Barnes & Noble Education, Inc. - Quarter Report: 2022 October (Form 10-Q)
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 October 29, 2022
OR
| ¨ | 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
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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, | NJ | 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 | x | ||||||||||||||
| 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 November 25, 2022, 52,598,798 shares of Common Stock, par value $0.01 per share, were outstanding.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Fiscal Quarter Ended October 29, 2022
Index to Form 10-Q
| Page No. | |||||||||||
2
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 | 26 weeks ended | ||||||||||||||||||||||
| October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Product sales and other | $ | 575,764 | $ | 577,329 | $ | 828,710 | $ | 805,099 | |||||||||||||||
| Rental income | 41,334 | 49,648 | 52,246 | 62,672 | |||||||||||||||||||
| Total sales | 617,098 | 626,977 | 880,956 | 867,771 | |||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||
| Product and other cost of sales | 449,322 | 453,070 | 643,427 | 627,231 | |||||||||||||||||||
| Rental cost of sales | 22,941 | 28,348 | 29,206 | 34,952 | |||||||||||||||||||
| Total cost of sales | 472,263 | 481,418 | 672,633 | 662,183 | |||||||||||||||||||
| Gross profit | 144,835 | 145,559 | 208,323 | 205,588 | |||||||||||||||||||
| Selling and administrative expenses | 107,086 | 107,902 | 205,572 | 194,137 | |||||||||||||||||||
| Depreciation and amortization expense | 10,759 | 11,952 | 23,292 | 24,576 | |||||||||||||||||||
| Restructuring and other charges | 260 | 1,116 | 635 | 3,021 | |||||||||||||||||||
| Operating income (loss) | 26,730 | 24,589 | (21,176) | (16,146) | |||||||||||||||||||
| Interest expense, net | 4,886 | 2,264 | 8,754 | 4,758 | |||||||||||||||||||
| Income (loss) before income taxes | 21,844 | 22,325 | (29,930) | (20,904) | |||||||||||||||||||
| Income tax (benefit) expense | (300) | (203) | 633 | 196 | |||||||||||||||||||
| Net income (loss) | $ | 22,144 | $ | 22,528 | $ | (30,563) | $ | (21,100) | |||||||||||||||
| Income (Loss) per share of common stock: | |||||||||||||||||||||||
| Basic | $ | 0.42 | $ | 0.43 | $ | (0.58) | $ | (0.41) | |||||||||||||||
| Diluted | $ | 0.42 | $ | 0.41 | $ | (0.58) | $ | (0.41) | |||||||||||||||
| Weighted average shares of common stock outstanding: | |||||||||||||||||||||||
| Basic | 52,438 | 51,666 | 52,305 | 51,570 | |||||||||||||||||||
| Diluted | 53,195 | 54,568 | 52,305 | 51,570 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
| October 29, 2022 | October 30, 2021 | April 30, 2022 | |||||||||||||||
| (unaudited) | (unaudited) | (audited) | |||||||||||||||
| ASSETS | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 19,129 | $ | 10,996 | $ | 10,388 | |||||||||||
| Receivables, net | 210,009 | 218,053 | 137,039 | ||||||||||||||
| Merchandise inventories, net | 371,570 | 370,529 | 293,854 | ||||||||||||||
| Textbook rental inventories | 49,355 | 50,642 | 29,612 | ||||||||||||||
| Prepaid expenses and other current assets | 54,924 | 68,965 | 61,709 | ||||||||||||||
| Total current assets | 704,987 | 719,185 | 532,602 | ||||||||||||||
| Property and equipment, net | 96,096 | 91,875 | 94,072 | ||||||||||||||
| Operating lease right-of-use assets | 291,704 | 252,650 | 286,584 | ||||||||||||||
| Intangible assets, net | 121,487 | 141,847 | 129,624 | ||||||||||||||
| Goodwill | 4,700 | 4,700 | 4,700 | ||||||||||||||
| Deferred tax assets, net | — | 15,943 | — | ||||||||||||||
| Other noncurrent assets | 20,980 | 26,010 | 23,971 | ||||||||||||||
| Total assets | $ | 1,239,954 | $ | 1,252,210 | $ | 1,071,553 | |||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 326,168 | $ | 333,099 | $ | 182,790 | |||||||||||
| Accrued liabilities | 118,689 | 122,734 | 95,387 | ||||||||||||||
| Current operating lease liabilities | 130,802 | 118,434 | 97,143 | ||||||||||||||
| Short-term borrowings | — | — | 40,000 | ||||||||||||||
| Total current liabilities | 575,659 | 574,267 | 415,320 | ||||||||||||||
| Long-term deferred taxes, net | 1,430 | — | 1,430 | ||||||||||||||
| Long-term operating lease liabilities | 190,758 | 171,341 | 219,594 | ||||||||||||||
| Other long-term liabilities | 19,643 | 51,113 | 21,135 | ||||||||||||||
| Long-term borrowings | 252,000 | 183,300 | 185,700 | ||||||||||||||
| Total liabilities | 1,039,490 | 980,021 | 843,179 | ||||||||||||||
| 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, 55,132, 54,162 and 54,234 shares, respectively; outstanding, 52,599, 51,976 and 52,046 shares, respectively | 551 | 541 | 542 | ||||||||||||||
| Additional paid-in capital | 744,339 | 736,886 | 740,838 | ||||||||||||||
| Accumulated deficit | (522,057) | (443,737) | (491,494) | ||||||||||||||
| Treasury stock, at cost | (22,369) | (21,501) | (21,512) | ||||||||||||||
| Total stockholders' equity | 200,464 | 272,189 | 228,374 | ||||||||||||||
| Total liabilities and stockholders' equity | $ | 1,239,954 | $ | 1,252,210 | $ | 1,071,553 | |||||||||||
See accompanying notes to condensed consolidated financial statements.
4
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| 26 weeks ended | |||||||||||
| October 29, 2022 | October 30, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (30,563) | $ | (21,100) | |||||||
| Adjustments to reconcile net loss to net cash flows from operating activities: | |||||||||||
| Depreciation and amortization expense | 23,292 | 24,576 | |||||||||
| Content amortization expense | 3,195 | 2,586 | |||||||||
| Amortization of deferred financing costs | 1,200 | 725 | |||||||||
| Merchandise inventory loss | — | 434 | |||||||||
| Stock-based compensation expense | 3,510 | 2,600 | |||||||||
| Changes in other long-term assets and liabilities, net | 319 | 1,596 | |||||||||
| Changes in operating lease right-of-use assets and liabilities | (298) | 286 | |||||||||
| Changes in other operating assets and liabilities, net | 8,721 | 12,573 | |||||||||
| Net cash flows provided by operating activities | 9,376 | 24,276 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (20,573) | (21,264) | |||||||||
| Net change in other noncurrent assets | 255 | 326 | |||||||||
| Net cash flows used in investing activities | (20,318) | (20,938) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings | 348,200 | 259,720 | |||||||||
| Repayments of borrowings | (321,900) | (254,020) | |||||||||
| Payment of deferred financing costs | (1,716) | — | |||||||||
| Purchase of treasury shares | (857) | (2,359) | |||||||||
| Proceeds from the exercise of stock options, net | — | 37 | |||||||||
| Net cash flows provided by financing activities | 23,727 | 3,378 | |||||||||
| Net increase in cash, cash equivalents and restricted cash | 12,785 | 6,716 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 21,934 | 16,814 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 34,719 | $ | 23,530 | |||||||
| Changes in other operating assets and liabilities, net: | |||||||||||
| Receivables, net | $ | (72,970) | $ | (96,981) | |||||||
| Merchandise inventories | (77,716) | (89,851) | |||||||||
| Textbook rental inventories | (19,743) | (21,950) | |||||||||
| Prepaid expenses and other current assets | 12,538 | (3,288) | |||||||||
| Accounts payable and accrued liabilities | 166,612 | 224,643 | |||||||||
| Changes in other operating assets and liabilities, net | $ | 8,721 | $ | 12,573 | |||||||
See accompanying notes to condensed consolidated financial statements.
5
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 1, 2021 | 53,327 | $ | 533 | $ | 734,257 | $ | (422,637) | 1,948 | $ | (19,142) | $ | 293,011 | ||||||||||||||||||||||||||||||||
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 | (43,628) | (43,628) | ||||||||||||||||||||||||||||||||||||||||||
| Balance July 31, 2021 | 53,665 | $ | 536 | $ | 735,376 | $ | (466,265) | 2,078 | $ | (20,357) | $ | 249,290 | ||||||||||||||||||||||||||||||||
Stock-based compensation expense | 1,478 | 1,478 | ||||||||||||||||||||||||||||||||||||||||||
Vested equity awards | 487 | 5 | (5) | — | ||||||||||||||||||||||||||||||||||||||||
Shares repurchased for tax withholdings for vested stock awards | 108 | (1,144) | (1,144) | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | 10 | — | 37 | 37 | ||||||||||||||||||||||||||||||||||||||||
| Net income | 22,528 | 22,528 | ||||||||||||||||||||||||||||||||||||||||||
| Balance October 30, 2021 | 54,162 | $ | 541 | $ | 736,886 | $ | (443,737) | 2,186 | $ | (21,501) | $ | 272,189 | ||||||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||||||||
| Balance at April 30, 2022 | 54,234 | $ | 542 | $ | 740,838 | $ | (491,494) | 2,188 | $ | (21,512) | $ | 228,374 | ||||||||||||||||||||||||||||||||
Stock-based compensation expense | 1,791 | 1,791 | ||||||||||||||||||||||||||||||||||||||||||
Vested equity awards | 540 | 5 | (5) | — | ||||||||||||||||||||||||||||||||||||||||
Shares repurchased for tax withholdings for vested stock awards | 238 | (612) | (612) | |||||||||||||||||||||||||||||||||||||||||
| Net loss | (52,707) | (52,707) | ||||||||||||||||||||||||||||||||||||||||||
| Balance July 30, 2022 | 54,774 | $ | 547 | $ | 742,624 | $ | (544,201) | 2,426 | $ | (22,124) | $ | 176,846 | ||||||||||||||||||||||||||||||||
Stock-based compensation expense | 1,719 | 1,719 | ||||||||||||||||||||||||||||||||||||||||||
Vested equity awards | 357 | 4 | (4) | — | ||||||||||||||||||||||||||||||||||||||||
Shares repurchased for tax withholdings for vested stock awards | 107 | (245) | (245) | |||||||||||||||||||||||||||||||||||||||||
| Net income | 22,144 | 22,144 | ||||||||||||||||||||||||||||||||||||||||||
| Balance October 29, 2022 | 55,131 | $ | 551 | $ | 744,339 | $ | (522,057) | 2,533 | $ | (22,369) | $ | 200,464 | ||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(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 April 30, 2022, which includes consolidated financial statements for the Company as of April 30, 2022 and May 1, 2021 and for each of the three fiscal years ended April 30, 2022, May 1, 2021 and May 2, 2020 (Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively) and the unaudited condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the quarter ended July 30, 2022.
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 1,399 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content, tools and general merchandise 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 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 gross 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.
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 April 30, 2022.
First Day Inclusive and Equitable Access Programs
We provide product and service offerings designed to address the most pressing issues in higher education, including equitable access, enhanced convenience and improved affordability through innovative course material delivery models designed to drive improved student experiences and outcomes. We offer our BNC First Day® inclusive and equitable access programs, consisting of First Day Complete and First Day, in which course materials, including both physical and digital content, are offered at a reduced price through a course fee or included in tuition, and delivered to students on or before the first day of class.
•First Day Complete is adopted by an institution and includes all classes, providing students both physical and digital materials. The First Day Complete model drives substantially greater unit sales and sell-through for the bookstore.
7
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
•Through First Day, digital course materials are adopted by a faculty member for a single course, and students receive their materials through their school's learning management system.
Offering courseware sales through our inclusive and equitable access First Day Complete and First Day models is a key, and increasingly important strategic initiative of ours to meet the market demands of substantially reduced pricing to students, as well as the opportunity to improve student outcomes, while, at the same time, increasing our market share, revenue and relative gross profits of courseware sales given the higher volumes of units sold in such models as compared to historical sales models that rely on individual student marketing and sales. We expect these programs to allow us to ultimately reverse historical long-term trends in courseware revenue declines, which has occurred at those schools where such programs have been adopted. We are moving quickly and decisively to accelerate our First Day Complete strategy. We plan to move many institutions to First Day Complete for the Fall of 2023 and the majority of schools by Fall 2024.
Approximately 111 campus stores adopted our First Day Complete course materials delivery program for the 2022 Fall Term, representing approximately 545,000 (as reported by National Center for Education Statistics) in total undergraduate student enrollment, a growth rate of 85% over Fall 2021. During the 13 weeks ended October 29, 2022, First Day Complete sales increased by $44,301 to $89,892, or 97%, as compared to $45,591 in the prior year period. During the 26 weeks ended October 29, 2022, First Day Complete sales increased by $54,732 to $106,314, or 106%, as compared to $51,582 in the prior year period.
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 Lids (FLC's parent company), 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.
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, and FLC owns the inventory it manages, relieving us of the obligation to finance inventory purchases from working capital.
COVID-19 Business Impact
Our business has been significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. However, on campus traffic continues to grow from increased campus events and activities, as compared to the last two years. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including variants, on enrollments, campus activities, university budgets, athletics and other areas that directly affect our business operations. Although most four year schools returned to a traditional on-campus environment, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic, including on enrollments at community colleges and by international students, the continuation of remote and hybrid class offerings, and its effect on our ability to source products, including textbooks and general merchandise offerings.
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.
8
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
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. 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.
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 and 26 weeks ended October 29, 2022 are not indicative of the results expected for the 52 weeks ending April 29, 2023 (Fiscal 2023).
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.
Restricted Cash
As of October 29, 2022 and October 30, 2021, we had restricted cash of $15,590 and $12,534, respectively, comprised of $14,686 and $11,637, respectively, in prepaid and other current assets in the condensed consolidated balance sheet related to segregated funds for commission due to FLC for logo merchandise sales as per the FLC Partnership's merchandising agreement, and $904 and $897, respectively, in other noncurrent assets in the condensed consolidated balance sheet related to amounts held in trust for future distributions related to employee benefit plans.
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 courseware 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 courseware 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 in the condensed consolidated statement of operations 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, at which time, we received additional proceeds of $1,906, and recognized a merchandise inventory loss on the sale of $434 in cost of goods sold in the condensed consolidated statement of operations 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.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
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.
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 in April 2021, 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. The transition to FLC for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout 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 sales on a gross basis in the periods prior to the transition.
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.
10
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
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.
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 October 29, 2022, we had $4,700 of goodwill on our condensed consolidated balance sheet related to our DSS reporting unit. 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 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 October 29, 2022, our other long-lived assets include property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets of $96,096, $291,704, $121,487, and $20,980, respectively, on our condensed consolidated balance sheet.
Our business has been significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. However, on campus traffic continues to grow from increased campus events and activities, as compared to the last two years. In Fiscal 2022, we continued to experience the ongoing effects of COVID-19 with the surge of the Omicron variant further impacting students return to campus and on-campus activities. While the majority of schools brought students back to campus, some schools chose to conduct classes virtually.
Income Taxes
The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. We regularly review deferred tax assets for recoverability and establish a valuation allowance, if determined to be necessary.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(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 | 26 weeks ended | |||||||||||||||||||||||||
| October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||||||||||||||||
| Retail | ||||||||||||||||||||||||||
| Course Materials Product Sales | $ | 419,879 | $ | 433,734 | $ | 547,476 | $ | 555,954 | ||||||||||||||||||
General Merchandise Product Sales (a) | 122,648 | 106,200 | 211,472 | 171,623 | ||||||||||||||||||||||
Service and Other Revenue (b) | 14,749 | 19,370 | 23,923 | 29,172 | ||||||||||||||||||||||
| Retail Product and Other Sales sub-total | 557,276 | 559,304 | 782,871 | 756,749 | ||||||||||||||||||||||
| Course Materials Rental Income | 41,334 | 49,648 | 52,246 | 62,672 | ||||||||||||||||||||||
| Retail Total Sales | $ | 598,610 | $ | 608,952 | $ | 835,117 | $ | 819,421 | ||||||||||||||||||
| Wholesale Sales | $ | 21,120 | $ | 21,669 | $ | 58,203 | $ | 66,153 | ||||||||||||||||||
DSS Sales (c) | $ | 8,465 | $ | 8,279 | $ | 17,649 | $ | 16,582 | ||||||||||||||||||
Eliminations (d) | $ | (11,097) | $ | (11,923) | $ | (30,013) | $ | (34,385) | ||||||||||||||||||
| Total Sales | $ | 617,098 | $ | 626,977 | $ | 880,956 | $ | 867,771 | ||||||||||||||||||
(a)Effective in April 2021, 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. The transition to FLC for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout 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 sales on a gross basis in the periods prior to the transition.
(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 Liabilities
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.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
The following table presents changes in deferred revenue associated with our contract liabilities:
| 26 weeks ended | ||||||||||||||
| October 29, 2022 | October 30, 2021 | |||||||||||||
| Deferred revenue at the beginning of period | $ | 19,722 | $ | 18,139 | ||||||||||
| Additions to deferred revenue during the period | 114,975 | 82,515 | ||||||||||||
| Reductions to deferred revenue for revenue recognized during the period | (83,651) | (66,364) | ||||||||||||
| Deferred revenue balance at the end of period: | $ | 51,046 | $ | 34,290 | ||||||||||
| Balance Sheet classification: | ||||||||||||||
| Accrued liabilities | $ | 46,610 | $ | 29,820 | ||||||||||
| Other long-term liabilities | 4,436 | 4,470 | ||||||||||||
| Deferred revenue balance at the end of period: | $ | 51,046 | $ | 34,290 | ||||||||||
As of October 29, 2022, we expect to recognize $46,610 of the deferred revenue balance within the next 12 months.
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 April 30, 2022.
Retail
The Retail Segment operates 1,399 college, university, and K-12 school bookstores, comprised of 793 physical bookstores and 606 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 websites 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 and equitable 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 3,100 physical bookstores (including our Retail Segment's 793 physical bookstores) and sources and distributes new and used textbooks to our 606 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 350 college bookstores.
DSS
The Digital Student Solutions (“DSS”) Segment includes 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®, an institutional and 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.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
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
•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.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
Summarized financial information for our reportable segments is reported below:
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||
| October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Retail | $ | 598,610 | $ | 608,952 | $ | 835,117 | $ | 819,421 | |||||||||||||||
| Wholesale | 21,120 | 21,669 | 58,203 | 66,153 | |||||||||||||||||||
| DSS | 8,465 | 8,279 | 17,649 | 16,582 | |||||||||||||||||||
| Elimination | (11,097) | (11,923) | (30,013) | (34,385) | |||||||||||||||||||
| Total Sales | $ | 617,098 | $ | 626,977 | $ | 880,956 | $ | 867,771 | |||||||||||||||
| Gross Profit | |||||||||||||||||||||||
Retail (a) | $ | 129,502 | $ | 128,825 | $ | 183,495 | $ | 176,968 | |||||||||||||||
| Wholesale | 5,455 | 5,620 | 12,354 | 16,025 | |||||||||||||||||||
| DSS | 6,694 | 6,906 | 14,177 | 13,936 | |||||||||||||||||||
| Elimination | 3,184 | 4,208 | (1,703) | (1,341) | |||||||||||||||||||
| Total Gross Profit | $ | 144,835 | $ | 145,559 | $ | 208,323 | $ | 205,588 | |||||||||||||||
| Selling and Administrative Expenses | |||||||||||||||||||||||
| Retail | $ | 90,086 | $ | 89,486 | $ | 169,090 | $ | 157,851 | |||||||||||||||
| Wholesale | 3,867 | 4,387 | 7,998 | 8,378 | |||||||||||||||||||
| DSS | 8,132 | 7,305 | 16,277 | 13,752 | |||||||||||||||||||
| Corporate Services | 5,075 | 6,809 | 12,289 | 14,253 | |||||||||||||||||||
| Elimination | (74) | (85) | (82) | (97) | |||||||||||||||||||
| Total Selling and Administrative Expenses | $ | 107,086 | $ | 107,902 | $ | 205,572 | $ | 194,137 | |||||||||||||||
| Depreciation and Amortization | |||||||||||||||||||||||
| Retail | $ | 8,869 | $ | 8,669 | $ | 18,398 | $ | 18,076 | |||||||||||||||
| Wholesale | 1,370 | 1,364 | 2,719 | 2,664 | |||||||||||||||||||
| DSS | 503 | 1,902 | 2,140 | 3,801 | |||||||||||||||||||
| Corporate Services | 17 | 17 | 35 | 35 | |||||||||||||||||||
| Total Depreciation and Amortization | $ | 10,759 | $ | 11,952 | $ | 23,292 | $ | 24,576 | |||||||||||||||
| Operating Income (Loss) | |||||||||||||||||||||||
| Retail | $ | 30,547 | $ | 29,595 | $ | (3,993) | $ | (1,042) | |||||||||||||||
| Wholesale | 218 | (131) | 1,637 | 4,983 | |||||||||||||||||||
| DSS | (1,941) | (2,301) | (4,240) | (3,617) | |||||||||||||||||||
| Corporate Services | (5,352) | (6,867) | (12,959) | (15,226) | |||||||||||||||||||
| Elimination | 3,258 | 4,293 | (1,621) | (1,244) | |||||||||||||||||||
| Total Operating Income (Loss) | $ | 26,730 | $ | 24,589 | $ | (21,176) | $ | (16,146) | |||||||||||||||
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||
| Reconciliation of segment Operating Income (Loss) to consolidated Income (Loss) Before Income Taxes: | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||||||||||||
| Total Operating Income (Loss) | $ | 26,730 | $ | 24,589 | $ | (21,176) | $ | (16,146) | |||||||||||||||
| Interest Expense, net | 4,886 | 2,264 | 8,754 | 4,758 | |||||||||||||||||||
| Income (Loss) Before Income Taxes | $ | 21,844 | $ | 22,325 | $ | (29,930) | $ | (20,904) | |||||||||||||||
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
(a) For the 26 weeks ended October 30, 2021, gross margin includes a merchandise inventory loss of $434 in the Retail Segment. See Note 2. Summary of Significant Accounting Policies - Merchandise Inventories.
Note 5. Equity and Earnings Per Share
Equity
Share Repurchases
During the 26 weeks ended October 29, 2022, we did not repurchase shares of our Common Stock under the stock repurchase program and as of October 29, 2022, approximately $26,669 remains available under the stock repurchase program.
During the 26 weeks ended October 29, 2022, we repurchased 344,587 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 October 29, 2022 and October 30, 2021, average shares of 3,153,516 and 523,447 were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive, respectively. During the 26 weeks ended October 29, 2022 and October 30, 2021, average shares of 4,898,303 and 3,771,594 were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive, respectively.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
The following is a reconciliation of the basic and diluted earnings per share calculation:
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||
| (shares in thousands) | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||||||||||||
| Numerator for basic earnings per share: | |||||||||||||||||||||||
| Net income (loss) available to common shareholders | $ | 22,144 | $ | 22,528 | $ | (30,563) | $ | (21,100) | |||||||||||||||
| Less allocation of earnings to participating securities | (11) | (64) | — | — | |||||||||||||||||||
| Net income (loss) available to common shareholders | $ | 22,133 | $ | 22,464 | $ | (30,563) | $ | (21,100) | |||||||||||||||
| Numerator for diluted earnings per share: | |||||||||||||||||||||||
| Net income (loss) available to common shareholders | $ | 22,133 | $ | 22,464 | $ | (30,563) | $ | (21,100) | |||||||||||||||
| Allocation of earnings to participating securities | 11 | 64 | — | — | |||||||||||||||||||
| Less diluted allocation of earnings to participating securities | (11) | (61) | — | — | |||||||||||||||||||
| Net income (loss) available to common shareholders | $ | 22,133 | $ | 22,467 | $ | (30,563) | $ | (21,100) | |||||||||||||||
| Denominator for basic earnings per share: | |||||||||||||||||||||||
| Basic weighted average shares of Common Stock | 52,438 | 51,666 | 52,305 | 51,570 | |||||||||||||||||||
| Denominator for diluted earnings per share: | |||||||||||||||||||||||
| Basic weighted average shares of Common Stock | 52,438 | 51,666 | 52,305 | 51,570 | |||||||||||||||||||
| Average dilutive restricted stock units | 141 | 611 | — | — | |||||||||||||||||||
| Average dilutive performance shares | — | — | — | — | |||||||||||||||||||
| Average dilutive restricted shares | 10 | 126 | — | — | |||||||||||||||||||
| Average dilutive performance share units | — | 255 | — | — | |||||||||||||||||||
| Average dilutive stock options | 606 | 1,910 | — | — | |||||||||||||||||||
| Diluted weighted average shares of Common Stock | 53,195 | 54,568 | 52,305 | 51,570 | |||||||||||||||||||
| Earnings (Loss) per share of Common Stock: | |||||||||||||||||||||||
| Basic | $ | 0.42 | $ | 0.43 | $ | (0.58) | $ | (0.41) | |||||||||||||||
| Diluted | $ | 0.42 | $ | 0.41 | $ | (0.58) | $ | (0.41) | |||||||||||||||
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
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.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
Non-Financial Assets and Liabilities
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.
Other 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 October 29, 2022, we recorded a liability of $1,398 (Level 2 input) which is reflected in accrued liabilities ($1,318) and other long-term liabilities ($80) on the condensed consolidated balance sheet. As of October 30, 2021, we recorded a liability of $3,474 (Level 2 input) which is reflected in accrued liabilities ($2,345) and other long-term liabilities ($1,129) on the condensed consolidated balance sheet. For additional information, see Note 10. Long-Term Incentive Plan Compensation Expense.
Note 7. Debt
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 March 1, 2019 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. As of October 29, 2022, we were in compliance with all debt covenants under the Credit Agreement.
On March 4, 2022, we were granted a waiver to the condition to the draw scheduled for April 2022 under the FILO Facility, that Consolidated EBITDA (as defined in the Credit Agreement) minus Restricted Payments (as defined in the Credit Agreement) equal at least $110,000. Under the waiver amendment, the commitment under the FILO Facility of $25,000 was increased to $40,000, with all remaining terms unchanged.
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 April 30, 2022.
During the 26 weeks ended October 29, 2022, we borrowed $318,200 and repaid $321,900 under the Credit Agreement, with $222,000 of outstanding borrowings as of October 29, 2022, comprised entirely of borrowings under the Credit Facility. During the 26 weeks ended October 30, 2021, we borrowed $259,720 and repaid $254,020 under the Credit Agreement, with $183,300 of outstanding borrowings as of October 30, 2021, comprised entirely of borrowings under the Credit Facility. As of both October 29, 2022 and October 30, 2021, we have issued $4,759 in letters of credit under the Credit Facility.
Term Loan
On June 7, 2022, we entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) with TopLids LendCo, LLC and Vital Fundco, LLC and we entered an amendment to our existing Credit Agreement. For additional information, see the Company’s Report on Form 8-K dated June 7, 2022 and filed with the SEC on June 10, 2022.
The Term Loan Credit Agreement provides for term loans in an amount equal to $30,000 (the “Term Loan Facility” and, the loans thereunder, the “Term Loans”). The proceeds of the Term Loans are being used to finance working capital, and to pay fees and expenses related to the Term Loan Facility. During the 26 weeks ended October 29, 2022, we borrowed $30,000 and repaid $0 under the Term Loan Credit Agreement, with $30,000 of outstanding borrowings as of October 29, 2022.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
We incurred debt issuance costs totaling $1,964 related to the Term Loan Credit Agreement. The debt issuance costs have been deferred and are presented as prepaid and other current assets and other noncurrent assets in the consolidated balance sheets, and subsequently amortized ratably over the term of the Term Loan Facility.
The Term Loans accrue interest at a rate equal to 11.25%, payable quarterly, and mature on June 7, 2024. We have the right, through December 31, 2022, to pay all or a portion of the interest on the Term Loans in kind. To date, all interest on the term loan has been paid in cash. The Term Loans do not amortize prior to maturity. Solely to the extent that any Term Loans remain outstanding on June 7, 2023, we must pay a fee of 1.5% of the outstanding principal amount of the Term Loans on such date.
The Term Loans are required to be repaid (i) after repayment of the FILO Facility under the Credit Agreement, with up to 100% of the proceeds of the sale of a non-core business line of the Company generating net proceeds in excess of $1,000, other than ordinary course dispositions and (ii) in full in connection with a debt or equity financing transaction generating net proceeds in excess of an amount sufficient to repay the FILO Facility under the Credit Agreement.
The Term Loan Credit Agreement does not contain a financial covenant, but otherwise contains representations and warranties, covenants and events of default that are substantially the same as those in the Credit Agreement, including restrictions on the ability of the Company and its subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and make dividends and distributions. The Term Loan Facility is secured by second-priority liens on all assets securing the obligations under the Credit Agreement, which is all of the assets of the Company and the Guarantors, subject to customary exclusions and limitations set forth in the Term Loan Credit Agreement and the other loan documents executed in connection therewith.
The Credit Agreement amendment permitted us to incur the Term Loan Facility and also provides that, upon repayment of the Term Loan Credit Agreement (and, if applicable, any replacement credit facility thereof), we may incur second lien secured debt in an aggregate principal amount not to exceed $75,000.
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) 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.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
The following table summarizes lease expense:
| 13 weeks ended | 26 weeks ended | |||||||||||||||||||||||||
| October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||||||||||||||||
| Variable lease expense | $ | 25,281 | $ | 30,738 | $ | 40,465 | $ | 42,440 | ||||||||||||||||||
| Operating lease expense | 52,998 | 48,990 | 75,860 | 65,363 | ||||||||||||||||||||||
| Net lease expense | $ | 78,279 | $ | 79,728 | $ | 116,325 | $ | 107,803 | ||||||||||||||||||
The increase in lease expense during the 26 weeks ended October 29, 2022 is primarily due to higher sales for contracts based on a percentage of revenue during the 26 weeks ended October 29, 2022, the impact of the timing due to contract renewals, and the increase in minimum contractual guarantees which were temporarily eliminated in the prior year due to limited on campus store traffic resulting from the COVID pandemic.
The following table summarizes our minimum fixed lease obligations, excluding variable commissions, as of October 29, 2022:
| As of | ||||||||
| October 29, 2022 | ||||||||
| Remainder of Fiscal 2023 | $ | 102,628 | ||||||
| Fiscal 2024 | 58,137 | |||||||
| Fiscal 2025 | 50,811 | |||||||
| Fiscal 2026 | 38,301 | |||||||
| Fiscal 2027 | 30,161 | |||||||
| Thereafter | 83,321 | |||||||
| Total lease payments | 363,359 | |||||||
| Less: imputed interest | (41,799) | |||||||
| Operating lease liabilities at period end | $ | 321,560 | ||||||
Future lease payment obligations related to leases that were entered into, but did not commence as of October 29, 2022, were not material. The following summarizes additional information related to our operating leases:
| As of | ||||||||||||||
| October 29, 2022 | October 30, 2021 | |||||||||||||
| Weighted average remaining lease term (in years) | 5.3 years | 5.3 years | ||||||||||||
| Weighted average discount rate | 4.4 | % | 4.6 | % | ||||||||||
| Supplemental cash flow information: | ||||||||||||||
| Cash payments for lease liabilities within operating activities | $ | 75,876 | $ | 64,103 | ||||||||||
| Right-of-use assets obtained in exchange for lease liabilities from initial recognition | $ | 86,045 | $ | 77,811 | ||||||||||
Note 9. Supplementary Information
Restructuring and other charges
During the 13 and 26 weeks ended October 29, 2022, we recognized restructuring and other charges totaling $260 and $635, respectively, comprised primarily of costs associated with professional service costs for restructuring and process improvements.
During the 13 and 26 weeks ended October 30, 2021, we recognized restructuring and other charges totaling $1,116 and $3,021, respectively, comprised primarily of $418 and $1,250, respectively, for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives, ($754 is included in accrued liabilities in the condensed consolidated balance sheet as of October 30, 2021), $698 and $1,771, respectively, for costs associated with professional service costs for restructuring, process improvements, development and integration associated with the FLC Partnership, shareholder activist activities, and liabilities for a facility closure.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
Note 10. 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.
During the 26 weeks ended October 29, 2022, we granted the following awards:
•82,628 restricted stock units ("RSU") awards and 11,804 restricted stock ("RS") awards with a one year vesting period to the Board of Directors ("BOD") members for annual compensation.
•878,247 restricted stock units ("RSU") awards to employees with a three year vesting period.
•322,495 stock options with an exercise price of $2.36 per stock option, which was the fair market value on the date of grant (Stock Option Grant #1) and 348,723 stock options with an exercise price of $4.86 per stock option, which was above the fair market value on the date of grant, (Stock Option Grant #2) granted to employees. The stock options are exercisable in four equal annual installments commencing one year after the date of grant and have a ten year term. Holders are not entitled to receive dividends (if any) prior to vesting and exercise of the options. The following summarizes the stock option fair value assumptions:
| Stock Option Grant #1 | Stock Option Grant #2 | ||||||||||
| Exercise Price | $ | 2.36 | $ | 4.86 | |||||||
| Valuation method utilized | Black-Scholes | Monte Carlo | |||||||||
| Risk-free interest rate | 3.28 | % | 3.28 | % | |||||||
| Expected option term | 6.3 years | 10.0 years | |||||||||
| Company volatility | 74 | % | 74 | % | |||||||
| Dividend yield | — | % | — | % | |||||||
| Grant date fair value per award | $ | 1.61 | $ | 1.28 | |||||||
The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected stock option term. For Stock Option Grant #1, we are permitted to use the simplified approach to estimate the expected term of the stock options, which typically assumes exercise occurs at the mid-point between the end of the vesting period and the expiration date. The simplified approach is not allowed for premium-priced options (Stock Option Grant #2), which were estimated using a stock price multiple, as there is no option exercise history which to base an early exercise option. The expected stock option term represents the weighted average period of time that stock options granted are expected to be outstanding, based on vesting schedules and the contractual term of the stock options. Volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected stock option term.
21
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
We recognized compensation expense for long-term incentive plan awards in selling and administrative expenses as follows:
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||
| October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | ||||||||||||||||||||
| Stock-based awards | |||||||||||||||||||||||
| Restricted stock expense | $ | 64 | $ | 119 | $ | 158 | $ | 207 | |||||||||||||||
| Restricted stock units expense | 990 | 931 | 2,013 | 1,661 | |||||||||||||||||||
| Performance share units expense | — | 29 | 10 | 63 | |||||||||||||||||||
| Stock option expense | 665 | 399 | 1,329 | 669 | |||||||||||||||||||
| Sub-total stock-based awards: | $ | 1,719 | $ | 1,478 | $ | 3,510 | $ | 2,600 | |||||||||||||||
| Cash settled awards | |||||||||||||||||||||||
| Phantom share units expense | $ | 66 | $ | 2,452 | $ | 268 | $ | 4,924 | |||||||||||||||
| Total compensation expense for long-term incentive awards | $ | 1,785 | $ | 3,930 | $ | 3,778 | $ | 7,524 | |||||||||||||||
Total unrecognized compensation cost related to unvested awards as of October 29, 2022 was $13,077 and is expected to be recognized over a weighted-average period of 2.3 years.
Note 11. 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 $1,069 and $1,004 during the 13 weeks ended October 29, 2022 and October 30, 2021, respectively. Total employee benefit expense for these plans was $2,394 and $1,048 during the 26 weeks ended October 29, 2022 and October 30, 2021, 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 12. Income Taxes
We recorded an income tax benefit of $(300) on pre-tax income of $21,844 during the 13 weeks ended October 29, 2022, which represented an effective income tax rate of (1.4)% and an income tax benefit of $(203) on pre-tax income of $22,325 during the 13 weeks ended October 30, 2021, which represented an effective income tax rate of (0.9)%.
We recorded an income tax expense of $633 on pre-tax loss of $(29,930) during the 26 weeks ended October 29, 2022, which represented an effective income tax rate of (2.1)% and an income tax expense of $196 on pre-tax loss of $(20,904) during the 26 weeks ended October 30, 2021, which represented an effective income tax rate of (0.9)%.
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 October 29, 2022, we determined that it was more likely than not that we would not realize all 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 and 26 weeks ended October 29, 2022 is lower as compared to the prior year comparable period due to foreign taxes and lower projected annual taxable loss in the current year.
Note 13. 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. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on our condensed consolidated financial position, results of operations, or cash flows.
22
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021
(Thousands of dollars, except share and per share data)
(unaudited)
Note 14. Subsequent Event
On December 2, 2022, the Board of Directors approved a company-wide initiative to drive efficiencies, streamline operations, simplify the organizational structure and further reduce non-essential costs. These actions are expected to be substantially implemented within thirty days. The Company expects to incur restructuring charges, primarily related to severance, of approximately $5,000 to $6,000 in the third quarter of fiscal 2023 and expects to save $10,000 to $15,000 in fiscal year 2023. These initiatives are expected to provide annualized savings of $30,000 to $35,000 once fully implemented. The restructuring charges are excluded from non-GAAP adjusted EBITDA and from the annualized and fiscal year 2023 savings.
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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
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 1,399 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content, tools and general merchandise 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 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 gross general merchandise sales to continue 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.
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.
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 April 30, 2022.
Cost Savings Initiative
On December 2, 2022, the Board of Directors approved a company-wide initiative to drive efficiencies, streamline operations, simplify the organizational structure and further reduce non-essential costs. These actions are expected to be substantially implemented within thirty days. The Company expects to incur restructuring charges, primarily related to severance, of approximately $5 million to $6 million in the third quarter of fiscal 2023 and expects to save $10 million to $15 million in fiscal year 2023. These initiatives are expected to provide annualized savings of $30 million to $35 million once fully implemented. The restructuring charges are excluded from non-GAAP adjusted EBITDA and from the annualized and fiscal year 2023 savings.
First Day Inclusive and Equitable Access Programs
We provide product and service offerings designed to address the most pressing issues in higher education, including equitable access, enhanced convenience and improved affordability through innovative course material delivery models designed to drive improved student experiences and outcomes. We offer our BNC First Day® inclusive and equitable access programs, consisting of First Day Complete and First Day, in which course materials, including both physical and digital content, are offered at a reduced price through a course fee or included in tuition, and delivered to students on or before the first day of class.
•First Day Complete is adopted by an institution and includes all classes, providing students both physical and digital materials. The First Day Complete model drives substantially greater unit sales and sell-through for the bookstore.
•Through First Day, digital course materials are adopted by a faculty member for a single course, and students receive their materials through their school's learning management system.
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Offering courseware sales through our inclusive and equitable access First Day Complete and First Day models is a key, and increasingly important strategic initiative of ours to meet the market demands of substantially reduced pricing to students, as well as the opportunity to improve student outcomes, while, at the same time, increasing our market share, revenue and relative gross profits of courseware sales given the higher volumes of units sold in such models as compared to historical sales models that rely on individual student marketing and sales. We expect these programs to allow us to ultimately reverse historical long-term trends in courseware revenue declines, which has been observed at those schools where such programs have been adopted. We are moving quickly and decisively to accelerate our First Day Complete strategy. We plan to move many institutions to First Day Complete for the Fall of 2023 and the majority of schools by Fall 2024.
Approximately 111 campus stores adopted our First Day Complete course materials delivery program for the 2022 Fall Term, representing approximately 545,000 (as reported by National Center for Education Statistics) in total undergraduate student enrollment, a growth rate of 85% over Fall 2021. During the 13 weeks ended October 29, 2022, First Day Complete sales increased by $44.3 million to $89.9 million, or 97%, as compared to $45.6 million in the prior year period. During the 26 weeks ended October 29, 2022, First Day Complete sales increased by $54.7 million to $106.3 million, or 106%, as compared to $51.6 million in the prior year period.
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 Lids (FLC's parent company), 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.
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, and FLC owns the inventory it manages, relieving us of the obligation to finance inventory purchases from working capital.
COVID-19 Business Impact
Our business has been significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. However, on campus traffic continues to grow from increased campus events and activities, as compared to the last two years. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including variants, on enrollments, campus activities, university budgets, athletics and other areas that directly affect our business operations. Although most four year schools returned to a traditional on-campus environment, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic, including on enrollments at community colleges and by international students, the continuation of remote and hybrid class offerings, and its effect on our ability to source products, including textbooks and general merchandise offerings.
Segments
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 April 30, 2022.
Retail Segment
The Retail Segment operates 1,399 college, university, and K-12 school bookstores, comprised of 793 physical bookstores and 606 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 websites 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 and equitable access programs, in which
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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 Segment
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 3,100 physical bookstores (including our Retail Segment's 793 physical bookstores) and sources and distributes new and used textbooks to our 606 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 350 college bookstores.
DSS Segment
The Digital Student Solutions (“DSS”) Segment includes 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®, an institutional and 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.
Seasonality
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.
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, Capital Markets, College Enrollment and Consumer Spending Patterns. Our business is affected by the impact of the COVID-19 pandemic, the overall economic environment, capital markets, 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. Many colleges and K-12 schools had 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 since reopened, some are providing alternatives to traditional in-person instruction, including online and hybrid learning options and significantly reduced classroom sizes. While many athletic conferences resumed their sport activities, other events, such as parent and alumni weekends and prospective student campus tour activities, some may still be curtailed. Additionally, our business, like many others has been affected by the challenging labor market and the ability to recruit employees. The impact of COVID-19 store closings during Fiscal 2021 to Fiscal 2022 resulted in the loss of cash flow and increased borrowings that we would not otherwise have expected to incur.
•Economic Environment: Retail general merchandise sales are subject to short-term fluctuations driven by the broader retail environment and other economic factors, such as interest rate fluctuations and inflationary considerations. The broader macro-economic global supply chain issues have impacted our ability to source textbooks, school supplies and general merchandise sold in our campus bookstores, including technology-related products and emblematic clothing. A significant reduction in U.S. economic activity could lead to decreased consumer spending.
•Capital Market Trends: We may require additional capital in the future to sustain or grow our business. The future availability of financing will depend on a variety of factors, such as economic and market conditions, and the
26
availability of credit. These factors could materially adversely affect our costs of borrowing, and our financial position and results of operations would be adversely impacted. Volatility in global financial markets may also limit our ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our ability to react to changing economic and business conditions.
•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. 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. 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.
•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, including insurance, 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. The broader macro-economic global supply chain issues may also impact our ability to source school supplies and general merchandise sold in our campus bookstores, including technology-related products and emblematic clothing.
•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 and equitable 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. Offering courseware sales through our inclusive and equitable access First Day Complete and First Day models is a key, and increasingly important, strategic initiative of ours to meet the market demands of substantially reduced pricing to students. Our First Day Complete and First Day programs contribute to improved student outcomes, while increasing our market share, revenue and relative gross profits of courseware sales given the higher volumes of units sold in such models as compared to historical sales models that rely on individual student marketing and sales. We expect these programs to
27
allow us to ultimately reverse historical long-term trends in courseware revenue declines, which has been observed at those schools where such programs have been adopted. We are moving quickly and decisively to accelerate our First Day Complete strategy. While we plan to move many institutions to First Day Complete for the Fall of 2023, and the majority of our schools by Fall 2024, we cannot guarantee that we will be able to achieve these plans within these timeframes or at all. We also expect that certain less profitable or non-essential bookstores we operate may close. 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 April 30, 2022.
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.
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.
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 | 26 weeks ended | ||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||||||||||||
| Sales: | |||||||||||||||||||||||
Product sales and other (a) | $ | 575,764 | $ | 577,329 | $ | 828,710 | $ | 805,099 | |||||||||||||||
| Rental income | 41,334 | 49,648 | 52,246 | 62,672 | |||||||||||||||||||
| Total sales | $ | 617,098 | $ | 626,977 | $ | 880,956 | $ | 867,771 | |||||||||||||||
| Net income (loss) | $ | 22,144 | $ | 22,528 | $ | (30,563) | $ | (21,100) | |||||||||||||||
Adjusted Earnings (non-GAAP) (b) | $ | 24,022 | $ | 24,955 | $ | (26,733) | $ | (15,059) | |||||||||||||||
Adjusted EBITDA by Segment (non-GAAP) (b) | |||||||||||||||||||||||
| Retail | $ | 39,416 | $ | 39,444 | $ | 14,431 | $ | 19,822 | |||||||||||||||
| Wholesale | 1,588 | 1,233 | 4,356 | 7,647 | |||||||||||||||||||
| DSS | 180 | 807 | 1,069 | 2,499 | |||||||||||||||||||
| Corporate Services | (5,075) | (6,809) | (12,289) | (14,253) | |||||||||||||||||||
| Elimination | 3,258 | 4,293 | (1,621) | (1,244) | |||||||||||||||||||
| Total Adjusted EBITDA (non-GAAP) | $ | 39,367 | $ | 38,968 | $ | 5,946 | $ | 14,471 | |||||||||||||||
(a)Effective in April 2021, 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. The transition to FLC for campus
28
stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout 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 consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the periods prior to the transition. For Retail Gross Comparable Store Sales details, see below.
(b)Adjusted Earnings, Adjusted EBITDA, and Adjusted EBITDA by Segment are non-GAAP financial measures. See Use of Non-GAAP Measures discussion below.
The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales:
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||
| October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | ||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Product sales and other | 93.3 | % | 92.1 | % | 94.1 | % | 92.8 | % | |||||||||||||||
| Rental income | 6.7 | 7.9 | 5.9 | 7.2 | |||||||||||||||||||
| Total sales | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||
Product and other cost of sales (a) | 78.0 | 78.5 | 77.6 | 77.9 | |||||||||||||||||||
Rental cost of sales (a) | 55.5 | 57.1 | 55.9 | 55.8 | |||||||||||||||||||
| Total cost of sales | 76.5 | 76.8 | 76.4 | 76.3 | |||||||||||||||||||
| Gross margin | 23.5 | 23.2 | 23.6 | 23.7 | |||||||||||||||||||
| Selling and administrative expenses | 17.4 | 17.2 | 23.3 | 22.4 | |||||||||||||||||||
| Depreciation and amortization expense | 1.7 | 1.9 | 2.6 | 2.8 | |||||||||||||||||||
| Restructuring and other charges | — | 0.2 | 0.1 | 0.3 | |||||||||||||||||||
| Operating income (loss) | 4.4 | % | 3.9 | % | (2.4) | % | (1.8) | % | |||||||||||||||
(a)Represents the percentage these costs bear to the related sales, instead of total sales.
Results of Operations - 13 and 26 weeks ended October 29, 2022 compared with the 13 and 26 weeks ended October 30, 2021
| 13 weeks ended October 29, 2022 | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | DSS | Corporate Services | Eliminations | Total | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||||||||
| Product sales and other | $ | 557,276 | $ | 21,120 | $ | 8,465 | $ | — | $ | (11,097) | $ | 575,764 | |||||||||||||||||||||||
| Rental income | 41,334 | — | — | — | — | 41,334 | |||||||||||||||||||||||||||||
| Total sales | 598,610 | 21,120 | 8,465 | — | (11,097) | 617,098 | |||||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||||||||
| Product and other cost of sales | 446,167 | 15,665 | 1,771 | — | (14,281) | 449,322 | |||||||||||||||||||||||||||||
| Rental cost of sales | 22,941 | — | — | — | — | 22,941 | |||||||||||||||||||||||||||||
| Total cost of sales | 469,108 | 15,665 | 1,771 | — | (14,281) | 472,263 | |||||||||||||||||||||||||||||
| Gross profit | 129,502 | 5,455 | 6,694 | — | 3,184 | 144,835 | |||||||||||||||||||||||||||||
| Selling and administrative expenses | 90,086 | 3,867 | 8,132 | 5,075 | (74) | 107,086 | |||||||||||||||||||||||||||||
| Depreciation and amortization expense | 8,869 | 1,370 | 503 | 17 | — | 10,759 | |||||||||||||||||||||||||||||
| Restructuring and other charges | — | — | — | 260 | — | 260 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | 30,547 | $ | 218 | $ | (1,941) | $ | (5,352) | $ | 3,258 | $ | 26,730 | |||||||||||||||||||||||
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| 13 weeks ended October 30, 2021 | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | DSS | Corporate Services | Eliminations | Total | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||||||||
| Product sales and other | $ | 559,304 | $ | 21,669 | $ | 8,279 | $ | — | $ | (11,923) | $ | 577,329 | |||||||||||||||||||||||
| Rental income | 49,648 | — | — | — | — | 49,648 | |||||||||||||||||||||||||||||
| Total sales | 608,952 | 21,669 | 8,279 | — | (11,923) | 626,977 | |||||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||||||||
| Product and other cost of sales | 451,779 | 16,049 | 1,373 | — | (16,131) | 453,070 | |||||||||||||||||||||||||||||
| Rental cost of sales | 28,348 | — | — | — | — | 28,348 | |||||||||||||||||||||||||||||
| Total cost of sales | 480,127 | 16,049 | 1,373 | — | (16,131) | 481,418 | |||||||||||||||||||||||||||||
| Gross profit | 128,825 | 5,620 | 6,906 | — | 4,208 | 145,559 | |||||||||||||||||||||||||||||
| Selling and administrative expenses | 89,486 | 4,387 | 7,305 | 6,809 | (85) | 107,902 | |||||||||||||||||||||||||||||
| Depreciation and amortization expense | 8,669 | 1,364 | 1,902 | 17 | — | 11,952 | |||||||||||||||||||||||||||||
| Restructuring and other charges | 1,075 | — | — | 41 | — | 1,116 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | 29,595 | $ | (131) | $ | (2,301) | $ | (6,867) | $ | 4,293 | $ | 24,589 | |||||||||||||||||||||||
| 26 weeks ended October 29, 2022 | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | DSS | Corporate Services | Eliminations | Total | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||||||||
| Product sales and other | $ | 782,871 | $ | 58,203 | $ | 17,649 | $ | — | $ | (30,013) | $ | 828,710 | |||||||||||||||||||||||
| Rental income | 52,246 | — | — | — | — | 52,246 | |||||||||||||||||||||||||||||
| Total sales | 835,117 | 58,203 | 17,649 | — | (30,013) | 880,956 | |||||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||||||||
| Product and other cost of sales | 622,416 | 45,849 | 3,472 | — | (28,310) | 643,427 | |||||||||||||||||||||||||||||
| Rental cost of sales | 29,206 | — | — | — | — | 29,206 | |||||||||||||||||||||||||||||
| Total cost of sales | 651,622 | 45,849 | 3,472 | — | (28,310) | 672,633 | |||||||||||||||||||||||||||||
| Gross profit | 183,495 | 12,354 | 14,177 | — | (1,703) | 208,323 | |||||||||||||||||||||||||||||
| Selling and administrative expenses | 169,090 | 7,998 | 16,277 | 12,289 | (82) | 205,572 | |||||||||||||||||||||||||||||
| Depreciation and amortization expense | 18,398 | 2,719 | 2,140 | 35 | — | 23,292 | |||||||||||||||||||||||||||||
| Restructuring and other charges | — | — | — | 635 | — | 635 | |||||||||||||||||||||||||||||
| Operating (loss) income | $ | (3,993) | $ | 1,637 | $ | (4,240) | $ | (12,959) | $ | (1,621) | $ | (21,176) | |||||||||||||||||||||||
| 26 weeks ended October 30, 2021 | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | DSS | Corporate Services | Eliminations | Total | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||||||||
| Product sales and other | $ | 756,749 | $ | 66,153 | $ | 16,582 | $ | — | $ | (34,385) | $ | 805,099 | |||||||||||||||||||||||
| Rental income | 62,672 | — | — | — | — | 62,672 | |||||||||||||||||||||||||||||
| Total sales | 819,421 | 66,153 | 16,582 | — | (34,385) | 867,771 | |||||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||||||||
| Product and other cost of sales | 607,501 | 50,128 | 2,646 | — | (33,044) | 627,231 | |||||||||||||||||||||||||||||
| Rental cost of sales | 34,952 | — | — | — | — | 34,952 | |||||||||||||||||||||||||||||
| Total cost of sales | 642,453 | 50,128 | 2,646 | — | (33,044) | 662,183 | |||||||||||||||||||||||||||||
| Gross profit | 176,968 | 16,025 | 13,936 | — | (1,341) | 205,588 | |||||||||||||||||||||||||||||
| Selling and administrative expenses | 157,851 | 8,378 | 13,752 | 14,253 | (97) | 194,137 | |||||||||||||||||||||||||||||
| Depreciation and amortization expense | 18,076 | 2,664 | 3,801 | 35 | — | 24,576 | |||||||||||||||||||||||||||||
| Restructuring and other charges | 2,083 | — | — | 938 | — | 3,021 | |||||||||||||||||||||||||||||
| Operating (loss) income | $ | (1,042) | $ | 4,983 | $ | (3,617) | $ | (15,226) | $ | (1,244) | $ | (16,146) | |||||||||||||||||||||||
30
Sales
The following table summarizes our sales for the 13 and 26 weeks ended October 29, 2022 and October 30, 2021:
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | October 30, 2021 | Var $ | Var % | October 29, 2022 | October 30, 2021 | Var $ | Var % | |||||||||||||||||||||||||||||||||||||||
| Product sales and other | $ | 575,764 | $ | 577,329 | $ | (1,565) | (0.3)% | $ | 828,710 | $ | 805,099 | $ | 23,611 | 2.9% | |||||||||||||||||||||||||||||||||
| Rental income | 41,334 | 49,648 | $ | (8,314) | (16.7)% | 52,246 | 62,672 | $ | (10,426) | (16.6)% | |||||||||||||||||||||||||||||||||||||
| Total Sales | $ | 617,098 | $ | 626,977 | $ | (9,879) | (1.6)% | $ | 880,956 | $ | 867,771 | $ | 13,185 | 1.5% | |||||||||||||||||||||||||||||||||
The sales decrease during the 13 weeks ended October 29, 2022 is primarily related to lower course material sales primarily due to the shift to more digital course materials, partially offset by higher general merchandise sales as many schools approach a more traditional on campus learning experience.
The sales increase during the 26 weeks ended October 29, 2022 is primarily related to higher general merchandise sales as many schools approach a more traditional on campus learning experience, partially offset by lower course material sales primarily due to the shift to more digital course materials.
The components of the variances for the 13 and 26 week periods are reflected in the table below.
| Sales variances | 13 weeks ended | 26 weeks ended | ||||||||||||
| Dollars in millions | October 29, 2022 | October 29, 2022 | ||||||||||||
| Retail Sales | ||||||||||||||
| New stores | $ | 40.1 | $ | 51.9 | ||||||||||
| Closed stores | (19.1) | (24.5) | ||||||||||||
Comparable stores (a) | (16.7) | 4.8 | ||||||||||||
| Textbook rental deferral | (10.0) | (11.2) | ||||||||||||
Service revenue (b) | (1.9) | (2.4) | ||||||||||||
Other (c) | (2.7) | (2.9) | ||||||||||||
| Retail sales subtotal: | $ | (10.3) | $ | 15.7 | ||||||||||
| Wholesale Sales | $ | (0.6) | $ | (8.0) | ||||||||||
| DSS Sales | $ | 0.2 | $ | 1.1 | ||||||||||
Eliminations (d) | $ | 0.8 | $ | 4.4 | ||||||||||
| Total sales variance: | $ | (9.9) | $ | 13.2 | ||||||||||
(a) In December 2020, we entered into merchandising partnership with Fanatics Retail Group Fulfillment, LLC, Inc. (“Fanatics”) and Fanatics Lids College, Inc. (“FLC”) (collectively referred to herein as the “FLC Partnership”). Effective in April 2021, 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. The transition to FLC for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout 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 consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the periods prior to the transition. For Retail Gross 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.
31
Retail
The following is a store count summary for physical stores and virtual stores. Many of the store closings relate to closing less profitable stores, including satellite store locations.
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Stores: | Physical | Virtual | Total | Physical | Virtual | Total | Physical | Virtual | Total | Physical | Virtual | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning of period | 793 | 613 | 1,406 | 784 | 645 | 1,429 | 805 | 622 | 1,427 | 769 | 648 | 1,417 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Opened | 8 | 10 | 18 | 11 | 12 | 23 | 34 | 24 | 58 | 41 | 35 | 76 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Closed | 8 | 17 | 25 | 1 | 6 | 7 | 46 | 40 | 86 | 16 | 32 | 48 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| End of period | 793 | 606 | 1,399 | 794 | 651 | 1,445 | 793 | 606 | 1,399 | 794 | 651 | 1,445 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Generally, sales are impacted by revenue from net new/closed stores, increased campus traffic, and an increase in the number of on campus activities and events, such as graduations, alumni events and prospective student campus tours, as schools approach a more traditional campus experience. We continued to experience higher general merchandise sales, especially for graduation products, logo and emblematic products, and cafe and convenience products, as on campus traffic continues to grow compared to the prior year. Sales were also negatively impacted by lower enrollments, primarily at community colleges and by international students, and the continuation of remote and hybrid class offerings.
Retail sales decreased by $10.3 million, or 1.7%, to $598.6 million during the 13 weeks ended October 29, 2022 from $608.9 million during the 13 weeks ended October 30, 2021.
•Product sales and other decreased by $2.0 million, or 0.4%, to $557.3 million during the 13 weeks ended October 29, 2022 from $559.3 million during the 13 weeks ended October 30, 2021. During the 13 weeks ended October 29, 2022, total course material product sales decreased by $13.9 million, or 3.2%, to $419.9 million; and service and other revenue decreased by $4.6 million, or 23.9%, to $14.7 million primarily due to lower shipping and handling income resulting from increased in-store order fulfillment; partially offset by an increase in total general merchandise product sales of $16.4 million, or 15.5%, to $122.7 million as students return to on campus activities.
•Course material product sales decreased primarily due to the shift to more digital course materials. Additionally, the First Day programs increased rental textbook activity, increasing deferred revenue for the Fall term into the third quarter. Revenue from both of our First Day models offset this decline with increased total revenue of $47.2 million to $143.2 million, or 49%, during the 13 weeks ended October 29, 2022, as compared to $96.0 million during the 13 weeks ended October 30, 2021. Specifically, First Day Complete total sales increased by $44.3 million to $89.9 million, or 97%, during the 13 weeks ended October 29, 2022, as compared to $45.6 million during the 13 weeks ended October 30, 2021. Approximately 111 campus stores adopted our First Day Complete course materials delivery program for the 2022 Fall Term, representing approximately 545,000 (as reported by National Center for Education Statistics) in total undergraduate student enrollment, a growth rate of 85% over Fall 2021.
•Total course material rental income decreased by $8.3 million, or 16.7%, to $41.3 million during the 13 weeks ended October 29, 2022 from $49.6 million during the 13 weeks ended October 30, 2021 primarily due to the shift to more digital course materials.
Retail sales increased by $15.7 million, or 1.9%, to $835.1 million during the 26 weeks ended October 29, 2022 from $819.4 million during the 26 weeks ended October 30, 2021.
•Product sales and other increased by $26.1 million, or 3.5%, to $782.9 million during the 26 weeks ended October 29, 2022 from $756.7 million during the 26 weeks ended October 30, 2021. During the 26 weeks ended October 29, 2022, total general merchandise product sales increased by $39.8 million, or 23.2%, to $211.5 million as students return to on campus activities; offset by a decrease in total course material product sales of $8.5 million, or 1.5%, to $547.5 million; and a decrease in service and other revenue of $5.2 million, or 18.0%, to $23.9 million, primarily due to lower shipping and handling income resulting from increased in-store order fulfillment.
•Course material product sales decreased primarily due to the shift to more digital course materials. Additionally, the First Day programs increased rental textbook activity, increasing deferred revenue for the Fall term into the third quarter. Revenue from both of our First Day models offset this decline with increased total revenue of $65.2 million to $188.2 million, or 53%, during the 26 weeks ended October 29, 2022, as compared to $123.0 million during the 26 weeks ended October 30, 2021. Specifically, First Day Complete total sales increased by $54.7 million to $106.3 million, or 106%, during the 26 weeks ended October 29, 2022, as compared to $51.6 million during the 26 weeks ended October 30, 2021. Approximately 111 campus stores adopted our First Day Complete course materials delivery program for the 2022 Fall Term, representing approximately 545,000 (as reported by National Center for Education Statistics) in total undergraduate student enrollment, a growth rate of 85% over Fall 2021.
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•Total course material rental income decreased by $10.4 million, or 16.6%, to $52.2 million during the 26 weeks ended October 29, 2022 from $62.7 million during the 26 weeks ended October 30, 2021 primarily due to the shift to more digital course materials.
Retail Gross Comparable Store Sales
During the 13 and 26 weeks ended October 29, 2022, logo and emblematic sales are reflected in 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 for the majority of our e-commerce websites during the 26 weeks ended October 30, 2021.
To supplement the Total Sales table presented above, the Company uses Retail Gross Comparable Store Sales as a key performance indicator. Retail Gross Comparable Store Sales includes sales from physical and virtual stores that have been open for an entire fiscal year period and does not include sales from permanently closed stores for all periods presented. For Retail Gross Comparable Store Sales, sales for logo and emblematic general merchandise fulfilled by FLC, Fanatics and digital agency sales are included on a gross basis for consistent year-over-year comparison.
Effective in April 2021, 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. The transition to FLC for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout 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 sales on a gross basis in the periods prior to the transition.
We believe the current Retail Gross Comparable Store Sales calculation method reflects management’s view that such comparable store sales are an important measure of the growth in sales when evaluating how established stores have performed over time. We present this metric as additional useful information about the Company’s operational and financial performance and to allow greater transparency with respect to important metrics used by management for operating and financial decision-making. Retail Gross Comparable Store Sales are also referred to as "same-store" sales by others within the retail industry and the method of calculating comparable store sales varies across the retail industry. As a result, our calculation of comparable store sales is not necessarily comparable to similarly titled measures reported by other companies and is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP.
During the 13 and 26 weeks ended October 29, 2022, Retail Gross Comparable Store general merchandise sales increased by 4.5% and 14.9%, respectively. During the 13 and 26 weeks ended October 29, 2022, Retail Gross Comparable Store course material sales decreased by 4.6% and 3.2%, respectively. The decrease in course material sales was primarily due to a shift to lower cost options and more affordable solutions, including digital offerings, offset by the growth of First Day inclusive and equitable access programs, digital and eTextbook revenue increases.
Revenue from both of our First Day models offset the course materials declines. Total revenue from our First Day models increased by $47.2 million to $143.2 million, or 49%, during the 13 weeks ended October 29, 2022, as compared to $96.0 million during the 13 weeks ended October 30, 2021. Specifically, First Day Complete total sales increased by $44.3 million to $89.9 million, or 97%, during the 13 weeks ended October 29, 2022, as compared to $45.6 million during the 13 weeks ended October 30, 2021. Total revenue from our First Day models increased by $65.2 million to $188.2 million, or 53%, during the 26 weeks ended October 29, 2022, as compared to $123.0 million during the 26 weeks ended October 30, 2021. Specifically, First Day Complete total sales increased by $54.7 million to $106.3 million, or 106%, during the 26 weeks ended October 29, 2022, as compared to $51.6 million during the 13 weeks ended October 30, 2021.
Retail Gross Comparable Store Sales variances by category for the 13 week periods are as follows:
| 13 weeks ended | 26 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Textbooks (Course Materials) | $ | (21.8) | (4.6) | % | $ | (0.5) | (0.1) | % | $ | (19.5) | (3.2) | % | $ | 22.9 | 4.1 | % | ||||||||||||||||||||||||||||||||||
| General Merchandise | 7.7 | 4.5 | % | 74.0 | 76.6 | % | 39.2 | 14.9 | % | 124.7 | 89.5 | % | ||||||||||||||||||||||||||||||||||||||
| Total Retail Gross Comparable Store Sales | $ | (14.1) | (2.2) | % | $ | 73.5 | 13.2 | % | $ | 19.7 | 2.3 | % | $ | 147.6 | 21.0 | % | ||||||||||||||||||||||||||||||||||
Wholesale
Wholesale sales decreased by $0.6 million, or 2.5% to $21.1 million during the 13 weeks ended October 29, 2022 from $21.7 million during the 13 weeks ended October 30, 2021. Wholesale sales decreased by $8.0 million, or 12.0% to $58.2 million during the 26 weeks ended October 29, 2022 from $66.2 million during the 26 weeks ended October 30, 2021. The decrease is primarily due to lower gross sales impacted by supply constraints resulting from the lack of textbook purchasing opportunities during the prior fiscal year, 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 lower returns and allowances.
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DSS
DSS total sales increased by $0.2 million, or 2.3% to $8.5 million during the 13 weeks ended October 29, 2022 from $8.3 million during the 13 weeks ended October 30, 2021. DSS total sales increased by $1.1 million, or 6.4% to $17.6 million during the 26 weeks ended October 29, 2022 from $16.6 million during the 26 weeks ended October 30, 2021. Sales increased primarily due to an increase in Student Brands subscription sales.
Cost of Sales and Gross Margin
Our cost of sales decreased as a percentage of sales to 76.5% during the 13 weeks ended October 29, 2022 compared to 76.8% during the 13 weeks ended October 30, 2021. Our gross margin decreased by $0.7 million, or 0.5%, to $144.8 million, or 23.5% of sales, during the 13 weeks ended October 29, 2022 from $145.6 million, or 23.2% of sales during the 13 weeks ended October 30, 2021.
Our cost of sales increased as a percentage of sales to 76.4% during the 26 weeks ended October 29, 2022 compared to 76.3% during the 26 weeks ended October 30, 2021. Our gross margin increased by $2.7 million, or 1.3%, to $208.3 million, or 23.6% of sales, during the 26 weeks ended October 29, 2022 from $205.6 million, or 23.7% of sales during the 13 weeks ended October 30, 2021. During the 26 weeks ended October 30, 2021, we recognized a merchandise inventory loss of $0.4 million in cost of goods sold in the Retail Segment discussed below. For additional information, see Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories.
Retail
The following table summarizes the Retail cost of sales for the 13 and 26 weeks ended October 29, 2022 and October 30, 2021:
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | % of Related Sales | October 30, 2021 | % of Related Sales | October 29, 2022 | % of Related Sales | October 30, 2021 | % of Related Sales | |||||||||||||||||||||||||||||||||||||||
Product and other cost of sales | $ | 446,167 | 80.1% | $ | 451,779 | 80.8% | $ | 622,416 | 79.5% | $ | 607,501 | 80.3% | |||||||||||||||||||||||||||||||||||
Rental cost of sales | 22,941 | 55.5% | 28,348 | 57.1% | 29,206 | 55.9% | 34,952 | 55.8% | |||||||||||||||||||||||||||||||||||||||
Total Cost of Sales | $ | 469,108 | 78.4% | $ | 480,127 | 78.8% | $ | 651,622 | 78.0% | $ | 642,453 | 78.4% | |||||||||||||||||||||||||||||||||||
The following table summarizes the Retail gross margin for the 13 and 26 weeks ended October 29, 2022 and October 30, 2021:
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | % of Related Sales | October 30, 2021 | % of Related Sales | October 29, 2022 | % of Related Sales | October 30, 2021 | % of Related Sales | |||||||||||||||||||||||||||||||||||||||
Product and other gross margin | $ | 111,109 | 19.9% | $ | 107,525 | 19.2% | $ | 160,455 | 20.5% | $ | 149,248 | 19.7% | |||||||||||||||||||||||||||||||||||
Rental gross margin | 18,393 | 44.5% | 21,300 | 42.9% | 23,040 | 44.1% | 27,720 | 44.2% | |||||||||||||||||||||||||||||||||||||||
Gross Margin | $ | 129,502 | 21.6% | $ | 128,825 | 21.2% | $ | 183,495 | 22.0% | $ | 176,968 | 21.6% | |||||||||||||||||||||||||||||||||||
For the 13 weeks ended October 29, 2022, the Retail gross margin as a percentage of sales increased as discussed below:
•Product and other gross margin increased (70 basis points), driven primarily by a favorable sales mix (75 basis points) due to higher general merchandise sales and higher margin rates (5 basis points) due to lower markdowns, partially offset by higher contract costs as a percentage of sales related to our college and university contracts (10 basis points) resulting from contract renewals and new store contracts.
•Rental gross margin increased (160 basis points), driven primarily by a favorable rental mix (205 basis points), and higher margin rates (85 basis points), partially offset by higher contract costs as a percentage of sales related to our college and university contracts (125 basis points) resulting from contract renewals and new store contracts.
For the 26 weeks ended October 29, 2022, the Retail gross margin as a percentage of sales increased as discussed below:
•Product and other gross margin increased (80 basis points), driven primarily by a favorable sales mix (155 basis points) due to higher general merchandise sales and higher margin rates (70 basis points) due to lower markdowns, partially offset by higher contract costs as a percentage of sales related to our college and university contracts (150 basis points) resulting from contract renewals and new store contracts.
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•Rental gross margin decreased (10 basis points), driven primarily by higher contract costs as a percentage of sales related to our college and university contracts (215 basis points) resulting from contract renewals and new store contracts, partially offset by a favorable rental mix (160 basis points) and higher rental margin rates (45 basis points).
Wholesale
The cost of sales and gross margin for Wholesale were $15.7 million, or 74.2% of sales, and $5.5 million, or 25.8% of sales, respectively, during the 13 weeks ended October 29, 2022. The cost of sales and gross margin for Wholesale was $16.1 million or 74.1% of sales and $5.6 million or 25.9% of sales, respectively, during the 13 weeks ended October 30, 2021. The gross margin rate decreased during the 13 weeks ended October 29, 2022 primarily due to higher markdowns.
The cost of sales and gross margin for Wholesale were $45.8 million, or 78.8% of sales, and $12.4 million, or 21.2% of sales, respectively, during the 26 weeks ended October 29, 2022. The cost of sales and gross margin for Wholesale was $50.1 million or 75.8% of sales and $16.0 million or 24.2% of sales, respectively, during the 26 weeks ended October 30, 2021. The gross margin rate decreased during the 26 weeks ended October 29, 2022 primarily due to higher markdowns.
DSS
The gross margin for the DSS segment was $6.7 million, or 79.1% of sales, during the 13 weeks ended October 29, 2022 and $6.9 million, or 83.4% of sales, during the 13 weeks ended October 30, 2021. The gross margin for the DSS segment was $14.2 million, or 80.3% of sales, during the 26 weeks ended October 29, 2022 and $13.9 million, or 84.0% of sales, during the 26 weeks ended October 30, 2021. The high gross margins are driven primarily by high margin subscription service revenue earned.
Intercompany Eliminations
During the 13 weeks ended October 29, 2022 and October 30, 2021, our sales eliminations were $(11.1) million and $(11.9) million, respectively. During the 26 weeks ended October 29, 2022 and October 30, 2021, our sales eliminations were $(30.0) million and $(34.4) 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 October 29, 2022 and October 30, 2021, the cost of sales eliminations were $(14.3) million and $(16.1) million, respectively. During the 26 weeks ended October 29, 2022 and October 30, 2021, the cost of sales eliminations were $(28.3) million and $(33.0) 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.
During the 13 weeks ended October 29, 2022 and October 30, 2021, the gross margin eliminations were $3.2 million and $4.2 million, respectively. During the 26 weeks ended October 29, 2022 and October 30, 2021, the gross margin eliminations were $(1.7) million and $(1.3) 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 | 26 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | % of Sales | October 30, 2021 | % of Sales | October 29, 2022 | % of Sales | October 30, 2021 | % of Sales | |||||||||||||||||||||||||||||||||||||||
Total Selling and Administrative Expenses | $ | 107,086 | 17.4% | $ | 107,902 | 17.2% | $ | 205,572 | 23.3% | $ | 194,137 | 22.4% | |||||||||||||||||||||||||||||||||||
During the 13 weeks ended October 29, 2022, selling and administrative expenses decreased by $0.8 million, or 0.8%, to $107.1 million from $107.9 million during the 13 weeks ended October 30, 2021. During the 26 weeks ended October 29, 2022, selling and administrative expenses increased by $11.4 million, or 5.9%, to $205.6 million from $194.1 million during the 26 weeks ended October 30, 2021. The variances by segment are discussed by segment below.
Retail
During the 13 weeks ended October 29, 2022, Retail selling and administrative expenses increased by $0.6 million, or 0.7%, to $90.1 million from $89.5 million during the 13 weeks ended October 30, 2021. This increase was primarily due to a $3.2 million increase in store payroll and operating costs primarily at new/closed stores and a $3.3 million increase in corporate payroll, infrastructure and product development costs, partially offset by a $5.9 million decrease in incentive plan compensation expense, including compensation expense related to phantom share awards.
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During the 26 weeks ended October 29, 2022, Retail selling and administrative expenses increased by $11.2 million, or 7.1%, to $169.1 million from $157.9 million during the 26 weeks ended October 30, 2021. This increase was primarily due to a $9.6 million increase in store payroll and operating costs primarily at new/closed stores and a $7.9 million increase in corporate payroll, infrastructure and product development costs, partially offset by a $6.3 million decrease in incentive plan compensation expense, including compensation expense related to phantom share awards.
The payroll increase is primarily related to increased staffing at stores that had temporarily or partially closed due to limited on campus activities related to the COVID-19 pandemic in the prior year. The increase is also due to greater on campus activity and related sales during the 26 weeks ended October 29, 2022 and costs to support the growth in First Day programs.
Wholesale
Wholesale selling and administrative expenses decreased by $0.5 million, or 11.8%, to $3.9 million from $4.4 million during the 13 weeks ended October 30, 2021. Wholesale selling and administrative expenses decreased by $0.4 million, or 4.5%, to $8.0 million from $8.4 million during the 26 weeks ended October 30, 2021. For the 13 and 26 week periods, the decreases were primarily driven by lower compensation expense, including incentive plan compensation expense of $0.2 million and $0.3 million, respectively, partially offset by higher operating costs.
DSS
During the 13 weeks ended October 29, 2022, DSS selling and administrative expenses increased by $0.8 million, or 11.3%, to $8.1 million from $7.3 million during the 13 weeks ended October 30, 2021. The increase in costs was primarily driven by an increase of $1.1 million in operating costs invested in the business associated with product development, sales and infrastructure costs aimed at increasing revenue, and an increase of $1.0 million in compensation expense, partially offset by lower incentive plan compensation expense of $1.3 million.
During the 26 weeks ended October 29, 2022, DSS selling and administrative expenses increased by $2.5 million, or 18.4%, to $16.3 million from $13.8 million during the 26 weeks ended October 30, 2021. The increase in costs was primarily driven by an increase of $2.3 million in compensation expense and an increase of $1.4 million in operating costs invested in the business associated with product development, sales and infrastructure costs aimed at increasing revenue, partially offset by lower incentive plan compensation expense of $1.2 million.
DSS has begun to adjust its cost structure, particularly within its Bartleby organization, to focus on enhanced profitability and sustainable growth.
Corporate Services
During the 13 weeks ended October 29, 2022, Corporate Services' selling and administrative expenses decreased by $1.7 million, or 25.5%, to $5.1 million from $6.8 million during the 13 weeks ended October 30, 2021. During the 26 weeks ended October 29, 2022, Corporate Services' selling and administrative expenses decreased by $2.0 million, or 13.8%, to $12.3 million from $14.3 million during the 26 weeks ended October 30, 2021. The decrease in costs was primarily due to lower incentive plan compensation costs, including incentive plan compensation expense related to phantom share awards.
Depreciation and Amortization Expense
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | % of Sales | October 30, 2021 | % of Sales | October 29, 2022 | % of Sales | October 30, 2021 | % of Sales | |||||||||||||||||||||||||||||||||||||||
Total Depreciation and Amortization Expense | $ | 10,759 | 1.7% | $ | 11,952 | 1.9% | $ | 23,292 | 2.6% | $ | 24,576 | 2.8% | |||||||||||||||||||||||||||||||||||
Depreciation and amortization expense decreased by $1.2 million, or 10.0%, to $10.8 million during the 13 weeks ended October 29, 2022 from $12.0 million during the 13 weeks ended October 30, 2021. Depreciation and amortization expense decreased by $1.3 million, or 5.2%, to $23.3 million during the 26 weeks ended October 29, 2022 from $24.6 million during the 26 weeks ended October 30, 2021. The decrease was primarily attributable to lower depreciable assets and intangibles due to the store impairment loss recognized during Fiscal 2022.
Restructuring and other charges
During the 13 and 26 weeks ended October 29, 2022, we recognized restructuring and other charges totaling $0.3 million and $0.6 million, respectively, comprised primarily of professional service costs for restructuring and process improvements.
During the 13 and 26 weeks ended October 30, 2021, we recognized restructuring and other charges totaling $1.1 million and $3.0 million, respectively, comprised primarily of $0.4 million and $1.3 million, respectively, for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives, and $0.7 million and $1.7 million, respectively, for costs associated with professional service costs for restructuring, process improvements, development and integration associated with the FLC Partnership, shareholder activist activities, and liabilities for a facility closure.
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Operating Income (Loss)
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | % of Sales | October 30, 2021 | % of Sales | October 29, 2022 | % of Sales | October 30, 2021 | % of Sales | |||||||||||||||||||||||||||||||||||||||
| Total Operating Income (Loss) | $ | 26,730 | 4.4% | $ | 24,589 | 3.9% | $ | (21,176) | (2.4)% | $ | (16,146) | (1.8)% | |||||||||||||||||||||||||||||||||||
Our operating income was $26.7 million during the 13 weeks ended October 29, 2022, compared to operating income of $24.6 million during the 13 weeks ended October 30, 2021. The increase in operating income is due to the matters discussed above. For the 13 weeks ended October 29, 2022, excluding the $0.3 million of restructuring and other charges, discussed above, operating income was $27.0 million (or 4.4% of sales). For the 13 weeks ended October 30, 2021, excluding the $1.1 million of restructuring and other charges, discussed above, operating income was $25.7 million (or 4.1% of sales).
Our operating loss was $(21.2) million during the 26 weeks ended October 29, 2022, compared to operating loss of $(16.1) million during the 26 weeks ended October 30, 2021. The increase in operating loss is due to the matters discussed above. For the 26 weeks ended October 29, 2022, excluding the $0.6 million of restructuring and other charges, discussed above, operating loss was $(20.5) million (or (2.3)% of sales). For the 26 weeks ended October 30, 2021, excluding the $0.4 million of merchandise inventory loss and the $3.0 million of restructuring and other charges, discussed above, operating loss was $(12.7) million (or (1.5)% of sales).
Interest Expense, Net
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||||||||||||
| Interest Expense, Net | $ | 4,886 | $ | 2,264 | $ | 8,754 | $ | 4,758 | |||||||||||||||
Net interest expense increased by $2.6 million to $4.9 million during the 13 weeks ended October 29, 2022 from $2.3 million during the 13 weeks ended October 30, 2021. Net interest expense increased by $4.0 million to $8.8 million during the 26 weeks ended October 29, 2022 from $4.8 million during the 26 weeks ended October 30, 2021. The increase was primarily due to higher borrowings and higher interest rates compared to the prior year.
Income Tax (Benefit) Expense
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | Effective Rate | October 30, 2021 | Effective Rate | October 29, 2022 | Effective Rate | October 30, 2021 | Effective Rate | |||||||||||||||||||||||||||||||||||||||
| Income Tax Expense (Benefit) | $ | (300) | (1.4)% | $ | (203) | (0.9)% | $ | 633 | (2.1)% | $ | 196 | (0.9)% | |||||||||||||||||||||||||||||||||||
We recorded an income tax benefit of $(0.3) million on pre-tax income of $21.8 million during the 13 weeks ended October 29, 2022, which represented an effective income tax rate of (1.4)% and we recorded an income tax benefit of $(0.2) million on a pre-tax income of $22.3 million during the 13 weeks ended October 30, 2021, which represented an effective income tax rate of (0.9)%.
We recorded an income tax expense of $0.6 million on pre-tax loss of $(29.9) million during the 26 weeks ended October 29, 2022, which represented an effective income tax rate of (2.1)% and we recorded an income tax expense of $0.2 million on a pre-tax loss of $(20.9) million during the 26 weeks ended October 30, 2021, which represented an effective income tax rate of (0.9)%.
The effective tax rate for the 13 and 26 weeks ended October 29, 2022 is lower as compared to the prior year comparable period due to foreign taxes and lower projected annual taxable loss in the current year.
Net Income (Loss)
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||||||||||||
| Net income (loss) | $ | 22,144 | $ | 22,528 | $ | (30,563) | $ | (21,100) | |||||||||||||||
As a result of the factors discussed above, net income was $22.1 million during the 13 weeks ended October 29, 2022, compared with net income of $22.5 million during the 13 weeks ended October 30, 2021. As a result of the factors discussed
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above, net loss was $(30.6) million during the 26 weeks ended October 29, 2022, compared with net loss of $(21.1) million during the 26 weeks ended October 30, 2021.
Adjusted Earnings (non-GAAP) is $24.0 million during the 13 weeks ended October 29, 2022, compared with $25.0 million during the 13 weeks ended October 30, 2021. Adjusted Earnings (non-GAAP) is $(26.7) million during the 26 weeks ended October 29, 2022, compared with $(15.1) million during the 26 weeks ended October 30, 2021. See Adjusted Earnings (non-GAAP) discussion below.
Use of Non-GAAP Measures - Adjusted Earnings, Adjusted EBITDA, Adjusted EBITDA by Segment, 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, Adjusted EBITDA by Segment, 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 (loss). We define Adjusted EBITDA as net income (loss) 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 (loss). We define Free Cash Flow as Cash Flows from Operating Activities 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-Q, the reconciliation of Adjusted Earnings to net income (loss), the reconciliation of consolidated Adjusted EBITDA to consolidated net income (loss), and the reconciliation of Adjusted EBITDA by Segment to net income (loss) by segment, the most directly comparable financial measure presented in accordance with GAAP, set 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 at a consolidated level and at a segment level 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 management believes do not reflect the ordinary performance of our operations in a particular period. Our Board of Directors and management also use Adjusted EBITDA and Adjusted EBITDA by Segment, at a consolidated and at a segment level, as one of the primary methods for planning and forecasting expected performance, for evaluating on a quarterly and annual basis actual results against such expectations, and as a measure for performance incentive plans. Management also uses Adjusted EBITDA by Segment to determine segment capital allocations. We believe that the inclusion of Adjusted Earnings, Adjusted EBITDA, and Adjusted EBITDA by Segment results provides investors useful and important information regarding our operating results, in a manner that is consistent with management's evaluation of business performance. 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.
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Consolidated Adjusted Earnings (non-GAAP)
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||||||||||||
| Net income (loss) | $ | 22,144 | $ | 22,528 | $ | (30,563) | $ | (21,100) | |||||||||||||||
Reconciling items, after-tax (below) | 1,878 | 2,427 | 3,830 | 6,041 | |||||||||||||||||||
| Adjusted Earnings (non-GAAP) | $ | 24,022 | $ | 24,955 | $ | (26,733) | $ | (15,059) | |||||||||||||||
| Reconciling items, pre-tax | |||||||||||||||||||||||
Merchandise inventory loss (a) | $ | — | $ | — | — | 434 | |||||||||||||||||
Content amortization (non-cash) | 1,618 | 1,311 | 3,195 | 2,586 | |||||||||||||||||||
Restructuring and other charges (a) | 260 | 1,116 | 635 | 3,021 | |||||||||||||||||||
| Reconciling items, pre-tax | 1,878 | 2,427 | 3,830 | 6,041 | |||||||||||||||||||
Less: Pro forma income tax impact (a)(b) | — | — | — | — | |||||||||||||||||||
| Reconciling items, after-tax | $ | 1,878 | $ | 2,427 | $ | 3,830 | $ | 6,041 | |||||||||||||||
(a) See Management Discussion and Analysis and Results of Operations discussion above.
(b) Represents the income tax effects of the non-GAAP items.
Consolidated Adjusted EBITDA (non-GAAP)
| 13 weeks ended | 26 weeks ended | ||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | |||||||||||||||||||
| Net income (loss) | $ | 22,144 | $ | 22,528 | $ | (30,563) | $ | (21,100) | |||||||||||||||
| Add: | |||||||||||||||||||||||
| Depreciation and amortization expense | 10,759 | 11,952 | 23,292 | 24,576 | |||||||||||||||||||
| Interest expense, net | 4,886 | 2,264 | 8,754 | 4,758 | |||||||||||||||||||
| Income tax (benefit) expense | (300) | (203) | 633 | 196 | |||||||||||||||||||
Merchandise inventory loss (a) | — | — | — | 434 | |||||||||||||||||||
Content amortization (non-cash) | 1,618 | 1,311 | 3,195 | 2,586 | |||||||||||||||||||
Restructuring and other charges (a) | 260 | 1,116 | 635 | 3,021 | |||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 39,367 | $ | 38,968 | $ | 5,946 | $ | 14,471 | |||||||||||||||
(a) See Management Discussion and Analysis and Results of Operations discussion above.
The following is Adjusted EBITDA by segment for the 13 and 26 weeks ended October 29, 2022 and October 30, 2021.
| Adjusted EBITDA - by Segment | 13 weeks ended October 29, 2022 | |||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | DSS | Corporate Services(a) | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 30,547 | $ | 218 | $ | (1,941) | $ | (9,938) | $ | 3,258 | $ | 22,144 | ||||||||||||||||||||||||||
| Add: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 8,869 | 1,370 | 503 | 17 | — | 10,759 | ||||||||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 4,886 | — | 4,886 | ||||||||||||||||||||||||||||||||
| Income tax benefit | — | — | — | (300) | — | (300) | ||||||||||||||||||||||||||||||||
| Content amortization (non-cash) | — | — | 1,618 | — | — | 1,618 | ||||||||||||||||||||||||||||||||
Restructuring and other charges (b) | — | — | — | 260 | — | 260 | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 39,416 | $ | 1,588 | $ | 180 | $ | (5,075) | $ | 3,258 | $ | 39,367 | ||||||||||||||||||||||||||
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| Adjusted EBITDA - by Segment | 13 weeks ended October 30, 2021 | |||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | DSS | Corporate Services(a) | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 29,595 | $ | (131) | $ | (2,301) | $ | (8,928) | $ | 4,293 | $ | 22,528 | ||||||||||||||||||||||||||
| Add: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 8,669 | 1,364 | 1,902 | 17 | — | 11,952 | ||||||||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 2,264 | — | 2,264 | ||||||||||||||||||||||||||||||||
| Income tax benefit | — | — | — | (203) | — | (203) | ||||||||||||||||||||||||||||||||
| Content amortization (non-cash) | 105 | — | 1,206 | — | — | 1,311 | ||||||||||||||||||||||||||||||||
Restructuring and other charges (b) | 1,075 | — | — | 41 | — | 1,116 | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 39,444 | $ | 1,233 | $ | 807 | $ | (6,809) | $ | 4,293 | $ | 38,968 | ||||||||||||||||||||||||||
| Adjusted EBITDA - by Segment | 26 weeks ended October 29, 2022 | |||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | DSS | Corporate Services(a) | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Net (loss) income | $ | (3,993) | $ | 1,637 | $ | (4,240) | $ | (22,346) | $ | (1,621) | $ | (30,563) | ||||||||||||||||||||||||||
| Add: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 18,398 | 2,719 | 2,140 | 35 | — | 23,292 | ||||||||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 8,754 | — | 8,754 | ||||||||||||||||||||||||||||||||
| Income tax expense | — | — | — | 633 | — | 633 | ||||||||||||||||||||||||||||||||
| Content amortization (non-cash) | 26 | — | 3,169 | — | — | 3,195 | ||||||||||||||||||||||||||||||||
Restructuring and other charges (b) | — | — | — | 635 | — | 635 | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 14,431 | $ | 4,356 | $ | 1,069 | $ | (12,289) | $ | (1,621) | $ | 5,946 | ||||||||||||||||||||||||||
| Adjusted EBITDA - by Segment | 26 weeks ended October 30, 2021 | |||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | DSS | Corporate Services(a) | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Net (loss) income | $ | (1,042) | $ | 4,983 | $ | (3,617) | $ | (20,180) | $ | (1,244) | $ | (21,100) | ||||||||||||||||||||||||||
| Add: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 18,076 | 2,664 | 3,801 | 35 | — | 24,576 | ||||||||||||||||||||||||||||||||
| Interest expense, net | — | — | — | 4,758 | — | 4,758 | ||||||||||||||||||||||||||||||||
| Income tax expense | — | — | — | 196 | — | 196 | ||||||||||||||||||||||||||||||||
Merchandise inventory loss (b) | 434 | — | — | — | — | 434 | ||||||||||||||||||||||||||||||||
| Content amortization (non-cash) | 271 | — | 2,315 | — | — | 2,586 | ||||||||||||||||||||||||||||||||
Restructuring and other charges (b) | 2,083 | — | — | 938 | — | 3,021 | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 19,822 | $ | 7,647 | $ | 2,499 | $ | (14,253) | $ | (1,244) | $ | 14,471 | ||||||||||||||||||||||||||
(a) Interest expense is reflected in Corporate Services as it is primarily related to our Credit Agreement and Term Loan Agreement which fund our operating and financing needs across the organization. Income taxes are reflected in Corporate Services as we record our income tax provision on a consolidated basis.
(b) See Management Discussion and Analysis and Results of Operations discussion above.
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Free Cash Flow (non-GAAP)
| 13 weeks ended | 26 weeks ended | |||||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | ||||||||||||||||||||||
| Net cash flows provided by operating activities | $ | 38,374 | $ | 41,580 | $ | 9,376 | $ | 24,276 | ||||||||||||||||||
| Less: | ||||||||||||||||||||||||||
Capital expenditures (a) | 10,847 | 9,894 | 20,573 | 21,264 | ||||||||||||||||||||||
| Cash interest | 4,368 | 1,980 | 7,301 | 3,662 | ||||||||||||||||||||||
| Cash taxes | (15,705) | (8,032) | (15,583) | (7,778) | ||||||||||||||||||||||
| Free Cash Flow (non-GAAP) | $ | 38,864 | $ | 37,738 | $ | (2,915) | $ | 7,128 | ||||||||||||||||||
(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 | 26 weeks ended | ||||||||||||||||||||||||
| Dollars in thousands | October 29, 2022 | October 30, 2021 | October 29, 2022 | October 30, 2021 | ||||||||||||||||||||||
| Physical store capital expenditures | $ | 6,052 | $ | 3,587 | $ | 10,548 | $ | 7,480 | ||||||||||||||||||
| Product and system development | 2,947 | 3,856 | 5,612 | 7,480 | ||||||||||||||||||||||
| Content development costs | 1,294 | 1,865 | 3,313 | 4,712 | ||||||||||||||||||||||
| Other | 554 | 586 | 1,100 | 1,592 | ||||||||||||||||||||||
| Total Capital Expenditures | $ | 10,847 | $ | 9,894 | $ | 20,573 | $ | 21,264 | ||||||||||||||||||
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 October 29, 2022, we had $222.0 million and $30.0 million outstanding borrowings under the Credit Agreement and Term Loan Agreement, respectively. See Financing Arrangements discussion below.
We believe that our future cash from operations, access to borrowings under the Credit Agreement and Term Loan Agreement 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.
COVID-19 Business Impact
Our business has been significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. However, on campus traffic continues to grow from increased campus events and activities, as compared to the last two years. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including variants, on enrollments, campus activities, university budgets, athletics and other areas that directly affect our business operations. Although most four year schools returned to a traditional on-campus environment for learning, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic, including on enrollments at community colleges and by international students, the continuation of remote and hybrid class offerings, and its effect on our ability to source products, including textbooks and general merchandise offerings.
We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine how to operate our bookstores in the safest manner for our employees and customers. 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.
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Sources and Uses of Cash Flow
| 26 weeks ended | ||||||||||||||
| Dollars in thousands | October 29, 2022 | October 30, 2021 | ||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | $ | 21,934 | $ | 16,814 | ||||||||||
| Net cash flows provided by operating activities | 9,376 | 24,276 | ||||||||||||
| Net cash flows used in investing activities | (20,318) | (20,938) | ||||||||||||
| Net cash flows provided by financing activities | 23,727 | 3,378 | ||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 34,719 | $ | 23,530 | ||||||||||
As of October 29, 2022 and October 30, 2021, we had restricted cash of $15.6 million and $12.5 million, respectively, comprised of $14.7 million and $11.6 million, respectively, in prepaid and other current assets in the consolidated balance sheet related to segregated funds for commission due to FLC for logo merchandise sales as per the FLC Partnership's merchandising agreement and $0.9 million for both periods in other noncurrent assets in the condensed consolidated balance sheet related to amounts held in trust for future distributions related to employee benefit plans.
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. When a school adopts our First Day inclusive and equitable access offerings, cash collection from the school generally occurs after the student drop/add dates, which is later in the working capital cycle, as compared to direct-to-student point-of-sale transactions where cash is generally collected during the point-of-sale transaction or within a few days from the credit card processor. As a higher percentage of our sales shift to First Day inclusive and equitable access offerings, we are focused on efforts to better align the timing of our cash outflows to course material vendors with cash inflows collected from schools. 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.
Cash flows provided by operating activities during the 26 weeks ended October 29, 2022 were $9.4 million compared to $24.3 million during the 26 weeks ended October 30, 2021. This decrease in cash flows provided by operating activities of $14.9 million was primarily due to changes in working capital, including higher inventory purchases, partially offset by lower receivables and lower earnings in the current year period compared to the prior year period.
Cash Flow from Investing Activities
Cash flows used in investing activities during the 26 weeks ended October 29, 2022 were $(20.3) million compared to $(20.9) million during the 26 weeks ended October 30, 2021. The decrease in cash used in investing activities is primarily due to lower capital expenditures and contractual capital investments associated with content development, digital initiatives, enhancements to internal systems and websites, and new store construction. Capital expenditures totaled $20.6 million and $21.3 million during the 26 weeks ended October 29, 2022 and October 30, 2021, respectively.
Cash Flow from Financing Activities
Cash flows provided by financing activities during the 26 weeks ended October 29, 2022 were $23.7 million compared to $3.4 million during the 26 weeks ended October 30, 2021. This net change of $20.3 million is primarily due to higher net borrowings.
Financing Arrangements
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 million (the “Credit Facility”) effective from the March 1, 2019 amendment. 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
42
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. As of October 29, 2022, we were in compliance with all debt covenants under the Credit Agreement.
On March 4, 2022, we were granted a waiver to the condition to the draw scheduled for April 2022 under the FILO Facility, that Consolidated EBITDA (as defined in the Credit Agreement) minus Restricted Payments (as defined in the Credit Agreement) equal at least $110.0 million. Under the waiver amendment, the commitment under the FILO Facility of $25.0 million was increased to $40.0 million, with all remaining terms unchanged.
During the 26 weeks ended October 29, 2022, we borrowed $318.2 million and repaid $321.9 million under the Credit Agreement, with $222.0 million of outstanding borrowings as of October 29, 2022, comprised entirely of borrowings under the Credit Facility. During the 26 weeks ended October 30, 2021, we borrowed $259.7 million and repaid $254.0 million under the Credit Agreement, with $183.3 million of outstanding borrowings as of October 30, 2021, comprised entirely of borrowings under the Credit Facility. As of both October 29, 2022 and October 30, 2021, 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 April 30, 2022.
Term Loan
On June 7, 2022, we entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) with TopLids LendCo, LLC and Vital Fundco, LLC and we entered an amendment to our existing Credit Agreement. For additional information, see the Company’s Report on Form 8-K dated June 7, 2022 and filed with the SEC on June 10, 2022.
The Term Loan Credit Agreement provides for term loans in an amount equal to $30.0 million (the “Term Loan Facility” and, the loans thereunder, the “Term Loans”). The proceeds of the Term Loans are being used to finance working capital, and to pay fees and expenses related to the Term Loan Facility. During the 26 weeks ended October 29, 2022, we borrowed $30.0 million and repaid $0 under the Term Loan Credit Agreement, with $30.0 million of outstanding borrowings as of October 29, 2022.
We incurred debt issuance costs totaling $2.0 million related to the Term Loan Credit Agreement. The debt issuance costs have been deferred and are presented as prepaid and other current assets and other noncurrent assets in the consolidated balance sheets, and subsequently amortized ratably over the term of the Term Loan Facility.
The Term Loans accrue interest at a rate equal to 11.25%, payable quarterly, and mature on June 7, 2024. We have the right, through December 31, 2022, to pay all or a portion of the interest on the Term Loans in kind. To date, all interest on the term loan has been paid in cash. The Term Loans do not amortize prior to maturity. Solely to the extent that any Term Loans remain outstanding on June 7, 2023, we must pay a fee of 1.5% of the outstanding principal amount of the Term Loans on such date.
The Term Loans are required to be repaid (i) after repayment of the FILO Facility under the Credit Agreement, with up to 100% of the proceeds of the sale of a non-core business line of the Company generating net proceeds in excess of $1.0 million, other than ordinary course dispositions and (ii) in full in connection with a debt or equity financing transaction generating net proceeds in excess of an amount sufficient to repay the FILO Facility under the Credit Agreement.
The Term Loan Credit Agreement does not contain a financial covenant, but otherwise contains representations and warranties, covenants and events of default that are substantially the same as those in the Credit Agreement, including restrictions on the ability of the Company and its subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and make dividends and distributions. The Term Loan Facility is secured by second-priority liens on all assets securing the obligations under the Credit Agreement, which is all of the assets of the Company and the Guarantors, subject to customary exclusions and limitations set forth in the Term Loan Credit Agreement and the other loan documents executed in connection therewith.
The Credit Agreement amendment permitted us to incur the Term Loan Facility and also provides that, upon repayment of the Term Loan Credit Agreement (and, if applicable, any replacement credit facility thereof), we may incur second lien secured debt in an aggregate principal amount not to exceed $75.0 million.
Income Tax Implications on Liquidity
For the fiscal year ended April 30, 2022, we filed an application to change our tax year from January to April under the automatic consent provisions. As a result of the tax year-end change, there is no longer a long-term tax payable associated with the LIFO reserve in other long-term liabilities.
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We have filed our federal income tax returns for the tax year ended January 2021, which included claims for $33.6 million in refunds for cash taxes paid in prior years. We received refunds of $7.8 million in Fiscal 2022 and $15.8 million on August 29, 2022 (Fiscal 2023). We expect to receive additional refunds of approximately $10.0 million.
Share Repurchases
During the 26 weeks ended October 29, 2022, we did not repurchase any of our Common Stock under the stock repurchase program. As of October 29, 2022, approximately $26.7 million remains available under the stock repurchase program.
During the 26 weeks ended October 29, 2022, we repurchased 344,587 shares of our Common Stock outside of the stock repurchase program in connection with employee tax withholding obligations for vested stock awards.
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 April 30, 2022.
Off-Balance Sheet Arrangements
As of October 29, 2022, 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 April 30, 2022.
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 public health crises, epidemics, and pandemics, such as the COVID-19 pandemic, including the duration, spread, severity, and any recurrences thereof, and the impact such public health crises have on the overall demand for BNED products and services, our operations, the operations of our suppliers and other business partners, and the effectiveness of our 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;
•the inability to achieve the expected cost savings during the anticipated time frame, and the inability to implement our cost saving initiatives in a timely and efficient manner;
•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;
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•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;
•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 April 30, 2022.
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 April 30, 2022.
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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.
As disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022, management concluded that a material weakness existed at April 30, 2022 due to an operating deficiency resulting from insufficient precision applied in the execution of management’s review of the analysis of its deferred tax asset valuation allowance. The Company is in the process of implementing its remediation plan, which will occur in the fourth quarter of Fiscal 2023, due to the annual nature of the control. Based on management’s 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 not effective at the reasonable assurance level.
Management has not identified any changes in the Company’s internal control over financial reporting that occurred during the second quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 26 weeks ended October 29, 2022 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 April 30, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information as of October 29, 2022 with respect to shares of Common Stock we purchased during the first quarter of Fiscal 2023:
| 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 | |||||||||||||||||||
| July 31, 2022 - August 27, 2022 | — | $ | — | — | $ | 26,669,324 | |||||||||||||||||
| August 28, 2022 - October 1, 2022 | — | $ | — | — | $ | 26,669,324 | |||||||||||||||||
| October 1, 2022 - October 29, 2022 | — | $ | — | — | $ | 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.
During the 26 weeks ended October 29, 2022, we did not repurchase any shares of our Common Stock under the stock repurchase program.
During the 26 weeks ended October 29, 2022, we repurchased 344,587 shares of our Common Stock outside of the stock repurchase program in connection with employee tax withholding obligations for vested stock awards.
Item 5. Other Information
None
Item 6. Exhibits
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| 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) | |||||||||||
December 6, 2022
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