Barnes & Noble Education, Inc. — Form 10-Q Summary
Business Context and Reporting Period
BNED operates college, university, and K-12 physical and virtual bookstores, a textbook wholesale business, and digital student-solutions businesses. It operated 1,429 bookstores and served more than 6 million students. The filing covers the 13 weeks ended July 31, 2021, BNED’s first quarter of Fiscal 2022, compared with the 13 weeks ended August 1, 2020.
The business is highly seasonal, with Retail sales generally highest in the second and third fiscal quarters. First-quarter results are therefore not indicative of the full fiscal year.
Key Financial Metrics
| Metric | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | Change |
|---|---|---|---|
| Total sales | $240.8 million | $204.0 million | 18.0% increase |
| Gross profit | $60.0 million | $30.9 million | 94.5% increase |
| Gross margin | 24.9% | 15.1% | 980 basis-point increase |
| Operating loss | $(41.5) million | $(58.9) million | $17.5 million improvement |
| Net loss | $(44.3) million | $(46.7) million | $2.3 million improvement |
| Diluted loss per share | $(0.86) | $(0.96) | Improved by $0.10 |
| Adjusted EBITDA | $(24.5) million | $(38.0) million | $13.5 million improvement |
| Free cash flow | $(37.8) million | $(53.0) million | $15.2 million improvement |
Selling and administrative expense increased 23.1% to $86.2 million, while depreciation and amortization declined 10.2% to $12.6 million. Restructuring and other charges were $2.6 million, compared with $5.7 million in the prior-year period.
Operating cash flow used was $17.5 million, compared with $53.1 million used in the prior-year period. Capital expenditures were $11.4 million, compared with $7.1 million. Cash, cash equivalents, and restricted cash totaled $13.2 million at July 31, 2021; cash and cash equivalents alone were $7.6 million.
Total borrowings were $203.7 million, consisting of $153.7 million under the asset-backed credit facility and $50.0 million under the FILO facility. The credit agreement provides aggregate committed capacity of $400.0 million, with a potential $100.0 million increase subject to restrictions and a $100.0 million incremental FILO facility. Letters of credit totaled $4.8 million.
Material Changes Versus the Prior Comparable Period
- Retail sales increased 32.6% to $210.5 million, primarily because stores that had been temporarily closed during the COVID-19-affected prior-year period reopened.
- Retail gross profit increased to $48.1 million from $16.1 million, supported by higher margin rates, lower inventory reserves and markdowns, and a more favorable sales mix.
- Wholesale sales declined 44.6% to $44.5 million because of lower customer demand, shifts from physical to digital textbooks, and the prior year’s temporary assumption of direct-to-student fulfillment for closed Retail stores.
- DSS sales increased 41.4% to $8.3 million, primarily from higher subscription sales.
- Retail gross comparable-store sales, presented on a non-GAAP gross basis, increased 49.8%; First Day inclusive-access sales increased approximately 200%.
- Effective April 4, 2021, logo and emblematic general merchandise fulfilled by Fanatics and FLC is reported on a net commission basis rather than gross sales. BNED also sold related inventory to FLC and recognized a $0.4 million inventory loss in the quarter.
- Income tax expense was $0.4 million despite a pretax loss of $43.9 million, versus a $14.9 million tax benefit in the prior-year period. Management determined that certain deferred tax assets were not more likely than not to be realized.
Outlook, Commentary, Risks, and Unusual Items
Management expected most schools to return to traditional on-campus learning and sporting activities for the upcoming fall semester, but stated that the duration and effects of COVID-19, including the Delta variant, remained uncertain. No quantitative revenue, earnings, or cash-flow guidance was provided.
Management expects the Fanatics/FLC partnership to expand product assortment, e-commerce capabilities, digital marketing, and long-term general merchandise growth. BNED also plans to expand digital solutions, e-commerce, new accounts, acquisitions, and strategic partnerships.
- Key risks include renewed COVID-19 disruption, enrollment declines, reduced university funding, store closures or contract nonrenewals, competitive pressure from publishers and digital platforms, price sensitivity, and declining used-textbook supply.
- Technology, cybersecurity, data privacy, supply-chain disruptions, labor costs, shipping costs, and publisher changes to pricing or rental models remain significant risks.
- BNED reported $25.3 million of long-term tax payable associated with the LIFO reserve and stated that an additional portion could become payable within 12 months, although the amount cannot be reasonably projected.
- BNED expects approximately $30.5 million of aggregate federal tax refunds related to filed returns and claims for prior-year cash taxes.
- Restructuring charges included severance, professional services, FLC partnership development and integration costs, shareholder activist-related costs, and facility-closure liabilities.
- Previously disclosed antitrust class actions were dismissed with prejudice on June 14, 2021; the plaintiffs did not appeal, and the matter was concluded.
- Management stated that there were no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Investor Verification Checklist
- Verify fall-semester enrollment, campus reopening, athletic attendance, and COVID-19 developments because Retail performance is highly dependent on on-campus activity.
- Reconcile reported Retail growth with the change to net commission revenue for Fanatics/FLC-fulfilled merchandise.
- Monitor seasonal working-capital needs, inventory levels, operating cash flow, and utilization of the credit and FILO facilities.
- Assess the company’s ability to convert higher sales and gross margins into positive EBITDA and free cash flow.
- Review deferred tax asset realizability, the $25.3 million LIFO-related tax liability, and the expected $30.5 million tax refunds.
- Track Wholesale demand, digital textbook adoption, used-textbook availability, and the profitability of DSS subscription investments.