Barnes & Noble Education, Inc. — Fiscal 2021 Second-Quarter 10-Q Summary
Business Context and Reporting Period
BNED operates physical and virtual college, university, and K-12 bookstores, a textbook wholesale business, and direct-to-student digital education services. It operated 1,439 stores, served more than 6 million students, and reported Retail, Wholesale, and Digital Student Solutions segments.
The filing covers the 13 and 26 weeks ended October 31, 2020, compared with the 13 and 26 weeks ended October 26, 2019. Results are highly seasonal and were materially affected by COVID-19-related campus closures, remote learning, lower enrollment, and reduced campus activities.
Financial Performance and Key Metrics
| Metric | 13 Weeks Ended Oct. 31, 2020 | 13 Weeks Ended Oct. 26, 2019 | 26 Weeks Ended Oct. 31, 2020 | 26 Weeks Ended Oct. 26, 2019 |
|---|---|---|---|---|
| Total sales | $595.5 million | $772.2 million | $799.5 million | $1,091.9 million |
| Gross profit / margin | $115.3 million / 19.4% | $187.0 million / 24.2% | $146.1 million / 18.3% | $258.6 million / 23.7% |
| Operating income (loss) | $6.7 million | $56.4 million | $(52.2) million | $12.6 million |
| Net income (loss) | $7.5 million | $35.9 million | $(39.1) million | $3.8 million |
| Diluted EPS | $0.15 | $0.74 | $(0.81) | $0.08 |
| Adjusted EBITDA | $24.5 million | $74.5 million | $(13.5) million | $49.4 million |
- Sales declined 22.9% in the quarter and 26.8% for the six-month period, primarily because of temporary store closures, lower in-store traffic, reduced enrollment, fewer campus events, and lower general merchandise demand.
- Retail sales declined 22.3% in the quarter and 27.7% year to date. Wholesale sales declined 9.5% in the quarter but increased 3.7% for the six-month period. DSS sales increased 14.0% in the quarter and 11.6% year to date, primarily due to higher bartleby subscription sales.
- Gross margin contracted because of unfavorable product mix, lower high-margin general merchandise sales, increased markdowns, and a shift toward lower-margin digital courseware.
- Selling and administrative expense decreased 18.9% in the quarter and 23.3% year to date, reflecting lower payroll, furloughs, store operating costs, and other cost reductions.
- Restructuring and other charges were $3.4 million in the quarter and $9.1 million year to date, mainly for severance, professional services, restructuring, process improvements, and facility closure costs.
- The six-month tax benefit was $16.6 million on a pretax loss of $55.7 million, including benefits associated with the CARES Act.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Six-month operating cash flow was $88.1 million, down from $161.4 million in the prior-year period.
- Capital expenditures were $16.2 million, compared with $19.3 million in the prior-year period.
- Financing activities used $76.1 million, including $330.8 million of borrowings and $406.0 million of repayments under the credit agreement.
- Cash, cash equivalents, and restricted cash totaled $8.1 million at October 31, 2020, compared with $25.4 million at October 26, 2019 and $9.0 million at the beginning of the fiscal year.
- Debt outstanding was $99.5 million, all under the asset-backed revolving credit facility. The credit agreement provides a $400 million facility and a potential $100 million FILO seasonal facility, subject to applicable conditions. Letters of credit totaled $4.8 million.
- Current assets were $707.0 million and current liabilities were $569.7 million. Merchandise and textbook rental inventories totaled $508.4 million.
- Operating lease liabilities totaled $320.5 million, including current and long-term portions. Minimum fixed lease payments totaled $368.7 million before imputed interest.
- Management stated that expected operating cash flow, credit availability, the FILO facility, and vendor financing should provide adequate resources for foreseeable operating and financing needs, but noted that future liquidity depends on COVID-19 recovery, inventory levels, store openings, acquisitions, and capital-market access.
Material Changes Versus the Prior Comparable Period
- COVID-19 significantly reduced campus activity and shifted demand toward remote learning, online fulfillment, inclusive access, and digital course materials.
- Retail comparable-store sales declined 28.1% in the quarter and 31.8% for the six-month period. General merchandise comparable sales declined 52.0% and 58.6%, respectively.
- Retail adjusted EBITDA fell to $18.3 million in the quarter from $62.6 million and was $(22.3) million for the six-month period versus $41.1 million.
- Wholesale benefited from assuming direct-to-student fulfillment for certain Retail locations that were not fully operational.
- Management implemented a significant cost-reduction program and expected meaningful annualized savings, with most benefits beginning in fiscal 2021.
- BNED concluded its strategic review in August 2020 and determined that continued execution of its existing business plan was the best path forward.
- The company suspended employer 401(k) matching contributions through December 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal numeric revenue, earnings, or EBITDA guidance. Management expects long-term growth from digital solutions, e-commerce, new accounts, inclusive access, partnerships, and general merchandise, while acknowledging substantial uncertainty regarding the duration and severity of the pandemic.
- Key risks include further COVID-19 disruption, lower college enrollment, reduced university funding, declining campus traffic, contract non-renewals, store closures, price competition, publisher disintermediation, digital investment execution, inventory availability, supply-chain interruptions, cybersecurity, and access to capital.
- Thirteen purported class actions concerning inclusive access and course-material sales were consolidated into multidistrict litigation. BNED intends to defend the claims and stated that potential losses cannot currently be estimated.
- Management believes an additional portion of the $25.7 million long-term tax payable associated with the LIFO reserve could become payable within the next 12 months, but the amount cannot be reasonably projected.
- On November 9, 2020, the Executive Vice President, Corporate Development and President of DSS resigned effective November 30, 2020. The former officer is to receive a $1.1 million lump-sum payment.
- The company reported no material off-balance-sheet arrangements and stated that disclosure controls were effective as of October 31, 2020.
Investor Verification Checklist
- Verify the pace of campus reopening, enrollment recovery, on-campus athletic activity, and the resulting Retail comparable-sales and margin trends.
- Assess whether the cost-reduction program produces the anticipated annualized savings without impairing store operations or digital growth.
- Monitor cash balances, seasonal borrowing needs, credit-facility availability, covenant compliance, and the potential cash-tax impact of the LIFO reserve.
- Evaluate whether DSS subscription growth and digital initiatives can offset continued declines in physical textbook and general merchandise sales.
- Follow the consolidated antitrust litigation and any developments that could create material financial exposure.
- Reconcile non-GAAP Adjusted Earnings and Adjusted EBITDA with GAAP results, particularly restructuring charges, content amortization, and tax benefits.