Barnes & Noble Education, Inc

Good afternoon. Thank you for attending today's Barnes & Noble Education Fiscal 2023 Third Quarter Earnings Conference Call. My name is Hannah, and I will be your 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 Start 1 on your telephone keypad. I would now like to pass the conference over to our host, Hunter Blakenbaker, Vice President of Investment Relations. Please go ahead.

Good morning and welcome to our fiscal 2023 third quarter earnings call. Joining us today are Mike Hughesby, CEO, Tom Donahue, CFO, Jonathan Schaar, Executive Vice President, BNED Retail, and President, Barnes & Noble College, and David Henderson, President of MBS. Before we begin the call, I'd like to remind you that statements we make on today's call are covered by the Safe Harbor disclaimer contained in our press release and public documents. 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 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. And now, I'll turn the call over to Mike Huseby.

Thanks Hunter, and good morning everyone. Thank you for joining us today. I want to start today's call by thanking our BNED team members. When I consider our journey over the last three years, the operating environment has been anything but predictable or easy. While we are certainly seeing some green shoots, we are still well below pre-pandemic enrollment levels. Nonetheless, our teams have adapted and responded with resolve and innovation to an array of challenges and actions we have taken to meet them, including a significant reduction to our headcount in December. Despite the uncertain macro environment and specific challenges we address, our team continues to rise to the occasion every single day to deliver for the students, educators, and institutions we serve. I'm both grateful and proud of our people and their tremendous efforts. Through their efforts, we continue to innovate and adapt our unique platform to the rapidly changing higher education market. As we discussed with you last quarter, we did not see the expected improvements in the operating environment in the fall rush period and recognized the need to take swift and decisive actions. We began undertaking a broad set of measures to manage our cost structure and improve our execution. While some of the strategic initiatives we are implementing will take time and results won't be linear, we are taking the appropriate actions to deliver consistent and profitable long-term growth. Our third quarter results reflect the early benefits of these actions. We delivered consolidated top-line growth of 11%, expanded our gross margins, and significantly grew adjusted EBITDA on a year-over-year basis. First-day complete revenue grew 76%, and we made meaningful progress in the discussions with our institutional partners to accelerate market adoption of the FDC model. Before providing more detail on those discussions, let's review our high-level financial results. Total retail segment revenue increased 12.4% to $421.2 million, fueled by strong first day complete, first day by course, and general merchandise sales. The traditional a la carte course material model continued to decline, albeit at a much slower rate than we saw in the fall 22 rush. Special recognition goes to our in-store teams that continue to explore ways to improve execution to drive sales. This includes providing better in-store support, partnering on collecting more adoptions, enhanced content sourcing through MBS, and significant system enhancements to receive and fulfill orders faster. Results on a same-store basis were encouraging. Total retail gross cost sales increased 5.9%. Course material same-store sales grew 7.4%, driven by the continued momentum of our first-day complete offering. General merchandise same-store sales increased 2.3%, aided by strong performance in logo general merchandise and cafe and convenience. Third quarter retail EBITDA was $6.2 million, a $21.6 million year-over-year increase. As we announced last quarter, we are taking decisive and aggressive action to significantly adjust staffing and related costs based on the trends we experienced in the fall rush. This quarter, we saw the initial and partial quarterly positive impact of these cost savings initiatives, which we began implementing in December. We continue to focus on reducing costs and operating more efficiently. DSS revenues decreased 4.5% to $9 million as we shifted our priorities to optimize return on our existing assets with a much more rigorous approach to profitability. The team has executed quickly and well on our initiatives to optimize our marketing spend, drive improved conversion rates, and lower content development costs. while investing in the continued optimization of our SEO capabilities. Within our U.S. Bartleby operations, after several months of declining traffic and lower growth subs, January subscriber growth was positive. As well publicized recently, the learning market is evolving at a rapid pace. Within BSS, we're focused on building differentiated capabilities, leveraging our years of AI experience. We continue to use AI to enrich and curate content, to provide contextually relevant results to learners, to optimize the teaching path for our subject matter experts, and to do demand analysis at scale. For example, we are using OpenAI's API to help our experts answer questions faster and at a lower cost. In addition, we're harnessing the power of large language models, including GPT-3, to create tools that will guide a student through their own writing experience and teach them to be better writers. We strongly believe that the future of AI in higher education is to support a student's learning journey, but never to substitute for it. Moving on to wholesale, revenue increased 5.2% during the quarter after more than two years of decline. During the quarter, we saw an easing of supply constraints and more textbook purchasing opportunities enabling us to fill increasing demand at BNC and other bookstores. Additionally, we believe the recent consolidation in the wholesale textbook market provides a larger opportunity for MBS to meet the continued demand of physical courseware materials and further highlights the unique competitive differentiation that MBS's wholesale capabilities provide to BNED. Now, let's take a deeper look at First Aid Complete, our number one strategic priority. In December, We kicked off a journey to accelerate the transition of the schools we serve to our subscription-like FDC model. While we are still relatively early in this process, I'd like to provide some color on our conversations. The FDC strategy and overall communication plan has created urgency and prioritized discussions on campuses across our footprint. We are in active dialogue with hundreds of institutional partners regarding first day complete and We're encouraged by the progress we're making. We plan to provide more specificity on our expected fall 2023 first day complete enrollment growth in connection with our year-end earnings release in June. Some schools where we required a fall of 2023 FDC launch have submitted to FDC, but have asked us to defer its adoption until the fall of 2024, primarily due to their internal process and governance constraints. In cases where we could run the store at an acceptable profitability level, we're working with these schools to provide a bridge here to make the transition in fall 2024. As expected, certain schools chose not to make the transition to FDC with us. We're taking a disciplined approach to protect the integrity of the FDC conversion strategy and, accordingly, we are winding down our relationships with these schools that have a different vision for their institution. In fiscal 2024, our total score count is expected to be lower than today, but our store platform will be more profitable and better positioned for future growth. Our commitment to growing profitability is the key to strengthening our ability to serve our students and institutions in a manner that they deserve and expect. We remain confident in our ability to successfully accelerate the scaling of our FCC model and the long-term growth and sustainable financial benefits of the equitable access model. In summary, after the initial round of conversations with schools, we are confident that accelerating the shift to FDC is the right move for all parties. The access, achievement, mental health, and affordability benefits to students are clear. The economic benefits that institutions receive are compelling. And the much more predictable higher margin revenue growth is a critical part of FB&ED's successful path forward with our institutional partners whose success and ours are truly shared. In closing, our third quarter provides evidence that we are moving in the right direction and regaining positive momentum. We're highly focused on improving our operational and financial performance as we continue to put the most significant of our environmental operating challenges of the last several years in our rearview mirror. We will also have headwinds such as the broader issues facing all businesses today that we need to diligently manage. However, as we finish fiscal 2023 and look ahead to fiscal 24, we are in a much improved position than we were the last three years. I am confident that the actions we are taking along with the progress we have made put us on the right trajectory to achieve more predictable and sustainable growth and profitability. I'm excited about the road in front of us as we continue to build a stronger, more resilient, and more profitable business model and company aimed at unlocking long-term value for our shareholders. Now, I'll turn the call over to Tom to discuss the quarter in more detail.