Barnes & Noble Education, Inc. — Fiscal 2021 Third-Quarter Form 10-Q
Reporting period: 13 weeks and 39 weeks ended January 30, 2021, compared with January 25, 2020. The business is highly seasonal, with peak retail activity in the second and third fiscal quarters. Results are significantly affected by the COVID-19 pandemic and are not necessarily indicative of the full fiscal year.
Business Context
BNED operates 1,441 physical, virtual, and custom college and K-12 bookstores, serves more than 6 million students, distributes textbooks through its Wholesale segment, and provides direct-to-student digital services through DSS. Reportable segments are Retail, Wholesale, and Digital Student Solutions.
Key Financial Metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 39 Weeks FY2021 | 39 Weeks FY2020 |
|---|---|---|---|---|
| Total sales | $411.6 million | $502.3 million | $1,211.1 million | $1,594.2 million |
| Gross profit | $70.6 million | $118.5 million | $216.8 million | $377.1 million |
| Gross margin | 17.2% | 23.6% | 17.9% | 23.7% |
| Operating income (loss) | $(64.7) million | $(3.0) million | $(116.9) million | $9.6 million |
| Net income (loss) | $(48.3) million | $(1.7) million | $(87.4) million | $2.1 million |
| Diluted EPS | $(0.96) | $(0.04) | $(1.78) | $0.04 |
| Adjusted EBITDA | $(20.8) million | $13.4 million | $(34.3) million | $62.8 million |
Q3 sales declined 18.1%; year-to-date sales declined 24.0%. Selling and administrative expense decreased 12.7% in Q3 and 19.7% year to date, but declined less rapidly than revenue. Interest expense was $2.3 million in Q3 and $5.9 million year to date, broadly comparable with the prior-year periods.
Segment Performance and Material Changes
- Retail: Sales declined 15.4% in Q3 and 23.8% year to date. Comparable-store sales decreased 19.9% in Q3 and 28.0% year to date. General merchandise sales were especially weak because of reduced athletic attendance and fewer students on campus. Retail operating loss was $60.0 million in Q3 and $107.7 million year to date, before consolidated impairment and restructuring charges.
- Wholesale: Sales declined 41.1% in Q3 and 13.0% year to date. Gross margin rates improved, primarily from favorable returns and allowances and lower markdowns, but operating income declined to $4.7 million in Q3 and $21.6 million year to date.
- DSS: Sales increased 12.0% in Q3 and 11.8% year to date, primarily from higher bartleby subscription sales. Year-to-date operating loss improved modestly to $6.2 million from $6.4 million.
- Margins: Consolidated gross margin fell 640 basis points in Q3 and 580 basis points year to date. Retail product margins were pressured by lower high-margin general merchandise sales, increased markdowns, and a shift toward lower-margin digital courseware.
- Store footprint: BNED opened 88 stores and closed 66 stores, excluding temporary COVID-19 closures, during the first 39 weeks, ending with 765 physical and 676 virtual stores.
Cash Flow, Debt, Liquidity, and Balance Sheet
- Operating cash flow was $41.6 million for the first 39 weeks, down from $92.0 million in the prior-year period.
- Capital expenditures were $25.9 million, compared with $26.8 million in the prior-year period.
- Cash, cash equivalents, and restricted cash ended at $10.7 million, compared with $10.6 million at the prior-year comparable date. Cash and cash equivalents on the balance sheet were $9.9 million.
- Outstanding borrowings were $150.8 million at January 30, 2021, compared with $65.9 million at January 25, 2020. The company borrowed $547.6 million and repaid $571.5 million during the 39-week period.
- The asset-backed Credit Facility has $400 million of committed capacity, with an option for up to $100 million of additional commitments, and includes a $100 million FILO seasonal facility, subject to borrowing-base availability and other restrictions. The filing does not provide a clear unused-availability amount at period end.
- Total operating lease liabilities were $296.1 million, including $84.1 million of minimum fixed obligations for the remainder of fiscal 2021.
- Current assets were $755.7 million and current liabilities were $550.2 million. Merchandise and textbook rental inventories totaled $493.3 million.
Unusual Items, Outlook, and Risks
- BNED recorded a $27.6 million non-cash impairment charge in Q3 and year to date, primarily related to Retail property, lease right-of-use assets, amortizable intangibles, and other noncurrent assets. The after-tax impact was $20.5 million.
- Restructuring and other charges were $1.7 million in Q3 and $10.7 million year to date, including severance, professional fees, strategic-review costs, Fanatics partnership costs, shareholder-activist activities, and facility-closure costs.
- Management expects meaningful annualized cost savings from a cost-reduction program, with most savings expected to begin in fiscal 2021; no quantified savings target or formal earnings guidance is provided.
- In December 2020, BNED entered a merchandising partnership with Fanatics and Fanatics Lids College. The partners invested $15.0 million for 2.3 million treasury shares at $6.50 per share. BNED expects the partnership to launch in the second calendar quarter of 2021, and FLC expects to purchase BNED’s logo and emblematic merchandise inventory during the fourth fiscal quarter.
- Management believes future operating cash flow, credit facilities, and vendor financing will provide adequate resources for foreseeable needs, but notes that additional debt or equity financing could be required if available funds are insufficient. The filing provides no assurance that future capital-market access will be available on acceptable terms.
- COVID-19 remains the principal operating uncertainty, affecting campus openings, enrollment, store traffic, athletic events, general merchandise demand, used-textbook supply, and university budgets. Further impairment or adverse effects on cash flow remain possible.
- Thirteen purported class actions alleging antitrust and unfair-trade-practice violations related to inclusive access and course-material sales have been consolidated in multidistrict litigation. BNED intends to defend the claims and cannot estimate potential losses.
- Approximately $25.7 million of long-term tax payable relates to the LIFO reserve; management expects some additional amount could become payable within 12 months, but the amount cannot be reasonably projected.
Investor Verification Points
- Verify the pace and durability of campus reopening, enrollment recovery, comparable-store sales, and general merchandise demand after COVID-19 disruptions.
- Reconcile the reported $150.8 million of borrowings with borrowing-base availability, covenant compliance, interest rates, and seasonal liquidity needs.
- Assess whether planned cost savings offset ongoing margin pressure, restructuring costs, lease obligations, and corporate expenses.
- Monitor the Fanatics/FLC launch, inventory purchase, contract-liability recognition, and contribution to higher-margin merchandise sales.
- Evaluate further impairment risk for Retail store assets and the sensitivity of management’s discounted-cash-flow assumptions.
- Track the consolidated antitrust litigation and any developments that could create a material loss.
- Review the company’s ability to fund capital expenditures, LIFO-related tax payments, and working-capital requirements with only approximately $9.9 million of unrestricted cash at quarter end.