Barnes & Noble Education, Inc. — Q1 Fiscal 2023 Summary
Reporting period: Unaudited Form 10-Q for the 13 weeks ended July 30, 2022, compared with the 13 weeks ended July 31, 2021. BNED operates Retail, Wholesale and Digital Student Solutions segments and 1,406 physical and virtual bookstores serving more than 6 million students. Results are highly seasonal, with the first quarter generally among the weaker retail periods.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total sales | $263.9 million | $240.8 million | 9.6% increase |
| Gross profit / margin | $63.5 million / 24.1% | $60.0 million / 24.9% | Margin down 80 bps |
| Operating loss / margin | $(47.9) million / (18.0%) | $(40.7) million / (16.9%) | Loss increased |
| Net loss | $(52.7) million | $(43.6) million | Loss increased $9.1 million |
| Diluted loss per share | $(1.01) | $(0.85) | Worsened |
| Adjusted EBITDA | $(33.4) million | $(24.5) million | Worsened $8.9 million |
| Operating cash flow | $(29.0) million | $(17.3) million | Use increased $11.7 million |
| Free cash flow | $(41.8) million | $(30.6) million | Use increased $11.2 million |
Product sales and other revenue rose 11.1% to $252.9 million, while rental income declined 16.2% to $10.9 million, primarily reflecting the shift toward digital course materials. Selling and administrative expense increased 14.2% to $98.5 million, or 37.3% of sales versus 35.8% previously. Interest expense increased 55.1% to $3.9 million due to higher borrowings and interest rates.
- Retail: Sales increased 12.4% to $236.5 million; segment operating loss widened to $34.5 million from $30.6 million. Adjusted EBITDA declined to $(25.0) million from $(19.6) million.
- Wholesale: Sales decreased 16.6% to $37.1 million; operating income declined to $1.4 million from $5.1 million, primarily because of supply constraints, lower physical textbook demand and higher markdowns.
- DSS: Sales increased 10.6% to $9.2 million, but operating loss widened to $2.3 million from $1.3 million as the company invested in compensation, product development and sales infrastructure.
Retail gross comparable-store sales increased 15.0%, including a 34.0% increase in general merchandise and a 1.5% increase in course materials. First Day inclusive-access revenue increased to $45.0 million from $27.0 million, or 67%. Retail opened 40 stores and closed 61, ending with 793 physical and 613 virtual stores.
At July 30, 2022, cash and cash equivalents were $9.1 million, and cash, cash equivalents and restricted cash totaled $16.6 million. Merchandise inventories were $463.6 million, up substantially from $293.9 million at April 30, 2022, reflecting preparation for the fall term. Total stockholders’ equity was $176.8 million, down from $228.4 million at April 30, 2022, principally due to the quarterly net loss.
Material changes versus the prior comparable period
- Sales benefited from higher campus traffic, increased on-campus activities, general merchandise demand and new stores, but rental revenue and Wholesale sales declined.
- Gross margin fell to 24.1% from 24.9%, with higher Retail contract costs and lower rental margins; Wholesale margin declined primarily because of higher markdowns.
- Operating and net losses increased despite lower restructuring charges, as selling and administrative costs rose faster than gross profit.
- Cash used in operations increased because of higher inventory purchases for the upcoming fall selling season and lower earnings.
- On June 7, 2022, BNED entered into a $30.0 million term loan. Total borrowings at July 30, 2022 were approximately $260.3 million, consisting of $230.3 million under the Credit Agreement, including a $40.0 million FILO facility, plus $30.0 million of term loans, compared with $203.7 million under the Credit Agreement at July 31, 2021.
- The new term loans bear interest at 11.25%, mature June 7, 2024, do not amortize before maturity and may have interest paid in kind through December 31, 2022. They are secured by second-priority liens.
Guidance, outlook, risks and unusual items
The filing does not provide quantified earnings or revenue guidance. Management expects long-term growth from inclusive-access programs, digital solutions, e-commerce, new accounts and the Fanatics/FLC partnership. Management also expects general merchandise sales to increase over the long term and views First Day programs as a means to counter historical course-material revenue declines.
- COVID-19 effects continued to create uncertainty regarding enrollment, campus activity, community-college and international-student demand, remote or hybrid learning and product sourcing.
- Inflation, labor-market constraints, supply-chain disruption and shortages of used textbooks may pressure costs, inventory availability and margins.
- Declining enrollment, competition from publishers and digital platforms, price-sensitive students, contract losses and store closures remain material business risks.
- BNED reported that it was in compliance with Credit Agreement covenants at July 30, 2022, but its liquidity depends on seasonal operating cash flow and continued access to borrowings. The company stated that available cash and financing sources should cover foreseeable needs, while noting that additional debt or equity financing could be required if funds are insufficient.
- Restructuring and other charges were $0.4 million, compared with $1.9 million in the prior year. Prior-year results included a $0.4 million merchandise inventory loss.
- BNED received a $15.8 million tax refund on August 29, 2022 and expects approximately $6.9 million of additional refunds.
- Management concluded that disclosure controls were not effective because of a previously identified material weakness involving the precision of review procedures for deferred tax asset valuation allowances. Remediation was planned for the fourth quarter of Fiscal 2023.
- Ordinary-course legal proceedings were not expected to have a material adverse effect, although the filing notes that outcomes remain uncertain.
Important facts for investors to verify
- Whether fall-term sales and cash collections sufficiently offset the substantial seasonal inventory investment and negative first-quarter operating cash flow.
- The company’s borrowing availability, interest expense, covenant headroom and ability to refinance or repay the 11.25% term loan before its June 2024 maturity.
- Whether First Day inclusive-access growth improves sustainable course-material revenue and margins as adoption expands.
- The effect of the Fanatics/FLC fulfillment transition on reported revenue comparability, commissions, gross margins and working capital.
- Whether Wholesale sales and profitability recover from supply constraints, lower physical textbook demand and markdown pressure.
- Progress in remediating the material weakness in disclosure controls and the realizability of deferred tax assets.
- The timing and receipt of the remaining expected tax refunds and their contribution to liquidity.