Barnes & Noble Education, Inc. — Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended May 2, 2020, comprising 53 weeks, compared with 52 weeks ended April 27, 2019. The filing includes a 14-week fourth quarter materially affected by COVID-19-related campus closures beginning in mid-March 2020.
Business context
BNED operates 772 physical and 647 virtual college, university, and K-12 bookstores, a national textbook wholesale business, point-of-sale and inventory-management systems, and direct-to-student digital education services through its Retail, Wholesale, and Digital Student Solutions segments. The Company serves more than 6 million students and reported 1,419 stores at fiscal year-end.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Total sales | $1,851.1 million | $2,034.6 million | Down 9.0% |
| Gross profit | $442.5 million | $527.7 million | Down 16.1% |
| Gross margin | 23.9% | 25.9% | Down 200 basis points |
| Operating loss | $(42.8) million | $(27.7) million | Worsened by $15.1 million |
| Net loss | $(38.3) million | $(24.4) million | Worsened by $13.9 million |
| Diluted loss per share | $(0.80) | $(0.52) | Worsened |
| Adjusted EBITDA | $42.2 million | $104.9 million | Down 59.8% |
| Adjusted earnings | $(21.1) million | $25.4 million | Declined $46.5 million |
- Retail sales declined 9.3% to $1,712.9 million; comparable-store sales declined 9.9%, including an 8.4% decline in course materials and an 11.9% decline in general merchandise.
- Wholesale sales declined 11.2% to $198.4 million, driven by lower demand, digital substitution, and COVID-19-related store closures.
- DSS sales increased 10.9% to $23.7 million, primarily from higher bartleby subscription sales, partly offset by lower Student Brands sales.
- First Day inclusive-access sales increased 90% year over year, and bartleby acquired more than 170,000 customers during the year.
- Selling and administrative expense declined 4.6% to $404.5 million, but increased to 21.9% of sales from 20.8% because revenue declined faster than costs.
Cash flow, balance sheet, debt, and liquidity
| Metric | May 2, 2020 | April 27, 2019 |
|---|---|---|
| Cash and cash equivalents | $8.2 million | $14.0 million |
| Cash, cash equivalents, and restricted cash | $9.0 million | $14.8 million |
| Total assets | $1,156.4 million | $946.2 million |
| Total liabilities | $738.7 million | $495.6 million |
| Total debt | $174.7 million | $133.5 million |
| Stockholders’ equity | $417.8 million | $450.6 million |
- Operating cash flow was $(16.1) million, versus $120.8 million of cash provided in Fiscal 2019.
- Investing cash flow was $(29.6) million, including $36.2 million of capital expenditures, compared with $(54.6) million in Fiscal 2019.
- Financing cash flow was $39.9 million, primarily reflecting increased borrowings to fund operations and seasonal liquidity needs.
- The Company had $99.7 million outstanding under its asset-backed revolving credit facility and $75.0 million under the FILO facility. The credit agreement provides aggregate committed capacity of up to $500 million, subject to availability and covenants.
- BNED stated that cash from operations, borrowing availability, and short-term vendor financing were expected to fund operating and financing needs for the foreseeable future, but warned that additional financing may be required if conditions worsen.
- The Company was in compliance with its debt covenants as of May 2, 2020. The FILO facility requires repayment of borrowings, including interest and fees, on July 31 of each year.
Material changes versus the prior comparable period
- COVID-19 closures caused the majority of physical campus stores to close during the fourth quarter, reducing retail traffic and eliminating or curtailing athletics, graduation, and other campus events.
- More than 300 stores transitioned to the Custom Store Solutions fulfillment model, compared with four stores in the prior year, allowing online orders to be fulfilled through the MBS warehouse.
- Retail gross margin fell to 22.4% from 23.9%, primarily because of higher markdowns, higher college contract costs, and an unfavorable mix from lower-margin course-material and general-merchandise activity.
- Wholesale gross margin fell to 20.1% from 25.2%, primarily due to unfavorable sales mix and higher inventory markdowns.
- Restructuring and other charges increased to $18.6 million from $7.2 million, including severance, management changes, process-improvement costs, shareholder-activist professional fees, retirement-plan actuarial losses, and store-level asset impairment.
- Fiscal 2020 included only $0.4 million of non-cash impairment loss, compared with $57.8 million in Fiscal 2019, including $49.3 million of goodwill impairment. Goodwill was $4.7 million at May 2, 2020.
- The Company adopted ASC 842 lease accounting, recognizing $250.8 million of operating lease right-of-use assets and $278.7 million of operating lease liabilities at year-end.
Outlook, management commentary, risks, and unusual items
- Management expected the most significant COVID-19 effects in the first half of Fiscal 2021, although the duration and effect on enrollments, university budgets, athletics, store operations, and demand could not be predicted.
- The Company implemented a cost-reduction program, with meaningful annualized savings expected to be realized primarily beginning in Fiscal 2021. The majority of the Retail workforce was furloughed effective April 2020, and employer 401(k) matching contributions were suspended through December 2020.
- A next-generation e-commerce platform was planned for Fiscal 2021 to support higher-margin general merchandise sales.
- BNED retained Morgan Stanley to review strategic opportunities, including partnerships, joint ventures, acquisitions, and continued execution of its existing plan. No transaction was assured and no timetable was established.
- Key risks include renewed campus closures, declining enrollment, reduced university funding, consumer and student spending pressure, migration from print to digital materials, price competition, inventory obsolescence, supplier concentration, contract non-renewals, technology and cybersecurity failures, liquidity constraints, and compliance with privacy and marketing regulations.
- Eleven purported class-action complaints were filed between January 22 and May 20, 2020, alleging antitrust and unfair-trade violations related to inclusive access and course-material sales. The Company intends to defend the claims and could not estimate potential losses.
- The Board adopted a short-term shareholder rights plan on March 25, 2020, with rights exercisable if a person or group acquired 10% or more of the common stock. The rights were scheduled to expire no later than December 31, 2020, subject to subsequent amendments.
- No cash dividends were paid or expected in the foreseeable future, and no shares were repurchased under the $50 million repurchase authorization during Fiscal 2020.
Important facts for investors to verify
- Whether campus reopening patterns, enrollment, online learning, and university budgets support recovery in Fiscal 2021 revenue and margins.
- Actual borrowing availability, FILO repayment requirements, fixed-charge covenant thresholds, and the effect of seasonal working-capital needs on liquidity.
- Progress and realized savings from the cost-reduction program, including whether savings offset COVID-19-related revenue declines.
- Retail and Wholesale inventory levels, markdown exposure, textbook rental residual values, and the shift toward digital and inclusive-access products.
- Status and potential financial exposure of the inclusive-access antitrust litigation.
- Performance and profitability of bartleby, First Day, and the Fiscal 2021 e-commerce platform relative to investment spending.
- Terms and developments arising from the strategic review and shareholder rights plan.