Business Context and Reporting Period
Barnes & Noble Education, Inc. operated contract bookstores and related e-commerce, textbook rental, general merchandise, café, and digital education businesses serving colleges and universities in the United States. The filing covers the unaudited 13 weeks ended August 1, 2015, compared with the 13 weeks ended August 2, 2014.
The company operated 736 stores at quarter-end, after opening 21 and closing 9 stores during the quarter. Results were reported on a stand-alone basis but before the legal separation from Barnes & Noble, Inc. The Spin-Off was completed on August 2, 2015, with regular-way trading of BNED beginning August 3, 2015.
Financial Performance and Position
| Metric | Q1 Fiscal 2016 | Q1 Fiscal 2015 | Change |
|---|---|---|---|
| Total sales | $239.0 million | $225.7 million | Up 5.9% |
| Product sales and other | $218.7 million | $206.2 million | Up 6.1% |
| Rental income | $20.3 million | $19.6 million | Up 3.7% |
| Gross profit | $51.5 million | $47.3 million | Up 8.9% |
| Gross margin | 21.6% | 21.0% | Up 60 basis points |
| Operating loss | $(48.2) million | $(46.5) million | Loss increased $1.7 million |
| Net loss | $(26.9) million | $(26.2) million | Loss increased $0.7 million |
| Loss per share | $(0.65) | $(0.71) | Improved $0.06 |
| EBITDA, non-GAAP | $(35.1) million | $(34.0) million | Loss increased $1.2 million |
Selling and administrative expenses increased 6.7% to $86.7 million and rose to 36.3% of sales from 36.0%. Depreciation and amortization was $13.1 million, compared with $12.5 million. The effective tax benefit rate was 44.2%, compared with 43.6%.
At August 1, 2015, cash and cash equivalents were $16.0 million, compared with $45.8 million a year earlier and $59.7 million at May 2, 2015. Merchandise inventories were $766.8 million, versus $695.0 million a year earlier. Accounts payable were $603.9 million, versus $538.0 million. The balance sheet reported no debt outstanding because borrowings under the pre-Spin-Off Barnes & Noble credit facility were recorded on the parent’s balance sheet.
Cash Flow, Liquidity, and Financing
- Operating cash flow was $1.8 million, compared with $(34.3) million in the prior-year quarter, primarily reflecting improved working-capital movements.
- Investing cash flow was $(16.6) million, including $11.8 million of capital expenditures, compared with $(13.3) million and $9.3 million, respectively, in the prior-year quarter.
- Financing cash flow was $(28.9) million, primarily net transfers to Barnes & Noble, compared with $(50.8) million previously.
- Cash decreased by $43.7 million during the quarter to $16.0 million.
- On August 3, 2015, the company entered into a new five-year, $400 million asset-backed revolving credit facility for general corporate purposes and seasonal working capital. The facility permits a potential commitment increase of up to $100 million, subject to restrictions, and initially bears interest at LIBOR plus 2.00% or the alternate base rate plus 1.00%.
Material Changes Versus the Prior Comparable Period
- Sales benefited from new store openings of approximately $11.2 million and were partially offset by approximately $1.8 million from closed stores. Comparable-store sales increased 1.8%, compared with a 2.0% decline in the prior-year period.
- General merchandise sales increased $6.9 million, or 7.3%, primarily from stronger emblematic apparel sales. Textbook and trade book sales decreased $3.2 million.
- Gross margin improved because of favorable sales mix, including used textbook rentals, recognition of previously deferred high-margin rentals, and improved textbook margins. Higher occupancy costs from contract renewals partly offset the improvement.
- Operating and net losses widened despite higher sales and gross profit because selling and administrative expenses increased, particularly store payroll and operating expenses associated with new stores in a low-volume quarter.
- Weighted-average shares increased to 41.4 million from 37.4 million, reflecting the assumed Spin-Off distribution ratio used in the per-share calculation.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects growth from increasing sales at existing bookstores, winning new bookstore-management contracts, expanding digital sales through Yuzu, and pursuing acquisitions and strategic partnerships. Management stated that cash from operations, the new revolving facility, and short-term vendor financing should provide adequate resources for foreseeable operating and financing needs.
The business is highly seasonal, with the majority of sales and operating profit typically generated in the second and third fiscal quarters. Accordingly, first-quarter results are not indicative of the full fiscal year.
- The historical financial statements include allocations for corporate and shared services provided by Barnes & Noble and may not represent the costs or results the company would have incurred as an independent public company.
- Post-Spin-Off risks include higher standalone operating costs, loss of Barnes & Noble’s purchasing and borrowing leverage, dependence on transition services, and obligations under the Tax Matters Agreement.
- Key operating risks include intense competition, declining print textbook demand, contract non-renewals, inventory obsolescence, supplier concentration, data security incidents, technology execution risk, and weak student or university spending.
- The new credit facility includes collateral requirements, negative covenants, events of default, and additional financial covenant requirements if excess availability falls below specified levels.
- A patent litigation matter resulted in a $1.3 million jury award in 2014, but the court later invalidated one asserted patent and scheduled further post-trial proceedings. Barnes & Noble agreed to indemnify the company for related expenses and liabilities under the Separation Agreement.
- Management identified an immaterial balance-sheet error correction that increased other long-term liabilities and reduced Parent company investment for prior periods; it did not affect income, earnings per share, or cash flows.
Important Facts for Investors to Verify
- Review post-Spin-Off financial statements to determine actual standalone corporate costs, transition-service expenses, tax allocations, and liquidity usage.
- Confirm borrowings, excess availability, covenant compliance, and collateral availability under the $400 million asset-backed revolving facility.
- Monitor second- and third-quarter textbook sales, rental activity, comparable-store sales, gross margins, and inventory levels because of the company’s seasonality.
- Assess whether Yuzu and other digital initiatives generate sufficient revenue and margin to offset ongoing investment spending.
- Track bookstore contract wins, renewals, cancellations, occupancy costs, and profitability by account.
- Review the resolution and indemnification treatment of the Adrea patent litigation and any related tax or legal contingencies.
- Verify the effect of the Spin-Off and related agreements on dividend policy, tax obligations, trademark rights, and potential shareholder dilution.