Business Context and Reporting Period
Barnes & Noble Education, Inc. operates physical and virtual bookstores, textbook wholesale and distribution businesses, and digital student-solutions services. Its reportable segments are Barnes & Noble College (BNC), MBS, and Digital Student Solutions (DSS), with additional unallocated Corporate Services costs. The unaudited Form 10-Q covers the 13 and 39 weeks ended January 26, 2019, compared with the periods ended January 27, 2018. Results are highly seasonal, with BNC and MBS Direct sales generally strongest during the second and third quarters.
Financial Performance and Position
| Metric | 13 weeks ended Jan. 26, 2019 | 13 weeks ended Jan. 27, 2018 | 39 weeks ended Jan. 26, 2019 | 39 weeks ended Jan. 27, 2018 |
|---|---|---|---|---|
| Total sales | $550.3 million | $603.4 million | $1,702.6 million | $1,846.0 million |
| Gross profit | $133.0 million | $147.0 million | $410.3 million | $428.9 million |
| Gross margin | 24.2% | 24.4% | 24.1% | 23.2% |
| Operating income (loss) | $3.0 million | $(295.6) million | $32.4 million | $(267.9) million |
| Net income (loss) | $0.8 million | $(283.2) million | $21.8 million | $(269.6) million |
| Adjusted Earnings | $3.1 million | $19.6 million | $24.6 million | $39.8 million |
| Adjusted EBITDA | $22.0 million | $34.6 million | $84.9 million | $104.5 million |
- Sales declined 8.8% in the quarter and 7.8% for the 39-week period. Product sales declined 8.9% and 7.6%, respectively; rental income declined 7.7% and 9.4%.
- Quarterly operating income was $3.0 million, or 0.5% of sales. Excluding $2.5 million of restructuring charges and $0.1 million of transaction costs, operating income was $5.6 million, or 1.0% of sales.
- For the 39-week period, operating income was $32.4 million, or 2.0% of sales. Excluding restructuring and transaction costs, operating income was $35.6 million, or 2.1% of sales.
- Adjusted EBITDA declined 36.3% for the quarter and 18.8% for the 39-week period, reflecting weaker BNC and MBS results and higher Corporate Services costs.
- Cash provided by operating activities was $175.9 million for the 39-week period, compared with $140.4 million in the prior year. Capital expenditures were $31.7 million, and cash used in investing activities was $41.7 million.
- Cash used in financing activities was $128.3 million, primarily reflecting net debt repayments. Ending cash, cash equivalents and restricted cash was $22.8 million, compared with $25.1 million in the prior year.
- At January 26, 2019, the Company had $70.1 million of borrowings under its revolving credit facility, no FILO borrowings, and $4.8 million of letters of credit. Total long-term borrowings on the balance sheet were $70.1 million.
- Current assets were $904.0 million and current liabilities were $684.6 million. Merchandise inventories were $579.6 million and textbook rental inventories were $50.6 million.
Material Changes Versus the Prior Comparable Period
- BNC sales decreased 8.0% in the quarter and 6.6% for the 39-week period. Comparable BNC store sales declined 7.7% and 5.8%, respectively, driven mainly by lower textbook demand, increased purchases directly from publishers and online providers, lower enrollment in certain community colleges, and timing of the spring back-to-school season.
- BNC ended the period with 773 physical stores after opening 35 and closing 30 during the 39-week period. MBS Direct ended with 680 virtual stores.
- MBS sales decreased 16.2% in the quarter and 11.6% for the 39-week period. Wholesale and Direct sales both declined because of lower demand, returns, comparable-store weakness, and store closures.
- DSS sales declined 6.0% in the quarter but increased to $15.8 million from $10.1 million for the 39-week period, primarily because of the inclusion of Student Brands for a full comparable period and the August 2018 PaperRater acquisition.
- The prior-year period included a $313.1 million non-cash BNC goodwill impairment. No goodwill impairment was recorded in the current period.
- Current-year results included $2.5 million of restructuring charges related to the resignation of the BNC President. The prior-year 39-week period included approximately $5.4 million of CEO transition-related charges.
- Gross margin improved for the 39-week period to 24.1% from 23.2%, although quarterly margin declined to 24.2% from 24.4%. BNC quarterly product margins were pressured by higher markdowns and contract costs; MBS margins were pressured by an unfavorable shift toward lower-margin digital products.
- The Company adopted the revenue standard under Topic 606 using the modified retrospective method in Fiscal 2019, with no cumulative retained-earnings adjustment. Prior-period amounts were not recast under the new standard.
Outlook, Commentary, Risks and Unusual Items
- Management reported more than 50,000 Bartleby textbook-solutions subscribers in the third quarter and expects digital offerings to have a meaningful financial impact over the next 12 to 18 months as content expands. The filing does not provide quantified revenue, earnings, or EBITDA guidance.
- Management expects future growth from digital products, new bookstore accounts, outsourcing trends, acquisitions, and partnerships. The Company acquired PaperRater for $10.0 million in August 2018, allocated primarily to $5.3 million of intangible assets and $4.7 million of goodwill.
- On March 1, 2019, after quarter-end, the Company amended and extended its credit facilities for five years. The arrangement retains a $400.0 million revolving facility and a $100.0 million seasonal FILO facility, subject to scheduled reductions beginning August 2019 and annual repayment requirements.
- Management believes operating cash flow, credit availability, the FILO facility, and vendor financing will be adequate for foreseeable operating and financing needs, but notes that additional debt or equity financing could be required if available funds are insufficient.
- Material risks include declining college enrollment, student price sensitivity, competition from publishers and digital platforms, shifts from print to digital materials, bookstore contract losses, inventory and return risk, execution of the digital strategy, acquisition integration, technology and cybersecurity risks, tax liabilities, debt covenant compliance, and access to capital.
- The Company reported $40.4 million of long-term tax payable associated with the LIFO reserve and stated that an additional portion could become payable within the next 12 months, although the amount cannot be reasonably predicted.
- The filing reports no material changes to previously disclosed market-risk factors, no off-balance-sheet arrangements, and no legal proceedings expected to have a material adverse effect based on current information.
Important Facts for Investors to Verify
- Whether BNC comparable-store sales and textbook demand stabilize, particularly after the timing-related spring selling season.
- Whether Bartleby and other DSS offerings achieve the expected subscriber growth, revenue scale, and profitability within the stated 12-to-18-month horizon.
- The Company’s available borrowing capacity, borrowing-base limitations, debt covenants, interest rates, and compliance under the amended credit agreement.
- The timing and amount of additional cash taxes related to the LIFO reserve and other tax liabilities.
- Whether gross-margin improvement for the 39-week period persists despite continued migration toward lower-margin digital products and pricing pressure.
- The effect of the Fiscal 2020 lease-accounting adoption, including recognition of operating lease assets and liabilities.
- Management’s non-GAAP adjustments, particularly the exclusion of restructuring costs, transaction costs, prior-year impairment, and MBS inventory valuation amortization from Adjusted Earnings and Adjusted EBITDA.