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Q1 2024 Earnings Conference Call
spk03: Good morning. My name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the Barnes and Noble Education Fiscal 2024 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press the star one. Thank you. Hunter Blankenbaker, Vice President of Investor Relations, you may begin your conference.
spk02: Good morning and welcome to our Fiscal 2024 First Quarter Earnings Call. Joining us today are Mike Huseby, Chief Executive Officer, and Jonathan Schar, Executive Vice President B&ED Retail and President Barnes and Noble College. Mike Miller, EVP Corporate Development and Affairs and Chief Legal Officer, and Jason Snigusky, SVP and Treasurer will also be available during the Q&A session. As referenced in our first quarter slide presentation, which can be found on our Investor Relations website, I'd like to remind you that 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 and Noble Education and are not to rebroadcast or used by any other party without prior written consent of Barnes and 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. Good morning, everyone, and thank you for joining us today. Fiscal 2024 is off to a solid start with first quarter consolidated total revenue increasing almost 4% and adjusted EBITDA improving by approximately 22%. Our first quarter results reflect clear evidence that we are executing against our strategic initiatives to deliver profitable growth. Thanks to the focus and dedication of the BNDD team, our efforts to drive operational efficiencies and cost reductions are taking hold, and our first-day complete equitable access model continues to demonstrate strong momentum. Before providing a more detailed review of the first quarter, Jonathan and I would like to highlight how the successful execution of these two strategic initiatives are impacting our results. First, I'll discuss our continued focus on operational improvement and efficiency. Within our retail segment, total sales of $245.5 million increased by $9 million, or 3.8%. We achieved this growth despite operating 117 fewer stores, including 67 physical and 50 virtual stores, versus a year ago, as we focus on winding down underperforming, less profitable stores and satellite locations. Gross comparable store sales were up 5.9%, driven by strength in course materials, supply products, and graduation items. This growth, combined with our disciplined cost management, shows significant operating leverage. Retail, selling, and administrative expense as a percent of revenue decreased by 520 basis points to .2% from .4% in the prior year period. This improvement is the direct result of our fiscal year 2023 cost restructuring activities, which yielded a $9.8 million -over-year quarterly reduction in selling and administrative expense. Our store teams are operating with their characteristic commitment and increased focus on cost discipline to achieve these results. During our current fall rush, their performance has been exceptional as they continue to provide an unmatched in-store experience while implementing demanding new productivity standards tied to actively managing variable costs, including deep rigor on staffing levels and optimizing our labor mix of full and part-time team members. Further, our teams have adapted well to make sure our stores are meeting customer needs for fall rush despite the later arrival of certain inventory versus prior years. As we discussed with you last quarter, we successfully closed the amend and extend of our credit facilities on July 28. These amendments provide us with the necessary financial flexibility and operating runway to actively pursue a more permanent capital structure to complete our business model transformation. However, certain vendors delayed shipping inventory until we by the amendments. Our store teams, supported by MBS and our retail shared services teams, have been working nonstop to expedite receiving and present such inventory for sale to mitigate any impacts of such delays on our customers or our early rush period sales. Our second key initiative is the acceleration of our equitable access program, First Day Complete, which is one of the cornerstones of our long-term profitability growth plan. In the first quarter, First Day Complete revenue increased 55% year over year and First Day by course revenue grew 27%. The growth of our First Day models drove total course material sales up by 8.4%. Now I'll turn the call over to Jonathan Schar, president of retail, to discuss the impact First Day Complete is having on students, higher education, and on our business.
spk04: Thanks, Mike. It's been an exciting fall back to school season thus far as we now have 157 campus stores using our First Day Complete subscription-like model representing enrollment of nearly 800,000 undergraduate and postgraduate students, a 46% increase over the fall of 2022. Based upon the current -add-drop enrollment and participation levels, we expect FDC billings for the fall term to be up more than 46%, which will be recognized as gap revenue primarily in the second quarter with a smaller relative amount recognized in our third quarter of fiscal year 2024. As I visited many campus stores over the last few weeks, it's clear that FDC, our equitable access model, is having a very positive impact on the student experience, which is why FDC's acceptance in the market has such positive momentum. The marketplace reaction to FDC strongly supports our strategy and conclusion that FDC will be the primary course material distribution model in the near future. As we shared with you last quarter, based on survey results from our Barnes and Noble College Insights platform, students reported overwhelmingly that through First Day Complete, they had a better customer experience, were better prepared, saved money, and ultimately achieved improved academic success. These benefits have been on full display throughout this fall rush. For students, acquiring required textbooks and course materials is one of the first tasks they need to accomplish at the beginning of each new academic term. First Day Complete has turned this initial task list item into a welcoming, positive event through the ease of the First Day Complete process, leveraging our proprietary technology and commitment to service. As an example, at Emporio State University, which just launched FDC this fall term, a student nominated the Barnes and Noble College Bookstore team for a Heart of a Hornet Award, which recognizes campus community members that go above and beyond in service excellence for how welcoming, quick, and easy the FDC program made acquiring course materials. The way First Day Complete has transformed the student experience is striking and provides further motivation to work with all our partner institutions to accelerate their adoptions to the First Day Complete model. We believe we are best positioned to deliver on the equitable access model and continue to be the clear marketplace leader. We've invested in advanced proprietary software such as our student-facing and personalized FDC customer platform, the adoption and insights portal for faculty and academic leadership, and the seamless integrations we have with an institution systems like registration, student information ERPs, learning management systems, and single sign-on. Additionally, MBS is a critical component of our FDC fulfillment engine with unmatched warehousing and logistics capabilities and the industry's largest single source of affordable use textbooks. BND's unique mix of assets and capabilities coupled with our experience in executing at
spk04: have allowed us to provide flexible and customized solutions for the colleges and universities we serve, enabling us to add a record number of schools to the First Day Complete model this fall. First Day Complete also provides economic benefit to BND. Since inception, the First Day Complete model has delivered increased predictability, higher revenue, and improved gross margins and EBITDA at a school post transition. To demonstrate this, we examined the cohort of stores that transitioned to First Day Complete in the fall of 2022 from the a la carte model in the fall of 2021. On slide nine of our investor presentation, you can see that when a cohort of stores moved to First Day Complete, their course material sales increased by 82% year over year due to the ease of the subscription-like service and the much higher sell-through rate versus the a la carte model. Taking this a step further, the gross profit dollars of this cohort nearly doubled, increasing by 96%, and drove a 200 basis point improvement in the gross profit margin to approximately 31% from 29%. Furthermore, as schools use FDC year after year, we are able to increase student participation rates, and as a result, the gross profit dollars of First Day Complete stores in fall of 2022 that also operated FDC in the fall of 2021 increased by .2% in fiscal year 2023. All of this, of course, is only possible through the talent and passion of our BND team. I'd like to recognize and thank some of our outstanding operating executives and teams, like Brian Stark, Phil Dampier, Celeste Rizmini-Johnson, Chris Sacken, and others for their outstanding leadership and commitment to serving our clients and customers. It's inspiring to see our team members who are committed to our mission of serving all who work to elevate their lives through education. Now I'll turn the call back over to Mike to review our results in more detail.
spk02: Thanks, Jonathan. Turning to a focus on the first quarter results and related matters. Consolidated first quarter revenue from continuing operations of $264.2 million grew by .7% or $9.5 million. Consolidated adjusted EBITDA grew by .8% or $7.5 million to a negative $26.8 million. As a reminder, our first quarter is a seasonally low volume period primarily consisting of summer classes, graduations, and preparation for fall rush. Fiscal 2024 first quarter total retail segment revenue increased by $9 million or .8% to $245.5 million driven by an .4% increase in course material revenue and strong graduation and supply product sales. Within course material, our total first day and first day complete revenues increased 37%. First quarter retail gross profit of $50.3 million decreased by 3.7 million or .9% while retail gross margin of .5% decreased by 230 basis points from the prior year period. Course materials gross margin declined due to higher markdowns including markdowns related to closed stores as well as a higher percentage of lower margin digital course material sales. These decreases were partially offset by lower contract costs resulting from contract renewals and a favorable sales mix of higher margin graduation products. Additionally, as noted by lower contractual commissions emblematic general merchandise sales as part of the fanatics and lids partnership agreements effective August 1, 2023 under the terms of the July 2023 term loan credit agreement amendment the commission rates for emblematic general merchandise increased for an estimated one year period. Each of these trends and margin impacts are reflected in the guidance we have provided. Retail EBITDA increased by 6.1 million to negative 18.9 million due to increased revenue offset by a lower gross margin as noted and the 9.8 million year over year reduction in selling and administrative expense I mentioned earlier. Importantly, we believe we've adjusted and will continue to adjust the cost structure of the retail business to fundamentally change profit profile of the business. This was evident in our lower volume first quarter and we expect these expense reduction benefits to continue during our much higher volume second and third quarters. Moving on to wholesale, first quarter sales increased by 1.7 million or .6% to 38.8 million. The increase is primarily due to higher gross sales of 5.1 million compared to the 3.4 million. Wholesale gross profit was 5.8 million or .9% of sales in the first quarter of fiscal 2024 compared to 6.9 million or .6% of sales in the first quarter of fiscal 2023. Gross profit and gross margin rates decreased in the first quarter of fiscal 2024 primarily due to higher product costs and an increase in returns and allowances partially offset by lower markdowns. First quarter wholesale selling and administrative expenses decreased by 18% to 3.4 million. This decrease was primarily due to cost savings initiatives comprised of lower payroll and incentive plan compensation expense. Wholesale non-GAAP adjusted EBITDA for the quarter was 2.4 million down by $360,000 due to the lower gross margin. Moving on to the balance sheet and cash flow, our cash balance was 7.7 million at the end of the quarter with outstanding borrowings of 278 million as compared to borrowings of 259 million in the prior year period. Cash flow use and operating activities increased due to timing of payables to vendors and increased receivables related to increased adoption of our first day programs in summer term. Merchandise inventories were down 17% or 79.4 million to 384.2 million versus the prior year. This reflects the delay in inventory delivery from the first quarter to the second quarter that I discussed earlier. First quarter capital expenditures decreased by 3.3 million to 4.2 million from 7.5 million due primarily to lower store build outs and internal system spend. Regarding guidance, we're maintaining our fiscal 2024 adjusted EBITDA expectation of approximately $40 million. While the inventory delays during the first two weeks of fall rush resulted in lower sales than expected, we believe the current and expected first day sales and our discipline management of store payroll and other costs will limit the financial impact of the delayed inventory receipts. Before closing, I want to thank departing board members Emily Chiu and Dan DiMatteo for their contributions to the company. We are pleased to welcome two new directors, Steve Panagos and Ray Wallander to the B&ED board. Both new directors bring fresh perspectives and highly relevant experience to B&ED's continued transformation and we look forward to working closely with them. In addition, we are very pleased to announce this morning that Kevin Watson is joining us as our new executive vice president and chief financial officer effective tomorrow. As you get to know Kevin, I'm confident you will agree that he is a strong addition to our senior management team at a very important time in B&ED's strategic transformation. In summary, we had a solid first quarter and we're encouraged by further scaled proof points that our strategy is working. Our first day complete equitable access model is having a significant positive impact on students, institutions and B&ED. Our cost reduction and efficiency actions are improving profitability and we are on the path to consistently improving adjusted EBITDA and cash flows. I want to thank our people who daily show through their actions an unwavering commitment to our mission, customers and each other. The field and operating teams that Miller senior leadership, our exceptional treasury team laid by Jason and Joe and our finance and accounting teams led by Seema and Paul have all made significant contributions as have others that are instrumental positioning us for success this fall and beyond. We believe in our opportunity to create value for all stakeholders. Our model transformation has clearly proved that this opportunity is within our grasp at scale. What really excites us is a significant market opportunity that's still in front of us and how well positioned we are to translate that opportunity to increased and sustainable value. I'll now turn the call over to the operator to open the line for questions. Operator?
spk03: At this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad. And your first question comes from a line of Ryan McDonald from Needham. Your line is open.
spk00: Thanks for taking my questions. Mike maybe just to start on the clarification on the inventory delays. Can you provide a little more color about where you were feeling that most whether it was on the course material side or on the we should expect as a result of that for the fall rush?
spk02: Yeah right thanks. We wanted to point this out we don't consider this to be have any impact on our guidance for the year but we do want to did want to mention it because it is probably obvious if you look at our balance sheet at the end of July we had a huge payable balance as we were working to complete the amend and extend which we did on July 28th became effective on the 31st when we got our clean opinion from our outside auditors. So there was a lot of pent up cash that needed to be released to creditors whether they were or trade vendors partners whether they were publishers or in general merchandise both. We got that done fairly quickly and fortunately the delay you know was not in the two largest weeks of the first two weeks of August in other words are not the most significant start dates for fall rush that starts to happen really in the third week and fourth week of August and then you know as we get Labor Day and right after like where we are right now. So to answer your question directly our priority was making sure that we got all the course materials um vendors cleared up first and in general publishers reacted you know very very swiftly and were very helpful in terms of getting the inventory released to us. There were other categories of general merchandise that we didn't prioritize quite as highly in terms of you know nonetheless we dealt with all of it pretty much in the first two weeks of August because we want the in-store experience for the students when they come in to rush to be a complete one. So we didn't want to overplay this I don't think this is going to have a significant impact on our fall rush financial results or on the year but it's something that was so obvious we thought we had to mention it. So it was across the board but you know we did prioritize moving in courseware and related supplies that kids needed to get back to school or students need to get back school and then you know the other categories of general merchandise were being taken care of in parallel but we're not prioritized in terms of payments quite as highly.
spk00: I appreciate the color on that. On first day complete great to see the interesting and good results there. I'm curious as you've gone into the fall rush here first what have opt-in rates looked like amongst the student population on the newer cohort of schools that have started and then as we think about pipeline development for spring of 2024 how that continues to develop and what you've got kind of lined up for the spring rush as well.
spk04: Thanks. Yeah Ryan it's Jonathan thank you for the thank you for the question and you know in the first day complete model there's just to clarify there's sort of two models one is it's built into tuition at certain schools where there isn't a opt-out and then we have where it's listed as a course charge and students can opt out of those so we don't have an opt-in model per se it's either included or opt-out and the for the schools that have opt-out the opt-out period runs through the add drop period which we haven't hit at many of the institutions yet which will come up in the next few weeks so we don't really know although you know the initial view is that participation rates are strong and one of the things we're seeing is the second and third years that an institution runs first day complete and there's cohorts that have experienced that that participation rates grow or or opt-out rates decline over time so that's an exciting sort of metric that we're tracking and and something that we've seen to be positive so far this year although we haven't hit those add drop periods of don't know for sure where we'll land but but some good trends in what we're seeing with first day complete just based on the overall experience and impact that it's having on the you know on student experience and driving affordability and providing access to materials for all the students at those institutions
spk00: maybe just on the second part of that you know pipeline for for spring of 24 how's that looking so far
spk04: yeah we're in active conversation still with many schools to launch first day complete for spring in fact we have some signed amendments and agreements already in place and then we're having you know still daily hundreds of conversations with schools focused on launching in the next academic year which would be a year from now in fall of calendar 2024 which is which is really exciting so those conversations are active they've accelerated and we're really optimistic about the continued growth of institutions participating in first day first day complete and and it's really based on the impact that we've seen on student outcomes access affordability and convenience
spk00: thanks maybe just one more for me for mike you know i think you talked about 117 fewer stores year over year and doing a nice job of driving driving more profitable business off of despite sort of fewer stores can you give us a sense of what the runway looks like here for additional store wind downs and sort of how much how much is there left to go in terms of sort of winding down those unprofitable contracts and when we might sort of hit the trough i guess of impact and start to benefit on the other side of this thanks
spk02: yeah it's a great question it's something that we look at constantly as you know ryan our overall strategy is based on serving stores profitably we're continuing to work with stores to improve profitability so the trough as you call it you know is really going to be dependent upon our success in converting some stores many stores to first day complete and thereby you know increasing the profitability getting it at a level that's a good long-term healthy relationship for both us in the school as you said our store count was down 117 and that included 67 physical 50 virtual stores versus a year ago so that is evidence that we're following the strategy that's reflected in the results in terms of you know giving you guidance on the runway and that type of thing we're not going to do that but we'll do it each quarter because of what i just mentioned it's very dependent upon and john said as john said we're engaged in a lot of conversations with schools still about not just you know converting to first day complete but the other you know economic terms that impact our relationship like the commission rate that we pay the schools and you know we're rolling the payroll so there are different levers we can pull to achieve profitability in stores and so how successful we are in pulling those levers renewing contracts and you know making that strategy work is going to is going to answer the question of where is the trough i mean we expect to go to a lower number of stores you know next year than where we are this year but at some point in time as first day complete penetration as i would call it our sell through really becomes a much higher percentage well we should start you know adding back to that number on stores at some point i don't know when that's going to happen but you know our expectation is that you know all all stores will be on some form of equitable access at some point in time
spk00: so thanks for taking my questions i'll hop back into you
spk02: thanks ryan
spk03: your next question comes from a line of alex firman from craig hallen capital group your line is open
spk01: hey guys thanks for taking my question um can you talk a little bit about what the impact has been on general merchandise sales at schools that have transitioned the first day complete has there been any sort of a negative traffic impact just from having fewer students making that first trip to the bookstore um you know to shop for their books um and and then you know we'd love to just kind of further unpack um your your comments about you know driving really strong merchandise sales on a smaller number of bookstores and and you know can you just kind of help us understand you know what was driving that increase obviously this is a a seasonally you know slower period of the year for you but trying to understand what that's going to look like as as we get into the rest of the year alex
spk02: it's mike i'll make one general comment then john who's been spending a lot of time in our stores during rush can and can pick it up first off there aren't fewer students driven to the store through first day complete if anything there are more because most of those programs result in students coming in to pick up their first day complete package of course we're you know on or before the first day so that that's uh as opposed to you know more of a random who's going to show up when from a student perspective it's fairly predictable in terms of store traffic in terms of you know the the scale of students that are showing up to pick up first day complete so and i don't think our our results having analyzed this would not indicate that we have any fall off in a general merchandise sale kind of on a per student basis as we change the model but i'll let john give more details
spk04: no that's uh that's that's exactly right we're actually seeing more students come into the store post transition to first day complete uh based on the fact that we're serving nearly all of the students at that institution and uh and the primary sort of fulfillment channel is in store pickup we can ship the materials to students if they select but most of them from a convenience standpoint um come into the store and uh and pick up their materials or go through the process in real time and and have us pick them and uh and sort of box up their materials for them for distribution so it's actually an opportunity through some of the merchandising strategies and cross-merchandising strategies that we have to increase the sales of everything else in the store like general merchandise items uh that uh that we sell um to uh to students as part of that visit so we're actually optimistic that that's going to have a positive uh positive impact and uh and just from a store traffic point alone so uh so the we're we think that the model uh works well with the other parts of our business that we are looking to continue to drive growth in
spk01: okay that's that's really helpful and then just the the other part of of the question just thinking about you know the strong merchandise sales despite the you know the the pretty significantly smaller number of of stores that you were operating during the quarter I mean can we interpret that to mean that your you know biggest most kind of long-standing profitable stores you know we're experiencing really strong increases in sales during the summer months or or was it you know part of that maybe just driven by the fact that the the hundred something stores that you're no longer operating were just pretty small contributors to merchandise
spk02: uh yeah I think it's a combination of the both of those and as we called out in some of the prepared remarks you know we have very strong uh you know summer early summer uh first quarter and graduation products which was somewhat of a surprise test quite frankly we we plan on you know we did a lot of great things uh in our merchandising group to make that happen but if you recall uh last year in the spring of spring and summer of 22 there are many schools that actually had commencement ceremonies to include more than just one graduating class because of the impacts of covid and the fact that many many schools weren't able to walk graduating classes in prior years so even with that as a benchmark you know the graduation products um perform better year over year and much better in course with our expectations so that was a big part actually of the contribution of uh general merchandise growth as it relates to the the other categories um we continue to see good performance but you know graduation was one that really stood out for us in the first quarter the other thing I would say is that it impacts both the digital kind of the digital weighting of sales to the margin um and also a number of students that on campus there were many many schools this year that had online virtual courses this summer more than actually in the number we expected so even with that and not having as many students on campus for the summer you know our general merchandise sales did well
spk01: okay that's really helpful thank you
spk03: and we have reached the end of our question and answer session I will now turn the call back over to Mr. Hunter Blakenbaker for some final closing remarks
spk02: great thank you Rob that does include our call and we're going to get back to fall rush here we look to forward us speaking with you in early December on our second quarter call thank you
spk03: this concludes today's conference call thank you for your participation you may now disconnect