Business Context and Reporting Period
Barnes & Noble Education, Inc. operates physical and virtual college and K-12 bookstores, a textbook wholesale business, and digital student solutions. The company reported its fiscal third quarter Form 10-Q for the 13 and 39 weeks ended January 28, 2023, compared with January 29, 2022. Results are highly seasonal, with Retail sales concentrated in the second and third fiscal quarters.
BNED operated 1,388 bookstores at quarter-end, consisting of 785 physical and 603 virtual stores, and served more than 6 million students. Reportable segments are Retail, Wholesale, and Digital Student Solutions (DSS).
Financial Highlights
| Metric | 13 weeks ended Jan. 28, 2023 | 13 weeks ended Jan. 29, 2022 | 39 weeks ended Jan. 28, 2023 | 39 weeks ended Jan. 29, 2022 |
|---|---|---|---|---|
| Total sales | $447.1 million | $402.8 million | $1,328.0 million | $1,270.6 million |
| Gross profit | $104.2 million | $87.0 million | $312.5 million | $292.5 million |
| Gross margin | 23.3% | 21.6% | 23.5% | 23.0% |
| Operating loss | $(17.9) million | $(33.1) million | $(39.0) million | $(49.3) million |
| Net loss | $(25.0) million | $(36.8) million | $(55.6) million | $(57.9) million |
| Diluted loss per share | $(0.48) | $(0.71) | $(1.06) | $(1.12) |
| Adjusted EBITDA | $6.4 million | $(13.1) million | $12.4 million | $1.4 million |
Quarterly selling and administrative expense declined 2.0% to $99.5 million, or 22.3% of sales, while nine-month selling and administrative expense increased 3.2% to $305.0 million. Net interest expense increased to $6.9 million for the quarter and $15.7 million for the nine-month period, primarily due to higher borrowings and interest rates.
At January 28, 2023, cash and cash equivalents were $11.1 million, while cash, cash equivalents, and restricted cash totaled $29.4 million. Restricted cash included $17.4 million associated with commissions payable to Lids. Total current assets were $790.1 million, including $408.9 million of merchandise inventories and $277.5 million of receivables. Total debt was $285.6 million, consisting of $255.6 million under the revolving credit facility and $30.0 million under the term loan. Stockholders’ equity was $176.5 million.
Cash Flow, Liquidity, and Debt
- Cash used in operating activities was $22.6 million for the first 39 weeks, compared with $7.9 million of cash provided in the prior-year period.
- Cash used in investing activities was $26.3 million, including $26.9 million of capital expenditures, compared with $32.7 million used in the prior-year period.
- Cash provided by financing activities was $56.4 million, primarily reflecting seasonal net borrowing. BNED borrowed $512.0 million and repaid $452.1 million under its credit agreement during the period.
- Non-GAAP free cash flow was negative $47.3 million, compared with negative $23.7 million in the prior-year period.
- The $30.0 million term loan bears interest at 11.25%, does not amortize before maturity, and is secured by second-priority liens. As of quarter-end, BNED was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Total sales increased 11.0% in the quarter and 4.5% for the nine-month period. Retail sales increased 12.4% quarterly and 5.2% for the nine-month period, benefiting from higher campus activity, First Day programs, general merchandise sales, rental activity, and improved used-textbook availability.
- First Day Complete sales increased 76% to $66.9 million in the quarter and 94% to $173.4 million for the nine-month period. First Day Complete was adopted by 116 campus stores for Spring 2023, versus 76 stores for Spring 2022.
- Wholesale sales increased 5.2% in the quarter but declined 5.8% for the nine-month period, reflecting supply constraints, lower physical-textbook demand, digital substitution, and higher returns and allowances.
- DSS sales declined 4.5% in the quarter but increased 2.5% for the nine-month period.
- Gross margin improved by 170 basis points in the quarter and 50 basis points for the nine-month period, driven primarily by higher rental margins, First Day activity, improved used-inventory availability, and favorable product mix.
- Operating loss narrowed despite $6.0 million of impairment expense and $6.0 million of restructuring charges in the quarter. The prior-year quarter included $6.4 million of impairment expense but only $46,000 of restructuring charges.
Outlook, Management Commentary, Risks, and Unusual Items
- Management expects to transition many institutions to First Day Complete for Fall 2023 and the majority of schools by Fall 2024, but acknowledges that these plans may not be achieved within the expected timeframe or at all.
- A company-wide cost-savings initiative approved in December 2022 is expected to generate $10 million to $15 million of fiscal 2023 savings and $30 million to $35 million of annualized savings. The filing does not provide a clear forecast for revenue, net income, or full-year EBITDA.
- BNED recorded $6.0 million of non-cash Retail impairment charges and $6.6 million of restructuring and other charges for the nine-month period, primarily severance and professional fees.
- On March 8, 2023, after quarter-end, the revolving credit facility was amended to extend maturity to August 29, 2024, reduce commitments to $380 million, increase interest margins, reduce borrowing-base advance rates, and impose an Availability covenant requiring availability to exceed the greater of 10% of the aggregate loan cap or $32.5 million.
- The amended credit and term-loan agreements require achievement of a Specified Event by no later than May 31, 2023, subject to permitted extensions. The filing does not clearly identify the expected source or certainty of that event.
- Key risks include declining or changing college enrollment, migration from print to digital materials, price competition, supply-chain and used-textbook availability, labor costs, campus-store contract renewals, cybersecurity, COVID-19 effects, and access to capital.
- Management concluded that disclosure controls and procedures were not effective at quarter-end because of a previously identified material weakness involving the precision of management’s review of the deferred tax asset valuation allowance. Remediation was expected in the fourth quarter of fiscal 2023.
- BNED stated that ordinary-course legal proceedings are not expected to have a material adverse effect, while noting that legal outcomes remain inherently uncertain.
Important Facts for Investors to Verify
- Whether the company achieved the required Specified Event and maintained the amended credit-facility Availability covenant after quarter-end.
- The amount and timing of cash savings actually realized from the cost-reduction initiative versus the stated $10 million to $15 million fiscal 2023 target and $30 million to $35 million annualized target.
- Whether First Day Complete adoption continues toward the Fall 2023 and Fall 2024 objectives and whether the program improves sustainable cash flow, not only reported sales.
- Operating cash flow, inventory purchases, receivable collections, and borrowing needs during the seasonally weaker fourth fiscal quarter.
- Progress in remediating the deferred-tax-asset valuation allowance control deficiency.
- The company’s ability to refinance or repay debt before the amended 2024 maturities, given negative free cash flow, higher interest expense, and significant lease obligations.