Barnes & Noble Education, Inc. - Quarter Report: 2021 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________

FORM 10-Q

_______________________________________________

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2021


¨			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-37499

_______________________________________________

BARNES & NOBLE EDUCATION, INC.

(Exact Name of Registrant as Specified in Its Charter)

_______________________________________________

Delaware

46-0599018

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

120 Mountain View Blvd.,

Basking Ridge,

07920

(Address of Principal Executive Offices)

(Zip Code)

(Registrant’s Telephone Number, Including Area Code): (908) 991-2665

Securities registered pursuant to Section 12(b) of the Act:


Title of Class	Trading Symbol	Name of Exchange on which registered
Common Stock, $0.01 par value per share	BNED	New York Stock Exchange

_______________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 27, 2021, 51,587,330 shares of Common Stock, par value $0.01 per share, were outstanding.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Fiscal Quarter Ended July 31, 2021

Index to Form 10-Q


			Page No.
PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations – For the 13 weeks ended July 31, 2021 and August 1, 2020		3
	Condensed Consolidated Balance Sheets – As of July 31, 2021, August 1, 2020, and May 1, 2021		4
	Condensed Consolidated Statements of Cash Flows – For the 13 weeks ended July 31, 2021 and August 1, 2020		5
	Condensed Consolidated Statements of Equity – As of July 31, 2021 and August 1, 2020		6
	Notes to Condensed Consolidated Financial Statements		7
	Note 1.	Organization	7
	Note 2.	Summary of Significant Accounting Policies	8
	Note 3.	Revenue	12
	Note 4.	Segment Reporting	13
	Note 5.	Equity and Earnings Per Share	15
	Note 6.	Fair Value Measurements	15
	Note 7.	Credit Facility	16
	Note 8.	Leases	16
	Note 9.	Supplementary Information	18
	Note 10.	Employee Benefit Plans	18
	Note 11.	Long-Term Incentive Plan Compensation Expense	18
	Note 12.	Income Taxes	19
	Note 13.	Legal Proceedings	19

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
	Overview		20
	Results of Operations		23
	Adjusted Earnings, Adjusted EBITDA, and Free Cash Flow (non-GAAP)		30
	Liquidity and Capital Resources		33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		36

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 5.	Other Information		38
Item 6.	Exhibits		38
	SIGNATURES		39

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PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)


	13 weeks ended
	July 31, 2021		August 1, 2020
Sales:
Product sales and other	$	227,770	$	193,210
Rental income	13,024		10,804
Total sales	240,794		204,014
Cost of sales:
Product and other cost of sales	174,161		165,765
Rental cost of sales	6,604		7,387
Total cost of sales	180,765		173,152
Gross profit	60,029		30,862
Selling and administrative expenses	86,235		70,043
Depreciation and amortization expense	12,624		14,063

Restructuring and other charges	2,623		5,671
Operating loss	(41,453)		(58,915)
Interest expense, net	2,494		2,653
Loss before income taxes	(43,947)		(61,568)
Income tax expense (benefit)	399		(14,916)
Net loss	$	(44,346)	$	(46,652)



Loss per share of common stock:
Basic	$	(0.86)	$	(0.96)
Diluted	$	(0.86)	$	(0.96)
Weighted average shares of common stock outstanding:
Basic	51,474		48,411
Diluted	51,474		48,411

See accompanying notes to condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)


	July 31, 2021		August 1, 2020		May 1, 2021
	(unaudited)		(unaudited)		(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,649	$	7,471	$	8,024
Receivables, net	118,254		107,522		121,072
Merchandise inventories, net	472,461		575,246		281,112
Textbook rental inventories	6,657		16,482		28,692
Prepaid expenses and other current assets	64,724		22,415		61,933

Total current assets	669,745		729,136		500,833
Property and equipment, net	91,080		94,102		89,172
Operating lease right-of-use assets	289,102		320,287		240,456
Intangible assets, net	146,035		170,466		150,904
Goodwill	4,700		4,700		4,700
Deferred tax assets, net	23,248		8,459		23,248
Other noncurrent assets	27,405		33,646		29,105
Total assets	$	1,251,315	$	1,360,796	$	1,038,418
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	331,055	$	291,496	$	137,578
Accrued liabilities	92,061		75,084		92,871
Current operating lease liabilities	135,937		131,525		92,513
Short-term borrowings	50,000		—		50,000
Total current liabilities	609,053		498,105		372,962

Long-term operating lease liabilities	179,540		209,867		184,780
Other long-term liabilities	52,427		45,986		52,042
Long-term borrowings	153,700		234,560		127,600
Total liabilities	994,720		988,518		737,384
Commitments and contingencies	—		—		—
Stockholders' equity:


Preferred stock, $0.01 par value; authorized, 5,000 shares; 0 shares issued and 0 shares outstanding	—		—		—
Common stock, $0.01 par value; authorized, 200,000 shares; issued, 53,665, 52,654 and 53,327 shares, respectively; outstanding, 51,587, 48,633 and 51,379 shares, respectively	536		526		533

Additional paid-in capital	735,376		734,474		734,257
Accumulated deficit	(458,960)		(329,479)		(414,614)
Treasury stock, at cost	(20,357)		(33,243)		(19,142)
Total stockholders' equity	256,595		372,278		301,034
Total liabilities and stockholders' equity	$	1,251,315	$	1,360,796	$	1,038,418

See accompanying notes to condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	13 weeks ended
	July 31, 2021		August 1, 2020
Cash flows from operating activities:
Net loss	$	(44,346)	$	(46,652)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization expense	12,624		14,063
Content amortization expense	1,275		1,164
Amortization of deferred financing costs	362		270
Merchandise inventory loss	434		—
Deferred taxes	—		(654)
Stock-based compensation expense	1,122		1,521
Changes in other long-term assets and liabilities, net	1,814		1,424
Changes in operating lease right-of-use assets and liabilities	(10,464)		(6,770)
Changes in other operating assets and liabilities, net	19,717		(17,515)
Net cash flows used in operating activities	(17,462)		(53,149)
Cash flows from investing activities:
Purchases of property and equipment	(11,370)		(7,055)
Net change in other noncurrent assets	350		(85)
Net cash flows used in investing activities	(11,020)		(7,140)
Cash flows from financing activities:


Proceeds from borrowings under Credit Agreement	71,720		186,700
Repayments of borrowings under Credit Agreement	(45,620)		(126,840)


Purchase of treasury shares	(1,215)		(342)
Net cash flows provided by financing activities	24,885		59,518

Net decrease in cash, cash equivalents and restricted cash	(3,597)		(771)
Cash, cash equivalents and restricted cash at beginning of period	16,814		9,008
Cash, cash equivalents and restricted cash at end of period	$	13,217	$	8,237
Changes in other operating assets and liabilities, net:
Receivables, net	$	2,818	$	(16,671)
Merchandise inventories	(191,783)		(146,307)
Textbook rental inventories	22,035		24,228
Prepaid expenses and other current assets	(6,012)		(6,238)
Accounts payable and accrued liabilities	192,659		127,473
Changes in other operating assets and liabilities, net	$	19,717	$	(17,515)

See accompanying notes to condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(In thousands)

(unaudited)


				Additional
	Common Stock			Paid-In		Accumulated		Treasury Stock			Total
	Shares	Amount		Capital		Deficit		Shares	Amount		Equity
Balance at May 2, 2020	52,140	$	521	$	732,958	$	(282,827)	3,842	$	(32,901)	$	417,751
Stock-based compensation expense				1,521							1,521
Vested equity awards	514	5		(5)							—
Shares repurchased for tax withholdings for vested stock awards								179	(342)		(342)
Net loss						(46,652)					(46,652)
Balance August 1, 2020	52,654	$	526	$	734,474	$	(329,479)	4,021	$	(33,243)	$	372,278












				Additional
	Common Stock			Paid-In		Accumulated		Treasury Stock			Total
	Shares	Amount		Capital		Deficit		Shares	Amount		Equity
Balance at May 1, 2021	53,327	$	533	$	734,257	$	(414,614)	1,948	$	(19,142)	$	301,034
Stock-based compensation expense				1,122							1,122
Vested equity awards	338	3		(3)							—
Shares repurchased for tax withholdings for vested stock awards								130	(1,215)		(1,215)
Net loss						(44,346)					(44,346)
Balance July 31, 2021	53,665	$	536	$	735,376	$	(458,960)	2,078	$	(20,357)	$	256,595

See accompanying notes to condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

Unless the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education or "BNED", Inc., a Delaware corporation. References to “Barnes & Noble College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our virtual bookstore and wholesale textbook distribution business operated through our subsidiary MBS Textbook Exchange, LLC.

This Form 10-Q should be read in conjunction with our Audited Consolidated Financial Statements and accompanying Notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021, which includes consolidated financial statements for the Company for each of the three fiscal years ended May 1, 2021, May 2, 2020 and April 27, 2019 (Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively).

Note 1. Organization

Description of Business

Barnes & Noble Education, Inc. (“BNED”) is one of the largest contract operators of physical and virtual bookstores for college and university campuses and K-12 institutions across the United States. We are also one of the largest textbook wholesalers, inventory management hardware and software providers, and a leading provider of digital education solutions. We operate 1,429 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content and tools within a dynamic omnichannel retail environment. Additionally, we offer direct-to-student products and services to help students study more effectively and improve academic performance.

The strengths of our business include our ability to compete by developing new products and solutions to meet market needs, our large operating footprint with direct access to students and faculty, our well-established, deep relationships with academic partners and stable, long-term contracts and our well-recognized brands. We expect to continue to introduce scalable and advanced digital solutions focused largely on the student, expand our e-commerce capabilities and accelerate such capabilities through our recent merchandising partnership with Fanatics Retail Group Fulfillment, LLC, Inc. (“Fanatics”) and Fanatics Lids College, Inc. (“FLC”) (collectively referred to herein as the “FLC Partnership”), increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect general merchandise sales to increase over the long term, as our product assortments continue to emphasize and reflect changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, which we expect to be further enhanced and accelerated through the “FLC Partnership”. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our logo and emblematic general merchandise business.

We believe the Barnes & Noble brand (licensed from our former parent) along with our subsidiary brands, BNC and MBS, are synonymous with innovation in bookselling and campus retailing, and are widely recognized and respected brands in the United States. Our large college footprint, reputation, and credibility in the marketplace not only support our marketing efforts to universities, students, and faculty, but are also important to our relationship with leading publishers who rely on us as one of their primary distribution channels, and for being a trusted source for students in our direct-to-student digital solutions business.

We have three reportable segments: Retail, Wholesale and DSS. For additional information related to our strategies, operations and segments, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Partnership with Fanatics and FLC

In December 2020, we entered into the FLC Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our general merchandise business. Fanatics’ cutting-edge e-commerce and technology expertise offers our campus stores expanded product selection, a world-class online and mobile experience, and a progressive direct-to-consumer platform. Coupled with FLC, the leading standalone brick and mortar retailer focused exclusively on licensed fan and alumni products, our campus stores have improved access to trend and sales performance data on licensees, product styles, and design treatments.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

reflect each campus’s brand. We leverage Fanatics’ e-commerce technology and expertise for the operational management of the emblematic merchandise and gift sections of our campus store websites. FLC manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores.

In December 2020, Fanatics, Inc. and Lids Holdings, Inc. jointly made a strategic equity investment in BNED. On April 4, 2021, as contemplated by the FLC Partnership's merchandising agreement, we sold our logo and emblematic general merchandise inventory to FLC, which was finalized during the first quarter of Fiscal 2022. As contemplated by the FLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products during the first quarter of Fiscal 2022. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories and Note 6. Equity and Earnings Per Share in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

COVID-19 Business Impact

Since the fourth quarter of Fiscal 2020, our business has been significantly negatively impacted by the COVID-19 pandemic, resulting in an unprecedented material decline in revenue. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most schools currently expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities and events, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic.

The COVID-19 impact on higher education remains a fluid situation, and we are committed to supporting our campus partners through our flexible offerings and our ability to quickly pivot to ensure uninterrupted service as institutions manage the safety of their campuses. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine when our operations can begin returning to normal levels of business. Please see our Part II - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

Our condensed consolidated financial statements reflect our condensed consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position and the results of its operations and cash flows for the periods reported. These condensed consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by GAAP. All material intercompany accounts and transactions have been eliminated in consolidation.

Our business is highly seasonal. Our quarterly results also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. Due to the seasonal nature of the business, the results of operations for the 13 weeks ended July 31, 2021 are not indicative of the results expected for the 52 weeks ending April 30, 2022 (Fiscal 2022).

For certain of our retail operations, sales are generally highest in the second and third fiscal quarters, when students purchase and rent textbooks and other course materials for the typical academic year, and lowest in the first and fourth fiscal quarters. Sales attributable to our wholesale business are generally highest in our first, second and third quarters, as MBS sells textbooks and other course materials for retail distribution. Our DSS segment sales and operating profit are realized relatively consistently throughout the year.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

Use of Estimates

In preparing financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Merchandise Inventories

Merchandise inventories, which consist of finished goods, are stated at the lower of cost or market. Market value of our inventory, which is all purchased finished goods, is determined based on its estimated net realizable value, which is generally the selling price less normally predictable costs of disposal and transportation. Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory, which includes certain significant assumptions, including markdowns, sales below cost, inventory aging and expected demand.

Cost is determined primarily by the retail inventory method for our Retail segment and last-in first out, or “LIFO”, method for our Wholesale segment. Our textbook inventories, for Retail and Wholesale, and trade book inventories are valued using the LIFO method and the related reserve was not material to the recorded amount of our inventories.

For our physical bookstores, we also estimate and accrue shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.

The Retail Segment fulfillment order is directed first to our wholesale business before other sources of inventory are utilized. The products that we sell originate from a wide variety of domestic and international vendors. After internal sourcing, the bookstore purchases textbooks from outside suppliers and publishers.

As contemplated by the FLC Partnership merchandising agreement, we sold our logo and emblematic general merchandise inventory to FLC and received proceeds of $41,773, and recognized a merchandise inventory loss on the sale of $10,262 in cost of goods sold during the 52 weeks ended May 1, 2021 for the Retail Segment. The final inventory sale price was determined during the first quarter of Fiscal 2022. During the 13 weeks ended July 31, 2021, we received additional proceeds of $1,906, and recognized a merchandise inventory loss on the sale of $434 in cost of goods sold for the Retail Segment.

Textbook Rental Inventories

Physical textbooks out on rent are categorized as textbook rental inventories. At the time a rental transaction is consummated, the book is removed from merchandise inventories and moved to textbook rental inventories at cost. The cost of the book is amortized down to its estimated residual value over the rental period. The related amortization expense is included in cost of goods sold. At the end of the rental period, upon return, the book is removed from textbook rental inventories and recorded in merchandise inventories at its amortized cost.

Leases

We recognize lease assets and lease liabilities on the condensed consolidated balance sheet for all operating lease arrangements based on the present value of future lease payments as required by Accounting Standards Codification ("ASC") Topic 842, Leases. We do not recognize lease assets or lease liabilities for short-term leases (i.e., those with a term of twelve months or less). We recognize lease expense on a straight-line basis over the lease term for contracts with fixed lease payments, including those with fixed annual minimums, or over a rolling twelve-month period for leases where the annual guarantee resets at the start of each contract year, in order to best reflect the pattern of usage of the underlying leased asset. For additional information, see Note 8. Leases.

Revenue Recognition and Deferred Revenue

Product sales and rentals

The majority of our revenue is derived from the sale of products through our bookstore locations, including virtual bookstores, and our bookstore affiliated e-commerce websites, and contains a single performance obligation. Revenue from sales of our products is recognized at the point in time when control of the products is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for the products. For additional information, see Note 3. Revenue.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

Retail product revenue is recognized when the customer takes physical possession of our products, which occurs either at the point of sale for products purchased at physical locations or upon receipt of our products by our customers for products ordered through our websites and virtual bookstores. Wholesale product revenue is recognized upon shipment of physical textbooks at which point title passes and risk of loss is transferred to the customer. Additional revenue is recognized for shipping charges billed to customers and shipping costs are accounted for as fulfillment costs within cost of goods sold.

Revenue from the rental of physical textbooks, which contains a single performance obligation, is deferred and recognized over the rental period based on the passage of time commencing at the point of sale, when control of the product transfers to the customer. Rental periods are typically for a single semester and are always less than one year in duration. We offer a buyout option to allow the purchase of a rented physical textbook at the end of the rental period if the customer desires to do so. We record the buyout purchase when the customer exercises and pays the buyout option price which is determined at the time of the buyout. In these instances, we accelerate any remaining deferred rental revenue at the point of sale.

Revenue from the rental of digital textbooks, which contains a single performance obligation, is recognized at the point of sale. A software feature is embedded within the content of our digital textbooks, such that upon expiration of the rental term the customer is no longer able to access the content. While the digital rental allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer, our performance obligation is complete.

We estimate returns based on an analysis of historical experience. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded.

For sales and rentals involving third-party products, we evaluate whether we are acting as a principal or an agent. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. There are significant judgments involved in determining whether we control the specified goods or services prior to transferring them to the customer including whether we have the ability to direct the use of the good or service and obtain substantially all of the remaining benefits from the good or service. For those transactions where we are the principal, we record revenue on a gross basis, and for those transactions where we are an agent to a third-party, we record revenue on a net basis. Effective April 4, 2021, as contemplated by the FLC Partnership's merchandising agreement, logo and emblematic general merchandise sales were fulfilled by FLC. During the first quarter of Fiscal 2022, as contemplated by the FLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis in the prior year.

We do not have gift card or customer loyalty programs. We do not treat any promotional offers as expenses. Sales tax collected from our customers is excluded from reported revenues. Our payment terms are generally 30 days and do not extend beyond one year.

Service and other revenue

Service and other revenue is primarily derived from DSS segment subscription-based service revenues and partnership marketing services which includes promotional activities and advertisements within our physical bookstores and web properties performed on behalf of third-party customers.

Subscription-based revenue, which contains a single performance obligation, is deferred and recognized based on the passage of time over the subscription period commencing at the point of sale, when control of the service transfers to the customer. The majority of subscriptions sold are one month in duration.

Partnership marketing agreements often include multiple performance obligations which are individually negotiated with our customers. For these arrangements that contain distinct performance obligations, we allocate the transaction price based on the relative standalone selling price method by comparing the standalone selling price (“SSP”) of each distinct performance obligation to the total value of the contract. The revenue is recognized as each performance obligation is satisfied, typically at a point in time for partnership marketing service and overtime for advertising efforts as measured based upon the passage of time for contracts that are based on a stated period of time or the number of impressions delivered for contracts with a fixed number of impressions.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

Cost of Sales

Our cost of sales primarily includes costs such as merchandise costs, textbook rental amortization, content development cost amortization, warehouse costs related to inventory management and order fulfillment, insurance, certain payroll costs, and management service agreement costs, including rent expense, related to our college and university contracts and other facility related expenses.

Selling and Administrative Expenses

Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include long-term incentive plan compensation expense and general office expenses, such as merchandising, procurement, field support, finance and accounting, and operating costs related to our DSS segment subscription-based services business. Shared-service costs such as human resources, legal, treasury, information technology, and various other corporate level expenses and other governance functions, are not allocated to any specific reporting segment and are recorded in Corporate Services.

Evaluation of Goodwill and Other Long-Lived Assets

As of July 31, 2021, we had $0, $0 and $4,700 of goodwill on our condensed consolidated balance sheet related to our Retail, Wholesale and DSS reporting units, respectively. In accordance with ASC 350-10, Intangibles - Goodwill and Other, we complete our annual goodwill impairment test as of the first day of the third quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of the reporting unit exceeds its fair value. We completed our annual goodwill impairment test as of the first day of the third quarter of Fiscal 2021. The fair value of the DSS reporting unit was determined to exceed the carrying value of the reporting unit; therefore, no goodwill impairment was recognized.

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. As of July 31, 2021, our other long-lived assets include property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets of $91,080, $289,102, $146,035, and $27,405, respectively, on our condensed consolidated balance sheet.

Our business has been significantly negatively impacted by the ongoing COVID-19 pandemic, as many schools continued to adjust their learning models and on-campus activities. We believe many of the negative trends impacting our results, such as fewer students returning to campus and fewer restrictions for athletic conferences, will be marginally reversed in the upcoming Fall semester. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most schools currently expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. We believe indicators of impairment do not exist and the carrying amount of our long-lived assets and property and equipment are recoverable and the fair value of the DSS reporting unit continues to exceed the carrying value of the reporting unit resulting in no goodwill impairment during the quarter. We will continue to evaluate our other long-lived assets for indicators of impairment.

Income Taxes

As of July 31, 2021, other long-term liabilities includes $25,335 related to the long-term tax payable associated with the LIFO reserve. The LIFO reserve is impacted by changes in the consumer price index (“CPI”) and is dependent on the inventory levels at the end of our tax year (on or about January 31st) which is in the middle of our second largest selling cycle. At the end of the most recent tax year, inventory levels declined as compared to the prior year resulting in approximately $745 of the LIFO reserve becoming currently payable. Given recent trends relating to the pricing and rental of textbooks, management believes that an additional portion of the remaining long-term tax payable associated with the LIFO reserve could be payable within the next twelve months. We are unable to predict future trends for CPI and inventory levels, therefore it is difficult to project with reasonable certainty how much of this liability will become payable within the next twelve months.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

Note 3. Revenue

Revenue from sales of our products and services is recognized either at the point in time when control of the products is transferred to our customers or over time as services are provided in an amount that reflects the consideration we expect to be entitled to in exchange for the products or services. See Note 2. Summary of Significant Accounting Policies for additional information related to our revenue recognition policies and Note 4. Segment Reporting for a description of each segment's product and service offerings.

Disaggregation of Revenue

The following table disaggregates the revenue associated with our major product and service offerings:


	13 weeks ended
	July 31, 2021		August 1, 2020
Retail
Product Sales (a)	$	189,058	$	141,826
Rental Income	13,024		10,804
Service and Other Revenue (b)	8,387		6,146
Retail Total Sales	$	210,469	$	158,776
Wholesale Sales	$	44,484	$	80,294
DSS Sales (c)	$	8,303	$	5,872
Eliminations (d)	$	(22,462)	$	(40,928)
Total Sales	$	240,794	$	204,014

(a)Effective April 4, 2021, as contemplated by the FLC Partnership's merchandising agreement, logo and emblematic general merchandise sales were fulfilled by FLC. During the first quarter of Fiscal 2022, as contemplated by the FLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis in the prior year.

(b)Service and other revenue primarily relates to brand partnerships and other service revenues.

(c)DSS sales primarily relate to direct-to-student subscription-based revenue.

(d)The sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale.

Contract Assets and Contract Liabilities

Contract assets represent the sale of goods or services to a customer before we have the right to obtain consideration from the customer. Contract assets consist of unbilled amounts at the reporting date and are transferred to accounts receivable when the rights become unconditional. Contract assets (unbilled receivables) were $0 as of July 31, 2021, August 1, 2020 and May 1, 2021 on our condensed consolidated balance sheets.

Contract liabilities represent an obligation to transfer goods or services to a customer for which we have received consideration and consists of our deferred revenue liability (deferred revenue). Deferred revenue consists of the following:

•advanced payments from customers related to textbook rental and subscription-based performance obligations, which are recognized ratably over the terms of the related rental or subscription periods;

•unsatisfied performance obligations associated with partnership marketing services, which are recognized when the contracted services are provided to our partnership marketing customers; and

•unsatisfied performance obligations associated with the premium paid for the sale of treasury shares, which are expected to be recognized over the term of the e-commerce and merchandising contracts for Fanatics and FLC, respectively.

Deferred revenue of $16,028, $16,270, and $13,469 is recorded in accrued liabilities and $4,561, $0, and $4,670 is recorded in other long-term liabilities on our condensed consolidated balance sheets for the periods ended July 31, 2021,

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

August 1, 2020 and May 1, 2021, respectively. As of July 31, 2021, we expect to recognize $16,028 of the deferred revenue balance within the next 12 months. The following table presents changes in contract liabilities:


	13 weeks ended
	July 31, 2021		August 1, 2020
Deferred revenue at the beginning of period	$	18,139	$	13,373
Additions to deferred revenue during the period	21,857		21,411
Reductions to deferred revenue for revenue recognized during the period	(19,407)		(18,514)
Deferred revenue balance at the end of period	$	20,589	$	16,270

Note 4. Segment Reporting

We have three reportable segments: Retail, Wholesale and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, continue to be presented as “Corporate Services”.

We identify our segments in accordance with the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance. The following summarizes the three segments. For additional information about each segment's operations, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Retail

The Retail Segment operates 1,429 college, university, and K-12 school bookstores, comprised of 784 physical bookstores and 645 virtual bookstores. Our bookstores typically operate under agreements with the college, university, or K-12 schools to be the official bookstore and the exclusive seller of course materials and supplies, including physical and digital products. The majority of the physical campus bookstores have school-branded e-commerce sites which we operate independently or along with our merchant partners, and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. The Retail Segment also offers inclusive access programs, in which course materials are offered at a reduced price through a fee charged by the institution or included in tuition, and delivered to students on or before the first day of class. Additionally, the Retail Segment offers a suite of digital content and services to colleges and universities, including a variety of open educational resource-based courseware.

Wholesale

The Wholesale Segment is comprised of our wholesale textbook business and is one of the largest textbook wholesalers in the country. The Wholesale Segment centrally sources, sells, and distributes new and used textbooks to approximately 3,200 physical bookstores (including our Retail Segment's 784 physical bookstores) and sources and distributes new and used textbooks to our 645 virtual bookstores. Additionally, the Wholesale Segment sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 400 college bookstores.

DSS

The Digital Student Solutions (“DSS”) Segment includes direct-to-student products and services to assist students to study more effectively and improve academic performance. The DSS Segment is comprised of the operations of Student Brands, LLC, a leading direct-to-student subscription-based writing services business, and bartleby®, a direct-to-student subscription-based offering providing textbook solutions, expert questions and answers, writing and tutoring

Corporate Services represents unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources.

Intercompany Eliminations

The eliminations are primarily related to the following intercompany activities:

•The sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale, and

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

•These cost of sales eliminations represent (i) the recognition of intercompany profit for Retail inventory that was purchased from Wholesale in a prior period that was subsequently sold to external customers during the current period and the elimination of Wholesale service fees charged for fulfillment of inventory for virtual store sales, net of (ii) the elimination of intercompany profit for Wholesale inventory purchases by Retail that remain in ending inventory at the end of the current period.

Our international operations are not material and the majority of the revenue and total assets are within the United States.

Summarized financial information for our reportable segments is reported below:


	13 weeks ended
	July 31, 2021		August 1, 2020
Sales:
Retail	$	210,469	$	158,776
Wholesale	44,484		80,294
DSS	8,303		5,872
Elimination	(22,462)		(40,928)
Total Sales	$	240,794	$	204,014

Gross Profit
Retail (a)	$	48,143	$	16,135
Wholesale	10,405		16,757
DSS	7,030		4,746
Elimination	(5,549)		(6,776)
Total Gross Profit	$	60,029	$	30,862

Depreciation and Amortization
Retail	$	9,407	$	10,570
Wholesale	1,300		1,295
DSS	1,899		2,165
Corporate Services	18		33
Total Depreciation and Amortization	$	12,624	$	14,063

Operating Loss
Retail	$	(31,356)	$	(54,816)
Wholesale	5,114		11,671
DSS	(1,316)		(1,455)
Corporate Services	(8,358)		(7,552)
Elimination	(5,537)		(6,763)
Total Operating Loss	$	(41,453)	$	(58,915)


	13 weeks ended
Reconciliation of segment Operating Loss to consolidated Loss Before Income Taxes:	July 31, 2021		August 1, 2020
Total Operating Loss	$	(41,453)	$	(58,915)
Interest Expense, net	2,494		2,653
Loss Before Income Taxes	$	(43,947)	$	(61,568)

(a) For the 13 weeks ended July 13, 2021, gross margin includes a merchandise inventory loss of $434 in the Retail Segment. See Note 2. Summary of Significant Accounting Policies - Merchandise Inventories.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

Note 5. Equity and Earnings Per Share

Equity

Share Repurchases

On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $50,000, in the aggregate, of our outstanding Common Stock. The stock repurchase program is carried out at the direction of management (which may include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. During the 13 weeks ended July 31, 2021, we did not repurchase shares of our Common Stock under the program and as of July 31, 2021, approximately $26,669 remains available under the stock repurchase program.

During the 13 weeks ended July 31, 2021, we repurchased 130,135 shares of our Common Stock outside of the stock repurchase program in connection with employee tax withholding obligations for vested stock awards.

Earnings Per Share

Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of unvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. During the 13 weeks ended July 31, 2021 and August 2, 2020, average shares of 3,665,606 and 2,665,779 were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive, respectively. The following is a reconciliation of the basic and diluted earnings per share calculation:


	13 weeks ended
(shares in thousands)	July 31, 2021		August 1, 2020
Numerator for basic and diluted earnings per share:


Net loss available to common shareholders	$	(44,346)	$	(46,652)







Denominator for basic and diluted earnings per share:
Basic and diluted weighted average shares of Common Stock	51,474		48,411










Loss per share of Common Stock:
Basic	$	(0.86)	$	(0.96)
Diluted	$	(0.86)	$	(0.96)

Note 6. Fair Value Measurements

In accordance with ASC No. 820, Fair Value Measurements and Disclosures, the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Level 1—Observable inputs that reflect quoted prices in active markets

Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable

Level 3—Unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

Our financial instruments include cash and cash equivalents, receivables, accrued liabilities and accounts payable. The fair values of cash and cash equivalents, receivables, accrued liabilities and accounts payable approximates their carrying values because of the short-term nature of these instruments, which are all considered Level 1. The fair value of short-term and long-term debt approximates its carrying value.

Non-Financial Assets

Our non-financial assets include goodwill, property and equipment, operating lease right-of-use assets, and intangible assets. Such assets are reported at their carrying values and are not subject to recurring fair value measurements. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets.

Non-Financial Liabilities

We granted phantom share units as long-term incentive awards which are settled in cash based on the fair market value of a share of common stock of the Company at each vesting date. The fair value of the liability for the cash-settled phantom share unit awards will be remeasured at the end of each reporting period through settlement to reflect current risk-free rate and volatility assumptions. As of July 31, 2021, we recorded a liability of $6,317 (Level 2 input) which is reflected in accrued liabilities ($4,173) and other long-term liabilities ($2,144) on the condensed consolidated balance sheet.

Note 7. Credit Facility

We have a credit agreement (the “Credit Agreement”), amended March 31, 2021 and March 1, 2019, under which the lenders committed to provide us with a 5 year asset-backed revolving credit facility in an aggregate committed principal amount of $400,000 (the “Credit Facility”) effective from the date of the amendment. We have the option to request an increase in commitments under the Credit Facility of up to $100,000, subject to certain restrictions. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. The agreement includes an incremental first in, last out seasonal loan facility (the “FILO Facility”) for a $100,000 incremental facility maintaining the maximum availability under the Credit Agreement at $500,000. On March 31, 2021, we were granted a waiver to the condition to the current draw under the FILO Facility.

For additional information including interest terms and covenant requirements related to the Credit Facility, refer to Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

During the 13 weeks ended July 31, 2021, we borrowed $71,720 and repaid $45,620 under the Credit Agreement, with $203,700 of outstanding borrowings as of July 31, 2021, comprised of $153,700 and $50,000 under the Credit Facility and FILO Facility, respectively. During the 13 weeks ended August 1, 2020, we borrowed $186,700 and repaid $126,840 under the Credit Agreement, with $234,560 of outstanding borrowings as of August 1, 2020, comprised entirely of borrowings under the Credit Facility. As of both July 31, 2021 and August 1, 2020, we have issued $4,759 in letters of credit under the Credit Facility.

Note 8. Leases

We recognize lease assets and lease liabilities on the condensed consolidated balance sheets for substantially all lease arrangements as required by FASB ASC 842, Leases (Topic 842). Our portfolio of leases consists of operating leases comprised of operations agreements which grant us the right to operate on-campus bookstores at colleges and universities; real estate leases for office and warehouse operations; and vehicle leases. We do not have finance leases or short-term leases (i.e., those with a term of twelve months or less).

We recognize a right of use ("ROU") asset and lease liability in our condensed consolidated balance sheets for leases with a term greater than twelve months. Options to extend or terminate a lease are included in the determination of the ROU asset and lease liability when it is reasonably certain that such options will be exercised. Our lease terms generally range from one year to fifteen years and a number of agreements contain minimum annual guarantees, many of which are adjusted at the start of each contract year based on the actual sales activity of the leased premises for the most recently completed contract year.

Payment terms are based on the fixed rates explicit in the lease, including minimum annual guarantees, and/or variable rates based on: i) a percentage of revenues or sales arising at the relevant premises ("variable commissions"), and/or ii)

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

operating expenses, such as common area charges, real estate taxes and insurance. For contracts with fixed lease payments, including those with minimum annual guarantees, we recognize lease expense on a straight-line basis over the lease term or over the contract year in order to best reflect the pattern of usage of the underlying leased asset and our minimum obligations arising from these types of leases. Our lease agreements do not contain any material residual value guarantees, material restrictions or covenants.

We used our incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable. We utilized an estimated collateralized incremental borrowing rate as of the effective date or the commencement date of the lease, whichever is later.

The following table summarizes lease expense:


	13 weeks ended
	July 31, 2021		August 1, 2020
Variable lease expense	$	11,702	$	7,407
Operating lease expense	16,373		9,796
Net lease expense	$	28,075	$	17,203

The increase in lease expense is primarily due to higher sales for contracts based on a percentage of revenue during the 13 weeks ended July 31, 2021 and the impact of the timing and reduction of minimum contractual guarantees due to temporary store closings due to the COVID pandemic during the 13 weeks ended August 1, 2020.

The following table summarizes our minimum fixed lease obligations, excluding variable commissions, as of July 31, 2021:


	As of
	July 31, 2021
Remainder of Fiscal 2022	$	128,412
Fiscal 2023	49,419
Fiscal 2024	42,392
Fiscal 2025	37,372
Fiscal 2026	28,146
Thereafter	72,676
Total lease payments	358,417
Less: imputed interest	(42,940)
Operating lease liabilities at period end	$	315,477

Future lease payment obligations related to leases that were entered into, but did not commence as of July 31, 2021, were not material.

The following summarizes additional information related to our operating leases:


	As of
	July 31, 2021			August 1, 2020
Weighted average remaining lease term (in years)	5.1 years			5.4 years
Weighted average discount rate	4.3		%	4.4		%

Supplemental cash flow information:
Cash payments for lease liabilities within operating activities	$	27,378		$	16,676
ROU assets obtained in exchange for lease liabilities from initial recognition	$	67,106		$	89,167

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

Note 9. Supplementary Information

Restructuring and other charges

During the 13 weeks ended July 31, 2021, we recognized restructuring and other charges totaling $2,623 comprised primarily of $1,550 for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($2,369 is included in accrued liabilities in the consolidated balance sheet as of July 31, 2021), $983 for professional service costs related to restructuring, process improvements, costs related to development and integration associated with the FLC Partnership, and shareholder activist activities, and $91 related to liabilities for a facility closure.

During the 13 ended August 1, 2020, we recognized restructuring and other charges totaling $5,671 comprised of $3,396 for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($10,562 is included in accrued liabilities in the consolidated balance sheet as of August 1, 2020), and $2,103 for professional service costs related to restructuring, process improvements, and shareholder activities, and $172 related to liability for a facility closure.

Note 10. Employee Benefit Plans

We sponsor defined contribution plans for the benefit of substantially all of the employees of BNC and DSS. MBS maintains a profit sharing plan covering substantially all full-time employees of MBS. For all plans, we are responsible to fund the employer contributions directly. Total employee benefit expense for these plans was $44 and $73 during the 13 weeks ended July 31, 2021 and August 1, 2020, respectively.

Effective April 2020, due to the significant impact as a result of COVID-19 related campus store closures, we temporarily suspended employer matching contributions into our 401(k) plans. The matching contributions were reinstated effective July 25, 2021.

Note 11. Long-Term Incentive Plan Compensation Expense

We recognize compensation expense for restricted stock awards and performance share awards ratably over the requisite service period of the award, which is generally three years. We recognize compensation expense for these awards based on the number of awards expected to vest, which includes an estimated average forfeiture rate. We calculate the fair value of these awards based on the closing stock price on the date the award was granted. For those awards with market conditions, we have determined the grant date fair value using the Monte Carlo simulation model and compensation expense is recognized ratably over the requisite service period regardless of whether the market condition is satisfied.

For stock options granted with an "at market" exercise price, we determined the grant fair value using the Black-Scholes model and for stock options granted with "a premium" exercise price, we determined the grant date fair value using the Monte Carlo simulation model. The fair value models for stock options use assumptions that include the risk-free interest rate, expected volatility, expected dividend yield and expected term of the options.

We recognized compensation expense for long-term incentive plan awards in selling and administrative expenses as follows:


	13 weeks ended
	July 31, 2021		August 1, 2020
Stock-based awards
Restricted stock expense	$	88	$	30
Restricted stock units expense	730		1,359

Performance share units expense	34		132
Stock option expense	270		—
Sub-total stock-based awards:	$	1,122	$	1,521
Cash settled awards
Phantom share units expense	$	2,472	$	—
Total compensation expense for long-term incentive awards	$	3,594	$	1,521

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 weeks ended July 31, 2021 and August 1, 2020

(Thousands of dollars, except share and per share data)

(unaudited)

During the 13 weeks ended July 31, 2021, no awards were granted under the Equity Incentive Plan. Total unrecognized compensation cost related to unvested awards as of July 31, 2021 was $8,415 and is expected to be recognized over a weighted-average period of 2.2 years.

Note 12. Income Taxes

We recorded an income tax expense of $399 on a pre-tax loss of $(43,947) during the 13 weeks ended July 31, 2021, which represented an effective income tax rate of (0.9)% and income tax benefit of $(14,916) on a pre-tax loss of $(61,568) during the 13 weeks ended August 1, 2020, which represented an effective income tax rate of 24.2%.

In assessing the realizability of the deferred tax assets, management considered whether it is more likely than not that some or all of the deferred tax assets would be realized. As of July 31, 2021, we determined that it was more likely than not that we would not realize certain deferred tax assets and our tax rate for the current fiscal year reflects this determination. We will continue to evaluate this position.

The effective tax rate for the 13 weeks ended July 31, 2021 is lower as compared to the prior year comparable period due to the assessment of the realization of deferred tax assets.

Note 13. Legal Proceedings

Between January 22, 2020 and June 15, 2020, thirteen purported class action complaints were filed against the Company, along with several publishers, another collegiate bookstore retailer, and an industry association, by retailers of collegiate course materials or current or former college students. Although the specific allegations vary, the plaintiffs generally claim, on their own behalf and on behalf of the purported classes, that the Company and the other defendants violated Section 1 of the Sherman Act (15 U.S.C. § 1), Section 2 of the Sherman Act (15 U.S.C. § 2), Section 13(a) of the Robinson-Patman Act (15 U.S.C. §13(a)), and various state antitrust and unfair trade practices laws for alleged activities in connection with inclusive access and the sale of course materials to universities and their students. The United States Judicial Panel on Multidistrict Litigation consolidated these and other related cases in a consolidated proceeding before the Hon. Denise L. Cote of the United States District Court for the Southern District of New York. On June 14, 2021, the Court granted defendants' motion to dismiss both cases dismissed with prejudice. Neither Plaintiff group sought to appeal those decisions. The orders dismissing the cases are now final and the matter has concluded.

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise indicates, references to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc. or “BNED”, a Delaware corporation. References to “Barnes & Noble College” or “BNC” refer to our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our subsidiary MBS Textbook Exchange, LLC.

Overview

Description of Business

We expect general merchandise sales to increase over the long term, as our product assortments continue to emphasize and reflect changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, which we expect to be further enhanced and accelerated through the FLC Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our logo and emblematic general merchandise business.

For additional information related to our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Wolfram|Alpha Agreement

During the first quarter of Fiscal 2022, we launched Math Solver, a new bartleby® product feature that is powered by Wolfram|Alpha best-in-class computation engine. Math Solver allows students to access an interactive digital calculator that provides real-time, step-by-step explanations for even the most advanced math problems in subjects such as Algebra, Pre-Calc, Calculus.

Partnership with Fanatics and FLC

We maintain our relationships with campus partners and remain responsible for staffing and managing the day-to-day operations of our campus bookstores. We also work closely with our campus partners to ensure that each campus store maintains unique aspects of in-store merchandising, including localized product assortments and specific styles and designs that reflect each campus’s brand. We leverage Fanatics’ e-commerce technology and expertise for the operational management of the emblematic merchandise and gift sections of our campus store websites. FLC manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores.

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In December 2020, Fanatics, Inc. and Lids Holdings, Inc. jointly made a strategic equity investment in BNED. On April 4, 2021, as contemplated by the FLC Partnership's merchandising agreement, we sold our logo and emblematic general merchandise inventory to FLC, which was finalized during the first quarter of Fiscal 2022. As contemplated by the FLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products during the first quarter of Fiscal 2022. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis in the prior year. For additional information, see Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories.

COVID-19 Business Impact

Our business experienced an unprecedented and significant negative impact as a result of COVID-19 related campus store closures. Beginning in March 2020, colleges and universities nationwide began to close their campuses in light of safety concerns and as a result of local and state issued stay-at-home orders. By mid-March, during our Fiscal 2020 fourth quarter, we closed the majority of our physical campus stores to protect the health and safety of our customers and employees.

While our campus stores were closed, we continued to serve institutions and students through our campus websites, providing free shipping on all orders and an expanded digital content offering to provide immediate access to course materials to students at our campuses that closed due to COVID-19. We developed and implemented plans to safely reopen our campus stores based on national, state and local guidelines, as well as the campus policies set by the school administration.

Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most schools expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities and events, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine when our operations can begin returning to normal levels of business. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations. For additional information, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Segments

Retail Segment

Wholesale Segment

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DSS Segment

Seasonality

For our retail operations, sales are generally highest in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials, and lowest in the first and fourth fiscal quarters. Sales attributable to our wholesale business are generally highest in our first, second and third quarter, as it sells textbooks and other course materials for retail distribution. For our DSS segment, or direct-to-student business, sales and operating profit are realized relatively consistently throughout the year.

Trends, Competition and Other Business Conditions Affecting Our Business

The market for educational materials is undergoing unprecedented change. As tuition and other costs rise, colleges and universities face increasing pressure to attract and retain students and provide them with innovative, affordable educational content and tools that support their educational development. Current trends, competition and other factors affecting our business include:

•Overall Economic Environment, College Enrollment and Consumer Spending Patterns. Our business is affected by the impact of the COVID-19 pandemic, the overall economic environment, funding levels at colleges and universities, by changes in enrollments at colleges and universities, and spending on course materials and general merchandise.

•Impact of the COVID-19 Pandemic: The COVID-19 pandemic has materially and adversely impacted certain segments of the U.S. economy, with legislative and regulatory responses including unprecedented monetary and fiscal policy actions across all sectors, and there is significant uncertainty as to timing of stabilization and recovery, including the ability to gain adequate herd-immunity levels through vaccine programs and their resilience to future virus variants. Many colleges and K-12 schools have been required to cease in-person classes in an attempt to limit the spread of the COVID-19 virus and ensure the safety of their students. Although many academic institutions have reopened, they are considering alternatives to traditional in-person instruction, including online learning and significantly reduced classroom sizes. Additionally, while many athletic conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company’s high-margin general merchandise business.

•Economic Environment: Retail general merchandise sales are subject to short-term fluctuations driven by the broader retail environment.

•Enrollment Trends: The growth of our business depends on our ability to attract new customers and to increase the level of engagement by our current student customers. We continue to see downward enrollment trends and shrinking resources from state and federal government for colleges and universities. Enrollment trends, specifically at community colleges, generally correlate with changes in the economy and unemployment factors, e.g. low unemployment tends to lead to low enrollment and higher unemployment rates tend to lead to higher enrollment trends, as students generally enroll to obtain skills that are in demand in the workforce. Enrollment trends have been negatively impacted overall by COVID-19 concerns at physical campuses. A significant reduction in U.S. economic activity and increased unemployment could lead to decreased enrollment and consumer spending. Additionally, enrollment trends are impacted by the dip in the United States birth rate resulting in fewer students at the traditional 18-24 year-old college age. Online degree program enrollments continue to grow, even in the face of declining overall higher education enrollment.

•Increased Use of Online and Digital Platforms as Companions or Alternatives to Printed Course Materials. Students and faculty can now choose from a wider variety of educational content and tools than ever before, delivered across both print and digital platforms.

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•Increasing Costs Associated with Defending Against Security Breaches and Other Data Loss, Including Cyber-Attacks. We are increasingly dependent upon information technology systems, infrastructure and data. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. We continue to invest in data protection and information technology to prevent or minimize these risks and, to date, we have not experienced any material service interruptions and are not aware of any material breaches.

•Distribution Network Evolving. The way course materials are distributed and consumed is changing significantly, a trend that is expected to continue. The market for course materials, including textbooks and supplemental materials, is intensely competitive and subject to rapid change.

•Disintermediation. We are experiencing growing competition from alternative media and alternative sources of textbooks and other course materials. In addition to the official physical or virtual campus bookstore, course materials are also sold through off-campus bookstores, e-commerce outlets, digital platform companies, publishers, including Cengage, Pearson and McGraw Hill, bypassing the bookstore distribution channel by selling or renting directly to students and educational institutions, and student-to-student transactions over the Internet.

•Supply Chain and Inventory. Since the demand for used textbooks has historically been greater than the available supply, our financial results are highly dependent upon Wholesale’s ability to build its textbook inventory from suppliers in advance of the selling season. Recently, the impact of fewer students on campus due to COVID-19 has significantly impacted our on-campus buyback programs which supplies Wholesale’s used textbook inventory for future selling periods. Some textbook publishers have begun to supply textbooks pursuant to consignment or rental programs which could impact used textbook supplies in the future. Additionally, Wholesale is a national distributor for rental textbooks offered through McGraw-Hill Education's and Pearson Education’s consignment rental program, both of which are relatively nascent.

•Price Competition. In addition to the competition in the services we provide to our customers, our textbook and other course materials business faces significant price competition. Students purchase textbooks and other course materials from multiple providers, are highly price sensitive, and can easily shift spending from one provider or format to another.

•A Large Number of Traditional Campus Bookstores Have Yet to be Outsourced.

•Outsourcing Trends. We continue to see the trend towards outsourcing in the campus bookstore market and also continue to see a variety of business models being pursued for the provision of course materials (such as inclusive access programs and publisher subscription models) and general merchandise.

•New and Existing Bookstore Contracts. We expect awards of new accounts resulting in new physical and virtual store openings will continue to be an important driver of future growth in our business. We also expect that certain less profitable or essential bookstores we operate may close. Such stores could be included in contracts for stores we operate that may be deemed non-essential; and such stores could be operated by others or independently by schools. The scope of any such store closures remains uncertain, although we are not aware, at this time, of any significant volume of stores which we operate that are likely to close or have informed us of upcoming closures.

For additional discussion of our trends and other factors affecting our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year ended May 1, 2021.

Elements of Results of Operations

Our condensed consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). The results of operations reflected in our consolidated financial statements are presented on a consolidated basis. All material intercompany accounts and transactions have been eliminated in consolidation.

Our sales are primarily derived from the sale of course materials, which include new, used and digital textbooks, and at college and university bookstores which we operate, we sell high margin general merchandise, including emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. Our rental income is primarily derived from the rental of physical textbooks. We also derive revenue from other sources, such as sales of inventory management, hardware and point-of-sale software, direct-to-student subscription-based services, and other services.

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Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include long-term incentive plan compensation expense and general office expenses, such as merchandising, procurement, field support, finance and accounting, and operating costs related to our direct-to-student subscription-based services business. Shared-service costs such as human resources, legal, treasury, information technology, and various other corporate level expenses and other governance functions, are not allocated to any specific reporting segment and are recorded in Corporate Services as discussed in the Overview - Segments discussion above.

Results of Operations - Summary


	13 weeks ended
Dollars in thousands	July 31, 2021		August 1, 2020
Sales:
Product sales and other	$	227,770	$	193,210
Rental income	13,024		10,804
Total sales	$	240,794	$	204,014

Net loss	$	(44,346)	$	(46,652)

Adjusted Earnings (non-GAAP) (a)	$	(40,014)	$	(41,716)

Adjusted EBITDA (non-GAAP) (a)
Retail	$	(19,622)	$	(40,640)
Wholesale	6,414		12,966
DSS	1,692		1,664
Corporate Services	(7,444)		(5,244)
Elimination	(5,537)		(6,763)
Total Adjusted EBITDA (non-GAAP)	$	(24,497)	$	(38,017)

(a)Adjusted Earnings and Adjusted EBITDA are non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.

The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales:


	13 weeks ended
	July 31, 2021		August 1, 2020
Sales:
Product sales and other	94.6	%	94.7	%
Rental income	5.4		5.3
Total sales	100.0		100.0
Cost of sales:
Product and other cost of sales (a)	76.5		85.8
Rental cost of sales (a)	50.7		68.4
Total cost of sales	75.1		84.9
Gross margin	24.9		15.1
Selling and administrative expenses	35.8		34.3
Depreciation and amortization expense	5.2		6.9

Restructuring and other charges	1.1		2.8

Operating loss	(17.2)	%	(28.9)	%

(a)Represents the percentage these costs bear to the related sales, instead of total sales.

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Results of Operations - 13 weeks ended July 31, 2021 compared with the 13 weeks ended August 1, 2020


	13 weeks ended, July 31, 2021
Dollars in thousands	Retail		Wholesale		DSS		Corporate Services		Eliminations		Total
Sales:
Product sales and other	$	197,445	$	44,484	$	8,303	$	—	$	(22,462)	$	227,770
Rental income	13,024		—		—		—		—		13,024
Total sales	210,469		44,484		8,303		—		(22,462)		240,794
Cost of sales:
Product and other cost of sales	155,722		34,079		1,273		—		(16,913)		174,161
Rental cost of sales	6,604		—		—		—		—		6,604
Total cost of sales	162,326		34,079		1,273		—		(16,913)		180,765
Gross profit	48,143		10,405		7,030		—		(5,549)		60,029
Selling and administrative expenses	68,365		3,991		6,447		7,444		(12)		86,235
Depreciation and amortization expense	9,407		1,300		1,899		18		—		12,624
Sub-Total:	$	(29,629)	$	5,114	$	(1,316)	$	(7,462)	$	(5,537)	(38,830)

Restructuring and other charges											2,623

Operating loss											$	(41,453)


	13 weeks ended, August 1, 2020
Dollars in thousands	Retail		Wholesale		DSS		Corporate Services		Eliminations		Total
Sales:
Product sales and other	$	147,972	$	80,294	$	5,872	$	—	$	(40,928)	$	193,210
Rental income	10,804		—		—		—		—		10,804
Total sales	158,776		80,294		5,872		—		(40,928)		204,014
Cost of sales:
Product and other cost of sales	135,254		63,537		1,126		—		(34,152)		165,765
Rental cost of sales	7,387		—		—		—		—		7,387
Total cost of sales	142,641		63,537		1,126		—		(34,152)		173,152
Gross profit	16,135		16,757		4,746		—		(6,776)		30,862
Selling and administrative expenses	56,985		3,791		4,036		5,244		(13)		70,043
Depreciation and amortization expense	10,570		1,295		2,165		33		—		14,063
Sub-Total:	$	(51,420)	$	11,671	$	(1,455)	$	(5,277)	$	(6,763)	(53,244)

Restructuring and other charges											5,671

Operating loss											$	(58,915)

Sales

The following table summarizes our sales for the 13 weeks ended July 31, 2021 and August 1, 2020:


	13 weeks ended
Dollars in thousands	July 31, 2021		August 1, 2020		%
Product sales and other	$	227,770	$	193,210	17.9%
Rental income	13,024		10,804		20.5%
Total Sales	$	240,794	$	204,014	18.0%

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Sales increased by $36.8 million, or 18.0%, to $240.8 million during the 13 weeks ended July 31, 2021 from $204.0 million during the 13 weeks ended August 1, 2020. The sales increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. The first quarter is typically a low revenue quarter, consisting primarily of summer courses.

The components of the variances for the 13 week periods are reflected in the table below.


Sales variances	13 weeks ended
Dollars in millions	July 31, 2021		August 1, 2020
Retail Sales
New stores	$	10.3	$	7.9
Closed stores	(4.5)		(5.1)
Comparable stores (a)	44.6		(106.6)
Textbook rental deferral	0.2		(6.4)
Service revenue (b)	2.3		(4.7)
Other (c)	(1.2)		(1.0)
Retail sales subtotal:	$	51.7	$	(115.9)



Wholesale Sales	$	(35.8)	$	8.0
DSS Sales	$	2.4	$	0.5
Eliminations (d)	$	18.5	$	(8.2)
Total sales variance:	$	36.8	$	(115.6)

(a) Effective April 2021, as contemplated by the FLC Partnership's merchandising agreement, logo and emblematic general merchandise sales were fulfilled by FLC. During the first quarter of Fiscal 2022, as contemplated by the FLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis in the prior year period. For Comparable Store Sales details, see below.

(b) Service revenue includes brand partnerships, shipping and handling, and revenue from other programs.

(c) Other includes inventory liquidation sales to third parties, marketplace sales and certain accounting adjusting items related to return reserves, and other deferred items.

(d) Eliminates Wholesale sales and service fees to Retail and Retail commissions earned from Wholesale. See discussion of intercompany activities and eliminations below.

Retail

Retail sales increased by $51.7 million, or 32.6%, to $210.5 million during the 13 weeks ended July 31, 2021 from $158.8 million during the 13 weeks ended August 1, 2020. Retail added 53 new stores and closed 41 stores (not including temporary store closings due to COVID-19) during the 13 weeks ended July 31, 2021, ending the period with a total of 1,429 stores.


	13 weeks ended
	July 31, 2021		August 1, 2020
Number of Stores:	Physical	Virtual	Physical	Virtual
Number of stores at beginning of period	769	648	772	647
Opened	30	23	24	40
Closed	15	26	24	17
Number of stores at end of period	784	645	772	670

Product and other sales for Retail for the 13 weeks ended July 31, 2021 increased by $49.5 million, or 33.5% to $197.5 million from $148.0 million during the 13 weeks ended August 1, 2020. The sales increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year.

Product and other sales are impacted by comparable store sales (as noted in the chart below), new store openings and store closings, as well as the impact from the COVID-19 pandemic. Sales were impacted by the temporary store closings due to the COVID-19 pandemic in the prior year, as well as the impact of fewer students returning to campus, as many schools

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implemented a remote learning model and curtailed on-campus classes and activities. While many big-conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company’s general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. First Day (our inclusive access program), digital and eTextbook revenue increased, due to a shift to lower cost options and more affordable solutions, including digital offerings. First Day sales increased approximately 200% compared to the prior year period.

To supplement the Total Sales table presented above in accordance with generally accepted accounting principles (“GAAP”), the Company uses the non-GAAP financial measure of Retail Gross Comparable Store Sales. Retail Gross Comparable Store Sales (non-GAAP) includes sales from physical and virtual stores that have been open for an entire fiscal year period and does not include sales from closed stores for all periods presented. As contemplated by the FLC Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo and emblematic general merchandise sales to FLC and Fanatics. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the prior year period. For Retail Gross Comparable Store Sales (non-GAAP), sales for logo and emblematic general merchandise fulfilled by FLC, Fanatics and digital agency sales are included on a gross basis. We believe the current Retail Gross Comparable Store Sales (non-GAAP) calculation method reflects the manner in which management views comparable sales, as well as the seasonal nature of our business. Retail Gross Comparable Store Sales (non-GAAP) variances for Retail by category for the 13 week periods are as follows:


Retail Gross Comparable Store Sales (non-GAAP) variances	13 weeks ended
Dollars in millions	July 31, 2021				August 1, 2020
Textbooks (Course Materials)	$	23.1	21.9	%	$	(11.3)	(10.1)	%
General Merchandise	48.6		118.4	%	(87.6)		(68.3)	%
Trade Books	1.9		151.1	%	(7.7)		(85.2)	%
Total Retail Gross Comparable Store Sales (non-GAAP)	$	73.6	49.8	%	$	(106.6)	(42.8)	%

Rental income for Retail for the 13 weeks ended July 31, 2021 increased by $2.2 million, or 20.5% to $13.0 million from $10.8 million during the 13 weeks ended August 1, 2020. Rental income is impacted by comparable store sales, new store openings and store closings. The increase in rental income is primarily due to increased rental activity due to the temporary store closings due COVID-19 pandemic in the prior year discussed above.

Wholesale

Wholesale sales decreased by $35.8 million, or 44.6% to $44.5 million during the 13 weeks ended July 31, 2021 from $80.3 million during the 13 weeks ended August 1, 2020. The decrease is primarily due to decreased gross sales impacted by the COVID-19 pandemic, a decrease in customer demand resulting from a shift in buying patterns from physical textbooks to digital products, and lower demand from other third-party clients, partially offset by a lower returns and allowances. During the prior year period, the Wholesale operations assumed direct-to-student fulfillment of course material orders for the Retail Segment campus bookstores that were not fully operational due to COVID-19 campus store closures, whereas the sales shifted back to the physical bookstores in the current period.

DSS

DSS total sales increased by $2.4 million, or 41.4% to $8.3 million during the 13 weeks ended July 31, 2021 from $5.9 million during the 13 weeks ended August 1, 2020. Sales increased primarily due to an increase in subscription sales.

Cost of Sales and Gross Margin

Our cost of sales decreased as a percentage of sales to 75.1% during the 13 weeks ended July 31, 2021 compared to 84.9% during the 13 weeks ended August 1, 2020. Our gross margin increased by $29.2 million, or 94.5%, to $60.0 million, or 24.9% of sales, during the 13 weeks ended July 31, 2021 from $30.9 million, or 15.1% of sales during the 13 weeks ended August 1, 2020.

During the 13 weeks ended July 31, 2021, we recognized a merchandise inventory loss of $0.4 million in cost of goods sold in the Retail Segment discussed below. Excluding the merchandise inventory loss, cost of goods sold and gross margin was 74.9% and 25.1%, respectively, of sales during the 13 weeks ended July 31, 2021 compared to 84.9% and 15.1%, respectively, of sales during the 13 weeks ended August 1, 2020. For additional information, see Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories.

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Retail

The following table summarizes the Retail cost of sales for the 13 weeks ended July 31, 2021 and August 1, 2020:


	13 weeks ended
Dollars in thousands	July 31, 2021		% of Related Sales	August 1, 2020		% of Related Sales
Product and other cost of sales	$	155,722	78.9%	$	135,254	91.4%
Rental cost of sales	6,604		50.7%	7,387		68.4%
Total Cost of Sales	$	162,326	77.1%	$	142,641	89.8%

The following table summarizes the Retail gross margin for the 13 weeks ended July 31, 2021 and August 1, 2020:


	13 weeks ended
Dollars in thousands	July 31, 2021		% of Related Sales	August 1, 2020		% of Related Sales
Product and other gross margin	$	41,723	21.1%	$	12,718	8.6%
Rental gross margin	6,420		49.3%	3,417		31.6%
Gross Margin	$	48,143	22.9%	$	16,135	10.2%

For the 13 weeks ended July 31, 2021, the Retail gross margin as a percentage of sales increased as discussed below:

•Product and other gross margin increased (1,250 basis points), driven primarily by higher margin rates (1,215 basis points) due to lower inventory reserves and lower markdowns and a favorable sales mix (160 basis points) due to higher general merchandise sales, partially offset by higher contract costs as a percentage of sales related to our college and university contracts (90 basis points) resulting from contract renewals and new store contracts, and an inventory merchandise loss of $0.4 million (30 basis points) related to the final sale of our logo and emblematic general merchandise inventory below cost to FLC.

•Rental gross margin increased (1,765 basis points), driven primarily by lower contract costs as a percentage of sales related to our college and university contracts (1,215 basis points) and higher rental margin rates (690 basis points), partially offset by an unfavorable rental mix (140 basis points).

Wholesale

The cost of sales and gross margin for Wholesale were $34.1 million, or 76.6% of sales, and $10.4 million, or 23.4% of sales, respectively, during the 13 weeks ended July 31, 2021. The cost of sales and gross margin for Wholesale was $63.5 million or 79.1% of sales and $16.8 million or 20.9% of sales, respectively, during the 13 weeks ended August 1, 2020.

The gross margin rate increased during the 13 weeks ended July 31, 2021 primarily due to lower markdowns and a favorable sales mix, partially offset by the unfavorable impact of returns and allowances.

DSS

The gross margin for the DSS segment was $7.0 million, or 84.7% of sales, during the 13 weeks ended July 31, 2021 and $4.7 million, or 80.8% of sales, during the 13 weeks ended August 1, 2020. The high gross margins are driven primarily by high margin subscription service revenue earned.

Intercompany Eliminations

During the 13 weeks ended July 31, 2021 and August 1, 2020, our sales eliminations were $(22.5) million and $(40.9) million, respectively. These sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale.

During the 13 weeks ended July 31, 2021 and August 1, 2020, the cost of sales eliminations were $(16.9) million and $(34.2) million, respectively. These cost of sales eliminations represent (i) the recognition of intercompany profit for Retail inventory that was purchased from Wholesale in a prior period that was subsequently sold to external customers during the current period and the elimination of Wholesale service fees charged for fulfillment of inventory for virtual store sales, net of (ii) the elimination of intercompany profit for Wholesale inventory purchases by Retail that remain in ending inventory at the end of the current period.

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During the 13 weeks ended July 31, 2021 and August 1, 2020, the gross margin eliminations were $(5.5) million and $(6.8) million, respectively. The gross margin eliminations reflect the net impact of the sales eliminations and cost of sales eliminations during the above mentioned reporting periods.

Selling and Administrative Expenses


	13 weeks ended
Dollars in thousands	July 31, 2021		% of Sales	August 1, 2020		% of Sales
Total Selling and Administrative Expenses	$	86,235	35.8%	$	70,043	34.3%

During the 13 weeks ended July 31, 2021, selling and administrative expenses increased by $16.2 million, or 23.1%, to $86.2 million from $70.0 million during the 13 weeks ended August 1, 2020. The variances by segment are as follows:

Retail

During the 13 weeks ended July 31, 2021, Retail selling and administrative expenses increased by $11.4 million, or 20.0%, to $68.4 million from $57.0 million during the 13 weeks ended August 1, 2020. This increase was primarily due to a $12.1 million increase in stores payroll and operating expenses including comparable stores, virtual stores and new/closed stores payroll and operating expenses, partially offset by a $0.8 million decrease in corporate payroll, infrastructure and product development costs. The payroll increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year.

Wholesale

Wholesale selling and administrative expenses increased by $0.2 million, or 5.3%, to $4.0 million from $3.8 million during the 13 weeks ended August 1, 2020. The increase in selling and administrative expenses was primarily driven by higher compensation-related expense and higher operating expenses.

DSS

During the 13 weeks ended July 31, 2021, DSS selling and administrative expenses increased by $2.4 million, or 59.7%, to $6.4 million from $4.0 million during the 13 weeks ended August 1, 2020. The increase in costs was primarily driven by higher operating costs invested in the business to continue to increase sales.

Corporate Services

During the 13 weeks ended July 31, 2021, Corporate Services' selling and administrative expenses increased by $2.2 million, or 42.0%, to $7.4 million from $5.2 million during the 13 weeks ended August 1, 2020. The increase was primarily due to higher compensation-related expense and higher operating expenses.

Depreciation and Amortization Expense


	13 weeks ended
Dollars in thousands	July 31, 2021		% of Sales	August 1, 2020		% of Sales
Total Depreciation and Amortization Expense	$	12,624	5.2%	$	14,063	6.9%

Depreciation and amortization expense decreased by $1.4 million, or 10.2%, to $12.6 million during the 13 weeks ended July 31, 2021 from $14.1 million during the 13 weeks ended August 1, 2020. The decrease was primarily attributable to lower depreciable assets and intangibles due to the store impairment loss recognized during the third quarter of Fiscal 2021.

Restructuring and other charges

During the 13 weeks ended July 31, 2021, we recognized restructuring and other charges totaling $2.6 million comprised primarily of $1.5 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($2.4 million is included in accrued liabilities in the consolidated balance sheet as of July 31, 2021), $1.0 million for professional service costs related to restructuring, process improvements, costs related to development and integration associated with the FLC Partnership, and shareholder activist activities, and $0.1 million related to liabilities for a facility closure.

During the 13 ended August 1, 2020, we recognized restructuring and other charges totaling $5.7 million comprised of $3.4 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($10.6 million is included in accrued liabilities in the consolidated balance sheet as of August 1, 2020), and $2.1 million for professional service costs related to restructuring, process improvements, and shareholder activities, and $0.2 million related to liability for a facility closure.

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Operating Loss


	13 weeks ended
Dollars in thousands	July 31, 2021		% of Sales	August 1, 2020		% of Sales
Total Operating Loss	$	(41,453)	(17.2)%	$	(58,915)	(28.9)%

Our operating loss was $(41.5) million during the 13 weeks ended July 31, 2021, compared to an operating loss of $(58.9) million during the 13 weeks ended August 1, 2020. The decrease in operating loss is due to the matters discussed above. For the 13 weeks ended July 31, 2021, excluding the $0.4 million of merchandise inventory loss and the $2.6 million of restructuring and other charges, discussed above, operating loss was $(38.4) million (or (15.9)% of sales). For the 13 weeks ended August 1, 2020, excluding the $5.7 million of restructuring and other charges, discussed above, operating loss was $(53.2) million (or (26.1)% of sales).

Interest Expense, Net


	13 weeks ended
Dollars in thousands	July 31, 2021		August 1, 2020
Interest Expense, Net	$	2,494	$	2,653

Net interest expense decreased by $0.2 million, or 6.0%, to $2.5 million during the 13 weeks ended July 31, 2021 from $2.7 million during the 13 weeks ended August 1, 2020. The decrease was primarily due to lower borrowings compared to the prior year.

Income Tax Expense (Benefit)


	13 weeks ended
Dollars in thousands	July 31, 2021		Effective Rate	August 1, 2020		Effective Rate
Income Tax Expense (Benefit)	$	399	(0.9)%	$	(14,916)	24.2%

We recorded an income tax expense of $0.4 million on a pre-tax loss of $(43.9) million during the 13 weeks ended July 31, 2021, which represented an effective income tax rate of (0.9)% and we recorded an income tax benefit of $(14.9) million on a pre-tax loss of $(61.6) million during the 13 weeks ended August 1, 2020, which represented an effective income tax rate of 24.2%. The effective tax rate for the 13 weeks ended July 31, 2021 is lower as compared to the comparable prior year due to the assessment of the realization of deferred tax assets.

Net Loss


	13 weeks ended
Dollars in thousands	July 31, 2021		August 1, 2020
Net loss	$	(44,346)	$	(46,652)

As a result of the factors discussed above, net loss was $(44.3) million during the 13 weeks ended July 31, 2021, compared with net loss of $(46.7) million during the 13 weeks ended August 1, 2020. Adjusted Earnings (non-GAAP) is $(40.0) million during the 13 weeks ended July 31, 2021, compared with $(41.7) million during the 13 weeks ended August 1, 2020. See Adjusted Earnings (non-GAAP) discussion below.

Use of Non-GAAP Measures - Adjusted Earnings, Adjusted EBITDA and Free Cash Flow

To supplement our results prepared in accordance with generally accepted accounting principles (“GAAP”), we use the measure of Adjusted Earnings, Adjusted EBITDA, and Free Cash Flow, which are non-GAAP financial measures under Securities and Exchange Commission (the “SEC”) regulations. We define Adjusted Earnings as net income adjusted for certain reconciling items that are subtracted from or added to net income. We define Adjusted EBITDA as net income plus (1) depreciation and amortization; (2) interest expense and (3) income taxes, (4) as adjusted for items that are subtracted from or added to net income. We define Free Cash Flow as Adjusted EBITDA less capital expenditures, cash interest and cash taxes.

To properly and prudently evaluate our business, we encourage you to review our condensed consolidated financial statements included elsewhere in this Form 10-K, the reconciliation of Adjusted Earnings to net income and the reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure presented in accordance with GAAP, set

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forth in the tables below. All of the items included in the reconciliations below are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance.

These non-GAAP financial measures are not intended as substitutes for and should not be considered superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of these non-GAAP financial measures may be different from similarly named measures used by other companies, limiting their usefulness for comparison purposes.

We review these non-GAAP financial measures as internal measures to evaluate our performance and manage our operations. We believe that these measures are useful performance measures which are used by us to facilitate a comparison of our on-going operating performance on a consistent basis from period-to-period. We believe that these non-GAAP financial measures provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone, as they exclude certain items that do not reflect the ordinary earnings of our operations. Our Board of Directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance, for evaluating on a quarterly and annual basis actual results against such expectations, and as a measure for performance incentive plans. We believe that the inclusion of Adjusted Earnings and Adjusted EBITDA results provides investors useful and important information regarding our operating results. We believe that Free Cash Flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements and assists investors in their understanding of our operating profitability and liquidity as we manage the business to maximize margin and cash flow.

Adjusted Earnings (non-GAAP)


	13 weeks ended
Dollars in thousands	July 31, 2021		August 1, 2020
Net loss	$	(44,346)	$	(46,652)
Reconciling items, after-tax (below)	4,332		4,936
Adjusted Earnings (non-GAAP)	$	(40,014)	$	(41,716)

Reconciling items, pre-tax

Merchandise inventory loss (a)	$	434	$	—
Content amortization (non-cash)	1,275		1,164
Restructuring and other charges (a)	2,623		5,671

Reconciling items, pre-tax	4,332		6,835
Less: Pro forma income tax impact (a)(b)	—		1,899
Reconciling items, after-tax	$	4,332	$	4,936

(a) See Management Discussion and Analysis and Results of Operations discussion above.

(b) Represents the income tax effects of the non-GAAP items.

Adjusted EBITDA (non-GAAP)


	13 weeks ended
Dollars in thousands	July 31, 2021		August 1, 2020
Net loss	$	(44,346)	$	(46,652)
Add:
Depreciation and amortization expense	12,624		14,063
Interest expense, net	2,494		2,653
Income tax expense (benefit)	399		(14,916)

Merchandise inventory loss (a)	434		—
Content amortization (non-cash)	1,275		1,164
Restructuring and other charges (a)	2,623		5,671

Adjusted EBITDA (non-GAAP) (a)	$	(24,497)	$	(38,017)

(a) See Management Discussion and Analysis and Results of Operations discussion above.

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The following is Adjusted EBITDA by segment for the 13 weeks ended July 31, 2021 and August 1, 2020.


Adjusted EBITDA - by Segment	13 weeks ended July 31, 2021
Dollars in thousands	Retail		Wholesale		DSS		Corporate Services		Elimination(b)		Total
Sales	$	210,469	$	44,484	$	8,303	$	—	$	(22,462)	$	240,794
Cost of sales (a)	161,726		34,079		164		—		(16,913)		179,056
Gross profit	48,743		10,405		8,139		—		(5,549)		$	61,738
Selling and administrative expenses	68,365		3,991		6,447		7,444		(12)		86,235
Adjusted EBITDA (non-GAAP)	$	(19,622)	$	6,414	$	1,692	$	(7,444)	$	(5,537)	$	(24,497)


Adjusted EBITDA - by Segment	13 weeks ended August 1, 2020
Dollars in thousands	Retail		Wholesale		DSS		Corporate Services		Elimination(b)		Total
Sales	$	158,776	$	80,294	$	5,872	$	—	$	(40,928)	$	204,014
Cost of sales (a)	142,431		63,537		172		—		(34,152)		171,988
Gross profit	16,345		16,757		5,700		—		(6,776)		32,026
Selling and administrative expenses	56,985		3,791		4,036		5,244		(13)		70,043
Adjusted EBITDA (non-GAAP)	$	(40,640)	$	12,966	$	1,664	$	(5,244)	$	(6,763)	$	(38,017)

(a) For the 13 weeks ended July 31, 2021, gross margin excludes $0.2 million and $1.1 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. For the 13 weeks ended July 31, 2021, gross margin also excludes a merchandise inventory loss of $0.4 million in the Retail Segment.

For the 13 weeks ended August 1, 2020, gross margin excludes $0.2 million and $1.0 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively.

(b) See Management Discussion and Analysis and Results of Operations discussion above.

Free Cash Flow (non-GAAP)


	13 weeks ended
Dollars in thousands	July 31, 2021		August 1, 2020
Adjusted EBITDA (non-GAAP)	$	(24,497)	$	(38,017)
Less:
Capital expenditures (a)	11,370		7,055
Cash interest	1,682		1,960
Cash taxes	254		5,937
Free Cash Flow (non-GAAP)	$	(37,803)	$	(52,969)

(a) Purchases of property and equipment are also referred to as capital expenditures. Our investing activities consist principally of capital expenditures for contractual capital investments associated with renewing existing contracts, new store construction, digital initiatives and enhancements to internal systems and our website. The following table provides the components of total purchases of property and equipment:


Capital Expenditures	13 weeks ended
Dollars in thousands	July 31, 2021		August 1, 2020
Physical store capital expenditures	$	3,893	$	3,137
Product and system development	3,624		2,325
Content development costs	2,847		1,076
Other	1,006		517
Total Capital Expenditures	$	11,370	$	7,055

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Liquidity and Capital Resources

Our primary sources of cash are net cash flows from operating activities, funds available under our credit agreement and short-term vendor financing. As of July 31, 2021, we had $203.7 million outstanding borrowings under the Credit Agreement. See Financing Arrangements discussion below.

COVID-19 Business Impact

Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most schools currently expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities and events, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine when our operations can begin returning to normal levels of business. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations. For additional information, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

We believe that our future cash from operations, access to borrowings under the Credit Facility, FILO Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our future capital requirements will depend on many factors, including, but not limited to, the economy and the outlook for and pace of sustainable growth in our markets, the levels at which we maintain inventory, the number and timing of new store openings, and any potential acquisitions of other brands or companies including digital properties. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private financing of debt or equity. Our access to, and the availability of, financing in the future will be impacted by many factors, including the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms.

Sources and Uses of Cash Flow


	13 weeks ended
Dollars in thousands	July 31, 2021		August 1, 2020
Cash, cash equivalents, and restricted cash at beginning of period	$	16,814	$	9,008
Net cash flows used in operating activities	(17,462)		(53,149)
Net cash flows used in investing activities	(11,020)		(7,140)
Net cash flows provided by financing activities	24,885		59,518

Cash, cash equivalents, and restricted cash at end of period	$	13,217	$	8,237

Cash Flow from Operating Activities

Our business is highly seasonal. For our retail operations, cash flows from operating activities are typically a source of cash in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials for the upcoming semesters based on the typical academic semester. For our wholesale operations, cash flows from operating activities are typically a source of cash in the second and fourth fiscal quarters, as payments are received from the summer and winter selling season when they sell textbooks and other course materials for retail distribution. For both retail and wholesale, cash flows from operating activities are typically a use of cash in the fourth fiscal quarter, when sales volumes are materially lower than the other quarters. For our DSS segment, cash flows are not seasonal as cash flows from operating activities are typically consistent throughout the year. Our quarterly cash flows also may fluctuate depending on the timing of the start of the various school’s semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods.

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Cash flows used in operating activities during the 13 weeks ended July 31, 2021 were $(17.9) million compared to $(53.1) million during the 13 weeks ended August 1, 2020. This decrease in cash used in operating activities of $35.2 million was primarily due to higher earnings in the current year period compared to the prior year period, and changes in working capital. As discussed above, our operations were highly impacted by COVID-19 related campus store closures in the prior year period.

Cash Flow from Investing Activities

Cash flows used in investing activities during the 13 weeks ended July 31, 2021 were $(11.0) million compared to $(7.1) million during the 13 weeks ended August 1, 2020. The increase in cash used in investing activities is primarily due to higher capital expenditures and contractual capital investments associated with content development, digital initiatives, enhancements to internal systems and websites, renewing existing contracts and new store construction. Capital expenditures totaled $11.4 million and $7.1 million during the 13 weeks ended July 31, 2021 and August 1, 2020, respectively.

Cash Flow from Financing Activities

Cash flows provided by financing activities during the 13 weeks ended July 31, 2021 were $24.9 million compared to $59.5 million during the 13 weeks ended August 1, 2020. This net change of $34.6 million is primarily due to lower net borrowings under the credit agreement.

Financing Arrangements

We have a credit agreement (the “Credit Agreement”), amended March 31, 2021 and March 1, 2019, under which the lenders committed to provide us with a 5-year asset-backed revolving credit facility in an aggregate committed principal amount of $400 million (the “Credit Facility”). We have the option to request an increase in commitments under the Credit Facility of up to $100 million, subject to certain restrictions. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. The agreement includes an incremental first in, last out seasonal loan facility (the “FILO Facility”) for a $100 million incremental facility maintaining the maximum availability under the Credit Agreement at $500 million. On March 31, 2021, we were granted a waiver to the availability test condition to the current draw under the FILO Facility.

During the 13 weeks ended July 31, 2021, we borrowed $71.7 million and repaid $45.6 million under the Credit Agreement, with $203.7 million of outstanding borrowings as of July 31, 2021, comprised of $153.7 million and $50.0 million under the Credit Facility and FILO Facility, respectively. During the 13 weeks ended August 1, 2020, we borrowed $186.7 million and repaid $126.8 million under the Credit Agreement, with $234.6 million of outstanding borrowings as of August 1, 2020, comprised entirely of outstanding borrowings under the Credit Facility. As of both July 31, 2021 and August 1, 2020, we have issued $4.8 million in letters of credit under the Credit Facility.

For additional information including interest terms and covenant requirements related to the Credit Facility and FILO Facility, refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Income Tax Implications on Liquidity

As of July 31, 2021, other long-term liabilities includes $25.3 million related to the long-term tax payable associated with the LIFO reserve. The LIFO reserve is impacted by changes in the consumer price index ("CPI") and is dependent on the inventory levels at the end of our tax year (on or about January 31st) which is in the middle of our second largest selling cycle. At the end of the most recent tax year, inventory levels declined as compared to the prior year resulting in approximately $0.7 million of the income taxes associated with the LIFO reserve becoming currently payable. Given recent trends relating to the pricing and rental of textbooks, management believes that an additional portion of the remaining long-term tax payable associated with the LIFO reserve could become payable within the next twelve months. We are unable to predict future trends for CPI and inventory levels, therefore it is difficult to project with reasonable certainty how much of this liability will become payable within the next twelve months.

We have filed our federal income tax returns for the tax year ended January 2021, as well claims for refunds for cash taxes paid in prior years. We expect to receive an aggregate refund of approximately $30.5 million.

Share Repurchases

On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $50 million, in the aggregate, of our outstanding Common Stock. The stock repurchase program is carried out at the direction of management (which may include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. During the 13 weeks ended July 31, 2021, we did not repurchase any of our Common Stock under the stock repurchase program. As of July 31, 2021, approximately $26.7 million remains available under the stock repurchase program.

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Contractual Obligations

Our projected contractual obligations are consistent with amounts disclosed in Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Off-Balance Sheet Arrangements

As of July 31, 2021, we have no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Critical Accounting Policies

Our policies regarding the use of estimates and other critical accounting policies are consistent with the disclosures in Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Disclosure Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and information relating to us and our business that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to us or our management, identify forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Such statements reflect our current views with respect to future events, the outcome of which is subject to certain risks, including, among others:

•risks associated with COVID-19 and the governmental responses to it, including its impacts across our businesses on demand and operations, as well as on the operations of our suppliers and other business partners, and the effectiveness of our actions taken in response to these risks;

•general competitive conditions, including actions our competitors and content providers may take to grow their businesses;

•a decline in college enrollment or decreased funding available for students;

•decisions by colleges and universities to outsource their physical and/or online bookstore operations or change the operation of their bookstores;

•implementation of our digital strategy may not result in the expected growth in our digital sales and/or profitability;

•risk that digital sales growth does not exceed the rate of investment spend;

•the performance of our online, digital and other initiatives, integration of and deployment of, additional products and services including new digital channels, and enhancements to higher education digital products, and the inability to achieve the expected cost savings;

•the risk of price reduction or change in format of course materials by publishers, which could negatively impact revenues and margin;

•the general economic environment and consumer spending patterns;

•decreased consumer demand for our products, low growth or declining sales;

•the strategic objectives, successful integration, anticipated synergies, and/or other expected potential benefits of various acquisitions, may not be fully realized or may take longer than expected;

•the integration of the operations of various acquisitions into our own may also increase the risk of our internal controls being found ineffective;

•changes to purchase or rental terms, payment terms, return policies, the discount or margin on products or other terms with our suppliers;

•our ability to successfully implement our strategic initiatives including our ability to identify, compete for and execute upon additional acquisitions and strategic investments;

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•risks associated with operation or performance of MBS Textbook Exchange, LLC’s point-of-sales systems that are sold to college bookstore customers;

•technological changes;

•risks associated with counterfeit and piracy of digital and print materials;

•our international operations could result in additional risks;

•our ability to attract and retain employees;

•risks associated with data privacy, information security and intellectual property;

•trends and challenges to our business and in the locations in which we have stores;

•non-renewal of managed bookstore, physical and/or online store contracts and higher-than-anticipated store closings;

•disruptions to our information technology systems, infrastructure and data due to computer malware, viruses, hacking and phishing attacks, resulting in harm to our business and results of operations;

•disruption of or interference with third party web service providers and our own proprietary technology;

•work stoppages or increases in labor costs;

•possible increases in shipping rates or interruptions in shipping service;

•product shortages, including decreases in the used textbook inventory supply associated with the implementation of publishers’ digital offerings and direct to student textbook consignment rental programs, as well as the risks associated with the impacts that public health crises may have on the ability of our suppliers to manufacture or source products, particularly from outside of the United States;

•changes in domestic and international laws or regulations, including U.S. tax reform, changes in tax rates, laws and regulations, as well as related guidance;

•enactment of laws or changes in enforcement practices which may restrict or prohibit our use of texts, emails, interest based online advertising, recurring billing or similar marketing and sales activities;

•the amount of our indebtedness and ability to comply with covenants applicable to any future debt financing;

•our ability to satisfy future capital and liquidity requirements;

•our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms;

•adverse results from litigation, governmental investigations, tax-related proceedings, or audits;

•changes in accounting standards; and

•the other risks and uncertainties detailed in the section titled “Risk Factors” in Part I - Item 1A in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Form 10-Q.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the items discussed in Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Exchange Act) was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

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Management has not identified any changes in the Company’s internal control over financial reporting that occurred during the first quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, personal injuries and other matters. We record a liability when we believe that it is both probable that a loss has been incurred and the amount of loss can be reasonably estimated. Based on our current knowledge, we do not believe that there is a reasonable possibility that the final outcome of any pending or threatened legal proceedings to which we or any of our subsidiaries are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect our business, financial condition, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes during the 13 weeks ended July 31, 2021 to the risk factors discussed in Part I - Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table provides information as of July 31, 2021 with respect to shares of Common Stock we purchased during the first quarter of Fiscal 2021:


Period	Total Number of Shares Purchased	Average Price Paid per Share (a)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
May 2, 2021 - May 29, 2021	—	$	—	—	$	26,669,324
May 30, 2021 - July 3, 2021	—	$	—	—	$	26,669,324
July 4, 2021 - July 31, 2021	—	$	—	—	$	26,669,324
	—	$	—	—

(a) This amount represents the average price paid per common share. This price includes a per share commission paid for all repurchases.

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Item 5. Other Information

None

Item 6. Exhibits


10.1						Amended and Restated Employment Letter, dated June 19, 2019, between MBS Textbook Exchange, LLC and Dave Henderson.

10.2						Amended and Restated Employment Letter, dated June 19, 2019, between B&N Education, LLC, a subsidiary of Barnes & Noble Education, Inc. and Jonathan Shar.

10.3						Letter Agreement, dated July 22, 2021, by and among Barnes & Noble Education, Inc. and Outerbridge Capital Management, LLC and certain of its affiliates signatory thereto, filed as Exhibit 10.1 to Report on Form 8-K filed with the SEC on July 23, 2021, and incorporated herein by reference.

31.1						Certification by the Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification by the Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


BARNES & NOBLE EDUCATION, INC.
(Registrant)

By:						/S/ THOMAS D. DONOHUE
						Thomas D. Donohue
						Chief Financial Officer
						(principal financial officer)

By:						/S/ SEEMA C. PAUL
						Seema C. Paul
						Chief Accounting Officer
						(principal accounting officer)

September 2, 2021