Barnes & Noble Education, Inc. — Form 10-Q Summary
Reporting period: First quarter of Fiscal 2019, the 13 weeks ended July 28, 2018, compared with the 13 weeks ended July 29, 2017. The filing was signed August 22, 2018. Results are unaudited and highly seasonal; first-quarter results are not indicative of the full fiscal year.
Business context
BNED operates physical and virtual college and K-12 bookstores, textbook wholesale and distribution businesses, and digital student services. Its three reportable segments are Barnes & Noble College (BNC), MBS, and Digital Student Solutions (DSS). The company operated 753 BNC physical bookstores and 684 MBS Direct virtual bookstores at quarter-end, serving more than 6 million students. DSS includes Student Brands, acquired August 3, 2017, with approximately 100,000 subscribers.
Key financial metrics
| Metric | Q1 Fiscal 2019 | Q1 Fiscal 2018 | Change |
|---|---|---|---|
| Total sales | $337.5 million | $355.7 million | Down 5.1% |
| Gross profit | $66.6 million | $65.2 million | Up 2.2% |
| Gross margin | 19.7% | 18.3% | Up 140 basis points |
| Operating loss | $49.1 million | $55.5 million | Improved $6.5 million |
| Net loss | $38.6 million | $34.8 million | Worsened $3.8 million |
| Diluted loss per share | $0.82 | $0.75 | Worsened $0.07 |
| Adjusted EBITDA | $(32.5) million | $(32.4) million | Approximately flat |
| Cash flow from operations | $(27.4) million | $(56.3) million | Improved $28.9 million |
| Capital expenditures | $8.2 million | $7.9 million | Up $0.4 million |
Product sales and other revenue declined 5.1% to $317.8 million, while rental income declined 5.3% to $19.6 million. Selling and administrative expense decreased slightly to $99.1 million, but increased to 29.4% of sales from 28.1%. Depreciation and amortization increased 10.1% to $16.5 million, principally due to Student Brands-related assets and additional capital expenditures.
Segment performance and material changes
- BNC: Sales declined 1.9% to $245.2 million. Comparable-store sales declined 2.2%, reflecting lower course-material demand, increased purchases from publishers and online providers, lower community-college enrollment, and shifts toward lower-cost and digital offerings. BNC ended the quarter with 753 stores after opening 13 and closing 28.
- MBS: Sales declined 6.8% to $130.3 million. Wholesale sales declined 4.4% to $88.4 million, while MBS Direct sales declined 11.4% to $41.9 million, primarily due to fall-rush shipment timing, lower K-12 sales, and store closures. MBS gross margin was 20.5%, compared with 21.3% in the prior year excluding the prior-year acquisition-related inventory fair-value adjustment.
- DSS: Revenue was $5.7 million and operating income was $1.1 million, compared with no comparable prior-year reported revenue because Student Brands had not yet been acquired. The company launched Bartleby Textbook Solutions in August 2018 after quarter-end.
- Gross margin: Improvement reflected lower product costs, favorable BNC sales mix, higher margin rates, and the absence of the $2.2 million MBS inventory fair-value amortization recorded in the prior-year quarter. Margin was partly offset by lower-margin digital products and contract-related costs.
- Nonrecurring items: The prior-year quarter included $5.2 million of CEO transition and restructuring charges, $0.6 million of transaction costs, and $2.2 million of MBS inventory valuation amortization. No comparable charges were recorded in the current quarter.
- Income taxes: The current-quarter tax benefit was $14.0 million, producing a 26.6% effective tax rate versus a $23.8 million benefit and 40.6% effective rate in the prior-year quarter. The company stated that its accounting for the Tax Cuts and Jobs Act remained provisional.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $13.3 million at July 28, 2018, compared with $16.1 million at April 28, 2018 and $14.2 million at July 29, 2017.
- Total borrowings were $230.2 million, consisting of $130.2 million under the asset-backed credit facility and $100.0 million under the FILO facility. The company borrowed $96.3 million and repaid $62.5 million during the quarter.
- The credit facilities have total committed capacity of up to $500 million, subject to borrowing-base availability, restrictions, and covenants. Letters of credit outstanding totaled $4.8 million.
- Merchandise inventories increased to $729.9 million from $443.6 million at fiscal year-end, reflecting seasonal preparation for fall selling. Accounts payable increased to $463.7 million from $187.9 million.
- Other long-term liabilities included $40.4 million related to the LIFO tax payable. Management indicated that an additional portion could become payable within the next twelve months, but the amount cannot be reasonably predicted because it depends on inflation and inventory levels.
- The company stated that expected operating cash flow, credit-facility availability, FILO borrowings, and vendor financing should provide adequate resources for the foreseeable future, while acknowledging potential need for additional debt or equity financing if funds are insufficient.
Guidance, outlook, risks, and contingencies
The filing does not provide quantitative fiscal-year revenue, earnings, or EBITDA guidance. Management expects to pursue digital solutions, new accounts, acquisitions, partnerships, and expansion of the student-services ecosystem. The company also expects seasonal improvement in operating cash flow during higher-volume textbook selling periods.
- Key risks include declining or shifting college enrollment, consumer migration from print to digital materials, direct competition from publishers and online providers, price pressure, textbook supply and return risks, store closures or contract nonrenewals, and execution risk in digital initiatives.
- Integration and performance risks remain associated with the MBS and Student Brands acquisitions, including realization of expected synergies and the effectiveness of related internal controls.
- Additional risks include cybersecurity and data privacy incidents, technology or shipping disruptions, labor costs, publisher pricing and format changes, indebtedness and covenant compliance, access to capital, tax changes, and litigation or regulatory matters.
- Ordinary-course legal proceedings were not expected to have a material adverse effect, although the company noted that legal outcomes remain inherently uncertain.
- The company adopted the new revenue-recognition standard using the modified retrospective method in the first quarter of Fiscal 2019, with no cumulative retained-earnings adjustment. Lease accounting adoption is required in Fiscal 2020 and remains under evaluation.
- Disclosure controls were deemed effective, and management reported no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether fall-rush textbook sales and seasonal working-capital inflows improve operating cash flow and reduce borrowings.
- Whether BNC comparable-store sales stabilize despite digital substitution, lower enrollment, and competition from publishers and online providers.
- Whether DSS growth, including Bartleby Textbook Solutions, can offset declines in traditional textbook operations and generate sustainable profitability.
- Credit-facility availability, borrowing-base capacity, interest rates, covenant compliance, and the timing of required debt repayments.
- The amount and timing of additional LIFO-related tax payments, which management could not quantify beyond the disclosed $40.4 million long-term liability.
- The effect of revenue-recognition and upcoming lease-accounting standards on reported revenue, assets, liabilities, and comparability.
- Whether the provisional Tax Cuts and Jobs Act accounting and related tax benefits change as the measurement period is finalized.