Barnes & Noble Education, Inc

Good morning and welcome to the Barnes & Noble Education Earnings Call. At this time, for opening remarks and introductions, I would like to turn the call over to Andy Millivoy, Vice President, Corporate Finance and Investor Relations. Please go ahead.

Good morning and welcome to our fiscal 2021 third quarter earnings call. Joining us today are Mike Huseby, CEO and Chairman, Tom Donoghue, CFO, Jonathan Shar, Executive Vice President, BNED Retail and Client Solutions, Lisa Mallett, President of Barnes & Noble College, and David Henderson, President of MBS. Before we begin today's call, I'd like to remind you that the statements we make are covered by the Safe Harbor Disclaimer contained in our press release and public documents. The contents of this call are the property of Barnes & Noble Education and are not for rebroadcast or use by any other party without prior written consent of the company. 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 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 during this call. And now, I'll turn the call over to Mike Huseby.

Thanks, Andy, and thank you all for joining us this morning. Nearly one year ago today, colleges and universities nationwide began closing their campuses due to the COVID-19 pandemic. Shortly after, we would close down our campus doors protecting the safety and well-being of our employees and our customers. Last March, none of us could have anticipated the year to come nor the challenges we would face as this pandemic continued on. Many students assumed that though they would be finishing their spring term remotely, they would be back on campus by the summer of 2020. Now, in the spring of 2021, many still have yet to return. The challenges of this past year required tremendous fortitude and adaptability from both us and our partners. It also provided a significant opportunity for BNED to showcase the value we provide to institutions. This past year, it became more apparent than ever that the solutions we offer can help institutions address challenges that have grown exponentially in the midst of a global pandemic, driving affordability, access, and ROI for students. Further, our ability to customize these solutions to the unique needs of each college and university has not only demonstrated our value, but also what differentiates us in the marketplace. Highlighting the importance of equitable access, affordability, and an improved student experience Our first day and first day complete programs have grown significantly this fiscal year, and we see this growth continuing to rise rapidly as the value proposition and impact on student outcomes becomes even more relevant. To date, we have agreements with 31 campus stores to support the BNC first day complete program in fall term 2021, representing over 160,000 in total undergraduate enrollment, which is up from 12 campus stores and 43,000 in total undergraduate enrollment in the fall term 2020. And our teams continue to work with a significant number of additional campuses to secure agreements to launch First Day Complete for fall term 2021. First Day Complete provides substantial benefits for students, not only driving down costs, but also providing access to materials on or before the first day of class and a convenience of a concierge-style forced material delivery model. Importantly, it does not limit academic freedom for faculty. As the campus bookstore, we can ensure that no matter what the format or publisher, faculty can adopt whatever materials work best for their class at the most affordable cost. Coupled with AIP, our adoption and insights portal for faculty and administrators we can help faculty discover and choose cost-effective course materials for their students. This model of course material delivery provides benefits across the board, and we look forward to watching it grow as more and more institutions recognize the value it brings to students. The retail experience, particularly in stores, remains challenged this quarter as many campuses continue to operate in hybrid or completely remote formats, and continue to curtail on-campus activities to promote COVID-related safety protocols. We continue to serve customers through stores that have been adapted to promote health and safety guidelines, as well as through our mobile and web channels that have remained available to students even as campuses were closed. Our store and field teams have once again worked through a very challenging rush period and I remain incredibly grateful to each and every one of them for the tireless efforts in the midst of a pandemic. As anticipated, spring rush results were lower than the previous year due to the impacts of COVID, with continued pressure on our higher margin general merchandise business in particular. While we are managing expenses prudently in light of these anticipated declines, we have also sought out additional ways to ensure that when campus activity and athletic events do ultimately return to normal, Our retail experience is providing the best possible value for students, faculty, alumni, and fans. In December 2020, we announced that we had entered into a long-term strategic omnichannel merchandising partnership with Fanatics Lids College, or FLC, forging an alliance with the two online and offline leaders in the license, sports, and emblematic merchandise category. Fanatic's cutting-edge e-commerce and technology expertise will offer BNED campus stores expanded product selection, a world-class online and mobile experience, and a progressive direct-to-consumer platform. Coupled with LIDS, the leading standalone brick-and-mortar retailer focused exclusively on licensed fan and alumni products, BNC and its campus stores will have improved access to trended sales performance data on licensees, product styles, and design treatments for more than 1,200 LIDS stores and stores that they manage for sports organizations such as the New York Yankees, Los Angeles Dodgers, and others. Under the terms of the agreement, Bananix and LIDS also made a joint $15 million strategic equity investment in BNED, which we plan to use to further bolster our strategic growth initiatives. We believe our FLC partnership has tremendous potential to improve the customer experience, increase selection, and accelerate the recovery and growth of our high-margin general merchandise business, particularly in e-commerce, beginning in our upcoming fiscal 2022. This will in turn benefit our campus partners, providing a significant opportunity to increase our financial contribution to them. We are very excited for the partnership to begin this spring and look forward to providing further updates in a month to come. In addition to the benefits for our existing clients, as a very positive aspect of this alliance, we plan to go to market together with FLC to attract new business through our enhanced offering. Now I'll turn to our DSS business. Our Bartleby suite of solutions continues to grow rapidly, providing students with the academic support they need during this period when traditional learning routines have been upended. We experienced strong results once again this quarter, with Bartleby revenue growing 53% over last year. Bartleby growth subscribers grew to over 210,000 on a year-to-date basis, with DSS revenue increasing 11.8% over that same period driven by Bartleby revenue growth. Though the in-person learning experience remains invaluable, and students and institutions alike are eager to return to campus, we believe the dramatically increased use of online learning during this pandemic will lead to far more flexible models of learning in a post-pandemic world. With this flexibility will come the need for support outside the classroom, and as a result, tools such as Bartleby will remain relevant even as students return to campus. In the meantime, we're continuing to expand Bartleby's capabilities, most recently through a new agreement with Wolfram Alpha, a trusted name in education that provides highly sophisticated technical computing solutions to thousands of colleges and universities globally. As part of our agreement, we will work with Wolfram Alpha to develop a math solver as a new feature in our Bartleby suite of solutions. The math solver will allow students to access an interactive digital calculator that provides real-time, step-by-step explanations for even the most advanced math problems. We know from the questions we're currently seeing asked through Bartleby that math is a subject where students require a significant amount of learning support. Introducing this new math solver will ensure that Bartleby continues to grow with the students it serves. adding functionality that can meet the urgent demand to even better support students in this subject area. Bartleby remains a significant growth driver for BNED, and we have been very pleased with the progress our teams have made in increasing Bartleby's reach and brand awareness. Our highly skilled BFF team is also innovating new features and functionalities that will enhance both Bartleby's UX and its competitive position. We're confident that this positive momentum will continue as our product becomes more robust and students continue to recognize the support Bartleby can offer them throughout their academic journeys. I want to welcome our new DSS president, David Menke, who officially started yesterday. We're very fortunate and grateful to have attracted a leader of David's caliber with a proven and substantive track record of leading digital retail subscription-based businesses to large scale and success. All of us at BNED, including the DSS team he will be leading, are very excited to have David in this new key senior management role. As we look ahead, we continue to expect the pandemic to impact our results for the balance of this fiscal year. As such, we continue to tightly manage our expenses and our current liquidity position remains strong. Despite the many challenges that COVID-19 presented, I am very proud of all the work that our team has accomplished over the past year to position BNED for continued success. The progress we have made on our key strategic initiatives, further bolstered by the strategic partnerships that have been forged with the leading companies in their respective categories, enable us to provide unmatched solutions to our campus partners. Ultimately, this will be reflected in our ability to retain our current campus partnerships and to attract new ones to expand our foundational retail platform. Importantly, and very positively, on a year-to-date basis, we have signed over $100 million in new retail contracts this fiscal year, or $84 million on a net basis. These annual contract amounts are based on historical sales trends for each school. This past year was a catalyst for a great deal of change in higher education. It has accelerated long needed change and forced all of us who serve this industry to be nimble and flexible. It's pushed us to innovate faster than we ever thought possible. We firmly believe that the changes of this past year will lead to a better and more equitable future for higher education. For BNED, we have demonstrated the resilience and dedication of our people and the value of our contributions to our customers. which makes us very optimistic about our ability to create sustainable and enhanced shareholder value going forward. With that, Tom will provide the financial review. Thanks, Mike. Please note that our fiscal 2021 third quarter ended on January 30th, 2021, and consisted of 13 weeks. All comparisons will be to the prior year period unless otherwise noted. Total sales for the quarter were $411.6 million, compared with $502.3 million in the prior year. This decrease of $90.7 million, or 18.1%, was comprised of a $70.3 million decrease from the retail segment, a $27.5 million decrease from the wholesale segment, and a $0.8 million increase from the DSS segment. BNED's fiscal 2021 third quarter results were significantly impacted by the ongoing COVID-19 pandemic, as many schools continue to adjust their learning model and significantly reduce their on-campus activities in response to the pandemic. While our textbook business continues to be fairly resilient in the current environment, reduced on-campus activities and social distancing protocols continue to significantly affect our general merchandise business. Retail comparable store sales declined 19.9% during the quarter, comprised of an 8.1% decline in textbook sales and a 46% decline in our general merchandise business. These declines were partially mitigated by BNC's rapidly growing first day offerings, where a student is charged for course materials by the institution through a fee or included in tuition. These sales grew 107% to 46.4 million during the quarter. Consistent with prior years, the spring rush period typically extends beyond the quarter due to later school openings and students buying course materials later in the semester. Factoring in the fiscal month of February, comparable store sales for the retail segment decreased 26.7% on a year-to-date basis. Net sales for the wholesale segment decreased $27.5 million, or 41.1% to $39.5 million. primarily due to lower sales, especially at non-BNC bookstores, partially offset by lower returns and allowances. Additionally, results have been impacted by the significant reduction of on-campus textbook buyback opportunities due to COVID-19 safety protocols. We expect a lack of on-campus buyback programs during fiscal 21 to impact wholesale availability of used book inventory supply in fiscal 22. DSS sales grew 0.8 million or 12% to 7.2 million, benefiting from the growth in Bartleby subscriptions. Bartleby subscriptions revenue increased 53% to 2.6 million, while student brands revenue decreased 3% to 4.6 million. The consolidated gross margin rate for the quarter was 17.2% compared to 23.6% in the prior year period. This decrease was primarily due to sales mix including a higher concentration of lower margin digital courseware and lower sales of our higher margin general merchandise products, coupled with higher markdowns. This was partially offset by our efforts to renegotiate lower contract costs, along with higher margins in the wholesale segment, led by lower markdowns and lower returns and allowances. As we continue to operate in the challenging sales environment, we remain steadfast on prudently managing payroll and store operating expenses. These actions, coupled with the cost reduction actions taken in fiscal 20, enabled us to reduce selling and administrative expenses by $13.5 million, or 12.7% compared with the prior year period. During the third quarter, we evaluated some of our store-level long-lived assets for impairment, which were significantly affected by the COVID-19 pandemic. As a result of the impairment testing, we recognized a pre-tax $27.6 million non-cash charge. At the end of the quarter, our cash balance was $9.9 million with outstanding borrowings of $150.8 million as compared to borrowings of $65.9 million in the prior year period. This difference is directly the result of the lower sales environment we are experiencing. Our current liquidity position remains strong despite the challenging climate. As a component of the strategic partnership that we entered into with Fanatics and LIDS during the third quarter, in addition to the $15 million strategic equity investment they made in BNED, they have also agreed to purchase our logo and emblematic general merchandise product, which we expect to be finalized during our fiscal fourth quarter. CapEx for the third quarter was $9.7 million compared with $7.6 million in the prior year. Our retail segment operates 1,441 college, university, and K-12 school bookstores, comprised of 765 physical bookstores and their e-commerce sites, as well as 676 virtual bookstores. As of today, we have contracts to open an additional 13 stores in fiscal year 2021, with 15 additional known closings, primarily of smaller, unprofitable stores. This will bring our total physical and virtual store count to 1,439 locations, net of closed stores. With that, we will open the call for questions. Operator, please provide instructions for those interested in asking a question.