Barnes & Noble Education, Inc. — Form 10-Q Summary
Business context and reporting period
This Form 10-Q covers the 13 and 39 weeks ended January 28, 2017, representing the third quarter and first nine months of fiscal 2017. Although the request identifies “2016 Q3,” the filing period is fiscal 2017 Q3. BNED operates college-campus bookstores and related e-commerce and digital education services. It operated 770 stores serving more than 5 million students and faculty at period-end, compared with 748 stores a year earlier. The business is highly seasonal, with most sales and operating profit generated in the second and third fiscal quarters.
Financial performance and liquidity
| Metric | 13 weeks ended Jan. 28, 2017 | 13 weeks ended Jan. 30, 2016 | 39 weeks ended Jan. 28, 2017 | 39 weeks ended Jan. 30, 2016 |
|---|---|---|---|---|
| Total sales | $521.6 million | $518.4 million | $1,531.5 million | $1,513.3 million |
| Gross profit | $115.9 million | $120.6 million | $334.9 million | $347.3 million |
| Gross margin | 22.2% | 23.3% | 21.9% | 23.0% |
| Operating income (loss) | $5.2 million | $(2.4) million | $9.2 million | $8.8 million |
| Net income (loss) | $3.8 million | $(3.6) million | $5.1 million | $2.9 million |
| Diluted EPS | $0.08 | $(0.07) | $0.11 | $0.06 |
| Adjusted EBITDA | $18.8 million | $24.2 million | $52.7 million | $61.7 million |
Product sales were essentially flat in the quarter and increased 1.0% for the nine-month period. Rental income increased 5.2% in the quarter and 3.5% for the nine-month period, partly reflecting recognition of previously deferred rental revenue. Comparable-store sales declined 4.9% in the quarter and 3.6% for the nine-month period, primarily because of lower community-college enrollment, consumer purchases from publishers and online competitors, and timing of the spring rush season.
Gross margin declined because of increased textbook and general-merchandise markdowns, price matching, lower rental margins, and higher college contract costs. Selling and administrative expense was $97.1 million in the quarter, or 18.6% of sales, and $282.2 million for the nine months, or 18.4% of sales. Digital operating-cost reductions partly offset higher new-store and corporate costs.
Cash and cash equivalents were $132.1 million at January 28, 2017, compared with $108.2 million a year earlier and $28.6 million at April 30, 2016. Operating cash flow for the nine months was $145.0 million, versus $122.1 million in the prior-year period. Capital expenditures were $26.5 million, and investing cash outflows totaled $33.7 million. Financing cash outflows were $7.9 million, including $6.7 million of share repurchases.
BNED had no outstanding borrowings under its $400 million asset-backed revolving credit facility at January 28, 2017, although it borrowed and repaid $116.1 million during the nine months. Letters of credit outstanding totaled $4.3 million. Current liabilities were $688.1 million, and total liabilities were $787.0 million. Other long-term liabilities included $69.4 million related to a LIFO tax payable that management considered unlikely to require cash payment in the foreseeable future.
Material changes versus the prior comparable period
- Total sales increased 0.6% in the quarter and 1.2% for the nine months, driven mainly by new stores and higher rental income.
- BNED opened 36 stores and closed 17 during the nine-month period, resulting in 770 stores at period-end versus 748 a year earlier.
- Comparable-store sales weakened to a 3.6% nine-month decline from a 2.7% decline in the prior-year period.
- Gross margin contracted 110 basis points in both the quarter and nine-month period, while gross profit decreased $4.7 million and $12.5 million, respectively.
- Quarterly net income improved from a $3.6 million loss to $3.8 million of income, partly because the prior-year quarter included an $12.0 million non-cash impairment charge. Nine-month net income increased to $5.1 million from $2.9 million.
- Reported operating income for the nine months was broadly stable, but operating income excluding transaction, restructuring, and impairment items declined to $13.6 million from $22.4 million.
- Adjusted EBITDA declined to $52.7 million from $61.7 million for the nine-month period, and adjusted earnings declined to $7.8 million from $12.3 million.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide a specific full-year revenue, earnings, or EBITDA guidance figure. Management expects future growth to come from new bookstore accounts, expanded merchandising and digital offerings, and acquisitions or partnerships. Management stated that new store openings are expected to remain an important growth driver and that the restructured digital operation should have a lower cost structure in fiscal 2017.
On February 27, 2017, after the reporting period, BNED acquired MBS Textbook Exchange, LLC for $174.2 million. The transaction was funded with cash on hand and approximately $55 million of borrowings. MBS added more than 700 virtual bookstores and expanded the combined platform to more than 1,490 physical and virtual bookstores serving over 6 million students. The acquisition was a related-party transaction because MBS was majority-owned by affiliates of Leonard Riggio, who owned approximately 16% of BNED; an independent special committee and the full Board approved the transaction.
Also on February 27, 2017, BNED amended its credit facility by adding a $100 million seasonal FILO facility, increasing maximum availability to $500 million. FILO borrowings bear interest at LIBOR plus 3.00%, are available from April 1 through July 31, and must be repaid by July 31 each year. Management expects total facility borrowings to range from zero to $250 million over the following 12 months because of seasonality.
Fiscal 2016 digital restructuring produced a prior-year $12.0 million non-cash impairment charge. BNED recorded an additional $1.8 million of restructuring costs during the current nine-month period, with most employee-related restructuring completed in the first quarter.
Goodwill was $281.3 million at January 28, 2017. The annual impairment test showed fair value exceeding carrying value by approximately 5%, but the filing notes sensitivity to weaker digital growth, lower comparable-store sales, accelerated store closures, or changes in discount rates and growth assumptions. Legal proceedings are described as ordinary-course matters that are not currently expected to have a material adverse effect; Barnes & Noble, Inc. is obligated to indemnify BNED for the disclosed Adrea patent litigation.
Important facts for investors to verify
- Confirm the effect of the MBS acquisition on fiscal 2017 revenue, margins, goodwill, leverage, and integration costs.
- Monitor comparable-store sales, community-college enrollment, textbook pricing, rental adoption, and online competition.
- Assess whether gross-margin pressure from markdowns, price matching, and college contract costs persists.
- Review seasonal borrowing requirements, FILO repayment obligations, interest costs, and compliance with credit-facility covenants.
- Evaluate the relatively narrow goodwill valuation cushion and the dependence of the impairment test on digital earnings growth.
- Distinguish GAAP earnings from adjusted EBITDA and adjusted earnings, which declined despite reported nine-month net income growth.
- Verify the treatment and potential cash impact of the $69.4 million LIFO-related tax liability.