase THQ's marketing ability.
By the way, per the annual report, THQ reduces sales for amounts that it reserves. Therefore, gross sales have been significantly higher than the reported net sales for the past two quarters. |
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