Barnes & Noble Education, Inc

Good morning, everyone, and welcome to BNED's 2021 Virtual Investor Day. I'm Andy Millivoy, Head of Corporate Finance and Investor Relations for BNED, and I'd like to thank all of you for attending. In addition to the live webcast, I'd like to call everyone's attention to the presentation that's available on our corporate website and can be accessed at investor.bned.com and should be viewed in conjunction with today's comments. Additionally, today's presentation will contain forward-looking statements. These statements include projections that are beliefs of management and that are covered under the safe harbor of the company and are contained in our press releases and SEC filings. Today's agenda includes presentations by our Chairman and CEO, Mike Huseby, who will provide a strategic overview, Jonathan Schaar, EVP of B&ED Retail, who will discuss our initiatives to grow retail sales and increase adoption of our inclusive access model. Mike Miller, EVP Corporate Development and Affairs and Chief Legal Officer, who will discuss how partnerships have helped accelerate our initiatives. David Henderson, President of MBS, who will provide an overview of our wholesale business and how it is supporting our new initiatives. David Nenke, President of DSS, who will provide an update on our direct to student digital businesses and Tom Donoghue, our CFO, who'll provide a financial overview. Following Tom's presentation, there will also be a Q&A session. For those of you who are using the conference call bridge for the Q&A session, please state your name and your firm name when asking your question. And with that, we'll begin the presentation with a brief video.

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Good morning, and thank you all for joining us today. I'm Mike Hughesby, CEO and Chairman of Barnes & Noble Education, or BNED. Since BNED's 2015 spinoff from its former parent company, Barnes & Noble Inc., we have been focused on strengthening our core assets, innovating and marketing new digital offerings, and leading the higher education industry we serve through a period of exponential change. Becoming a public company allowed us to pursue greater growth opportunities in the education sector, including expanding our digital capabilities, creating innovative academic programs such as BNC First Day and First Day Complete, and utilizing acquisitions to accelerate our transformation. Today, BNDD's purpose is to serve all who work to elevate their lives through education, by providing best-in-class, easy-to-use solutions for schools, faculty and students. Prior to the onset of COVID-19, BNDD was focused on executing our strategies that targeted access, affordability and achievement. Once we got past the initial shock wave of the pandemic, we quickly discovered that the digital and virtual growth platforms we had been developing and marketing all significantly accelerated in terms of relevance and market demand. You'll hear about these offerings today, including our rapidly growing digital student solutions or DSS business, new and growing inclusive access models for the delivery of learning materials, our new e-commerce platform, and our exciting alliance with Fanatics and Liz to turbocharge our e-commerce growth, and how we're leveraging our advanced distribution facility in Missouri to shift direct to students who are studying remotely. As many schools began to shift to remote learning last spring and then continue to adapt their learning models in response to COVID, we were able to serve students with minimal disruption by leveraging our individualized school e-commerce sites by providing e-textbooks without charge to students, and by providing on-demand tutoring and writing services through our disruptive Bartleby suite of digital tools to students so that they could continue to learn anywhere and at any time that was convenient to them. Our value in Bond as a trusted partner has increased throughout the pandemic. We work closely with school leadership to help them to adapt and overcome the challenges they faced. The past 15 months have been significantly challenging for all of us on both a professional and personal level. As a company and as a management team, we were severely tested and I believe our entire organization rose to the challenge and is emerging as a stronger business. I am extremely proud of everyone's efforts at BNED to support our campus partners and the students we serve over the past school year. We collectively and relatively quickly adapted our business to address the unprecedented disruption to traditional learning models and the impact on our retail stores of not having students on campus. The strength of our current liquidity position coupled with the ongoing growth of our strategic initiatives during such a difficult period is a testament to the strength and commitment of our BNED team. BNUD is one of a very few strategic assets in the higher ed industry that already has a scale, unique asset mix, and competitive positioning to truly meet both the digital and physical demands of the higher ed institutions and students we serve. The education industry has been evolving rapidly. And while the COVID-19 pandemic upended the traditional learning model, it did not stop the industry's evolution. Rather, we believe the pandemic has further accelerated higher education's transformation. As we look ahead to fiscal 2022 and beyond, We are focused on the scaling of our strategic initiatives and expect these initiatives to make our offerings for our campus partners even more pertinent and to generate new business growth as more schools look to implement our valuable solutions. Today, I, along with the rest of our executive team, are excited to review our goals and initiatives with you. I will share a brief overview of B&ED and highlight the work we're doing to increase value for our customers and our shareholders. Our senior leadership team will then discuss the transformation that's occurring in higher education and the key initiatives that we are executing on to lead this industry change. Let's begin with a look at the higher education industry that we serve. Based on industry reporting, we estimate that the US higher education market for textbooks and general merchandise is approximately a $10 billion industry. Roughly one third of schools continue to self-operate their campus bookstores, a challenge which continues to become even more complex for them as students look for new offerings, including digital and lower cost options for course materials and self-study help. Containing costs is a significant focus of this industry. Based on Sally May's most recent report on how America pays for college, families spent an average of approximately $30,000 on college for the 2019 to 2020 academic year, which was up from $26,000 in the prior year. Further challenging schools have been enrollment declines over the last few years. Historically, enrollment trends have an inverse relationship with unemployment. In periods of low employment, enrollments tend to decline as potential students forego higher education when there's ample opportunity for employment and growth. Conversely, enrollment tends to grow in periods of higher unemployment as students look to increase their marketability or to refresh their skills. Based on industry reporting, Enrollment declined 4% between 2018 through 2020. The COVID-19 pandemic had a significant impact last year on college enrollments. Most striking, community colleges experienced a 10% enrollment decline in 2020, with freshman enrollment declining 19%. While the macro trends of declining enrollments and declining textbook prices affect us and the industry as a whole, As we will review today, we are confident that our strategic initiatives will address these trends in a significant way and benefit the schools we serve, their students, our publishing partners, and as a result, us. Now let's take a closer look at our company. Our company has three reporting segments, retail, wholesale, and digital student solutions, or DSS. Our retail segment operates more than 1,400 physical and virtual campus stores, which provide academic and retail merchandise solutions for colleges and universities nationwide, serving over 6 million students. Our wholesale segment supplies books to nearly 3,300 bookstores, including our retail segment's physical campus and virtual stores. As the largest wholesaler of textbooks in the US, MBS is an important source of used books for the industry. Physical books still represent a significant percentage of our courseware sales, approximately 70%. So having the ability to direct the supply is important and strategic as it relates to our delivery models. Through our DSS segment, we serve students directly, providing digital on-demand study writing and other learning solutions that supplement their in-class learning. As David Nenke will review in more detail, our DSS segment is comprised of two business lines, Bartleby and Student Brands. Bartleby exhibited strong growth last year, growing its gross subscriber count over 300,000 last year. Our student brands business, which operates a number of websites that help students improve their performance, attracts over 25 million monthly student visitors on a global basis. Our different business segments complement each other very well and enable us to provide a variety of highly customizable solutions that best support our campus partners. And while we have a strong retailing heritage and share one of the most trusted retail brand trademarks, Barnes & Noble, it's important to understand how B&ED's business model is much different than that of a traditional retailer. Our retail segment business is branded Barnes & Noble College or BNC. BNC, which has been successfully serving this market since 1965, is a contract management business that operates over 1,400 physical and virtual higher ed bookstores. Schools entrust their brand to us to be the official bookstore and the exclusive seller of course materials and to run their general merchandise business, both in-store and online. In return, they benefit from a revenue-sharing arrangement with us. Unlike a traditional retail model which occupancy is typically fixed, our occupancy cost is generally variable based on sales. Additionally, since it's a contract management business, we do not own or lease the real estate for any of the physical bookstores we operate. The physical bookstore contracts average five-year terms with renewal options and provide unusual flexibility as they are typically cancelable by either party without penalty with several months' notice. That being said, we pride ourselves on our long-standing relationships. Our average contract relationship term is 15 years with an approximately 90% renewal rate. As student needs continue to evolve and grow, including digital options and the need for technology investments, operating a college bookstore website have become more challenging and complex. The investments we have made over the past few years and the strategies we're executing on position us very well to serve our existing clients and also to attract new clients to expand our marketable footprint. To better serve our campus partners, we must fully understand the needs and challenges of today's students, which enables us to provide the best, most responsive solutions. Today's students face many challenges. What are the skill sets when they enter college that they need? The ability to afford an education, obtaining the proper skill set to transition to the workforce, mental health pressures, and others. Some of the data is very striking. 73% of high school seniors are deficient in writing competencies. 69% of college students graduate with student loan debt, and many lack the critical skills necessary to transition to the workforce. Based on these circumstances, it's not surprising that two-thirds of students feel overwhelming anxiety, and that figure is a pre-COVID survey response. Beyond industry studies, we conduct our own student pulse surveys that do exactly that. Get the student pulse on a variety of topics. Through these surveys and the findings, we fully understand the challenges that students face. This research focus gives us a unique ability to develop solutions responsive to specific needs. This begins with our focus on providing solutions that address access, affordability, and achievement to ensure that students are prepared and well equipped to succeed throughout their academic journey and beyond. Over the last few years, with a focus on addressing these key themes, we've developed stronger offerings that provide greater value to students and to our campus partners who serve them. Our strategic initiatives are each centered on tackling the issues of access, affordability and achievement and create significant growth opportunities for us and our campus partners. Our offerings ensure that millions of students are equipped for the classroom and beyond and provide tremendous value to the schools we serve. Through the execution of these initiatives, we expect to grow courseware sales, accelerate the growth of our general merchandise business, and to grow our direct-to-student digital subscription business. We also believe these offerings will help the schools we serve become more competitive in their marketplace, which in turn, we expect to drive new business growth as more clients will also want to access our offerings for their students. To lead the execution of these initiatives, we have a deep and experienced management team to lead this company forward. Tom and Carolyn transitioned with the company following the spinoff in 2015. Many other members of the leadership team joined following the spinoff. We also have individuals that bring a wealth of historical expertise to the table, including Dave Henderson, a 25-year veteran at MBS, and Steve Culver, who has been with BNN College since 2005. More recently, we recruited David Nanke, who joined the team to lead our DSS business. have a relatively small but very experienced and talented team that collectively blend historical education industry experience with executives that have a proven track record in growing digital technology-based businesses collectively this management team is focused on and responsible for the execution of our key initiatives for success these key initiatives include growing our share of course material adoptions through our BNC First Day and BNC First Day Complete inclusive access models. That means that tuition and learning materials costs are bundled in some fashion. In addition to lowering courseware costs up to 50% with First Day Complete, academic leadership can rest assured that students are prepared with the course materials they need on the first day of class. Another key initiative is to grow our high margin general merchandise business through a substantially improved e-commerce experience and our strategic alliance with Fanatics and Liz. This partnership has tremendous potential to improve the customer experience, increase selection, and to accelerate B&ED's growth across our high margin general merchandise business, particularly in e-commerce. Finally, growing our high-margin DSS business by leveraging our store base, partnerships, strategic SEO growth, and other channels to scale subscriptions of our Bartleby suite of digital learning services. We're excited by the work that has been done and the external response to our initiatives. As you'll hear from the management team this morning, we believe these new offerings further distinguish us from the competition and, most importantly, provide valuable solutions for the schools and students we serve. As we look at our efforts as a standalone public company since the spinoff in 2015, acquisitions have helped accelerate the transformation we've experienced thus far and have positioned us for success. Our acquisitions of student brands and LoudCloud enable us to more quickly establish our DSS offerings and to build a strong internal software solutions group. MBS enable us to expand our offerings and compete in the virtual school market in which we provide course materials to schools that do not have a physical bookstore presence on campus, as well as the K-12 market. Additionally, with the onset of the COVID-19 pandemic, MDS played a crucial role in enabling us to transition our physical stores to our custom store solutions model as schools transitioned to remote learning. That enabled us to supply course materials to students wherever they were studying from. Additionally, we are leveraging MBS's business model and expertise to ensure that we have the physical materials needed to supply product for the growth of our first-day complete inclusive access model. B&ED has created an unmatched value proposition, stemming from the combined strengths of our unique set of assets, coupled with a management team and broader team that has proven its ability to adapt, compete, and to deliver successful customer and business results. As the needs and expectations of both our campus partners and students have evolved, we have steadily transformed alongside them to ensure we are meeting customer demands and enhancing our already significant competitive advantages. BNED has a truly unique set of assets and a strategic business model that are difficult to replicate. That positions us for long-term success in the marketplace. We're highly focused on leveraging the strengths of each of our business units to help drive success for all of our customers. I'd like to take this opportunity to thank our shareholders for all of your support and to the potential investors joining us today for their time and interest in BNED. And now I'll turn it over to Jonathan.

Thanks, Mike. And good morning, everyone. I'm Jonathan Schaar, head of B&ED Retail. In my role, I oversee the services and solutions we provide for college and universities, including the operation of our campus bookstores, e-commerce websites, and our academic materials and general merchandise businesses. Since joining the company roughly three years ago, coupled with my prior experience in the ed tech space, I've witnessed and participated in the transformation of the higher education industry. I'm excited about the initiatives that we're executing on and the unique solutions we've developed to help our campus partners tackle their most important challenges, like student outcomes, equitable access, affordability, enhancing their brand, and driving financial contribution. What makes this such a great opportunity for us is that Barnes & Noble education is uniquely positioned between the intersection of institutions and students to propel the industry transformation. As a result of this position, we have access to and insights from both our campus partners as well as the students we serve to better understand the challenges they face and drive the decisions we are making. We're executing on a number of significant initiatives at B&ED, and we're very excited about their prospects. This morning, I'll provide an overview of our business, our opportunities for growth, and the key initiatives that we're executing to achieve this growth. It all begins with a deep understanding of the challenges that institutions face, providing valuable solutions to address their needs. Campuses nationwide are committed to retaining and graduating more students and preparing them for academic and career success. Our partnerships advance this mission with forward-thinking solutions tailored to meet an institution's needs and helping them stay ahead of the curve. our campus stores serve as a vibrant hub of college life and learning. We create retail and learning experiences that support faculty, engage students, and build alumni and fan loyalty. Ultimately, partnering with us helps enhance student success and secure a consistent revenue stream for institutions. We take pride in being a strategic partner, collaborator, and support system for the campus partners. Most importantly, we take pride in the opportunity to empower more than 6 million students enrolled in higher education and K through 12 institutions. From delivering the optimal content at the best prices to offering a convenient and seamless customer experience, we provide our campus partners the solutions they need to succeed inside and out of the classroom. Each school we serve is unique and has its own distinct needs. We've built a deep understanding of what institutions need from small private colleges to large public universities and multi-campus community college systems. We collaborate with our campus partners to surpass expectations and optimize the customer experience. We are very flexible in our offerings and provide highly customizable solutions for the schools we serve. In addition to operating their campus bookstores and respective websites, we in many cases also operate game day kiosks for sporting events and full-service cafes within the campus bookstore. We also offer a custom store solutions model where an institution has a physical on-campus store for general merchandise sales, but course materials are offered virtually and fulfilled direct to student, either to an individual address or a central campus pickup point. Our virtual-only solutions also have the ability to offer ship-to-campus options. In operating a campus bookstore, we ensure all required course materials are available for students and provide affordable solutions, including used, rental, and digital course material options. We work directly with faculty to ensure the materials they have chosen for their courses are available in all required formats before the start of classes. Our wholesale distribution channel enables our retail business to optimize textbook sourcing so we can more efficiently source and distribute a comprehensive inventory of affordable course materials to customers. In addition to being a trusted resource for course materials, we also offer a robust general merchandise offering across emblematic merchandise, supplies, technology, and other campus store essentials, to enhance the brand of the institution and provide a destination for the campus community. And as a campus partner, we're integrated with the school's financial aid system to accept financial aid and campus debit cards as tender. College and university stores are increasingly becoming more complex for institutions and competitors to operate. In addition to the macro pressures, including declining enrollments and lower textbook selling prices, digital options are proliferating, publishers have become competitors offering product directly to students, and customer expectations of an omni-channel retail experience has become far more demanding. These are daunting challenges, but we have invested heavily in our systems, people, and strategic partnerships to offer innovative and highly differentiated solutions, enabling our partners to benefit from our expertise and meet their evolving needs. We are focused on a number of exciting initiatives to grow our retail business. The industry continues to evolve, and we believe the COVID-19 pandemic has accelerated the pace of change. BNED fully understands the challenges students face, and our suite of solutions provide schools with tools to help address student outcomes, equitable access, affordability, and navigate this business that's becoming ever more complex to operate. We are confident that our initiatives will lead to growth in the number of schools we serve, as well as growth in our existing schools by capturing greater course material market share through our inclusive access models. And we see a big opportunity to grow our general merchandise business through our new partnership with industry leaders, fanatics, and lids. In addition to the organic sales growth within our existing store base, We believe there is ample opportunity to grow the total number of schools and students we serve. Currently, we serve approximately one third of the US student population. And as Mike highlighted, about one third of schools continue to be self operated, while the other third is outsourced to competitors. As the business continues to become ever more complex, and we strengthen our offerings, we believe we are well positioned to gain share. We've already begun to see evidence of this in our gross new business wins. In each of the last two years, we have signed contracts that are estimated to generate over 100 million in revenue on an annualized basis. We expect this trend to continue as the differentiation of our offerings become more apparent in the marketplace. Now let's take a look at some of the valuable solutions we are providing to our campus partners that provide for equitable access and improve student outcomes. Based on industry research, we know that students are foregoing getting their course materials and it's negatively impacting their success. For example, over half of students in a recent survey reported not having their materials before the first day of class. 85% of students delay or avoid purchasing course materials altogether. And 50% of them said that it has negatively impacted their grades. Seven in 10 students say they would have had better grades if they had access to required materials before the first day of class. 40% experienced stress due to the lack of preparedness on day one. And 44% noted that the pandemic has affected their ability to pay for college. These insights provide us with a deep understanding of the challenges that schools, faculty, and students face, enable us to provide valuable solutions to address these issues. For many years, we have provided course material options to students, including used, rental, and digital to lower costs. But we recognize that there was still a major issue with the number of students who didn't have all their required course materials, which ultimately affects academic performance. We developed First Day and First Day Complete, our inclusive access programs, to support student success through a course material delivery model that provides equitable access, affordability, and an improved student experience. Through these programs, course materials are offered at a reduced price through a course charge or included in tuition, and materials are delivered to students on or before the first day of class. Our first-day inclusive access programs provide substantial benefits for students, not only driving down costs, but also providing access to materials on or before the first day of class and the convenience of a concierge-style course material delivery model. Importantly, it does not limit academic freedom for faculty. As the campus bookstore operator, we can ensure that no matter the format or publisher, faculty can adopt whatever materials work best for their class at the most affordable cost. Let me quickly walk through the key differentiators between first day and first day complete. Through BNC First Day, digital course materials are adopted by a faculty member for a single course, and students receive their materials through their learning management system. BNC First Day Complete includes all classes and students at an institution and includes both physical and digital materials, driving substantially greater unit sell-through against enrollment for the bookstore, enhancing revenue for the schools. We are confident that these programs will allow us to attack and ultimately reverse historical long-term trends in courseware revenue declines. Offering courseware sales through our inclusive access first day and first day complete models is a key and increasingly important strategic initiative of ours to meet the demands of supporting improved student outcomes, enhanced convenience and reducing the price to students while at the same time, increasing our market share, revenue, and relative gross margins of horsewear sales, given the higher volumes of units sold in such models as compared to historical models that rely on individual student marketing and sales. Our First Day and First Day Complete programs have become increasingly popular, and we see this growth continuing to accelerate as the value proposition and impact on student outcomes becomes even more evident to more schools. To date, we have agreements for 64 campus stores to support the BNC First Day Complete program in the fall term 2021, representing almost 300,000 in total undergraduate enrollment. which is up from 12 campus stores and 43,000 in the prior year. That represents 7X year-over-year growth. And our teams continue to work with a significant number of additional campuses to secure agreements to launch first day complete in the coming terms. We are very proud of this program and its importance to BNED, and we'd like to take a moment to let you hear directly from our clients using this service.

The percentage of students in my classes showing up on the first day without their textbook was probably 80 or 90 percent.

Some students that came to school almost the whole quarter didn't have their books.