Barnes & Noble Education Reports Third Quarter 2019 Financial Results

New Bartleby Digital Study Product Successfully Launches in Stores

Amends and Extends $500 Million Credit Facility for Five Years

BASKING RIDGE, N.J.–(BUSINESS WIRE)–lt;a href=”https://twitter.com/search?q=%24BNED&src=ctag” target=”_blank”gt;$BNEDlt;/agt; lt;a href=”https://twitter.com/hashtag/earnings?src=hash” target=”_blank”gt;#earningslt;/agt;–Barnes
& Noble Education, Inc. (NYSE: BNED)
, a leading provider of
educational products and services solutions for higher education and
K-12, today reported sales and earnings for the third quarter for fiscal
year 2019, which ended on January 26, 2019.

The Company has three reportable segments: Barnes & Noble College
Booksellers, LLC (“BNC”), MBS Textbook Exchange, LLC (“MBS”), and
Digital Student Solutions (“DSS”). All material intercompany accounts
and transactions have been eliminated in consolidation.

Financial highlights for the third quarter 2019 and fiscal year to
date 2019:

  • Consolidated sales of $550.3 million decreased 8.8%, as compared to
    the prior year period; year to date consolidated sales of $1,702.6
    million decreased 7.8% as compared to the prior year period.
  • Consolidated third quarter GAAP net income of $0.8 million, as
    compared to net loss of $283.2 million in the prior year period; year
    to date GAAP net income of $21.8 million, as compared to net loss of
    $269.6 million in the prior year period. The fiscal 2018 third quarter
    and year to date net loss included a non-cash goodwill impairment
    charge of $313.1 million in the BNC segment.
  • Consolidated third quarter non-GAAP Adjusted Earnings of $3.1 million,
    as compared to $19.6 million in the prior year period; year to date
    non-GAAP Adjusted Earnings of $24.6 million, as compared to $39.8
    million in the prior year period.
  • Consolidated third quarter non-GAAP Adjusted EBITDA of $22.0 million,
    as compared to $34.6 million in the prior year period; year to date
    non-GAAP Adjusted EBITDA of $84.9 million, as compared to $104.5
    million in the prior year period.

Operational highlights for the third quarter 2019:

  • Demonstrated positive leverage of managed store footprint during
    initial in-store promotional offers of Bartleby, the Company’s
    digital study product. Bartleby gained more than 50,000
    subscribers during the Spring Rush sales period, including the month
    of February. The Company continues to adjust pricing models and
    content offerings ahead of the next rush period, and anticipates
    scaling of this digital offering with meaningful financial impacts
    over the next 12-18 months.
  • Developed and implemented Q&A within Bartleby to provide
    the best value proposition for students to achieve better success.
  • Surpassed one million textbook solutions available through Bartleby.
    The Company continues to aggressively and strategically expand its
    catalogue.
  • Continued to grow the Company’s First Day™ inclusive access program,
    with BNC revenue from First Day increasing 133.2% year over year.
  • Launched next-generation First Day solution for MBS Direct virtual
    bookstore clients after completing successful pilot programs. First
    Day will be available to all MBS Direct clients for the Fall Rush.
  • Expanded relationships with Oxford University Press, Wiley and
    Macmillan Learning through agreements that will make the publishers’
    digital content available through inclusive access programs on BNED
    campuses nationwide.

In this environment of rapid change, we continued to make significant
progress this quarter in strengthening our digital capabilities. The
Spring Rush period allowed for our first in-store sales push of Bartleby,
and our entire organization is energized by the positive reaction we
received from students,” said Michael P. Huseby, Chairman and Chief
Executive Officer, BNED. “We are taking steps in each of our segments to
ensure we are serving the needs of the education market both today and
in the future. The acceleration from physical textbooks to digital
offerings contributed to somewhat higher than expected declines in
revenue and EBITDA at BNC and MBS. Nonetheless, we are confident in our
ability to manage these businesses for margin and cash flow while we
invest in and begin to scale high value digital growth platforms and
offerings. As we introduce new products and services to meet the
changing needs of our customers, we will also continue to optimize our
cost structure. We continue to make strides in developing, enhancing and
delivering digital products and packages that provide substantial
benefits for our campus partners and the students we serve. We expect
such digital offerings to scale and contribute to expanded margins and
cash flow to drive BNED’s value.”

Third Quarter 2019 and Year to Date Results

Results for the 13 and 39 weeks of fiscal 2019 and fiscal 2018 are as
follows:

     
$ in millions 13 and 39 Weeks Selected Data (unaudited)

13 Weeks
Q3 2019

   

13 Weeks
Q3 2018

   

39 Weeks
2019

   

39 Weeks
2018

Total Sales $550.3 $603.4 $ 1,702.6 $1,846.0
Net Income (Loss)(1) $ 0.8 $(283.2) $ 21.8 $(269.6)

Non-GAAP(2)

Adjusted EBITDA

$22.0 $34.6 $84.9 $104.5
Adjusted Earnings $ 3.1 $19.6 $ 24.6 $39.8
(1) Includes a pre-tax goodwill non-cash impairment charge of $313.1
million at BNC, or $302.9 million after tax on a net tax basis,
recorded in the third quarter of fiscal year 2018.
(2) These non-GAAP financial measures have been reconciled in the
attached schedules to the most directly comparable GAAP measure as
required under SEC rules regarding the use of non-GAAP financial
measures.
 

BNC Results

BNC sales of $461.1 million decreased by $39.9 million, or 8.0%, as
compared to the prior year period. Comparable store sales at BNC
decreased 7.7% for the quarter representing approximately $37.2 million
in revenue due to lower textbook sales. Consistent with prior years, the
Spring Rush period extended beyond the quarter due to later school
openings and the continued pattern of students buying course materials
later in the semester. Factoring in the month of February, comparable
store sales at BNC decreased 4.9% on a year to date basis.

BNC non-GAAP Adjusted EBITDA for the quarter was $10.2 million, as
compared to $20.5 million in the prior year period. The decrease was
primarily due to lower textbook sales and the timing of the Spring Rush.

MBS Results

MBS total sales of $116.4 million for the quarter decreased by $22.5
million, or 16.2%, as compared to $138.9 million in the prior year
period.

MBS Wholesale net sales of $77.0 million for the quarter decreased by
$15.1 million, or 16.4%, as compared to $92.1 million during the prior
year period. MBS Wholesale net sales were impacted by lower publisher
rental penetration than anticipated, as well as lower net sales of
traditional wholesale textbooks. MBS Direct sales of $39.4 million for
the quarter decreased by $7.4 million, or 15.8%, as compared to $46.8
million in the prior year period, due to lower sales from higher ed
accounts and net new stores.

MBS non-GAAP Adjusted EBITDA for the quarter was $17.6 million for the
quarter, as compared to $22.4 million in the prior year period. This
decrease was primarily driven by the impact of lower sales, partially
offset by lower selling and administrative expenses.

DSS Results

DSS sales of $5.2 million for the quarter decreased by $0.3 million, or
6.0% as compared to $5.5 million during the prior year period. The
decrease reflects lower sales at Student Brands overall, partially
offset by growth in certain English and foreign language properties.

DSS non-GAAP Adjusted EBITDA was $1.4 million for the quarter, as
compared to $3.1 million in the prior year period. The decrease is the
result of investments in the development of the Company’s new study
subscription product offering, Bartleby.

Other

Expenses for Corporate Services, which includes unallocated
shared-service costs, such as various corporate level expenses and other
governance functions, were $6.2 million for the quarter as compared to
$5.7 million in the prior period.

Intercompany gross margin eliminations of $(1.0) million were reflected
in Adjusted EBITDA, as compared to $(5.8) million in the prior year
period.

Amended and Extended Credit Facility

The Company also announced that it has amended and extended its existing
credit facility for a five year term to ensure the Company’s liquidity
and financial flexibility through February 2024. Under the terms of the
agreement, the Company will continue to have an asset-backed revolving
credit facility in an aggregate committed principal amount of $400
million (the “Credit Facility”), as well as the $100 million incremental
first in, last out seasonal loan facility (the “FILO Facility”).

Outlook

For fiscal year 2019, the Company has updated its outlook and currently
expects consolidated sales to be in the range of $2.15 billion to $2.2
billion before intercompany eliminations, and consolidated Adjusted
EBITDA to be approximately $100 million. Capital expenditures are
expected to be approximately $50 million, increasing over fiscal year
2018 primarily due to the Company’s investments in digital content
required to develop and offer new DSS products.

Conference Call

A conference call with Barnes & Noble Education, Inc. senior management
will be webcast at 10:00 a.m. Eastern Time on Tuesday, March 5, 2019 and
can be accessed at the Barnes & Noble Education corporate website at www.bned.com.

Barnes & Noble Education expects to report fiscal 2019 fourth quarter
results on or about June 25, 2019.

ABOUT BARNES & NOBLE EDUCATION, INC.

Barnes & Noble Education, Inc. (NYSE: BNED) is a leading
provider of higher education and K-12 educational products and
solutions. Through its Barnes & Noble College and MBS Textbook Exchange
segments, Barnes & Noble Education operates 1,453 physical and virtual
bookstores across the U.S., serving more than 6 million students and
faculty. Through its Digital Student Solutions segment, the Company
offers direct-to-student products and services that help students study
more effectively and improve academic performance, enabling them to gain
the valuable skills necessary to succeed after college. The Company also
operates one of the largest textbook wholesale distribution channels in
the United States. For more information please visit www.bned.com.

BNED companies include: Barnes
& Noble College Booksellers, LLC
, MBS
Textbook Exchange, LLC
, BNED
LoudCloud, LLC
, Student
Brands, LLC
, Promoversity,
LLC
, and PaperRater,
LLC
.
General information on Barnes & Noble Education may be
obtained by visiting the Company’s corporate website: www.bned.com.

Forward Looking Statements

This press release 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 press release 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: general competitive
conditions, including actions our competitors and content providers may
take to grow their businesses; a decline in college enrollment or
decreased funding available for students; decisions by colleges and
universities to outsource their physical and/or online bookstore
operations or change the operation of their bookstores; implementation
of our digital strategy may not result in the expected growth in our
digital sales and/or profitability; risk that digital sales growth does
not exceed the rate of investment spend; the performance of our online,
digital and other initiatives, integration of and deployment of,
additional products and services including new digital channels, and
enhancements to higher education digital products, and the inability to
achieve the expected cost savings; the risk of price reduction or change
in format of course materials by publishers, which could negatively
impact revenues and margin; the general economic environment and
consumer spending patterns; decreased consumer demand for our products,
low growth or declining sales; the strategic objectives, successful
integration, anticipated synergies, and/or other expected potential
benefits of various acquisitions, including MBS Textbook Exchange, LLC
and Student Brands, LLC, may not be fully realized or may take longer
than expected; the integration of the operations of various
acquisitions, including MBS Textbook Exchange, LLC and Student Brands,
LLC, 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 risks associated with merchandise
sourced indirectly from outside 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 which may restrict or prohibit our use of emails or
similar marketing 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 year ended April 28, 2018. 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 press
release.

EXPLANATORY NOTE

We have three reportable segments: BNC, MBS and DSS as follows:

  • The BNC Segment is comprised of the operations of Barnes &
    Noble College Booksellers, LLC (“BNC”) which operates 773 physical
    campus bookstores, the majority of which also have school-branded
    e-commerce sites operated by BNC and which offer students access to
    affordable course materials and affinity products, including
    emblematic apparel and gifts. BNC also offers its First Day™ inclusive
    access program, in which course materials, including e-content, are
    offered at a reduced price through a course materials fee, and
    delivered to students digitally on or before the first day of class.
    Additionally, the BNC segment offers a suite of digital content,
    software, and services to colleges and universities through our
    LoudCloud platform, such as predictive analytics, a variety of open
    educational resources courseware, and a competency-based learning
    platform.
  • The MBS Segment is comprised of MBS Textbook Exchange, LLC’s
    (“MBS”) two highly integrated businesses: MBS Direct which operates
    680 virtual bookstores for college and university campuses, and K-12
    schools, and MBS Wholesale which is one of the largest textbook
    wholesalers in the country. MBS Wholesale’s business centrally sources
    and sells new and used textbooks to more than 3,500 physical college
    bookstores, including BNC’s 773 campus bookstores. MBS Wholesale sells
    hardware and a software suite of applications that provides inventory
    management and point-of-sale solutions to over 400 college bookstores.
  • The Digital Student Solutions (“DSS”) Segment
    includes direct-to-student products and services to assist students to
    study more effectively and improve academic performance. The DSS
    segment is comprised of the operations of Student Brands, a leading
    direct-to-student subscription-based writing services business, and
    Bartleby subscriptions for textbook solutions and expert questions and
    answers. The DSS segment also includes tutoring and test prep services
    offered through our partnership with The Princeton Review.

    The
    condensed consolidated financial statements for the 13 and 39 weeks
    ended January 26, 2019 include the financial results of Student
    Brands, LLC (in the DSS segment) for the entire period and the
    condensed consolidated financial statements for the 13 and 39 weeks
    ended January 27, 2018 include the financial results of Student
    Brands, LLC from the acquisition date on August 3, 2017 (the second
    quarter of fiscal year 2018).

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.

All material intercompany accounts and transactions have been eliminated
in consolidation.

Our condensed consolidated financial statements reflect the following
reclassifications for consistency with the current year presentation:

  • Cost of Sales expenses primarily related to facility costs and
    insurance for the Corporate Services category have been reclassified
    to Selling and Administrative Expenses in the condensed consolidated
    statements of operations.
  • For our digital rental products, we have reclassified Rental Income to
    Product Sales and Other, and have reclassified Rental Cost of Sales to
    Product and Other Cost of Sales in the condensed consolidated
    statements of operations, with no impact to Gross Margin. Digital
    rental revenue and digital rental cost of sales are recognized at the
    time of delivery and are not deferred over the rental period.

Prior periods presented reflect the reclassifications noted above.

 
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
 
  13 weeks ended   39 weeks ended

January 26,
2019

 

January 27,
2018

January 26,
2019

 

January 27,
2018

Sales:
Product sales and other $ 494,311 $ 542,729 $ 1,568,329 $ 1,697,769
Rental income 56,019   60,662   134,251   148,194  
Total sales 550,330   603,391   1,702,580   1,845,963  
Cost of sales: (a)
Product and other cost of sales 384,275 420,499 1,211,998 1,328,353
Rental cost of sales 33,102   35,893   80,259   88,711  
Total cost of sales 417,377   456,392   1,292,257   1,417,064  
Gross profit 132,953   146,999   410,323   428,899  
Selling and administrative expenses 110,941 112,438 325,408 327,625
Depreciation and amortization expense 16,374 17,007 49,333 48,728
Impairment loss (non-cash) (a) 313,130 313,130
Restructuring and other charges (a) 2,500 2,500 5,429
Transaction costs (a) 117   49   654   1,895  
Operating income (loss) 3,021 (295,625 ) 32,428 (267,908 )
Interest expense, net 2,546   2,954   7,904   7,828  
Income (loss) before income taxes 475 (298,579 ) 24,524 (275,736 )
Income tax (benefit) expense (294 ) (15,344 ) 2,680   (6,113 )
Net income (loss) $ 769   $ (283,235 ) $ 21,844   $ (269,623 )
 
Earnings (loss) per common share:
Basic $ 0.02 $ (6.04 ) $ 0.46 $ (5.77 )
Diluted $ 0.02 $ (6.04 ) $ 0.46 $ (5.77 )
Weighted average common shares outstanding:
Basic 47,561 46,914 47,220 46,712
Diluted 47,937 46,914 47,772 46,712
 
(a) For additional information, see Note (a) – (d) in the Non-GAAP
disclosure information of this Press Release.
 
   
13 weeks ended 39 weeks ended
January 26,
2019
  January 27,
2018
January 26,
2019
  January 27,
2018
Percentage of sales:
Sales:
Product sales and other 89.8 % 89.9 % 92.1 % 92.0 %
Rental income 10.2 % 10.1 % 7.9 % 8.0 %
Total sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales:
Product and other cost of sales (a) 77.7 % 77.5 % 77.3 % 78.2 %
Rental cost of sales (a) 59.1 % 59.2 % 59.8 % 59.9 %
Total cost of sales 75.8 % 75.6 % 75.9 % 76.8 %
Gross profit 24.2 % 24.4 % 24.1 % 23.2 %
Selling and administrative expenses 20.2 % 18.6 % 19.1 % 17.7 %
Depreciation and amortization expense 3.0 % 2.8 % 2.9 % 2.6 %
Impairment loss (non-cash) — % 51.9 % — % 17.0 %
Restructuring and other charges 0.5 % — % 0.1 % 0.3 %
Transaction costs — % — % — % 0.1 %
Operating income (loss) 0.5 %

(48.9)%

2.0 %

(14.5)%

Interest expense, net 0.5 % 0.5 % 0.5 % 0.4 %
Income (loss) before income taxes — %

(49.4)%

1.5 %

(14.9)%

Income tax (benefit) expense

(0.1)%

(2.5)%

0.2 %

(0.3)%

Net income (loss) 0.1 %

(46.9)%

1.3 %

(14.6)%

 
(a) Represents the percentage these costs bear to the related sales,
instead of total sales.
 
 
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
 
 

January 26,
2019

  January 27,
2018
ASSETS
Current assets:
Cash and cash equivalents $   22,049 $   22,373
Receivables, net 231,106 243,434
Merchandise inventories, net 579,582 600,419
Textbook rental inventories 50,577 61,427
Prepaid expenses and other current assets 20,691   26,354  
Total current assets 904,005   954,007  
Property and equipment, net 109,414 112,062
Intangible assets, net 208,439 224,314
Goodwill 53,982 49,282
Other noncurrent assets 40,216   40,915  
Total assets $   1,316,056   $   1,380,580  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 464,933 $ 488,954
Accrued liabilities 219,713   252,202  
Total current liabilities 684,646   741,156  
Long-term deferred taxes, net 7,991 4,278
Other long-term liabilities 58,632 73,468
Long-term borrowings 70,100   113,000  
Total liabilities 821,369   931,902  
Commitments and contingencies
Stockholders’ equity:

Preferred stock, $0.01 par value; authorized, 5,000 shares; issued
and
outstanding, none

Common stock, $0.01 par value; authorized, 200,000 shares; issued,
51,026
and 50,028 shares, respectively; outstanding, 47,561
and 46,914 shares,
respectively

511 500
Additional paid-in-capital 724,164 715,088
Accumulated deficit (198,359 ) (237,260 )
Treasury stock, at cost (31,629 ) (29,650 )
Total stockholders’ equity 494,687   448,678  
Total liabilities and stockholders’ equity $   1,316,056   $   1,380,580  
 

Contacts

Media:
Carolyn J. Brown
Senior
Vice President
Corporate Communications & Public Affairs
908-991-2967
cbrown@bned.com

Investors:
Thomas
D. Donohue
Executive Vice President
Chief Financial Officer
908-991-2966
tdonohue@bned.com

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