Barnes & Noble Education, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter ended October 29, 2022, covering 13 and 26 weeks. Comparisons are to October 30, 2021. BNED operates 1,399 physical and virtual bookstores, serves more than 6 million students, and reports Retail, Wholesale, and Digital Student Solutions (DSS) segments. Results are highly seasonal, with Retail sales concentrated in the second and third fiscal quarters.
Financial Performance and Position
| Metric | 13 weeks ended October 29, 2022 | 13 weeks ended October 30, 2021 | 26 weeks ended October 29, 2022 | 26 weeks ended October 30, 2021 |
|---|---|---|---|---|
| Total sales | $617.1 million | $627.0 million | $881.0 million | $867.8 million |
| Gross profit | $144.8 million | $145.6 million | $208.3 million | $205.6 million |
| Gross margin | 23.5% | 23.2% | 23.6% | 23.7% |
| Operating income (loss) | $26.7 million | $24.6 million | $(21.2) million | $(16.1) million |
| Net income (loss) | $22.1 million | $22.5 million | $(30.6) million | $(21.1) million |
| Diluted EPS | $0.42 | $0.41 | $(0.58) | $(0.41) |
| Adjusted EBITDA | $39.4 million | $39.0 million | $5.9 million | $14.5 million |
- Quarterly results: Sales declined 1.6%, while gross margin improved 30 basis points. Operating income increased primarily because of lower selling and administrative, depreciation, restructuring, and other costs. Higher interest expense substantially offset the operating improvement.
- Year-to-date results: Sales increased 1.5%, but operating loss widened by $5.0 million and net loss increased by $9.5 million. Selling and administrative expenses rose 5.9% to $205.6 million, and net interest expense increased 84% to $8.8 million.
- Revenue mix: For the 26-week period, Retail sales increased 1.9% to $835.1 million, DSS sales increased 6.4% to $17.6 million, and Wholesale sales declined 12.0% to $58.2 million. Rental income declined 16.6% to $52.2 million.
- Operating performance: For the 26-week period, Retail generated a $4.0 million operating loss versus a $1.0 million loss in the prior year; Wholesale operating income declined to $1.6 million from $5.0 million; DSS operating loss increased to $4.2 million from $3.6 million; and Corporate Services operating loss improved to $13.0 million from $15.2 million.
- Cash flow: Operating cash flow was $9.4 million, down from $24.3 million. Capital expenditures were $20.6 million, producing reported non-GAAP free cash flow of $(2.9) million versus $7.1 million in the prior year.
- Balance sheet: Cash and cash equivalents were $19.1 million at October 29, 2022, compared with $10.4 million at April 30, 2022. Total assets were $1.24 billion and stockholders’ equity was $200.5 million, down from $228.4 million at fiscal year-end.
- Working capital: Merchandise inventories were $371.6 million and textbook rental inventories were $49.4 million. Accounts payable were $326.2 million, and current operating lease liabilities were $130.8 million.
Material Changes Versus Prior Comparable Period
- General merchandise sales benefited from increased campus traffic and more traditional on-campus activity, while course-material and rental revenue declined as customers shifted toward digital and lower-cost formats.
- First Day program revenue increased 49% to $143.2 million for the quarter and 53% to $188.2 million for the 26-week period. First Day Complete sales increased 97% to $89.9 million for the quarter and 106% to $106.3 million year to date.
- Approximately 111 campus stores adopted First Day Complete for Fall 2022, representing approximately 545,000 undergraduate students and an 85% increase in participating enrollment from Fall 2021.
- Wholesale performance weakened because of supply constraints, reduced physical textbook demand, changing buying patterns, and lower demand from third-party customers.
- Interest expense increased because of higher borrowings and interest rates. Lease expense increased to $116.3 million from $107.8 million for the 26-week period, primarily because of higher sales-based payments, contract renewals, and reinstated minimum guarantees.
- Restructuring and other charges declined to $0.6 million from $3.0 million. The prior-year period also included a $0.4 million merchandise inventory loss.
Debt, Liquidity, Outlook, and Risks
- Debt: Outstanding borrowings at October 29, 2022 totaled $252.0 million, consisting of $222.0 million under the asset-backed credit facility and a new $30.0 million term loan. The company had $4.8 million of letters of credit outstanding.
- Term loan: The $30.0 million term loan bears interest at 11.25%, matures June 7, 2024, has no scheduled amortization, and is secured by second-priority liens. A 1.5% fee applies to outstanding principal on June 7, 2023 if the loan remains outstanding.
- Covenants and liquidity: BNED reported compliance with its credit agreement covenants and stated that operating cash flow and borrowing availability should fund foreseeable needs. Management cautioned that future liquidity depends on operating performance, inventory levels, financing access, and capital-market conditions.
- Tax refunds: BNED received a $15.8 million tax refund on August 29, 2022 and expects an additional refund of approximately $10.0 million.
- Cost-saving initiative: On December 2, 2022, the board approved an initiative expected to generate $10 million to $15 million of fiscal 2023 savings and $30 million to $35 million of annualized savings after implementation. BNED expects approximately $5 million to $6 million of third-quarter fiscal 2023 restructuring charges, primarily severance.
- Strategic outlook: Management plans to expand First Day Complete, move many institutions to the program for Fall 2023, and target a majority of schools by Fall 2024. Management also expects long-term growth in general merchandise through the Fanatics/FLC partnership, digital solutions, e-commerce, new accounts, acquisitions, and partnerships.
- Principal risks: Risks include declining college enrollment, digital disintermediation and publisher-direct distribution, price competition, supply-chain constraints and used-textbook availability, labor costs, inflation and consumer spending, cyber and data-security threats, contract nonrenewals or store closures, financing availability, covenant compliance, and continued effects of COVID-19.
- Controls: Management concluded that disclosure controls and procedures were not effective as of October 29, 2022 because a material weakness related to insufficient precision in reviewing the deferred tax asset valuation allowance remained outstanding. Remediation was expected in the fourth quarter of fiscal 2023.
- Legal matters: BNED is involved in ordinary-course claims and proceedings and does not currently expect them to have a material adverse effect, although outcomes remain inherently uncertain.
Investor Verification Points
- Verify the company’s ability to convert First Day Complete adoption and reported sales growth into sustainable margins and cash flow.
- Monitor debt balances, interest expense, borrowing availability, the 11.25% term loan, and compliance with credit-facility covenants.
- Assess whether operating cash flow can fund inventory purchases, capital expenditures, lease obligations, and debt service during seasonal low-cash-flow periods.
- Evaluate the impact of continued migration from physical textbooks to digital and lower-cost formats on revenue, rental income, inventory requirements, and margins.
- Track execution of the December 2022 cost-saving plan, including the $5 million to $6 million restructuring charge and projected savings.
- Confirm remediation of the deferred-tax-asset control weakness and the recoverability of deferred tax assets; the filing reports no deferred tax asset balance at October 29, 2022.
- Consider the comparability limitations created by the Fanatics/FLC transition, which changed certain general-merchandise revenue from gross reporting to net commission reporting.