Business Context and Reporting Period
Barnes & Noble Education, Inc. operates 1,271 physical, virtual and custom bookstores serving more than 5.8 million students, together with textbook wholesale and bookstore technology businesses. The unaudited Form 10-Q covers the 13 and 26 weeks ended October 28, 2023, compared with October 29, 2022. Results are highly seasonal, with the second and third fiscal quarters generally benefiting from Fall and Spring academic-term demand.
The company reports Retail and Wholesale segments; its former Digital Student Solutions segment was sold on May 31, 2023 and is presented as discontinued operations.
Financial Performance and Key Metrics
| Metric | 13 weeks ended Oct. 28, 2023 | 13 weeks ended Oct. 29, 2022 | 26 weeks ended Oct. 28, 2023 | 26 weeks ended Oct. 29, 2022 |
|---|---|---|---|---|
| Total sales | $610.4 million | $608.6 million | $874.5 million | $863.3 million |
| Gross profit | $136.2 million | $138.1 million | $186.9 million | $194.1 million |
| Gross margin | 22.3% | 22.7% | 21.4% | 22.5% |
| Operating income (loss) | $35.8 million | $28.7 million | $(5.9) million | $(16.9) million |
| Net income (loss) from continuing operations | $24.9 million | $24.2 million | $(25.1) million | $(26.2) million |
| Net income (loss) | $24.2 million | $22.1 million | $(26.2) million | $(30.6) million |
| Adjusted EBITDA from continuing operations | $50.3 million | $39.2 million | $23.4 million | $4.9 million |
| Operating cash flow from continuing operations | Not separately provided for the quarter in the cash-flow statement | Not separately provided for the quarter in the cash-flow statement | $(47.2) million | $10.1 million |
Basic and diluted earnings per share were $0.46 for the quarter and $(0.50) year to date, compared with $0.42 and $(0.58), respectively, in the prior-year periods.
- Retail sales increased 0.1% to $599.3 million in the quarter and 1.2% to $844.8 million year to date. Course-material product sales increased 4.6% and 4.9%, respectively, while general-merchandise product sales declined 14.4% and 8.4%, primarily because of lower logo-merchandise commission rates and store closures.
- BNC First Day sales increased 39% to $199.2 million in the quarter and 39% to $261.0 million year to date. First Day Complete sales increased 52% in both periods. In Fall 2023, 157 campus stores used First Day Complete, representing approximately 800,000 students.
- Selling and administrative expense declined 13.1% in the quarter and 13.7% year to date, reflecting cost-reduction initiatives. However, gross margin declined 40 basis points in the quarter and 110 basis points year to date.
- Net interest expense increased to $10.7 million in the quarter and $18.9 million year to date, versus $4.9 million and $8.8 million, respectively, due to higher borrowings and interest rates.
Liquidity, Debt and Cash Flow
- At October 28, 2023, cash and cash equivalents were $15.0 million; cash, cash equivalents and restricted cash totaled $35.3 million, including $20.3 million of restricted cash, primarily for Lids-related commissions.
- Total debt was $233.9 million, consisting of $204.9 million under the Credit Facility and $30.9 million under the Term Loan, net of deferred financing costs. The Credit Facility matures December 28, 2024 and the Term Loan matures April 7, 2025.
- Year-to-date operating cash flow from continuing operations was an outflow of $47.2 million, versus an inflow of $10.1 million in the prior-year period. Working-capital use included higher receivables and inventories associated with First Day sales; higher accounts payable, including delayed vendor payments, partially offset the outflow.
- Capital expenditures were $8.2 million, down from $16.8 million. Net financing cash inflow was $41.2 million, including $284.7 million of borrowings and $234.0 million of repayments.
- Management stated that prior conditions had raised substantial doubt about going-concern status as of fiscal year-end 2023, but concluded that debt amendments, additional liquidity and operational actions alleviated that substantial doubt for at least 12 months from issuance of the financial statements. The company remained in compliance with debt covenants through the filing date.
Material Changes, Outlook and Risks
- On July 28, 2023, the Credit Facility maturity was extended to December 28, 2024 and the Term Loan maturity to April 7, 2025. The amendments added or modified liquidity, EBITDA, reporting and other covenants, permitted payment-in-kind interest on the Term Loan through September 2, 2024, and required a Chief Restructuring Officer and board committee to evaluate strategic alternatives.
- An October 10, 2023 amendment created a $3.8 million Specified Liquidity Transaction Fee payable no later than January 31, 2024, subject to the agreement’s conditions, if a qualifying transaction had not been completed. The filing provides no assurance that a strategic transaction will be consummated.
- Management reported annualized savings of approximately $30 million to $35 million from prior cost initiatives and targeted approximately $25 million of additional fiscal 2024 gross capital-expenditure reductions, with approximately $14 million achieved year to date.
- The company opened 31 stores and closed 126 during the first 26 weeks, with estimated net annual sales of approximately $60 million associated with the closures. Management expects to move many institutions to First Day Complete in fiscal 2024 and the majority of its schools by fiscal 2025, but provides no guarantee of achieving those targets.
- The DSS sale generated $20 million of net cash proceeds and a $3.1 million gain recognized in discontinued operations. Discontinued operations produced a $1.1 million year-to-date net loss, including restructuring and impairment costs.
- Key risks include limited liquidity and financing availability, covenant compliance, debt maturities, delayed collections from school partners, vendor and publisher payment terms, store-contract losses, declining or shifting enrollment, digital and open-educational-resource competition, margin pressure, reliance on Fanatics and Lids, cybersecurity, supply-chain disruption and the ability to complete a strategic liquidity transaction.
Investor Verification Checklist
- Verify current borrowing-base availability, covenant headroom, required minimum EBITDA and the potential timing and payment of the $3.8 million liquidity transaction fee.
- Assess whether operating cash flow improves as First Day receivables are collected and whether delayed vendor payments normalize.
- Reconcile the reported growth in First Day sales with gross margin, opt-out and return assumptions, school receivables and cash conversion.
- Evaluate the sustainability of cost savings and the effect of store closures, markdowns and lower logo-merchandise commissions on future margins.
- Confirm progress toward a strategic liquidity transaction and the company’s ability to refinance or repay debt before the December 2024 and April 2025 maturities.
- Review the discontinued-operations treatment and the use of DSS sale proceeds for debt repayment and working capital.