Barnes & Noble Education, Inc. — Form 10-K Summary
Reporting period: Fiscal 2016, the 52 weeks ended April 30, 2016. The requested “2015 Q4” does not match the filing period; the filing includes the fourth quarter ended April 30, 2016, with comparable annual data for the 52 weeks ended May 2, 2015. Results are not fully comparable because the Company separated from Barnes & Noble, Inc. on August 2, 2015; the first 13 weeks of Fiscal 2016 were presented on a stand-alone basis and the remaining 39 weeks on a consolidated basis.
Business Context
BNED operates college bookstores, school-branded e-commerce sites and digital education services through Barnes & Noble College. At April 30, 2016, it operated 751 stores under 472 contracts across 43 states and the District of Columbia, serving more than 5 million students and faculty. The Company opened 39 stores and closed 12 during Fiscal 2016. It acquired LoudCloud Systems for $17.8 million and outsourced the Yuzu eTextbook reading platform to VitalSource.
The business is highly seasonal, with most sales and operating profit generated in the second and third fiscal quarters. Fiscal 2016 was the Company’s first year as an independent publicly traded company following the Spin-Off.
Financial Performance and Liquidity
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total sales | $1,808.0 million | $1,773.0 million | Up 2.0% |
| Product sales and other | $1,579.6 million | $1,545.0 million | Up 2.2% |
| Rental income | $228.4 million | $228.0 million | Up 0.2% |
| Gross profit | $453.3 million | $443.6 million | Up 2.2% |
| Gross margin | 25.1% | 25.0% | Up 10 bps |
| Operating income | $4.6 million | $33.6 million | Down $28.9 million |
| Net income | $0.1 million | $19.1 million | Down $19.0 million |
| Adjusted EBITDA | $80.5 million | $84.1 million | Down 4.2% |
| Capital expenditures | $50.8 million | $48.5 million | Up $2.3 million |
Comparable store sales declined 1.9%, primarily because of lower enrollment at two-year community colleges. Textbook revenue fell $43.9 million, mainly from lower new and used textbook sales, while general merchandise sales increased $13.3 million, or 2.6%, led by apparel, gifts and graduation products.
Selling and administrative expenses increased 4.4% to $375.2 million, or 20.8% of sales, from 20.3%. Operating income was affected by $12.0 million of non-cash impairment, $8.8 million of restructuring costs and $2.4 million of transaction costs. Excluding these items, management reported operating income of $27.8 million, or 1.5% of sales.
The effective tax rate was 96.9%, compared with 42.6% in Fiscal 2015, reflecting nondeductible restructuring costs, valuation allowances and permanent book-tax differences. Adjusted Earnings was $15.5 million, compared with $19.1 million in Fiscal 2015.
Net cash provided by operating activities was $82.8 million, compared with $17.7 million in Fiscal 2015. Investing cash outflows were $70.7 million, including $50.8 million of capital expenditures and the $17.8 million LoudCloud acquisition. Financing cash outflows were $28.3 million, including $18.6 million of share repurchases and $3.3 million of deferred financing costs. Cash declined to $28.6 million from $44.8 million.
The Company had no borrowings under its $400 million asset-backed revolving credit facility at April 30, 2016, although it borrowed and repaid $60.6 million during the year and had $3.6 million of letters of credit outstanding. The Company stated that it was in compliance with all covenants and expected operating cash flow, credit availability and vendor financing to fund foreseeable needs.
Material Changes Versus the Prior Comparable Period
- Sales increased 2.0%, but comparable store sales decreased 1.9% and textbook sales declined.
- Gross margin improved modestly to 25.1% due to inventory-management improvements, favorable product mix and better rental margins.
- Operating income and net income declined materially because of digital restructuring, impairment, transaction costs, higher corporate costs and increased interest expense.
- Cash flow from operations improved substantially, primarily because of working-capital changes and collection of a $38.2 million receivable from Barnes & Noble at the Spin-Off.
- The Company became independent, entered into its own credit facility and began incurring stand-alone public-company costs.
- The Company repurchased 1.7 million shares for approximately $16.6 million under a $50 million authorization; approximately $33.4 million remained available at year-end.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal numerical Fiscal 2017 guidance in the filing. Management expected lower digital costs in Fiscal 2017 after completing the Yuzu restructuring, outsourcing the reading platform and integrating LoudCloud. The restructuring was expected to be completed in the first quarter of Fiscal 2017. The Company had signed contracts for 32 additional stores, with estimated first-year sales of $109 million, expected to open during Fiscal 2017.
- Key growth opportunities include additional bookstore outsourcing, new store openings, merchandise expansion, rental and digital course materials, analytics and learning platforms, and strategic acquisitions.
- Major risks include intense competition from Amazon, publishers, digital platforms, rental providers and online marketplaces; enrollment declines; lower student spending; and loss or nonrenewal of college contracts.
- Most contracts are typically five years and generally cancellable by either party with 90 to 120 days’ notice. Future minimum school-management and facility obligations totaled approximately $748.9 million.
- Digital restructuring produced an $11.99 million impairment and $8.83 million of restructuring costs. Goodwill exceeded carrying value by approximately 9% in the annual impairment test, making future performance and digital projections important to monitor.
- The Company disclosed a material patent litigation matter relating to the former NOOK business. Barnes & Noble is obligated to indemnify BNED under the Separation Agreement, but the ultimate damages outcome remained uncertain.
- The Company disclosed supplier concentration: its four largest suppliers accounted for approximately 46% of Fiscal 2016 merchandise purchases.
- A $69.3 million long-term tax liability associated with the LIFO reserve was recorded; management considered payment in the foreseeable future remote if LIFO remains acceptable for tax purposes.
- The Company does not intend to pay cash dividends in the foreseeable future.
Investor Verification Items
- Verify the comparability of Fiscal 2016 results because the Spin-Off changed the basis of presentation and cost structure.
- Reconcile GAAP net income of $0.1 million with Adjusted Earnings of $15.5 million and Adjusted EBITDA of $80.5 million.
- Assess whether the Yuzu restructuring and LoudCloud acquisition produce the expected reduction in digital costs and improved growth.
- Monitor comparable store sales, community-college enrollment, textbook volumes, rental economics and general merchandise mix.
- Review renewal rates, contract cancellations, minimum guarantees and the $748.9 million of future contract and facility obligations.
- Evaluate liquidity seasonality, available borrowing capacity, covenant triggers and the effect of the $28.6 million year-end cash balance.
- Follow the pending patent litigation, tax matters, supplier concentration and goodwill impairment sensitivity.
- Confirm future store openings and whether the estimated $109 million of first-year sales from signed Fiscal 2017 contracts is achieved.