Barnes & Noble Education, Inc. — Form 10-Q Summary
Reporting period: 13 weeks ended July 27, 2019, representing the first quarter of Fiscal 2020; comparative period ended July 28, 2018. The financial statements are unaudited. BNED operates college, university, and K-12 physical and virtual bookstores, a textbook wholesale business, and digital student solutions. The company operated 1,491 stores and served more than 6 million students.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total sales | $319.7 million | $337.5 million | Down 5.3% |
| Gross profit | $71.7 million | $66.6 million | Up 7.6% |
| Gross margin | 22.4% | 19.7% | Up 270 basis points |
| Operating loss | $43.8 million | $49.1 million | Improved $5.3 million |
| Net loss | $32.2 million | $38.6 million | Improved $6.5 million |
| Loss per diluted share | $0.68 | $0.82 | Improved |
| Adjusted EBITDA | $(25.1) million | $(32.5) million | Improved $7.4 million |
| Cash flow from operations | $(40.2) million | $(27.4) million | Used $12.9 million more |
| Capital expenditures | $8.3 million | $8.2 million | Approximately flat |
Product sales and other revenue declined 4.9% to $302.2 million, while rental income declined 11.2% to $17.4 million. Selling and administrative expense decreased 1.5% to $97.7 million but increased as a percentage of sales to 30.6% from 29.4%. Interest expense declined to $2.5 million from $3.5 million.
At July 27, 2019, cash and cash equivalents were $8.2 million, and cash, cash equivalents, and restricted cash totaled $9.0 million. Merchandise inventories were $717.8 million, compared with $420.3 million at fiscal year-end, reflecting seasonal buildup. Total borrowings were $174.1 million, consisting of $74.1 million under the revolving Credit Facility and $100.0 million under the FILO Facility. The asset-based credit agreement provides up to $400 million of committed revolving capacity, with a potential $100 million increase, and a $100 million FILO facility; letters of credit totaled $4.8 million.
Material changes versus the prior comparable period
- Retail sales decreased 4.3% to $274.7 million. Comparable-store sales declined 3.5%, primarily because of lower course-material sales, increased purchases from publishers and online providers, lower enrollment at two-year colleges, and a shift toward lower-cost and digital options.
- Wholesale sales declined 19.6% to $72.3 million because of changed buying patterns, reduced textbook supply, and lower customer demand. Wholesale gross margin declined to 20.6% from 21.7%.
- DSS sales declined 5.3% to $5.4 million. Increased bartleby subscription sales and growth in certain foreign-language properties were offset by lower Student Brands sales.
- Retail gross margin improved to 22.6% from 19.7%, benefiting from a more favorable mix, increased general merchandise sales, and lower costs associated with certain contracts. Rental gross margin also improved.
- First Day inclusive-access revenue increased 46% year over year. BNED announced a new agreement with VitalSource to support the First Day platform.
- BNED recorded a $0.4 million non-cash impairment loss and $1.5 million of restructuring and other charges, primarily severance, management changes, position eliminations, professional services, and process improvements. These items were not recorded in the prior-year quarter.
- The company adopted ASC 842 lease accounting at the beginning of Fiscal 2020, recording operating lease right-of-use assets of $314.4 million and operating lease liabilities of $337.7 million at July 27, 2019. Total future fixed lease payments were $378.5 million before $40.8 million of imputed interest.
- The reportable segments were realigned from BNC, MBS, and DSS to Retail, Wholesale, and DSS. Prior-period segment information was presented on the revised basis.
Outlook, management commentary, and risks
Management expects future cash from operations, credit facilities, and short-term vendor financing to fund operating and financing needs for the foreseeable future, but notes that future requirements depend on inventory levels, store openings, economic conditions, and potential acquisitions. No formal earnings or revenue guidance is provided in the filing.
The business is highly seasonal; first-quarter results are not indicative of the full fiscal year, with retail sales generally strongest in the second and third quarters. Management’s strategy emphasizes digital education solutions, inclusive access, new accounts, outsourcing opportunities, acquisitions, and partnerships.
- Key risks include intense competition from publishers, online retailers, digital platforms, other bookstore operators, and direct student-to-student channels.
- Course-material price reductions, format changes, publisher direct-to-student programs, and used-textbook supply constraints could pressure revenue and margins.
- Declining college enrollment, reduced public funding, consumer price sensitivity, and changes in student spending could adversely affect results.
- BNED faces execution risk in its digital strategy, including the risk that digital sales growth will not exceed investment spending.
- Liquidity risks include seasonal working-capital needs, substantial inventory investment, debt and covenant requirements, access to credit markets, and potential tax payments related to the LIFO reserve.
- Other risks include bookstore contract nonrenewals, technology and cybersecurity incidents, data privacy, intellectual property, labor costs, supply-chain disruption, litigation, and tax or regulatory changes.
At July 27, 2019, BNED reported $32.8 million of long-term tax payable associated with its LIFO reserve and indicated that an additional portion could become payable within the next 12 months, although the amount could not be reasonably projected.
Important facts for investors to verify
- Whether the improved gross margin and lower operating loss are sustainable despite declining sales and continued negative Adjusted EBITDA.
- The causes and duration of the 19.6% Wholesale sales decline and the impact of textbook supply and buying-pattern changes.
- Progress, profitability, and investment requirements for First Day, digital products, bartleby, and other DSS initiatives.
- Seasonal cash generation, inventory liquidation, borrowing availability, and compliance with credit-facility covenants.
- The timing and amount of additional LIFO-related tax payments.
- The effect of the new lease obligations and the company’s substantial fixed lease commitments on future liquidity.
- Whether restructuring actions produce the expected cost savings and whether further impairment or restructuring charges arise.
- Management’s disclosure that legal proceedings are not expected to be material, while recognizing that litigation outcomes remain inherently uncertain.