Barnes & Noble Education, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first 39 weeks ended January 25, 2020, compared with the periods ended January 26, 2019. The business is highly seasonal, with retail and wholesale sales concentrated in the second and third fiscal quarters. BNED operated 1,436 physical, virtual and custom bookstores serving more than 6 million students.
Financial performance
| Metric | 13 weeks ended Jan. 25, 2020 | 13 weeks ended Jan. 26, 2019 | 39 weeks ended Jan. 25, 2020 | 39 weeks ended Jan. 26, 2019 |
|---|---|---|---|---|
| Total sales | $502.3 million | $548.0 million | $1,594.2 million | $1,700.3 million |
| Gross profit | $118.5 million | $133.0 million | $377.1 million | $410.3 million |
| Gross margin | 23.6% | 24.3% | 23.7% | 24.1% |
| Operating income (loss) | $(3.0) million | $3.0 million | $9.6 million | $32.4 million |
| Net income (loss) | $(1.7) million | $0.8 million | $2.1 million | $21.8 million |
| Diluted EPS | $(0.04) | $0.02 | $0.04 | $0.46 |
| Adjusted EBITDA | $13.4 million | $22.2 million | $62.8 million | $85.3 million |
Sales declined 8.3% in the quarter and 6.2% year to date. Product sales declined 7.8% and 5.8%, respectively, while rental income declined 13.2% and 10.8%. Selling and administrative expense decreased, but rose as a percentage of sales to 21.1% from 20.2% for the quarter and to 19.9% from 19.1% year to date. Net interest expense declined 25.2% for the quarter and 25.6% year to date because of lower borrowings.
Segment trends and material changes
- Retail: Sales declined 8.1% in the quarter and 6.0% year to date. Comparable store sales decreased 7.3% and 5.7%, driven by lower-cost and digital alternatives, direct publisher and online purchases, lower enrollment, and reduced textbook rental activity. First Day inclusive-access revenue increased 99% year to date.
- Wholesale: Sales declined 14.7% in the quarter and 14.2% year to date, primarily because customers shifted from physical textbooks to digital products. Gross margin fell to 21.2% from 29.0% in the quarter and to 23.2% from 27.0% year to date, reflecting unfavorable mix and inventory markdowns.
- Digital Student Solutions: Sales increased 22.9% in the quarter and 7.4% year to date, led by higher bartleby subscription sales, but profitability declined because of content amortization and higher development, marketing and selling costs.
- Retail added 107 stores and closed 119 during the first 39 weeks, ending with 772 physical and 664 virtual stores.
- The company realigned its reportable segments in the prior fiscal fourth quarter into Retail, Wholesale and Digital Student Solutions; prior-period segment comparisons reflect the revised presentation.
Cash flow, liquidity and debt
| Metric | Jan. 25, 2020 | Jan. 26, 2019 |
|---|---|---|
| Cash and cash equivalents | $9.8 million | $22.0 million |
| Cash, cash equivalents and restricted cash | $10.6 million | $22.8 million |
| Net cash from operating activities, 39 weeks | $86.4 million | $175.9 million |
| Capital expenditures, 39 weeks | $26.8 million | $31.7 million |
| Outstanding borrowings | $65.9 million | $70.1 million |
Operating cash flow decreased by $89.5 million, primarily because of working-capital changes, lower earnings, deferred-tax changes and the impact of operating lease accounting. The company had a $400 million asset-backed revolving credit facility, an incremental $100 million FILO seasonal facility and $4.8 million of letters of credit outstanding. BNED stated that it was in compliance with debt covenants at January 25, 2020 and expected operating cash flow, credit availability and vendor financing to fund foreseeable needs.
Effective April 28, 2019, BNED adopted ASC 842, recording $251.7 million of operating lease right-of-use assets and $271.5 million of operating lease liabilities at January 25, 2020. Total minimum fixed lease payments were $305.5 million, excluding variable commissions.
Outlook, unusual items and risks
- In February 2020, BNED implemented a significant cost-reduction program. It expects meaningful annualized savings, primarily beginning in fiscal 2021, and anticipates a fourth-quarter fiscal 2020 restructuring charge of $10 million to $15 million.
- On March 2, 2020, lenders waived a condition for the planned April 2020 FILO draw requiring Consolidated EBITDA less Restricted Payments of at least $90 million. The waiver increased the applicable FILO margin by 0.50 percentage points through the end of 2020.
- BNED retained Morgan Stanley to review strategic opportunities, including partnerships, joint ventures and other potential transactions; no outcome or timetable was assured.
- The company recognized $3.2 million of restructuring and other charges and a $0.4 million non-cash impairment loss during the first 39 weeks. It also recorded $3.0 million of content amortization, primarily related to bartleby.
- A purported antitrust class action filed in January 2020 alleges violations involving inclusive access and course-material sales. BNED intends to defend the matter and could not estimate potential losses.
- Key ongoing risks include declining college enrollment, substitution toward digital and lower-priced content, intense competition and price pressure, used-textbook supply constraints, contract nonrenewals, technology and cybersecurity risks, liquidity and covenant compliance, litigation, and the ability to achieve planned cost savings.
Important facts for investors to verify
- Whether the substantial year-to-date declines in sales, gross profit, operating income and Adjusted EBITDA stabilize or continue.
- The pace and profitability of First Day inclusive access, digital products and bartleby growth relative to required investment.
- Actual cash availability under the revolving and FILO facilities, including the effect of the March 2020 waiver and higher borrowing margin.
- The timing, cash cost and recurring savings from the $10 million to $15 million restructuring program.
- Potential financial exposure from the antitrust litigation and the amount of LIFO-related tax liabilities that may become payable within 12 months.
- The effect of ASC 842 lease obligations and the company’s ability to fund seasonal working-capital needs with only $9.8 million of cash at quarter-end.