Barnes & Noble Education, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended August 1, 2020, BNED’s first quarter of Fiscal 2021, compared with the 13 weeks ended July 27, 2019. BNED operates 1,442 physical and virtual college, university, and K-12 bookstores, a textbook wholesale business, and direct-to-student digital subscription services through its Retail, Wholesale, and Digital Student Solutions segments.
Results were materially affected by COVID-19 campus closures, remote learning, lower enrollment and reduced general merchandise demand. The first quarter is seasonally the company’s low-revenue period, so results are not indicative of the full fiscal year.
Financial performance and liquidity
| Metric | Q1 Fiscal 2021 | Prior comparable period | Change |
|---|---|---|---|
| Total sales | $204.0 million | $319.7 million | Down 36.2% |
| Gross profit | $30.9 million | $71.7 million | Down 56.9% |
| Gross margin | 15.1% | 22.4% | Down 730 basis points |
| Operating loss | $(58.9) million | $(43.8) million | Loss increased |
| Net loss | $(46.7) million | $(32.2) million | Loss increased |
| Diluted loss per share | $(0.96) | $(0.68) | Loss increased |
| Adjusted EBITDA | $(38.0) million | $(25.1) million | Loss increased |
| Cash flow from operations | $(54.8) million | $(40.2) million | Use increased by $14.6 million |
Retail sales fell 42.2% to $158.8 million, driven by COVID-19 closures, lower textbook and general merchandise demand, lower graduation and athletic-event-related sales, and a shift toward lower-cost digital products. Wholesale sales increased 11.0% to $80.3 million, primarily because Wholesale assumed direct-to-student fulfillment for affected Retail operations. DSS sales increased 9.3% to $5.9 million, primarily from higher bartleby subscriptions.
Product and other gross margin declined because of unfavorable mix, including approximately $87.6 million of lower-margin general merchandise sales, increased markdowns, and greater use of digital courseware. Selling and administrative expense declined 28.3% to $70.0 million, mainly from furloughs and lower store payroll and operating costs, but declined less than revenue.
Cash, cash equivalents and restricted cash totaled $8.2 million at quarter-end, including cash and cash equivalents of $7.5 million. The company used $54.8 million in operating cash and $5.5 million in investing cash, partly funded by $59.5 million of financing cash flow. Capital expenditures were $7.1 million.
Credit Agreement borrowings were $234.6 million at August 1, 2020, compared with $174.1 million at July 27, 2019 and $99.7 million at May 2, 2020. The facility has $400 million of committed revolving capacity, with a potential $100 million increase, and includes a $100 million FILO seasonal facility. Letters of credit totaled $4.8 million. Operating lease liabilities totaled $341.4 million, with total undiscounted lease payments of $391.2 million.
Material changes versus the prior comparable period
- Revenue decreased $115.6 million, primarily from a $115.9 million decline in Retail sales.
- Gross margin declined from 22.4% to 15.1%, while operating loss increased from $43.8 million to $58.9 million.
- Restructuring and other charges increased to $5.7 million from $1.5 million. Current-quarter charges included $3.4 million of severance and employee termination costs, $2.1 million of professional fees related to restructuring, process improvements and shareholder activist activities, and $0.2 million related to a facility closure.
- There was no current-quarter impairment charge; the prior-year quarter included a $0.4 million non-cash impairment loss.
- Operating cash use increased to $54.8 million from $40.2 million, while net borrowings increased materially.
- Retail ended the quarter with 772 physical and 670 virtual stores, compared with 777 physical and 714 virtual stores at the prior comparable period end.
- The company temporarily suspended employer 401(k) matching contributions through December 2020 and implemented a significant cost-reduction program.
Guidance, outlook, commentary and risks
Management did not provide formal quantitative revenue or earnings guidance. It expects the most significant COVID-19 effects to occur in the first half of Fiscal 2021 and expects meaningful annualized savings from its cost-reduction program, primarily beginning in Fiscal 2021. Management believes future operating cash flow, credit availability and short-term vendor financing will provide adequate resources for the foreseeable future, but noted that additional debt or equity financing could be required if available funds are insufficient.
Colleges continue to evaluate in-person, shortened-semester and fully virtual models. BNED is using virtual bookstores, individual school websites, Custom Store Solutions, digital offerings and Wholesale fulfillment to serve students remotely. The company expanded its VitalSource partnership to offer bartleby services with qualifying eBook purchases.
The Board concluded its strategic-opportunities review on August 24, 2020 and determined that continued execution of the current business plan was the best path forward. The filing also reports thirteen purported class actions alleging antitrust and unfair-trade-practice violations involving inclusive access and course-material sales. The cases were consolidated in multidistrict litigation, and the company stated that potential losses cannot currently be estimated.
Key risks include prolonged COVID-19 disruption, lower enrollment and consumer spending, university budget pressure, store closures or contract nonrenewals, competition from publishers and online providers, digital transition and investment execution, textbook pricing and supply changes, covenant and liquidity constraints, higher indebtedness, data-security risks, and adverse litigation or regulatory outcomes. A $25.7 million long-term tax payable associated with the LIFO reserve may become payable sooner than expected; the company cannot reliably estimate the amount that could become current within twelve months.
Important facts for investors to verify
- Whether campus reopening patterns, remote learning and enrollment changes improve Retail sales and gross margin in subsequent quarters.
- Available borrowing capacity, borrowing-base availability, interest rates, and compliance with Credit Agreement covenants.
- Whether operating cash flow turns positive during the seasonally stronger second and third quarters.
- The timing and realized amount of cost savings, including the effect of furloughs and suspended retirement-plan contributions.
- The financial impact and potential resolution of the consolidated antitrust litigation.
- The amount and timing of tax payments associated with the LIFO reserve.
- Whether digital, inclusive-access and bartleby initiatives generate sufficient revenue and profitability to offset declining print and general merchandise sales.