Barnes & Noble Education, Inc. — Fiscal 2022 Second-Quarter Form 10-Q
Reporting period: Quarter ended October 30, 2021, covering 13 weeks and year-to-date 26 weeks. Comparisons are to October 31, 2020. BNED operates 1,445 physical, virtual and custom bookstores, serves more than 6 million students, and reports Retail, Wholesale and Digital Student Solutions segments.
Financial highlights
| Metric | 13 weeks ended Oct. 30, 2021 | 13 weeks ended Oct. 31, 2020 | 26 weeks ended Oct. 30, 2021 | 26 weeks ended Oct. 31, 2020 |
|---|---|---|---|---|
| Total sales | $627.0 million | $595.5 million | $867.8 million | $799.5 million |
| Gross profit / margin | $145.6 million / 23.2% | $115.3 million / 19.4% | $205.6 million / 23.7% | $146.1 million / 18.3% |
| Operating income (loss) / margin | $24.6 million / 3.9% | $6.7 million / 1.2% | $(16.9) million / (1.9)% | $(52.2) million / (6.5)% |
| Net income (loss) | $22.5 million | $7.5 million | $(21.8) million | $(39.1) million |
| Diluted EPS | $0.41 | $0.15 | $(0.42) | $(0.81) |
| Adjusted EBITDA | $39.0 million | $24.5 million | $14.5 million | $(13.5) million |
| Operating cash flow | Not separately provided | Not separately provided | $24.1 million | $91.4 million |
Product sales and other increased 4.6% in the quarter and 8.1% year to date; rental income increased 13.7% and 15.1%, respectively. Selling and administrative expense increased 17.3% in the quarter and 19.8% year to date, primarily because stores reopened and long-term incentive compensation increased. Net interest expense rose to $2.3 million in the quarter and $4.8 million year to date, reflecting higher borrowings.
Segment and operating changes
- Retail: Sales increased 5.6% in the quarter and 11.4% year to date to $608.9 million and $819.4 million. The company added 76 stores and closed 48 during the 26 weeks, ending with 794 physical and 651 virtual stores. First Day inclusive-access revenue grew 80% to $96 million during the quarter, according to management.
- Wholesale: Sales declined 40.5% in the quarter and 43.3% year to date to $21.7 million and $66.2 million, reflecting supply constraints, weaker demand, a shift toward digital products and the return of fulfillment activity to Retail stores.
- DSS: Sales increased 39.2% in the quarter and 40.3% year to date to $8.3 million and $16.6 million, primarily from higher subscription sales.
- Margins: Consolidated gross margin improved substantially, driven by higher-margin general merchandise, lower contract costs, improved rental margins, lower inventory reserves and reduced markdowns. Retail gross margin rose to 21.2% in the quarter and 21.6% year to date from 16.6% and 15.2%.
- FLC Partnership: Logo and emblematic merchandise sales fulfilled by Fanatics and FLC are now recorded on a net commission basis rather than gross sales, reducing reported revenue comparability but supporting the company’s e-commerce and merchandise strategy.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash were $23.5 million at October 30, 2021, versus $8.1 million a year earlier. Unrestricted cash and cash equivalents were $11.0 million; restricted cash included $11.6 million for FLC commissions and $0.9 million held in trust for employee benefit plans.
- Operating cash flow was $24.1 million, down from $91.4 million, primarily because of higher receivables and inventory purchases. Capital expenditures were $21.3 million versus $16.2 million.
- Free cash flow, as defined by BNED, was negative $2.7 million versus negative $38.9 million in the prior-year period.
- Outstanding credit-facility borrowings were $183.3 million, compared with $99.5 million a year earlier and $127.6 million at May 1, 2021. The asset-based revolving facility has $400 million of committed capacity, with an incremental seasonal FILO facility of up to $100 million, subject to terms and availability. Letters of credit totaled $4.8 million.
- Management states that expected operating cash flow, credit-facility availability, the FILO facility and short-term vendor financing should provide adequate resources for foreseeable operating and financing needs, while noting that additional debt or equity financing could be required if funds become insufficient.
Outlook, risks and unusual items
- No specific revenue, earnings or EBITDA guidance is provided in the filing. Management expects continued investment in digital solutions, e-commerce, new accounts, acquisitions and partnerships, and expects general merchandise sales to increase over the long term.
- COVID-19 and the Delta variant remain material uncertainties affecting enrollment, university budgets, campus activity, hybrid and remote learning, product sourcing and store operations. The filing states that most four-year schools returned to traditional on-campus operations during the fall semester, but uncertainty remains for community colleges, international students and future campus restrictions.
- Supply-chain disruption, labor-market pressure, declining higher-education enrollment, intense price competition, publisher disintermediation, reduced used-textbook supply, cybersecurity incidents and nonrenewal or closure of bookstore contracts are key risks.
- Restructuring and other charges were $1.1 million in the quarter and $3.7 million year to date, versus $3.4 million and $9.1 million in the comparable periods. Year-to-date results also included a $0.4 million merchandise inventory loss related to the final sale of logo and emblematic inventory to FLC.
- Cash-settled phantom-share compensation expense increased total long-term incentive compensation expense to $7.5 million year to date from $2.9 million. The related liability was $3.5 million at October 30, 2021.
- BNED received a $7.8 million tax refund during the second quarter and expects an additional refund of approximately $22.6 million. A $25.3 million long-term tax payable associated with the LIFO reserve remains, with the amount becoming payable within 12 months dependent on CPI and inventory levels.
- Legal proceedings arise in the ordinary course, but management does not currently expect a material adverse outcome. No material changes to previously disclosed risk factors were reported, and management concluded disclosure controls were effective.
Investor verification checklist
- Reconcile reported Retail revenue and comparable-store growth after the shift to net commission accounting under the FLC Partnership.
- Monitor whether Retail margin improvement and First Day growth offset continued Wholesale declines and higher selling and administrative costs.
- Verify seasonal cash generation, inventory purchases, receivables and borrowing needs during the remaining fiscal year.
- Review credit-facility availability, borrowing-base requirements, covenants, interest rates and the impact of higher debt.
- Assess the timing and realization of the expected $22.6 million tax refund and potential LIFO-related tax payments.
- Track COVID-19 developments, enrollment trends, campus closures, supply-chain constraints, labor costs and used-textbook availability.
- Distinguish GAAP earnings and cash flow from Adjusted EBITDA, Adjusted Earnings and Free Cash Flow, which are non-GAAP measures.