Barnes & Noble Education Q1 2024 Earnings Call Transcript

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September 6, 2023

There are 6 speakers on the call.

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Barnes and Noble Education Education Fiscal 20 24 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Thank you.

Operator

Hunter Blankenbaker, Vice President of Investor Relations, you may begin your conference.

Speaker 1

Good morning, and welcome to our fiscal 2024 Q1 earnings call. Joining us today are Mike Huseby, Chief Executive Officer and Jonathan Schar, Executive Vice President, BNED Retail and President, Barnes and Noble College. Mike Miller, EVP, Corporate Development and Affairs and Chief Legal Officer and Jason Sniguski, SVP and Treasurer will also be available during the Q and A session. As referenced in our Q1 slide presentation, which can be found on our Investor Relations website. I'd like to remind you that the statements we make on today's call Education are covered by the Safe Harbor disclaimer contained in our press release and public documents.

Speaker 1

The contents of this call are the property Education and are not for rebroadcast or use by any other party without prior written consent Education. During this call, we will make forward looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any forward looking statements that may be made or discussed during this call. And now, I'll turn the call over to Mike Huseby.

Speaker 2

Thanks, Hunter. Good morning, everyone, and thank you for joining us today. Fiscal 2024 is off to a solid start with 1st quarter consolidated total revenue increasing almost 4% Education. Thanks to the focus and dedication of the BNED team, Our efforts to drive operational efficiencies and cost reductions are taking hold and our FirstDayComplete Equitable Access model continues to demonstrate Education. Before providing a more detailed review of the Q1, Jonathan and I would like to highlight how the successful execution of these two Education initiative are impacting our results.

Speaker 2

First, I'll discuss our continued focus on operational improvement and efficiency. Within our Retail segment, total sales of $245,500,000 increased by $9,000,000 or 3.8 percent. We achieved this growth despite operating 117 fewer stores, including 67 physical and 50 virtual stores Gross comparable store sales were up 5.9%, driven by strength in course materials, supply products and graduation items. This growth combined with our disciplined cost management grows significant operating leverage. Retail selling and administrative expense as a percent of revenue decreased by 520 basis points to 28.2 percent from 33.4% in the prior year period.

Speaker 2

This improvement is the direct result of our fiscal year 2023 cost restructuring activities, which yielded a $9,800,000 year over year quarterly Education. Our store teams are operating with their characteristic commitment Education and increased focus on cost discipline to achieve these results. During our current fall rush, their performance has been exceptional as they continue to provide an unmatched in store experience, while implementing demanding new productivity standards tied to actively managing variable costs, including Further, our teams have adapted well to make sure our stores are meeting customer needs for Fall Rush despite the later arrival As we discussed with you last quarter, we successfully closed the amend and extend of our credit facilities on July 28. These amendments provide us with the necessary financial flexibility and operating runway Certain vendors delayed shipping inventory until we received and applied liquidity enhancements provided by the amendments. Our store teams supported by MBS and our retail shared services teams have been working nonstop to expedite receiving and present such inventory for sale Our second key initiative is the acceleration of our Equitable Access Program, FirstDayComplete, which is one of the cornerstones of our long term Profitability Growth Plan.

Speaker 2

In the Q1, FirstDay Complete revenue increased 55% year over year Education and FirstDay by course revenue grew 27%. The growth of our FirstDay models drove total course material sales up by Education. Now, I'll turn the call over to Jonathan Shar, President of Retail to discuss the significant impact FirstDay Complete is having on students, Higher Education and on our business.

Speaker 3

Thanks, Mike. It's been an exciting fall back to school season thus far, Representing enrollment of nearly 800,000 undergraduate and postgraduate students, a 46% increase over the fall of 2022. Based upon the current pre adddrop enrollment and participation levels, We expect FDC billings for the fall term to be up more than 46%, which will be recognized as GAAP revenue primarily in the second quarter It's clear that FDC, our equitable access model, is having a very positive impact on the student experience, which is why FDC's acceptance in the market has such positive momentum. The marketplace reaction to FDC strongly supports our strategy and conclusion that FDC will be the primary course material distribution model in the near future. As we shared with you last quarter, based on survey results from our Barnes and Noble College Insights platform, Students reported overwhelmingly that through 1st day complete, they had a better customer experience, were better prepared, saved money, For students, acquiring required textbooks and course materials is one of the first tasks they need to accomplish at the beginning of each new academic term.

Speaker 3

1st Day Complete has turned this initial task list item into a welcoming positive event As an example, at Emporia State University, which just launched FDC this fall term, a student nominated the Barnes and Noble College Bookstore team for a Heart of a Hornet Award, which recognizes campus community members that go above and beyond in service excellence For how welcoming, quick and easy the FDC program made acquiring course materials. The way FirstDayComplete has transformed the student experience is striking We believe we are best positioned to deliver on the Equitable Access model and continue to be the clear marketplace leader. We've invested in advanced proprietary software such as our student facing and personalized SDC customer platform, The adoption and insights portal for faculty and academic leadership and the seamless integrations we have within institution systems like registration, Student Information ERPs, Learning Management Systems and Single Sign On. Additionally, MBS is a critical component of our SDC fulfillment engine with unmatched warehousing and logistics capabilities and the industry's largest single source of affordable use textbooks. BMD's unique mix of assets and capabilities, Coupled with our experience in executing at scale, have allowed us to provide flexible and customized solutions for the colleges and universities we serve, Enabling us to add a record number of schools to the FirstDayComplete model this fall.

Speaker 3

FirstDayComplete also provides economic benefit to BNED. Since inception, the 1st day complete model has delivered increased predictability, higher revenue and improved gross margins and EBITDA at a school post transition. To demonstrate this, we examined the cohort of stores that transitioned to 1st day complete in the fall of 2022 from the a la carte model in the fall of 2021. On Slide 9 of our investor presentation, You can see that when a cohort of stores move to 1st day complete, their course material sales increased by 82% year over year due to the ease of the subscription like service and the much higher sell through rate versus the alacarte model. Taking this a step further, the gross profit dollars of this cohort nearly doubled, increasing by 96% Furthermore, as schools use FDC year after year, we are able to increase student participation rates.

Speaker 3

And as a result, the gross profit dollars of FirstDay Complete stores in fall of 2022 that also operated SDC in the fall of 2021 increased by 5.2% in fiscal year 2023. All of this, of course, It's only possible through the talent and passion of our BNED team. I'd like to recognize and thank some of our outstanding operating executives and their teams like Brian Stark, Bill Dampier, Celeste Rizzmini Johnson, Chris Sacken and others for their outstanding leadership and commitment to serving our clients and customers. It's inspiring to see our team members who are committed to our mission of serving all who work to elevate their lives through education. Now, I'll turn the call back over to Mike to review our results in more detail.

Speaker 2

Thanks, Jonathan. Turning to a focus on the Q1 results and related matters. Consolidated first quarter revenue from continuing operations of $264,200,000 grew by 3.7 percent or $9,500,000 Consolidated adjusted EBITDA grew by 21.8 percent or $7,500,000 to a negative $26,800,000 As a reminder, Our Q1 is a seasonally low volume period, primarily consisting of summer classes, graduations and preparation for fall rush. Education. Fiscal 20 24 Q1 total Retail segment revenue increased by $9,000,000 or 3.8 percent $245,500,000 driven by an 8.4% increase in course material revenue and strong graduation and supply product sales.

Speaker 2

Within course material, our total 1st day and 1st day complete revenues increased 37%. 1st quarter retail gross profit of $50,300,000 decreased by $3,700,000 or 6.9 percent, While retail gross margin of 20.5 percent decreased by 230 basis points from the prior year period. Course material sales. These increases were partially offset by lower contract costs resulting from contract renewals Education and a favorable sales mix of higher margin graduation products. Additionally, as noted last quarter, 1st quarter retail gross margins were impacted by lower contractual commissions for Emblematic general merchandise sales as part of the Fanatics and Lids partnership agreement.

Speaker 2

Effective August 1, 2023, under the terms of the July 2023 Term Loan Credit Agreement Amendment, The commission rates for Emblematic General Merchandise increased for an estimated 1 year period. Each of these trends and margin impacts are reflected in the guidance we have provided. Retail EBITDA increased by $6,100,000 to negative $18,900,000 due to increased revenue and Jobs Act, offset by a lower gross margin as noted and the $9,800,000 year over year reduction in selling and administrative expense I mentioned earlier. Importantly, we believe we've adjusted and will continue to adjust the cost structure of the retail business to fundamentally change the profit profile of the business. This was evident in our lower volume Q1 and we expect these expense reduction benefits to continue during our much higher volume second and third quarters.

Speaker 2

Moving on to wholesale. 1st and Jobs. The increase is primarily due to higher gross sales of $5,100,000 compared to the prior year period, partially offset by higher returns and allowances of $3,400,000 Wholesale gross profit was $5,800,000 or 14.9 percent of sales in the Q1 of fiscal 2024 Gross profit and gross margin rates decreased in the Q1 of fiscal 2024, primarily due to higher product costs and an increase in the returns and allowances, partially offset by lower markdowns. 1st quarter wholesale selling and administrative expenses decreased by 18% to $3,400,000 This decrease was primarily due to cost savings initiatives comprised of lower payroll and incentive plan compensation expense. Wholesale non GAAP adjusted EBITDA for the quarter was $2,400,000 down by $360,000 due to the lower gross margin.

Speaker 2

Moving on to the balance sheet and cash flow. Our cash balance was $7,700,000 at the end of the quarter with outstanding borrowings of 278,000,000 as compared to borrowings of $259,000,000 in the prior year period. Cash flow used in operating activities increased merchandise inventories were down 17% or $79,400,000 to $384,200,000 versus the prior year. This reflects the delay in inventory delivery from the Q1 to the 2nd quarter that I discussed earlier. 1st quarter capital expenditures decreased by $3,300,000 to $4,200,000 from $7,500,000 due primarily to lower store build outs Education and Internal Systems spend.

Speaker 2

Regarding guidance, we're maintaining our fiscal 2024 adjusted EBITDA expectation of approximately $40,000,000 While the inventory delays during the 1st 2 weeks of fall rush resulted in lower sales than expected, we believe the current and expected first day sales and our disciplined management of store payroll and other costs will limit the financial impact of the delayed inventory receipts. Before closing, I want to thank departing Board members, Emily Chu and Dan DiMatteo for their contributions to the company. We are pleased to welcome 2 new directors, Steve Panagos and Ray Wallander to the BNDD Board. Both new directors bring fresh perspectives and highly relevant experience to BNED's continued transformation, and we look forward to working closely with them. In addition, we are very pleased to announce this morning that Kevin Watson is joining us as our new Executive Vice President and Chief Financial Officer Effective tomorrow.

Speaker 2

As you get to know Kevin, I'm confident you'll agree that he is a strong addition to our senior management team at a very important time and BNED strategic transformation. In summary, we had a solid Q1 and we're encouraged by further scale proof points that our strategy is working. Our FirstDayComplete equitable access model is having a significant positive impact on students, institutions Education. I want to thank our people who daily show through their actions and unwavering commitment to our mission, customers and each other. The field and operating teams that Jonathan mentioned as well as our corporate affairs and legal team under Mike Miller's senior leadership, our exceptional treasury team led by Jason Sneguski and Joe Loraney and our finance and accounting teams led by Seema Paul and Eunice Downs have all made significant contributions as have others that are instrumental positioning us for success this fall and beyond.

Speaker 2

We believe in our opportunity to create value for all stakeholders. Our model transformation has clearly proved that this opportunity is within our grasp at scale. What really excites us is a significant market opportunity that's still in front of us and how well positioned we are to translate that opportunity

Operator

And your first question comes from the line of Ryan MacDonald from Needham. Your line is open.

Speaker 4

Thanks for Mike, maybe just to start on the clarification on the inventory delays. Can you provide a little more color about Where you were feeling that most, whether it was on the course material side or on the emblematic or general merchandise side and What if any knock on effects we should expect as a result of that for the fall rush?

Speaker 2

Yes, Ryan, thanks. We wanted to point this out. We don't consider this to be have any impact on our guidance for the year, We do want to mention it because it's probably obvious if you look at our balance sheet at the end of July, we had a huge payables balance as we We're working to complete the amend and extend, which we did on July 28, became effective on 31 when we got our clean opinion from our outside auditors. So there was a lot of pent up cash that needed to be released to creditors whether they were trade vendors, partners, whether they were publishers Or in general merchandise, both. We got that done fairly quickly.

Speaker 2

And fortunately, the delay It was not in the 2 largest weeks of the 1st 2 weeks of August, in other words, are not the most significant start dates for fall rush that starts to happen really in the 3rd week and 4th week of August and then as we hit Labor Day and right after So, to answer your question directly, our priority was making sure that We got all the course material vendors cleared up first. And In general, publishers reacted very swiftly and were very helpful in terms of getting the inventory released to us. There were other categories of general merchandise that we didn't prioritize quite as highly In terms of trade, stores and convenience and food and beverage and that type of thing. But nonetheless, we dealt with all of it pretty much in the 1st 2 weeks of August because we want the in store experience for the students when

Operator

they come into Rush to

Speaker 2

be a complete one. So We don't

Speaker 1

want to overplay this.

Speaker 2

I don't think this is going to have a significant impact on our fall rush financial results or on the year, But it's something that was so obvious we thought we had to mention it. So it's across the board, but we did prioritize moving in courseware and related supplies that kids needed to get back to school or students need to get back to school. And then the other categories of general merchandise We're being taken care of in parallel, but we're not prioritized in terms of payments quite as highly.

Speaker 4

I appreciate the color on that. On 1st day complete, great to see the interesting and good results there. I'm curious as you've gone into the fall rush here. 1st, what have opt in rates looked like amongst the student population on the newer cohort of schools that have started. And then as we think about pipeline development for spring of 2024, how that

Speaker 3

education. Yes, Ryan, Jonathan, thank you for the question. And in the 1st day complete model, there's Just to clarify, there's sort of 2 models. 1 is, it's built into tuition at certain schools, where There isn't a opt out and then we have where it's listed as a course charge and students can opt out of those. We don't have an In mono per se, it's either included or opt out.

Speaker 3

And the for the schools that have opt out, the opt out period runs through the ad drop period, which we haven't hit at many of the institutions yet, which will come up the next few weeks. So we don't really know, although The initial view is that participation rates are strong and one of the things we're seeing is The 2nd and third years that an institution runs 1st day complete and there's cohorts that have experienced that, Something that we've seen to be positive so far this year, although we haven't hit those ad drop periods of don't know for sure where we'll land, But some good trends in what we're seeing with 1st day complete just based on the overall experience An impact that it's having on the student experience and driving affordability and providing access to

Speaker 4

Maybe just on the second part of that, pipeline for spring of 2024, how is that looking so far?

Speaker 3

We're in active conversation still with many schools to launch FirstDayComplete for In fact, we have some signed amendments and agreements already in place. And then we're having still daily hundreds of conversations with schools focused on Launching in the next academic year, which would be a year from now in fall of calendar 2024, which is really exciting. So Those conversations are active. They have accelerated and we're really optimistic about the continued growth of Institutions participating in 1st Day Complete. And it's really based on the impact that we've seen on

Speaker 4

Maybe just one more for me for Mike. I I think you talked about 117 fewer stores year over year and doing a nice job of driving more profitable business off of despite sort of fewer stores. Can you give us a sense of what the runway looks like here for additional store wind downs and sort of how much is there left to go in terms of sort of winding down those unprofitable contracts and when we might sort of hit the trough, I guess, of impact and start to benefit on the other side of this. Thanks.

Speaker 2

Yes, it's a great question. It's something that we look at constantly. As you know, Ron, our overall strategy is based on serving stores profitably. We're continuing to work with stores to improve profitability. So The trough as you call it is really going to be dependent upon our success in converting some stores, many stores For both us and the school, as you said, our store count was down 117 and that included 67 physical, 50 virtual stores versus a year ago.

Speaker 2

So that is evidence that we're following the strategy that's reflected in the results. In terms of giving you guidance on the runway and that type of thing, we're not going to do that, but we'll do it each quarter Because of what I just mentioned, it's very dependent upon. And as John said, we're engaged in a lot of conversations with schools still about not just converting to FirstDay Complete, but the other economic terms that impact Our relationship with the commission rate that we pay the schools and we're controlled doing a great job. Our field teams Great job of controlling the payroll. So there are different levers we can pull to achieve profitability in stores.

Speaker 2

And so how successful we are in pulling those levers, renewing contracts and Making that strategy work is going to answer the question of where is the trough. I mean, we expect to go to a lower number of stores next year than where we are this year. But at some point in time, as first day complete, penetration as I would call it, our sell through It really becomes a much higher percentage. Well, we should start adding back to that number of stores at some point. I don't know when that's going to happen, But our expectation is that all stores will be on some form of equitable access at some point in time.

Speaker 4

Thanks Thanks for taking my questions. I'll hop back in the queue.

Speaker 2

Thanks, Ryan.

Operator

Your next question comes from the line of Alex Experiment from Craig Hallum Capital Group. Your line is open.

Speaker 5

Hey, guys. Thanks for taking my question. Can you talk a little bit about what the impact has been on general merchandise sales at schools that have transitioned The first day complete. Has there been any sort of a negative traffic impact just from having fewer students making that first trip to the bookstore to shop for their book and then would love to just kind of further unpack your comments about driving really strong merchandise sales on a smaller number of bookstores and can you just kind of help us understand What was driving that increase? Obviously, this is a seasonally slower period of the year for you, but just trying to understand what that's going to look like as we get into the rest of the year.

Speaker 2

Alex, it's Mike. I'll make one general comment and then John has been Spending a lot of time in our stores during rush and pick it up. First off, there aren't fewer students driven to the store through First Aid Please, if anything, there are more because most of those programs result in students coming into pickup their 1st day complete package of courseware Honor before the 1st day. So that's as opposed to more of Random, who's going to show up when from a student perspective. It's fairly predictable in terms of store traffic, in terms of The scale of students that are showing up to pick up per state complete.

Speaker 2

So and I don't think our results having analyzed this Would not indicate that we have any fall off in any general merchandise sale kind of on a per student basis as we change the model, but I'll let John

Speaker 3

No, that's exactly right. We're actually seeing more students come into the store post transition to 1st day complete Based on the fact that we're serving nearly all of the students at that institution and the primary sort of Fulfillment channel is in store pickup. We can ship the materials to students that they select, but most of them from a convenience standpoint, Come into the store and pick up their materials or go through the process in real time and have us pick them and strategies and cross merchandising strategies that we have to increase the sales of everything else in the store like general merchandise items That we sell to students as part of that visit. So we're actually optimistic that that's going to have a positive and just from a store traffic point alone. So we think that the model works Well, with the other parts of our business that we are looking to continue to drive growth in.

Speaker 5

Okay. That's really helpful. And then just the other part of the question, just thinking about the strong merchandise sales The pretty significantly smaller number of stores that you were operating During the quarter, I mean, can we interpret that to mean that your biggest, most kind of long standing profitable stores We're experiencing really strong increases in sales during the summer months or was it part of that maybe just driven by the fact that the 100 something

Speaker 2

Yes. I think it's a combination of The bulk of those and as we called out in terms of the prepared remarks, we had a very strong summer, early summer, Q1 and graduation products, which was somewhat of a surprise to us quite frankly. We plan on we did a lot of great things merchandising group to make that happen. But if you recall, last year in the spring summer of 2022, There are many schools that actually has commencement ceremonies to include more than just one graduating class because of the impacts of COVID And the fact that many schools weren't able to walk graduated classes in prior years. So even with that as a benchmark, the graduation products performed better year over year and much better in accordance with our expectations.

Speaker 2

So that was a big part actually of contribution of general merchandise growth. As it relates to the other categories, that we continue to see good performance, Congratulations was one

Operator

that really stood out for us in the Q1.

Speaker 2

The other thing I would say is that In impact both the digital kind of the digital weighting of sales and the margin, and also number of students on campus. There were many, Many schools this year that had online virtual courses this summer, More than actually in the number we expected. So even with that and not having as many students on campus for the summer, Our general merchandise sales did well.

Speaker 5

Okay. That's really helpful. Thank you.

Operator

Education and we have reached the end of our question and answer session. I will now turn the call back over to Mr. Hunter Blankenbaker for some final closing remarks.

Speaker 1

Great. Thank you, Rob. That does conclude our call and we're going to get back to fall rush here. We look forward to speaking with you in early December on our Q2 call. Thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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