Barnes & Noble Education, Inc. — Fiscal 2024 First-Quarter 10-Q Summary
Reporting period: The unaudited Form 10-Q covers the 13 weeks ended July 29, 2023, compared with the 13 weeks ended July 30, 2022. BNED operates college, university, and K-12 bookstores, textbook wholesale operations, and related technology and services. It operated 1,289 physical, virtual, and custom bookstores serving more than 5.8 million students. Results are highly seasonal, with the majority of sales and operating profit generally occurring in the second and third fiscal quarters.
Key Financial Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Total sales | $264.2 million | $254.7 million | +3.7% |
| Gross profit / margin | $50.6 million / 19.2% | $56.0 million / 22.0% | Margin down 280 bps |
| Operating loss | $(41.7) million | $(45.6) million | Improved $3.9 million |
| Net loss from continuing operations | $(50.0) million | $(50.3) million | Improved $0.4 million |
| Net loss | $(50.4) million | $(52.7) million | Improved $2.3 million |
| Basic and diluted loss per share | $(0.96) | $(1.01) | Improved $0.05 |
| Adjusted EBITDA, continuing operations | $(26.8) million | $(34.3) million | Improved $7.5 million |
| Operating cash flow, continuing operations | $(119.9) million | $(28.6) million | Use increased $91.3 million |
Product sales and other revenue increased 3.6% to $252.7 million, while rental income increased 5.5% to $11.5 million. Course materials revenue increased 8.7% to $138.5 million. Retail sales increased 3.8% to $245.5 million, and Wholesale sales increased 4.6% to $38.8 million before eliminations.
Gross margin declined primarily because of higher course-material markdowns, a shift toward digital materials, lower logo general-merchandise commission rates under the Fanatics/Lids partnership, higher product costs, and increased wholesale returns and allowances. Selling and administrative expense declined 14.2% to $77.5 million, reflecting cost-reduction initiatives, lower payroll, incentive compensation, and operating costs.
Material Changes Versus the Prior Period
- First Day programs expanded materially: Total BNC First Day revenue increased 37% to $61.8 million. First Day Complete sales increased 55% to $25.5 million, while First Day sales increased 27% to $36.3 million.
- First Day Complete adoption increased: 157 campus stores were using the program for Fall 2023, representing nearly 800,000 students, compared with 111 stores and approximately 545,000 students in Fall 2022.
- Store portfolio contracted: BNED opened 20 stores and closed 97 stores during the quarter, ending with 726 physical and 563 virtual stores. Management estimated the closed stores represented approximately $52 million of annual sales.
- Cost reductions continued: Management reported approximately $17 million of savings achieved in the second half of Fiscal 2023 and expects $30 million to $35 million of annualized Fiscal 2024 savings, plus approximately $25 million of additional capital-expenditure and other cost reductions over the next twelve months.
- Discontinued operations sold: BNED completed the sale of its Digital Student Solutions assets on May 31, 2023, for net cash proceeds of $20 million. The quarter included a $3.1 million gain on sale, offset by impairment and restructuring charges, resulting in a $0.4 million loss from discontinued operations.
Cash Flow, Debt, and Liquidity
Cash, cash equivalents, and restricted cash totaled $19.3 million at July 29, 2023, including $10.7 million restricted for logo-merchandise commissions and $0.9 million held in trust for employee benefit plans. Unrestricted cash was therefore substantially lower than the reported total.
Operating cash flow from continuing operations was a $119.9 million use, driven principally by a $48.3 million increase in receivables, a $61.2 million increase in merchandise inventories, timing of vendor payments, and higher interest payments. Capital expenditures were $4.2 million, and free cash flow, as defined by BNED, was negative $130.0 million.
| Debt at July 29, 2023 | Amount |
|---|---|
| Credit Facility | $249.7 million |
| Term Loan | $30.0 million |
| Total debt, net of deferred financing costs | $277.7 million |
Net interest expense increased to $8.3 million from $3.9 million because of higher borrowings and interest rates. The 11.25% Term Loan remains outstanding, with interest permitted to be paid in kind until September 2, 2024 under the July amendment. The Credit Facility is secured by substantially all inventory, receivables, and related assets.
On July 28, 2023, the Credit Agreement maturity was extended to December 28, 2024, and the Term Loan maturity was extended to April 7, 2025. The amendments added or modified borrowing-base, availability, EBITDA, reporting, and other covenants, required appointment of a Chief Restructuring Officer and independent directors, and established a board committee to explore strategic alternatives involving a potential specified liquidity transaction. BNED reported compliance with its debt covenants as of July 29, 2023 and through the filing date.
Guidance, Outlook, Risks, and Unusual Items
- Management expects the majority of stores to adopt First Day Complete by Fiscal 2025, but cautions that adoption may be slower than planned or may not occur.
- Management expects Fiscal 2024 annualized cost savings of $30 million to $35 million and plans approximately $25 million of additional cost reductions and lower gross capital expenditures over the following twelve months.
- Management stated that the debt amendments and operational initiatives are expected to provide sufficient liquidity to meet obligations for at least twelve months and alleviate the conditions that previously raised substantial doubt about going concern. This conclusion depends on successful implementation of management’s plans and continued lender support.
- Liquidity remains highly seasonal and dependent on inventory financing, vendor terms, credit availability, and collection timing from school partners. First Day programs may delay cash collections until after drop/add dates while vendor and school payments may occur earlier.
- Principal risks include substantial indebtedness and covenant compliance, access to credit and capital markets, declining enrollment, store closures and contract losses, competition from publishers and digital platforms, product availability, supply-chain disruption, cybersecurity, labor costs, and dependence on Fanatics, Lids, and other strategic partners.
- Restructuring and other charges were $4.6 million, compared with $0.4 million in the prior-year quarter. The discontinued DSS operations also included $0.6 million of non-cash impairment and $3.3 million of restructuring costs.
Investor Verification Points
- Verify borrowing-base availability, minimum EBITDA and availability covenant compliance, amendment fees, and the timing of required debt repayments or other lender actions.
- Assess whether seasonal operating cash inflows in the second and third quarters are sufficient to offset the substantial first-quarter cash use and support vendor and school commission payments.
- Track unrestricted cash separately from restricted cash and monitor receivables growth associated with First Day programs.
- Evaluate whether First Day adoption, store closures, markdowns, digital-material mix, and Fanatics/Lids commission changes improve sustainable margins rather than only revenue.
- Confirm delivery of the stated cost savings and additional capital-expenditure reductions, including associated restructuring costs and execution risks.
- Monitor the board committee’s strategic-alternatives process; the filing provides no assurance that a specified liquidity transaction will be completed.
- Reconcile continuing-operations results with discontinued DSS results and exclude the one-time DSS sale gain when evaluating ongoing profitability.