Barnes & Noble Education, Inc. — Form 10-Q Summary
Business context and reporting period
BNED operates 1,450 physical and virtual bookstores serving more than 6 million students, textbook wholesale and inventory-management businesses, and Digital Student Solutions. Reportable segments are Barnes & Noble College (BNC), MBS, and Digital Student Solutions (DSS). This unaudited filing covers the 13 and 26 weeks ended October 27, 2018, compared with October 28, 2017. Results are highly seasonal, with the second and third fiscal quarters generally being the strongest for retail operations.
Financial performance and key metrics
| Metric | 13 weeks ended Oct. 27, 2018 | 13 weeks ended Oct. 28, 2017 | 26 weeks ended Oct. 27, 2018 | 26 weeks ended Oct. 28, 2017 |
|---|---|---|---|---|
| Total sales | $814.8 million | $886.9 million | $1,152.3 million | $1,242.6 million |
| Gross profit | $210.8 million | $216.7 million | $277.4 million | $281.9 million |
| Gross margin | 25.9% | 24.4% | 24.1% | 22.7% |
| Operating income | $78.5 million | $83.3 million | $29.4 million | $27.7 million |
| Operating margin | 9.6% | 9.4% | 2.6% | 2.3% |
| Net income | $59.7 million | $48.4 million | $21.1 million | $13.6 million |
| Diluted EPS | $1.25 | $1.03 | $0.44 | $0.29 |
| Adjusted EBITDA | $95.4 million | $102.4 million | $62.9 million | $70.0 million |
For the quarter, product sales and other revenue declined 7.8%, rental income declined 12.3%, and total sales declined 8.1%. For the six-month period, total sales declined 7.3%. The sales decline primarily reflected lower BNC comparable-store sales, store closures, reduced MBS Wholesale and MBS Direct sales, increased consumer purchases from publishers and online providers, greater use of digital materials, and lower enrollment in certain community colleges.
Gross margin improved despite lower revenue, driven primarily by lower markdowns, transfers of underutilized inventory to MBS, favorable mix, and high-margin subscription revenue. Selling and administrative expense was essentially flat in the quarter and declined 0.3% for the six-month period. Adjusted EBITDA declined 6.8% for the quarter and 10.1% for the six-month period.
Segments and material changes
- BNC: Second-quarter sales declined 7.2% to $702.9 million; six-month sales declined 5.9% to $948.0 million. Comparable-store sales declined 5.6% in the quarter and 4.8% for the six-month period, primarily due to lower textbook sales and rental activity. BNC ended the period with 773 stores.
- MBS: Second-quarter sales declined 11.8% to $119.0 million; six-month sales declined 9.2% to $249.3 million. Lower Wholesale and Direct sales were partly offset by improved Wholesale margins.
- DSS: Sales increased to $4.9 million in the quarter and $10.6 million for the six-month period, benefiting from the Student Brands acquisition, the August 2018 launch of Bartleby Textbook Solutions, and the PaperRater acquisition.
- PaperRater acquisition: BNED acquired the assets of PaperRater.com on August 21, 2018 for $10.0 million in cash, allocated primarily to $5.3 million of intangible assets and $4.7 million of goodwill.
- Accounting and tax: BNED adopted the revenue-recognition standard ASC 606 using the modified retrospective method with no cumulative retained-earnings adjustment. The second-quarter effective tax rate was 22.1%, versus 40.6% in the prior-year quarter; the six-month rate was 12.4%, versus 40.4%. The lower rates included a provisional $3.8 million Tax Cuts and Jobs Act measurement-period adjustment.
Cash flow, debt and liquidity
- Six-month operating cash flow was $236.6 million, compared with $199.2 million in the prior-year period.
- Investing cash flow was a $34.3 million use, including $23.2 million of capital expenditures and the $10.0 million PaperRater acquisition.
- Financing cash flow was a $198.4 million use, reflecting $119.9 million of borrowings and $316.3 million of repayments under the credit agreement.
- Cash, cash equivalents and restricted cash totaled $20.8 million at October 27, 2018, compared with $20.2 million at October 28, 2017.
- There were no outstanding borrowings under the $400 million credit facility or $100 million FILO facility at quarter-end; letters of credit outstanding totaled $4.8 million. Management stated that operating cash flow, credit availability and vendor financing should provide adequate resources for the foreseeable future.
- Other long-term liabilities included $40.4 million related to the LIFO-reserve tax payable. Management noted that an additional portion could become payable within the next 12 months, but the amount cannot be reasonably projected because it depends on CPI and inventory levels.
Outlook, commentary and risks
Management expects growth from digital products, new accounts, outsourcing opportunities, acquisitions and partnerships, including the developing Bartleby ecosystem. No quantitative revenue, earnings or EBITDA guidance is provided in the filing.
Key risks include declining or changing college enrollment, price-sensitive students, accelerated migration from print to digital materials, competition from publishers and online providers, textbook supply and inventory risks, store-contract nonrenewals and closures, execution and investment risk in the digital strategy, acquisition integration, technology and cybersecurity exposure, data privacy and intellectual-property matters, tax changes, debt covenant and liquidity requirements, and access to financing. Ordinary-course legal proceedings are not expected to have a material adverse effect, although outcomes remain uncertain.
The company stated that disclosure controls were effective as of October 27, 2018 and that no material changes to internal control over financial reporting were identified. There were no off-balance-sheet arrangements as defined by Item 303 of Regulation S-K.
Facts investors should verify
- Whether the decline in BNC comparable-store sales and textbook rentals stabilizes or continues as digital adoption and publisher-direct sales increase.
- Whether DSS revenue growth and Bartleby/PaperRater investments develop into sustainable profitability and offset pressure in the bookstore businesses.
- The amount and timing of LIFO-reserve tax payments that may become current within the next 12 months.
- Available borrowing capacity, covenant compliance and liquidity during seasonal inventory and selling cycles.
- The final accounting for the Tax Cuts and Jobs Act, which remained provisional at the filing date.
- The effect of the new lease standard, scheduled for adoption in Fiscal 2020, on reported assets and liabilities.
- The filing contains an apparent inconsistency in MD&A: one passage states a 27.1% quarterly effective tax rate, while the financial statements and tax note state 22.1%; investors should confirm the correct figure.