Barnes & Noble Education, Inc. — Form 10-K Summary
Reporting period: The filing is the Form 10-K for fiscal 2019, comprising 52 weeks ended April 27, 2019, with comparison to the 52 weeks ended April 28, 2018. The request references “2018 Q4,” but the source filing is an annual fiscal 2019 report. BNED operates college and K-12 bookstores, a textbook wholesale business, point-of-sale and inventory-management solutions, and direct-to-student digital education services.
Business Context
- BNED operated 1,448 stores at fiscal year-end: 772 physical and 676 virtual bookstores, serving more than 6 million students.
- During the fourth quarter, the Company reorganized its reporting structure into Retail, Wholesale and Digital Student Solutions (DSS); prior periods were reclassified for comparison.
- The Company added 68 stores and closed 64 stores during fiscal 2019, ending with four more physical stores and the same number of virtual stores as the prior year.
- Fiscal 2019 included PaperRater results from its August 21, 2018 acquisition. Fiscal 2018 included Student Brands results from its August 3, 2017 acquisition.
Key Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total sales | $2,034.6 million | $2,203.6 million | Down 7.7% |
| Product sales and other | $1,838.8 million | $1,984.5 million | Down 7.3% |
| Rental income | $195.9 million | $219.1 million | Down 10.6% |
| Gross profit | $527.7 million | $557.2 million | Down 5.3% |
| Gross margin | 25.9% | 25.3% | Up 60 basis points |
| Operating income/(loss) | $(27.7) million | $(262.7) million | Improved |
| Net income/(loss) | $(24.4) million | $(252.6) million | Improved |
| Adjusted Earnings | $25.4 million | $56.9 million | Down 55.4% |
| Adjusted EBITDA | $104.9 million | $126.8 million | Down 17.2% |
| Capital expenditures | $46.4 million | $42.8 million | Up $3.6 million |
Adjusted Earnings and Adjusted EBITDA are non-GAAP measures and are not substitutes for GAAP results.
Segment Performance
- Retail: Sales declined 6.7% to $1,889.0 million and Adjusted EBITDA declined to $89.1 million from $101.2 million. Comparable-store sales decreased 5.1%, primarily because of lower course-material demand, lower-cost and digital alternatives, direct publisher and online purchases, and lower enrollment in certain community colleges. General merchandise comparable sales increased 1.5%.
- Wholesale: Sales declined 13.5% to $223.4 million and Adjusted EBITDA declined to $35.0 million from $40.8 million, primarily due to lower demand. Gross margin improved to 25.2% from 24.6% excluding the prior-year inventory fair-value amortization.
- DSS: Sales increased 35.4% to $21.3 million and Adjusted EBITDA was $6.2 million versus $7.6 million. Growth reflected Student Brands, PaperRater and the launch of bartleby, while investment and content amortization reduced profitability.
Cash Flow, Liquidity and Capital Structure
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Cash flow from operating activities | $120.8 million | $60.0 million |
| Cash flow used in investing activities | $54.6 million | $100.0 million |
| Cash flow from/(used in) financing activities | $(68.3) million | $35.2 million |
| Cash and cash equivalents at year-end | $14.0 million | $16.1 million |
| Cash, cash equivalents and restricted cash | $14.8 million | $16.9 million |
- Total borrowings were $133.5 million at April 27, 2019, consisting of $33.5 million under the Credit Facility and $100.0 million under the FILO Facility, compared with $196.4 million at the prior year-end.
- On March 1, 2019, BNED amended and extended its asset-backed revolving Credit Facility to $400 million for five years, with an option for up to $100 million of additional commitments. The FILO Facility remained a $100 million incremental facility, with scheduled reductions beginning August 1, 2019.
- The Company had $4.8 million of letters of credit outstanding and was in compliance with its debt covenants at year-end.
- Management stated that operating cash flow, borrowing availability, the FILO Facility and short-term vendor financing should fund foreseeable operating and financing needs, but future access to capital is subject to market and economic conditions.
- Contractual obligations totaled approximately $1.06 billion, including $766.9 million of school-management contract and other lease obligations, $250.0 million of scheduled FILO obligations, and $6.1 million of purchase obligations. Debt obligations exclude interest.
Material Changes Versus Prior Period
- Sales and Adjusted EBITDA declined despite improved GAAP operating and net losses, reflecting the prior-year impact of a much larger goodwill impairment charge.
- Fiscal 2019 included a $57.7 million non-cash impairment charge, consisting of $49.3 million of goodwill and $8.5 million of long-lived assets. Fiscal 2018 included a $313.1 million goodwill impairment charge.
- Excluding impairment, restructuring, transaction costs and other specified items, operating income declined to $38.0 million, or 1.9% of sales, from $61.2 million, or 2.8% of sales.
- Retail gross margin improved modestly to 23.9% from 23.8%, while lower sales reduced gross profit dollars. DSS gross margin dollars increased but the margin rate declined to 93.9% from 97.7% because of bartleby content amortization.
- Operating cash flow increased by $60.8 million, primarily due to the lower net loss, favorable deferred-tax changes and working-capital changes.
- BNED adopted the new revenue-recognition standard using the modified retrospective method in fiscal 2019 with no cumulative retained-earnings adjustment. It expects to adopt the new lease standard in fiscal 2020 and estimated that operating lease right-of-use assets and liabilities could be $255 million to $315 million.
- The Company launched bartleby textbook solutions and question-and-answer services during the spring semester and reported more than 50,000 subscribers. First Day inclusive-access sales increased 92% year over year.
Outlook, Commentary, Risks and Unusual Items
- Management intends to expand digital student solutions, inclusive access, open educational resources, new bookstore accounts, acquisitions and strategic partnerships. No formal revenue or earnings guidance is provided in the filing.
- Key industry pressures include declining or shifting textbook demand, increased digital and direct-publisher distribution, price sensitivity, lower enrollment, publisher consignment programs, textbook supply constraints and competition from Amazon, Chegg, Follett, publishers and other digital providers.
- The digital strategy requires continued investment and depends on customer adoption, successful product development, scalable technology, content availability and the ability to achieve profitability above investment spending.
- Liquidity risks include seasonal working-capital needs, debt covenant triggers if excess availability falls below specified levels, dependence on vendor financing and possible additional capital requirements.
- Other significant risks include store-contract nonrenewal or termination, inventory obsolescence, supplier concentration, cybersecurity and privacy compliance, data breaches, third-party cloud-service interruptions, litigation, regulatory changes and intellectual-property claims.
- BNED recorded $7.2 million of restructuring and other charges, including $4.6 million of severance and termination costs and $2.6 million of other charges. Patrick Maloney resigned as Executive Vice President of Operations and President of BNC effective April 27, 2019.
- The Company reported no material off-balance-sheet arrangements and stated that pending legal matters were not expected to have a material adverse effect, while noting that outcomes remain uncertain.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor Verification Checklist
- Verify whether the decline in Retail comparable sales and Adjusted EBITDA stabilizes, particularly in course materials and rental revenue.
- Assess bartleby and other DSS subscriber growth, retention, content costs and progress toward sustainable profitability.
- Review cash availability, seasonal FILO borrowings, covenant headroom and the repayment schedule for the amended credit facilities.
- Evaluate the cash and balance-sheet effects of adopting the lease standard in fiscal 2020, including the projected $255 million to $315 million of right-of-use assets and liabilities.
- Monitor goodwill and long-lived-asset impairment risk, given the $49.3 million goodwill impairment recorded in fiscal 2019 and the limited remaining goodwill balance of $4.7 million.
- Review the $32.8 million long-term tax payable related to the LIFO reserve and the uncertain timing of potential payments.
- Reconcile GAAP losses with management’s non-GAAP Adjusted Earnings and Adjusted EBITDA, including the impairment, restructuring, transaction and content-amortization adjustments.