Barnes & Noble Education Q2 2024 Earnings Call Transcript

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December 6, 2023

There are 7 speakers on the call.

Operator

Afternoon, everyone, and welcome to our fiscal 2024 Second Quarter Earnings Call. Joining us today are Mike Susie, Chief Executive Officer Kevin Watson, Chief Financial Officer and Jonathan Schar, Executive Vice President, BNED Retail and President, Barnes and Noble College. As referenced in our Q2 slide presentation, which can be found on our Investor Relations website. 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. The content of this call are property of Barnes and Noble Education and are not for rebroadcast or use by any other party without prior written consent of Barnes and Noble Education.

Operator

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 Susie. Mike?

Speaker 1

Thanks, Hunter. Good afternoon, everyone, and thank you for joining us today. It's my pleasure to provide our earnings commentary today together with Jonathan and to introduce Kevin Watson, our new CFO who joined BNED in September and is already contributing significantly to BNED's success. 1 year ago, we announced decisive actions to accelerate our transition to the 1st day complete model and also implemented significant cost reduction and operational efficiency initiatives to improve our profitability. We've made substantial progress on these initiatives and our 2nd quarter financial results are further proof points that our strategy is working.

Speaker 1

Before we get into the details, I'll touch on the key highlights from the quarter. First, I'd like to really thank our teams for their commitment to our company's success and their continued efforts to deliver a great experience to our students, faculty, institutions, administration, parents, alumni and strategic partners. Our team's agility and resilience enabled us to not only deliver a successful fall rush in a very dynamic operating environment, but also to execute on our strategic initiatives over the last year. I'm truly grateful for their hard work and commitment. 2nd, our innovative equitable access program, FirstDay Complete continues to positively impact students, higher education and our business.

Speaker 1

In the Q2, FTC revenue increased 52% year over year to $136,000,000 and the combined First Aid Programs revenue reached 199,000,000 our strategic transition to First Aid courseware business model has reached an inflection point. First Aid and First Aid Complete revenues are approaching 50% of course material revenue and revenue increases from FirstDay offerings exceeded the decrease in revenue from the traditional a la carte model by $30,000,000 on a year to date basis. This evolution to a subscription like B2B model significantly improves revenue and revenue visibility, which enables us to better align costs with revenue, improve inventory management and operating efficiency, and to ultimately achieve much higher four wall EBITDA per store. Next, we've improved operational efficiency and maintained top line growth despite operating in 128 fewer stores. We've achieved our planned $30,000,000 to $35,000,000 of annualized cost savings and As a result, consolidated adjusted EBITDA increased 28% to $50,300,000 in the 2nd quarter.

Speaker 1

Looking ahead, we've identified additional opportunities to improve efficiencies further and reduce operating expenses to continue improving our profitability and cash flow. Importantly, the actions we have taken and continue to take position us to deliver more consistent, sustainable and profitable growth in the years ahead. Shifting to our 2nd quarter performance. Total revenue of 610,400,000 increased by $1,700,000 or 0.3% compared to the prior year period. The 2nd quarter sales increase is primarily due to the growth of our First Aid programs, which increased 39% to 199,000,000 partially offset by declines in the alacarte courseware sales, including lower sales from a smaller store footprint as we focused on the profitability of our stores.

Speaker 1

2nd quarter adjusted EBITDA from continuing operations of $50,300,000 increased by $11,100,000 or 28.3%, primarily driven by a $13,000,000 decrease in S and A expenses compared to the prior year. Before turning the call over to Jonathan to discuss our Retail segment results, I'll provide a brief comment on the strategic alternatives process. Our Board of Directors continues its ongoing review of a broad range of strategic alternatives available to the company, including but not limited to potential capital raises, asset divestitures, sales of business and pursuit of standalone growth plans. We're committed to executing on the best path forward for the company and our stakeholders to maximize value and best position our business for the future. We won't be commenting further on this until the Board of Directors has concluded that disclosure is appropriate or required.

Speaker 1

Now, I'll turn the call over to Jonathan.

Speaker 2

Thanks, Mike. Our team delivered a solid second quarter, driven by strong operating performance that enabled us to grow revenue, while increasing retail adjusted EBITDA by 23%. Retail revenue growth was driven by course material comparable store sales growth of 5.8%. Our FirstDay programs, which increased 39% to $199,000,000 were the primary drivers of this growth. In particular, FirstDay Complete revenue increased by 52% to 136,000,000 FirstDay Complete not only grew in the quarter due to the year over year store count growth, but comp FDC stores experienced 6.5% growth in course material sales due to increasing student participation rates, which highlights FCC's positive impact on access, affordability, convenience and academic success.

Speaker 2

Since we launched FirstDay Complete, we've transitioned 157 campus stores to our innovative B2B course material model, which this past fall term encompassed enrollment of nearly 800,000 students. While this is impressive growth, we believe we are just scratching the surface. Our active dialogue with institutions and the FDC contracts already signed for spring term 'twenty four and fiscal 2025 suggest that inclusive and equitable access is rapidly becoming the primary course material distribution model. Given the strength of our pipeline, we remain confident in our ability to successfully accelerate the scaling of FDC and the long term growth and sustainable financial benefits of the Equitable Access model. Turning to general merchandise, comparable store sales growth declined by 1.7%.

Speaker 2

The decrease was primarily due to declines in trade books and cafe and convenience items. These two categories were most impacted by the delayed inventory receipts we discussed with you last quarter. Partially offsetting the decline was a 0.5% increase in Emblematic sales. During the quarter, the benefits from our Fanatics and Liz relationship Chip, who are on full display at our schools. For example, at the Ohio State University Bookstore, lines began pouring around the block at 4:30 am to participate in an exclusive in store launch of Ohio State branded Lululemon merchandise.

Speaker 2

I continue to be amazed at how our teams provide our students, parents, faculty, staff and alumni with unique products and experiences that raised the bar in differentiating Barnes and Noble College run bookstores. As we've shared with you before, our commitment to growing profitability is at the heart of our ability to serve our students and institutions in a manner that they deserve and expect. It's been gratifying to see cost discipline, productivity and efficiency embedded into our culture, while continuing to provide an standing experience for our campus partners. As a result, 2nd quarter retail selling and administrative expenses decreased by $12,900,000 year over year and 2 10 basis points as a percent of revenue to 12.9% from 15%. Adjusted EBITDA increased by $8,900,000 I'll now turn the call over to Kevin to discuss our financial results in more detail.

Speaker 3

Thanks, Jonathan, and good afternoon, everyone. It's great to be on a call with you today. It's been an exciting times since joining Barnes and Noble Education back in September. The momentum behind our shift to a more profitable and predictable FDC model combined with our focus on operating efficiencies presents a compelling opportunity to create a sustainable long term value for our stakeholders. As such, I'm looking forward to contributing to the continued success of our transformation.

Speaker 3

Turning to the fiscal 2024 second quarter results and related matters. Consolidated second quarter revenue from Continua Operations of $610,400,000 grew by 0.3 percent or 1,700,000 consolidated adjusted EBITDA grew by 28.3 percent or 11,100,000

Speaker 1

to $50,300,000

Speaker 3

The combination of top line growth, improving operating efficiencies and further progress on our cost savings initiative actions drove a 180 basis point increase and to 8.2%. During the quarter, total retail segment revenue increased by 700,000 or 0.1 percent to $599,300,000 driven by a 5.8 percent increase in comparable store, course material sales offset by 1.7% decline in comparable store general merchandise sales. Course material sales growth was due to increase in the 1st day and 1st day complete revenues, which increased 39% to $199,200,000 with revenues from the subscription like programs approaching 50% of our course material revenues, our course material business is becoming a much more stable and predictable business. 2nd quarter retail gross profit of $125,500,000 decreased by $4,000,000 or 3.1 percent. Retail gross margin of 20.9 percent decreased by 70 basis points from the prior year period.

Speaker 3

Retail gross sale margins decreased due to a decline in course materials gross margin due to higher markdowns, including markdowns related to closing of underperforming and unprofitable stores as well as higher percentage a lower margin digital course material sales and lower commissions for our emblematic general merchandise. These decreases were partially offset by lower contract costs as a result of the shift to digital and FirstDay models and the growth of higher margin FirstDay complete revenue. Retail EBITDA increased by $8,900,000

Speaker 2

to $48,300,000

Speaker 3

due primarily to

Speaker 4

a

Speaker 3

$12,900,000 year over year reduction in selling and administrative costs, offset by a $4,000,000 reduction in gross profit. Moving on to wholesale, Sales for the quarter were essentially flat at $21,000,000 Wholesale gross profit was $6,100,000 or 29 percent of sales in the Q2 of fiscal 2024 compared to $5,500,000 or 25.8 percent of sales in the Q2 of fiscal 2023. The increase in gross profit and gross margin rate was due primarily to lower markdowns and lower product costs, partially offset by an increase in the returns and allowances. Wholesale, selling and administrative expenses for the quarter decreased by 9.7 percent to $3,500,000 The decrease was primarily due to cost savings initiatives comprised of lower payroll and incentive plan compensation expense. The lower S and A drove wholesale non GAAP adjusted EBITDA to $2,600,000 an increase of $1,000,000 Moving on to the balance sheet, our cash balance was $15,000,000 at the end of the quarter with outstanding borrowings of $234,000,000 as compared to borrowings of $250,000,000 in the prior year period $278,000,000 in the Q1.

Speaker 3

CapEx decreased by $5,300,000 to $4,000,000 from $9,300,000 due primarily to continued focused to reduce spending and capture additional efficiencies. Regarding guidance, We're maintaining our fiscal 2024 adjusted EBITDA from continuing operations expectation of approximately $40,000,000 The year over year increase in consolidated adjusted EBITDA is expected to be driven by growth in the company's retail segment, primarily due to growth in the company's 1st day programs and the impact of the cost reduction actions the company has executed and expects to continue to implement. With that, I'll turn the call over to Mike for closing comments.

Speaker 1

Thanks, Kevin. In closing, we had another solid quarter and we are making excellent progress against our strategic priorities. We're all extremely energized by what our team has accomplished in such a short period of time and even more so and where we are headed as a company. We're confident in our strategy, our highly capable and motivated team and our strong competitive position to continue the successful execution of our strategic focus on sustainable and profitable growth. Thank you for participating today.

Speaker 1

And now, I'll turn the call over to the operator, so we can take your questions.

Speaker 5

At this time, Your first question Comes from the line of Ryan McDonald, Bonita McColl. Ryan, your line is open.

Speaker 4

Hey guys, this is Matt Shea on for Ryan. Thanks for taking the questions and congrats on the strong quarter here. Couple of questions for me, maybe to start. So nice to see 6 additional wins for the spring term for the 1st day complete model. But thinking about the rest of the year, are there additional campuses in the pipeline For spring 'twenty four, is there just not enough time left in the year for those deals to still close?

Speaker 4

And then thinking about the flip side of that question and depending on the commitment timing, if not spring, are you seeing incremental commitments for fall of 2024 or how is that trending relative to your expectations?

Speaker 2

Yes. Thanks for the question. It's Jonathan. And we're actually really excited about the number of transitions we have for spring, it's consistent with past trends. And then the pipeline, we're really encouraged as we said in our remarks by the pipeline of schools that have either already committed or are on the verge of committing for a fall term 2024 launch, which will be our fiscal 2025.

Speaker 2

So pipeline is robust. We're having hundreds of conversations with institutions and the value proposition of affordability, access, convenience, which ultimately is leading to enhanced student outcomes continues to resonate on campuses throughout the country. So incredibly excited about the pipeline and the accelerated growth of our 1st day complete program.

Speaker 4

Okay, got it. That's helpful color. I mean, so it sounds like with the conversations there within the remaining university partners, partners that are going to opt out or churn away from the program?

Speaker 2

No, not at this point. I think all the conversations are really positive. And I would say it's not a matter of if, it's really a matter of when. And those are detailed discussions we have with each of our campus partners in terms of when we would launch the program when they communicate tuition and or fee changes within their academic calendars each year. And so it's incredibly positive.

Speaker 2

We've had great momentum in terms of what we've done and a number of campuses that we're now running FirstDayComplete with. And as I said before, we expect that to accelerate going forward.

Speaker 4

Okay. And then last question for me, just thinking about some of the newer programs and cohorts this fall, understanding it's no longer an opt in model, but rather an include or opt out model. You noted last Quarter, it was too early to gauge those opt out rates in the new cohort of schools. And now that you're a little deeper into the semester, how have those opt out rates trended and how do those kind of compare to your internal expectations. Thanks guys.

Speaker 2

Yes. We refer to it and we did in our comments as a participation rate and the number of students that are participating and the participation rates are aligned with and even exceeding our expectations at our schools this fall. And what we've seen is that and again mention this, not only do we see strong participation rates overall, but as schools participate in FDC year over year, Those participation rates at those schools are actually improving as students who are freshmen or sophomore experienced SDC, understand the convenience, the affordability aspect, the impact it has on their academic success and the rates continue to get better with each year for each of those cohorts, which is a really exciting development and even highlights more upside in the FirstDayComplete model for us and our campus partners.

Operator

Appreciate the color. Congrats again guys.

Speaker 1

Thanks Matt.

Speaker 5

Our next question comes from the line of Alex Fuhrman with Craig Hallum Capital. Alex, your line is open.

Speaker 6

Hey guys, thanks for taking my question. Yes, if I'm not mistaken, I believe you said that 1st day complete dollar revenue growth was more than enough to offset the decline that you saw in the quarter in dollars in a la carte course materials. If I'm not mistaken, I think this is the first time that you guys have said this. Does this more or less mean that you've turned a corner and from this point going forward, courseware material, required materials revenue should be growing?

Speaker 1

Yes, Alex, it's Mike. Exactly right. That's the numbers I cited were year to date increases in the First Aid and First Aid Complete combined program revenues versus the decline. If you look at Hawaiian and Access and think about that on a we have crossed that line now where the model change has inflected at the top line and that top line inflection, reversing the trend of years years of of course where it declines although we've been able to post some course where growth because the 1st day complete, it's very clear now that with the acceptance by the market of the equitable access and inclusive access model that when you combine those together that we're reversing that trend of courseware sales declines from a la carte, kind of a traditional a la carte model. That's a huge, and it's clear evidence that the strategy is the right strategy is working.

Speaker 1

And the other benefit is it's a much more predictable revenue stream. So that allows us to right size our cost structure and our CapEx with more certainty in advance as we approach each business cycle.

Speaker 6

Okay. That's really helpful. Thank you for that. And certainly sounds like a big milestone to have reached that point. So congratulations to you and the whole team that I know has been working on that for years to get to that moment here.

Speaker 6

Certainly understand that having more predictable and recurring revenue should help you on the cost side. Did want to just ask you about the comment in the press release. I guess given the nature of how some of these early deals We're struck it sounds like you're not actually collecting any cash until after the drop add dates. Can you just talk to us about that dynamic a little bit more. Does it perhaps counterintuitively mean that you might actually need a larger credit facility over time as first day complete Becomes a bigger share of revenue and more of the cash collection is deferred to farther into the semester?

Speaker 1

No, I think it speaks to the size of the credit facilities and working capital timing issue that we've improved a lot in terms of our ability to collect receivables much more quickly. Under the old traditional model, you're collecting at the point of sale at the cash register from students, but you really couldn't predict what that was going to be when you have a contract and in advance you have a fairly tight range of being able to forecast what the take rates are, what the participation rates are, I should say. You know what the price per credit hour is, becomes much more predictable. And I guess the other thing that I would say about the transition in working capital is that we're really transitioning the company to a B2B revenue model as opposed to B2C. That's what FirstDay, FirstDay Complete really is.

Speaker 1

So it really lines up the financial model we have with the operating model we have. We're a contract service provider where our real strength is the relationships and the contracts with exclusivity provisions that we enter into with the schools. And so putting that financial model on more of a B2B basis really makes sense because we're dealing with the school on a business basis and structuring the contracts and transferring that model to more of a we bill you school, we collect from you and they can see the benefit of it, we can see the benefit of it and it becomes much more of a joint partnership working to optimize that courseware delivery model.

Speaker 6

Okay. That's really helpful, guys. Thank you very much.

Speaker 5

Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now disconnect.

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Barnes & Noble Education Q2 2024
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