Barnes & Noble Education, Inc. 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 subscription services. The company reported its fiscal third quarter and first 39 weeks ended January 29, 2022, compared with the periods ended January 30, 2021. BNED operated 1,441 stores at quarter-end, including 799 physical and 642 virtual stores, and served more than 6 million students.
The business remains highly seasonal. Results were affected by COVID-19, the Omicron variant, delayed or virtual spring-semester starts, lower community-college and international enrollment, supply-chain constraints, and the transition of logo and emblematic merchandise fulfillment to Fanatics and FLC.
Key financial metrics
| Metric | 13 weeks ended Jan. 29, 2022 | 13 weeks ended Jan. 30, 2021 | 39 weeks ended Jan. 29, 2022 | 39 weeks ended Jan. 30, 2021 |
|---|---|---|---|---|
| Total sales | $402.8 million | $411.6 million | $1,270.6 million | $1,211.1 million |
| Gross profit / margin | $87.0 million / 21.6% | $70.6 million / 17.2% | $292.5 million / 23.0% | $216.8 million / 17.9% |
| Operating loss / margin | $(33.1) million / (8.2%) | $(64.7) million / (15.6%) | $(50.0) million / (4.0%) | $(116.9) million / (9.6%) |
| Net loss | $(36.8) million | $(48.3) million | $(58.6) million | $(87.4) million |
| Loss per diluted share | $(0.71) | $(0.96) | $(1.13) | $(1.78) |
| Adjusted EBITDA | $(13.1) million | $(20.8) million | $1.4 million | $(34.3) million |
| Cash flow from operations | $(16.2) million | $(50.2) million | $7.9 million | $41.2 million |
| Free cash flow | $(30.7) million | $(61.6) million | $(23.7) million | $4.3 million |
Product sales and other increased 1.1% in the quarter and 5.7% year to date, while rental income declined 34.2% and 5.2%, respectively. Quarter sales declined 2.1% because of lower course-material demand and the net presentation of Fanatics/FLC merchandise commissions. Year-to-date sales increased 4.9%, primarily because stores that were closed during the prior-year pandemic period reopened.
Interest expense increased to $3.1 million for the quarter and $7.8 million year to date, from $2.3 million and $5.9 million, respectively, due primarily to higher borrowings. Income tax expense was $0.6 million for the quarter and $0.8 million year to date, compared with prior-year tax benefits of $18.7 million and $35.3 million. BNED determined that certain deferred tax assets were not more likely than not to be realized.
Segment and operational developments
- Retail: Sales were $374.7 million in the quarter, down 3.3%, and $1,194.2 million year to date, up 6.3%. First Day and First Day Complete revenue increased to $76.1 million in the quarter and $199.2 million year to date, compared with $46.4 million and $108.9 million, respectively. Retail adjusted EBITDA was $(15.4) million in the quarter and $4.4 million year to date.
- Wholesale: Sales declined 6.1% in the quarter and 33.9% year to date to $37.0 million and $103.2 million, respectively. Declines reflected reduced physical-textbook demand, weaker used-textbook supply from prior-year buybacks, digital substitution, and the prior-year shift of fulfillment activity to Wholesale.
- DSS: Sales increased 30.9% in the quarter and 36.7% year to date to $9.4 million and $26.0 million, respectively, primarily from higher subscription sales. Adjusted EBITDA was $1.5 million in the quarter and $4.0 million year to date.
- Fanatics/FLC partnership: BNED completed the sale of logo and emblematic merchandise inventory to FLC and transitioned certain e-commerce fulfillment to Fanatics/FLC. BNED now records commission revenue on a net basis, reducing reported revenue comparability with the prior year. A final $0.4 million inventory loss was recognized year to date.
Liquidity, debt, and cash flow
Cash, cash equivalents, and restricted cash totaled $12.7 million at January 29, 2022, including $2.8 million of restricted cash. Cash and cash equivalents alone were $10.0 million. Operating cash flow was $7.9 million year to date, while capital expenditures were $33.4 million, producing negative free cash flow of $23.7 million.
Borrowings under the asset-backed Credit Agreement were $200.4 million at quarter-end, compared with $150.8 million a year earlier. The agreement includes a $400 million revolving Credit Facility and a seasonal FILO facility within total authorized capacity of up to $500 million, subject to terms and restrictions. BNED had $4.8 million of letters of credit outstanding and reported compliance with debt covenants at January 29, 2022.
On March 4, 2022, after quarter-end, lenders waived a condition for an anticipated April FILO draw requiring Consolidated EBITDA less Restricted Payments of at least $110.0 million. The FILO commitment was increased from $25.0 million to $40.0 million. Management stated that expected operating cash flow, credit availability, FILO financing, and vendor financing should provide adequate resources for the foreseeable future, but noted that additional debt or equity financing could be required if funds become insufficient.
Material changes, outlook, and risks
- Gross margin improved substantially because of favorable Retail sales mix, higher general-merchandise mix, lower inventory reserves and markdowns, and lower COVID-related contract costs. Selling and administrative expense increased as stores reopened, and remained elevated at 23.3% of sales year to date.
- Retail recorded a $6.4 million non-cash impairment loss in the quarter and year to date, versus $27.6 million in the prior-year comparable periods. Year-to-date restructuring and other charges were $3.8 million, versus $10.7 million previously.
- Management provided no specific quantified revenue, earnings, or cash-flow guidance. It expects long-term growth from inclusive-access programs, digital products, e-commerce, general merchandise, new accounts, acquisitions, and the Fanatics/FLC relationship.
- Principal risks include continuing COVID-19 effects, Omicron or other variants, enrollment declines, delayed campus activity, inflation and supply-chain disruption, labor availability and costs, digital substitution and publisher disintermediation, used-textbook shortages, contract renewals or store closures, cybersecurity, debt covenant compliance, and access to financing.
- BNED reported $25.3 million of long-term tax payable related to the LIFO reserve and stated that an additional portion could become payable within 12 months, although the amount cannot be reasonably projected because it depends on CPI and inventory levels.
Facts investors should verify
- Whether the improvement in Retail performance and First Day adoption offsets continued enrollment pressure and lower rental revenue.
- The effect of recording Fanatics/FLC merchandise commissions net rather than gross on future reported revenue and margins.
- Availability under the Credit Facility and FILO Facility, compliance with amended covenants, and the impact of higher debt and interest expense.
- Whether operating cash flow can fund capital expenditures and seasonal working-capital requirements without additional financing.
- The timing and amount of potential LIFO-related tax payments and expected tax refunds, including the approximately $22.6 million of additional refunds management expected to receive.
- Whether further store-level impairments, restructuring charges, inventory losses, or pandemic-related disruptions occur.