Barnes & Noble Education, Inc. — Fiscal 2018 First-Quarter 10-Q
Reporting period: 13 weeks ended July 29, 2017, compared with July 30, 2016. The quarter includes MBS Textbook Exchange, acquired February 27, 2017; the prior-year period excludes MBS and is therefore not fully comparable.
Business context
BNED operates physical and virtual higher-education and K-12 bookstores, textbook wholesale and rental businesses, and digital education services through Barnes & Noble College (BNC) and MBS. At quarter-end, BNC operated 781 physical stores and MBS Direct operated 714 virtual bookstores. The business is seasonal, with retail sales generally strongest in the second and third fiscal quarters.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total sales | $355.7 million | $239.2 million | +48.7% |
| Product sales and other | $334.5 million | $217.7 million | +53.6% |
| Rental income | $21.2 million | $21.5 million | -1.4% |
| Gross profit | $64.7 million | $47.4 million | +36.5% |
| Gross margin | 18.2% | 19.8% | -160 bps |
| Operating loss | $(55.5) million | $(52.8) million | Worsened $2.8 million |
| Net loss | $(34.8) million | $(27.9) million | Worsened $6.9 million |
| Basic and diluted loss per share | $(0.75) | $(0.60) | Worsened $0.15 |
| Adjusted EBITDA | $(32.4) million | $(36.5) million | Improved $4.1 million |
BNC generated $250.0 million of sales and a $56.1 million operating loss. MBS generated $139.8 million of sales and $12.2 million of operating income before intercompany eliminations. Consolidated results include $34.1 million of eliminations, primarily for intercompany textbook sales and commissions.
BNC comparable-store sales declined 2.5%, including an 8.5% decrease in textbooks, partly offset by a 3.3% increase in general merchandise. Management attributed textbook weakness primarily to lower community-college enrollment, increased direct purchases from publishers and online providers, and broader retail weakness.
Cash flow, balance sheet, debt and liquidity
| Metric | July 29, 2017 | April 29, 2017 | July 30, 2016 |
|---|---|---|---|
| Cash and cash equivalents | $14.2 million | $19.0 million | $8.9 million |
| Total assets | $1.619 billion | $1.300 billion | $1.413 billion |
| Total borrowings | $220.1 million | $159.6 million | $25.0 million |
| Stockholders’ equity | $680.9 million | $713.7 million | $675.7 million |
- Operating cash flow was $(56.0) million versus $(25.2) million in the prior-year quarter, primarily reflecting working-capital changes, including inventory investment.
- Investing cash flow was $(9.3) million, including $7.9 million of capital expenditures.
- Financing cash flow was $60.5 million, reflecting $110.3 million of borrowings and $49.8 million of repayments.
- The amended asset-backed credit agreement has maximum availability of $500 million, including a $100 million FILO seasonal facility. Outstanding borrowings comprised $120.1 million under the revolving facility and $100.0 million under the FILO facility. Letters of credit totaled $4.3 million.
- Management stated that expected operating cash flow, credit availability and vendor financing should provide adequate resources for foreseeable operating and financing needs, while noting that future access to capital is not assured.
Material changes and unusual items
- MBS acquisition: BNED paid $187.0 million for MBS, funded with operating cash and credit-facility borrowings. The preliminary purchase accounting included $48.1 million of goodwill and $21.6 million of identified intangible assets.
- CEO transition: The company recognized $5.2 million of restructuring and other charges related to the resignation of Max J. Roberts and the appointment of Michael P. Huseby, both effective September 19, 2017.
- MBS inventory valuation: A $2.2 million non-cash charge was recorded for amortization of the acquisition-date fair-value inventory adjustment; the total adjustment was $3.7 million and is expected to be recognized over six months.
- Interest expense: Net interest expense increased to $3.0 million from $0.7 million because of increased borrowings and the new FILO facility.
- Subsequent acquisition: On August 3, 2017, BNED acquired Student Brands, LLC for $58.5 million in cash. Student Brands provides subscription-based writing and study services and reported more than 20 million unique monthly users across its digital properties.
- No shares were repurchased during the quarter; approximately $26.7 million remained available under the repurchase authorization.
Outlook, commentary and risks
Management expects growth from new physical and virtual bookstore accounts, digital products, courseware, outsourcing trends and acquisitions. BNC opened 24 stores and MBS Direct opened 10 stores during the quarter. No specific quantitative revenue, earnings or EBITDA guidance was provided in the filing.
- Key risks include declining enrollment, consumer price sensitivity, competition from publishers and online providers, textbook format and pricing changes, contract non-renewals, store closures, inventory availability, and pressure from rental adoption and markdowns.
- Additional risks relate to integrating MBS and Student Brands, realizing acquisition synergies, digital investment returns, information technology and data-security issues, debt covenants, liquidity, access to capital, litigation, tax matters and accounting changes.
- Goodwill was $329.5 million. The latest impairment test showed only approximately 5% excess fair value over carrying value for the relevant reporting unit, leaving goodwill sensitive to comparable-store declines, accelerated closures or weaker digital performance.
- The company stated that ordinary-course legal proceedings are not expected to have a material adverse effect. A patent matter indemnified by Barnes & Noble, Inc. had been paid, with approximately $45,228 of costs still in dispute.
Investor verification points
- Separate the effects of MBS consolidation from underlying BNC performance when assessing sales, margins and earnings trends.
- Monitor BNC textbook comparable sales, enrollment exposure, general-merchandise performance and contract economics.
- Verify seasonal working-capital needs, inventory levels, borrowing availability, debt covenants and the ability to fund the Student Brands acquisition.
- Assess whether MBS integration benefits offset acquisition-related costs, inventory fair-value amortization and higher interest expense.
- Review goodwill valuation assumptions given the limited impairment-test cushion.
- Evaluate the sustainability of management’s liquidity assessment in light of recurring first-quarter operating cash outflows and increased leverage.