Barnes & Noble Education, Inc

Hello and welcome to today's Barnes & Noble Education Fiscal 2023 Second Quarter Earnings Conference Call. My name is Bailey and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the call over to today's host, Hunter Blankenbaker, Vice President of Investor Relations. Hunter, please go ahead.

Good morning and welcome to our fiscal 2023 second quarter earnings call. Joining us today are Mike Husey, CEO, Donahue, BFO, Jonathan Schaar, Executive Vice President, BNED Retail, and President, Barnes & Noble College, and David Henderson, President of MVS. Before we begin the call, I'd like to remind you the statements we make on today's call 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 used by any other party without prior written consent of Barnes & Noble 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. I'll turn the call over to Mike Houston.

Thanks Hunter and good morning everyone. As evidenced by our second quarter results, the higher ed industry continues to evolve at a rapid pace and we continue to adapt our offering to ensure that both BNED and our customers are on a path for mutual success. Given the rapidly evolving market, I'd like to focus my comments today on three areas. First, we'll provide an overview of our second quarter financial results. During the quarter, our key strategic areas of first day complete, or FDC, and general merchandise performed well. However, the traditional a la carte course material model declined at a faster pace than we anticipated. Second, we'll discuss the significant cost reduction initiatives that we are implementing across our organization. These initiatives involve streamlining our operational structure and aligning our capital allocation decisions to our highest return opportunities that accelerate growth and drive operating efficiencies. Finally, we'll outline decisive actions we are taking to accelerate our transition to the FDC model, which removes barriers for students by providing greater access, affordability, convenience, and ultimately greater academic success. It also helps colleges and universities meet and exceed their highest priority goals. And for BNED, it provides more predictable, higher margin revenue. With that, let's take a closer look at the second quarter. Our team continued to navigate the ongoing challenges in the higher ed space, particularly the continued negative enrollment trends, as well as unprecedented increases in operating and financing costs. The most profound insight we learned acutely from our second quarter results is that even though our first day complete model grew significantly, the traditional a la carte course model declined at a faster pace than we anticipated. Factors contributing to this decline included faculty assigning fewer course materials per class and many students electing not to purchase course materials at all. Despite these headwinds, Consolidated revenue and adjusted EBITDA were essentially flat versus last year, primarily due to the growth of our higher margin FCC and logo general merchandise businesses. Nonetheless, our expectations entering the second quarter were higher than what we realized, given that this was our first operating rush in two and a half years without the cloud of a material pandemic outbreak hanging over it. The engine that drives our overall business is our retail physical and virtual stores and websites, as reported in our retail segment. Total retail revenue of $598.6 million was down 1.7% year-over-year. Gross comparable course material revenue, including product sales and rental income, was down 4.6%, and the primary contributor to the overall revenue decline. Mitigating, but not completely offsetting, the decline in a la carte course material sales was the success of our first day model. The first day model includes SDC, which includes both physical and digital courseware, and first day by course, which is primarily digital. Second quarter SDC revenue grew 97% to $89.9 million, and 111 of our campus stores utilized SDC for the fall term representing undergraduate enrollment of approximately 545,000 students. The FDC equitable access program removes barriers for students by providing greater access, affordability, convenience, and ultimately greater academic success. This differentiated strategy is increasingly resonating with institutions. Our pipeline of schools considering FDC is very robust and seven more stores are launching FDC this upcoming spring rush, including the University of Memphis and University of Connecticut, bringing total undergraduate enrollment for spring to approximately 588,000 students. Moving on to general merchandise. Total GM sales were up 4.5% on a gross comparable basis. Logo and emblematic, which accounts for approximately 60% of general merchandise revenues, saw continued strength while supply products, which includes bigger ticket items like laptops and tablets, saw some softness. While a relatively small contributor to total GM revenue, supply products revenue is most directly correlated to the broader retail industry headwinds. Within GM, we see many opportunities to improve our execution and customer experience, including additional upside from our partnership with Fanatics and LIDS as our integration with their capabilities matures. DSS revenues increased 2.3% to $8.5 million. The lower-than-anticipated increase in revenue is primarily driven by product offering mix as well as lower-than-expected web traffic. DSS is comprised of student brands and Bartleby products. Since our August 2017 acquisition of student brands, It has generated steady free cash flow, which has been used to finance the growth of Bartleby's suite of digital learning and study tools. DSS grew significantly through the pandemic, including more than 30% year-over-year revenue growth in fiscal 22, and in recent years, we have made significant investments to support this growth. That said, with our focus on our highest return initiatives, we are shifting our priorities within DSS to maximize our past investments and existing assets with a more rigorous approach to profitability. Moving on to wholesale, revenue declined 2.5% during the quarter, while EBITDA increased by 0.4 million. Wholesale continued to be impacted by supply constraints and the lack of used book inventory, lower overall demand due to declining enrollment, and the transition to digital course materials. As we concluded the second quarter, we did not see the anticipated improvements to the operating environment and recognized the need to take swift and decisive action. We started with a deep analysis of all products and offerings, as well as our markets, customer needs, operations, investment requirements, and expected returns. This work has provided clarity on where we need to create efficiency and strategically invest to deliver on our mission, deepen our strategic moat, and drive our long-term growth and profitability. The first part of our plan involves aligning our overall expenses and resources with current market trends. We are taking actions across the company to drive efficiencies, simplify organizational structure, and further reduce non-essential costs. For example, within DSS, we are taking a much more rigorous approach to profitability. we are refining and optimizing marketing and content spend, streamlining data infrastructure and processes, while continuing to test pricing, positioning, and features for increased subscriber conversions and engagement. These actions may impact short-term growth, but we will be on a stronger foundation for fiscal year 24 and beyond. We expect to achieve free cash flow breakeven in our DSS segment in fiscal year 24. Within wholesale, We are rationalizing the workforce to align costs with the declining revenue base and the industry headwinds I mentioned earlier. MBS remains a valuable part of our FDC fulfillment engine. Also, MBS's experienced and dedicated team plays the lead role in managing our retail virtual bookstore operations and relationships, as well as all retail customer care. MBS's initial efforts to transition our retail virtual bookstores to FDC are encouraging and will continue. We see a long tail in physical courseware demand, and MBS's wholesale capabilities are proving to be and will continue to be a key competitive differentiator for BNED. Within retail, we are significantly adjusting staffing and related costs, as well as sales expectations for the remainder of this fiscal year to align with our analysis of retail's second quarter sales levels and trends. These cost reductions required difficult decisions and included many valued long-tenured colleagues. We want to underscore how grateful we are for the hard work and contributions of all the impacted employees by these actions, which are necessary to right-size our organization and enable us to invest in our highest conviction growth opportunities. We expect annual run rate savings of 30 to 35 million from these cost reduction activities once fully implemented. In the current fiscal year 23, we expect to save 10 to $15 million from these cost actions. We intend to reinvest most, if not all, of these savings back into the business in a very targeted manner to fund the advancement of our strategic priorities. Our highest and certainly most exciting priority initiative is the acceleration of the market transition to the FDC sales model. We've led the market change to equitable access over the past five years. And in that time, we've invested in advanced proprietary software, such as our adoption and insights portal, to provide seamless integration with an institution's systems, like registration and single sign-on, and personalized, mobile-optimized student-facing solutions, These investments have allowed us to differentiate and be the clear marketplace leader in equitable access. They also provide the confidence that we can execute on serving a significant number of new FDC accounts with near flawless execution at higher scale. Based on the positive outcomes that FDC provides our college and university partners, their students, content providers, and B&ED, we are moving quickly and decisively to accelerate FDC adoptions. We have developed a surgical approach and implementation plan to engage with and transition many more institutions to FDC. For many of our institutional partners, it will be the only model we offer and we expect the vast majority of our institutional partners and their students to implement the FDC model over the next two fiscal years. We have a substantial pipeline of additional schools seriously considering transitioning to FTC for the Fall 23 term, and we will engage with all of our schools in some fashion in this discussion as we execute our plan over the next several months. To accelerate the transition to this model, we are investing in additional sales, marketing, operational support resources, and technology to further streamline the FTC customer experience. We will continue to invest in our services and expand our strategic moat as we help facilitate the student academic journey and support improved student well-being and academic success. As we transition from offering great products to making a meaningful impact on the highest priority goals at the colleges and universities we serve, our value to the industry will increase and strengthen retention and improve customer lifetime value. We see the inclusive and equitable access offerings becoming the de facto model of the industry. The access, achievement, mental health and affordability benefits to students are clear. The economic benefits the institutions receive are compelling. And a much more predictable higher margin revenue growth is a critical part of BNED's successful fast forward with our institutional partners whose success and ours are truly shared. In closing, B&ED is one of the very few strategic assets in the higher end industry that already has the 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. Whether it's facilitating a better student academic journey, delivering superior customer experiences, or building lifetime relationships with parents, fans, and alumni, Our unique approach and set of proprietary assets allow us to support our partners in a more relevant and highly differentiated manner. We are operating with urgency and decisive action to accelerate market adoption of the FDC model. We're streamlining the company structure and we're taking costs out to allocate capital to our highest priority businesses. We have a clear path forward and we are confident in our ability create durable growth and shareholder value. And now, I'll turn the call over to Tom to discuss our Q2 financials in more detail, as well as our updated guidance.