Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Barnes and Noble education fiscal 2022nd quarter Conference call. At this time, all participants are not listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your color.
If you require any further assistance. Please press star zero I would now like to hand, the conference call over to Tom Donahue CFO . Thank you. Please go ahead.
Thank you.
Good morning, and walk into our fiscal 2022nd quarter earnings call, joining us today, or Mike, usually CEO and chairman.
Every burberry VP of operations.
And my whole trust President of digital students solution as well as other members of our senior management team.
Before we begin ever advise you that the statements will make on todays call are covered by the safe Harbor disclaimer contained in our press release.
Documents the contents of this call for the property Arsenal lunch, Acacia and enough or rebroadcast or used by any other party without prior written consent for parts and all that station.
During this call will be making 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 noticed contained in our press release from the public filings with the Securities Exchange Commission.
The company disclaims any obligation to update any forward looking statements that may be made or discussed during this call.
At this time I'll turn the call over to my excuse me.
Thanks, Tom and thank you all for joining us today.
As you saw in this mornings press release today, we announced it'd be a these board of directors has approved engagement of the financial advisor to assist with the evaluation of a range of potential strategic opportunities. This review will help because it shouldn't be any need to be able to deliver more immediate benefits for the institutions and students we serve.
And allow for the exploration of all strategic path.
Yeah its shareholder value.
Hi, REIT industry, we serve has significantly transfer formed over the past few years, including rapid shift to digital declining enrollments student retention issues and an increased focus on affordability.
Our strategic initiatives are centered on addressing affordability access an achievement and include.
Growing our hard our high margin DSS business by introducing and scaling part will be subscriptions.
Growing our share of course material adoption should be and see first day and other new digital models stabilizing and now increasing revenue from new business wins to grow our footprint match doors.
And strengthening and growing our general merchandise business.
Operational highlights in today's press release provide evidence of our progress on each of these priorities.
Our strategy is being validated daily by the markets. We serve however, we need to accelerate the execution of our strategy in order to more rapidly deliver value to our customers and to enhance shareholder value.
We believe that more aggressively exploring strategic opportunities will help facilitate this acceleration of value creation.
The past few years had been a disruptive time and of course materials marketplace as evidenced by trends seen in our own business as well as those disclosed why the large publishers.
Of course material sales declined 7.7% on a comp basis for the quarter, a slight improvement over the rate of decline in the prior year period. The sales decrease was primarily due to price and volume declines with approximately 40% of the decline attributable to price declines.
We are moving to digital delivery models of course materials as rapidly as the market demands and allow us.
As were able to scale digital delivery, we expect our share of courseware delivered to students to increase while fulfillment costs should ultimately decreased dramatically to mitigate lower unit pricing impacts.
For example.
Our first day digital models are now able to very effectively address demands from our campus partners for affordable and accessible coursework while at the same time substantially improving the toll financial <unk> contribution to our schools and to be any D.
We continue to see increased market adoption with revenues from first day, increasing 93% year over year.
As we saw with certain pilot schools. This fall our new first a complete packages and pricing will result in a true win win win for institutional customers and their students.
Any D and the publishing partners, whose collaborate with us.
Students enjoy significant courseware discounts wall penetrations approaching 100% of adoptions provide be any D and our campus partners will substantially improved economics.
Tom will give more detail how strong these improvements are.
This past summer, we also announced a new important strategic partnership with vital source, which will now power the technology, enabling our first day platform.
Transitioning our platform to vital sources technology allows us to accelerate and optimize first the first day implementations.
This partnership drive substantial efficiencies related to the development and maintenance of our platform technology and will enhance value for our partners by offering new functionality and expanded content offerings.
Most importantly is a true long term strategic partnership, which allows us to more rapidly and effectively deliver the benefits of first day packages pricing to our customers.
Well digital courseware delivery is increasing.
Since persist that there's still a strong appetite to learn using the physical book.
Our annual student Paul survey receive responses for more than 100000 students.
96% of those students told us that they find print textbooks to be helpful resource.
Our ability to service the full supply chain of both digital and physical courseware and to package them together as we did this past fall in our first day complete offerings is a strength that we have that is unmatched by any of our competitors.
We are also driving further value for institutions, who products and services such as the introduction this fall.
Our BNC adoption and insights portal or a IP, our new internally developed platform for faculty, an academic leadership to submit and monitor course material adoptions.
All right. The has had significant benefits for the pilots schools that have been using the platform to date and it's also generated very strong interest with new business opportunities.
Our absolute peak platform has enhanced the value of our service declined significantly streamlining the process of course materials selections for faculty and providing much needed visibility for academic leadership to support compliance.
Portability initiatives and student success.
It also provides data to ensure that adoptions are being submitted and recommended in accordance with the affordability and other objectives of the schools that we serve.
In the schools, where we've implemented at the we both collected more course materials submissions and receive them earlier in the process.
As one example, a.
A for a four year public large institution, whereas he has been implemented we've received almost 40% more course materials submissions today.
But other institutions. The tool has already helped facilitate a 100% submission rate across all courses.
This will translate into the ability to offer students more affordable content and greater selections and our stores, which we expect to drive unit sale increases for these schools starting in the upcoming spring 2020 term.
The value that we provide institutions is important to focus on as we seek to grow our store footprint, which remains a critical asset in our current and future success.
Our access to more than 6 million students and even more through our ecommerce sites is an unmatched sales channel for both our retail and DSS businesses, which is why we are focused on expanding our footprint a man stores.
We've made great strides and winning new business this year.
Year to date with five months still remaining in fiscal year 2020.
We have contracts to open approximately $97 million a new business gross sales were 36 million that after store closings.
By comparison in fiscal 2019, new business, new business grow sales net after store closings were 12.8 million.
Within DSS, we saw the power of our footprint throughout the past two records as we've concentrated on the in store and online sales of our Barbie suite of services.
Fiscal year 20 to date, including the month of November we gained over 100000 gross barbie subscribers, representing over 100% growth compared to approximately 50 to 50000 subscribers gained during the spring 2019 term.
Considering that part will be has been market in our footprint for less than a year. We're very encouraged by the continued momentum and a focused effort of our teams to accomplish this important goal.
We remain very proud of our differentiation and offer the product more focused on providing how to learn.
Than merely providing answers or short cuts to the learning process.
With a spring and fall rush period behind US we've learned a great deal and plan to move forward with even more efficient sales efforts.
Probably is quickly becoming a strong suite of products offer to disruptive price points and the results. We've achieved so far we thus far confirms our commitment to our direct to student strategy.
Additionally, we have seen FCO, becoming an increasingly important channel of customer acquisition throughout the fall semester and we expect this channel to be an increasingly significant source of customer acquisition beyond our physical distribution over the coming quarters.
In addition to direct students sales, where they truly unique opportunity to scale bar will be through institutional offerings, including bundles with our first they offerings.
We've added new dedicated talents in the team and we look forward to providing updates to you on this exciting initiative.
We feel confident in our ability to scale bar to be ensuring we are best serving today students and providing them with academic support anytime and anywhere.
Within our stores, we've continued to make enhancements this quarter to ensure we're strengthening our general merchandise business and enhancing retail experience.
We continue to see the success of our concept shops, which are now at more than 70 campuses nationwide.
This includes trend based concept shops, such as those centered around game day or graduation, as well as brand based concept shops, such as those featuring urban Outfitters live in 10 of our stores or champion merchandise.
Additionally, we continue to make progress developing our nexgen E Commerce platform, which we expect to fully launched in fiscal 2021.
Our new E Commerce platform will provide a hyper local personalized shopping experience for all customers and ensure that we provide a best in class Omnichannel experience for the campus communities we serve.
Which should result in increased sales for us at our partners.
In a short period of time, the energy established a tremendous amount than undergone incredible change as a service provider that exists at the intersection of students faculty institutions and publishers as an critical for us to evolve to best service industry.
As our value creation centers scale, including high margin DSS offerings increased Omnichannel general merchandise sales.
And scaling more profitable and more affordable digital courseware packages, we expect their contributions to our operating results first stabilize and then grow our EBITDA, helping to reverse the trend of recent years as EBITDA has declined with courseware sales trends.
We're also managing our cost structure as prudently and efficiently as possible with a sense of urgency.
We're very confident and initiatives we've set forth to ensure we can serve the market where it is today and where it's heading in the future.
Our focus is on moving as quickly as possible implement and scale these initiatives.
We believe that prove up by providing greater value to our customers through all our offerings, we will in turn significantly enhance shareholder value.
We see the impact of our solutions at each and every campus we serve.
And we're helping to drive affordability access and achievement, we all proud to work towards such an important missions.
We've already made great strides in driving value for both students and institutions and now we are poised to have that translate into our operating results going forward into translate into him enhance shareholder value with that I will turn it over time for the financial review.
Thank you Mike.
Please note that the second quarter ended on October 26, 2019 consisted of 13 weeks all comparisons will be the second quarter fiscal 2019, unless otherwise noted.
Total sales for the quarter were 772.2 million compared with 814.8 million in the prior year.
This decrease of 42.5 million or 5.2%, let's comprised of $42.1 million decrease from the retail segment and the 0.6 million decrease from the wholesale segment.
Partially offset by the 0.3 million increase from the DSS segment.
Comparable store sales in the retail segment decreased 5.9% for the quarter as compared to a decrease of 5.8% in the prior year period.
Comparable course material sales for the quarter decreased 7.7% as compared to a prior year decrease of 8.0 for Sir.
Of course material sales continued to be impacted by lower average selling prices.
At approximately 40% of the decrease in the quarter due to lower pricing.
Of course materials sales were also impacted by enrollment declines and student purchases from publishers directly as well as other online providers.
As we continue to scale, our first day inclusive access programs, we expect a model for our course material sales to change and ultimately stabilize.
As we move to digital course materials. So through the first day program books or margins will slightly decrease, but we will sell through.
But the sell through will increase from approximately 35% to almost a 100% the commissions we paid in the schools will also decrease.
We believe these increases in sell through in volume will help stabilize of course material declines we've experienced in recent years.
General merchandise comparable store sales for the quarter were essentially flat decreasing at 0.1% compared with a 1.8% increase in the prior year.
Net sales for wholesale the wholesale segment were 40.2 million a decrease of 0.6 million, a 1.5% compared with the prior year period.
Decrease is primarily due to the decrease in supply and the decrease in customer demand, including our own retail segment.
DFS sales were $5.2 million in the quarter, an increase of 0.3 million or 5.7% as compared to the prior year period.
The increase is primarily due to the increase in sales and part will be subscriptions.
As Mike previously stated as we scale this business high margin contributions from DSS will be an important factor in stabilizing and then growing our EBITDA, helping to reverse the trend in recent years I've never thought declines as as it has declined with our course wells courseware sales.
The consolidated gross margin for the quarter was 24.3% down from 25.9% in the prior year period.
This is primarily attributable to the decreases in the retail segment.
Related to the shifts to lower margin digital products and higher markdowns as well as higher costs from our college and University contracts.
Selling and administrative expenses in the second quarter decreased by 1.9 million or 1.7.
When compared to the prior year period, the decrease in the retail segment of $2 million per quarter was primarily the result of decreases in physical store payroll on operating expenses as well as corporate payroll, partially offset by increases in infrastructure costs and product development costs.
Wholesale expenses decreased in the second quarter by 0.8 million, primarily due to lower payroll expenses and operating expenses.
DSS selling and administrative expenses increased in the quarter by 1.2 million, primarily due to ongoing cost associated with the development of Barbie.
Corporate services in the quarter decreased by 0.3 million as a result of lower compensation related expenses and lower operating expenses.
Our cash balance at the ended the quarter was 24.6 million, an increase of 4.6 million as compared to $20 million in the prior year period.
There were no outstanding borrowings in the quarter as soon as the prior year, our current and projected liquidity remains strong despite declining sales trends and physical course material and the significant investments, we're making and strategic change initiatives. We continue to expect free cash flow to be in excess of 25 million to help.
Finance these initiatives.
In fiscal 2020, we expect the average back to be approximately 115 million compared with 143 million in the prior year RP borrowings of approximately 200 million were hit during the summer and fully repaid during fall rush.
We expect additional borrowings until the end of the fiscal year in a similar patents in fiscal 2019.
Capex for the second quarter was 10.9 million compared with 14.9 million in the prior year.
Currently our retail segment operates 1400, 36 College University and K through 12 school bookstores.
Hi, stuff 772, physical bookstores and their ecommerce sites.
As well as 664 virtual bookstores.
As of today, we've contracted to open an additional 21 stores in fiscal 2020 with four additional known closings.
This will bring our total physical and virtual store count to 1400 53 locations net of close stores.
While our new stores are typically EBITDA positive one we signed the contract. It typically takes a new store approximately 18 to 24 months to fully mature to reach a comparative EBITDA margin.
For fiscal year 2020, we expect consolidated adjusted EBITDA to be between 85 80 million to 85 million capital expenditures are expected to be in a range of 40 to 50 million and we continue to expect free cash for to be 25, and 35 million. The company defines free cash flow as adjusted EBITDA less.
Capital expenditures cash interest in cash taxes.
With that we will open the call for questions.
Operator, please provide instructions for those interested in asking a question.
Ladies and gentlemen to ask a question. Please press star one on your telephone keypad, well pause for just a moment to compile the county roster.
Your first question comes from Ryan Macdonald with Needham Your line is open.
Yes. Good morning, everyone. Thanks for taking my questions I guess, just first off talking touching on the strategic review you just maybe talk about sort of what you felt really changed in the business I guess, when we look look out the past three six months versus today to really I guess change your viewpoint on on sort of pursuit.
Being I guess or at least considering strategic alternatives.
Hi, Ryan it's like use B. I think probably the main thing and I alluded to it and the quote that we've put into the various releases the.
The level of unsolicited.
Inquiries we've had from.
Potential strategic partners, whether there.
Strategic partners from a commercial sense that would improve our competitive position or financial.
Financial players.
Like all of whom see that there's.
On the public stock price.
There's a lot of value in the assets that we have.
Given the relationships we have schools the contracts in the terms, we operate under as well as how MBS and B and C are starting to work together and and we're putting those two companies together and then the upside of DSS. So they see a lot of up a lot of a lot of upside in the asset obviously the time horizon for.
That is something we talk about but that's the main thing I think that changed and.
The volume of those inquiries that were hand that we're handling in terms of trying to educate.
You know potential strategic partners, who can help us accelerate our strategy or pursue other strategic path has increased and.
That's the board level, our discussion has been well because of that is probably time to the board to get some independent.
Advice from a financial advisor on on the various opportunities and alternatives are available.
As we said in the in the release, that's probably the main thing that's that's changed where we haven't changed our strategy is to same as it was six months ago as we said.
What would also as change now I think is that we actually have things that are done instead of just things we're talking about we've actually.
We have tools in place like like IP and offerings in place like first day completes that have been piloted and we see how they work and how they can contribute to the financial improved results an improvement of our financial results longer term these new packages and pricing models.
As well as some of the other.
Yes, as part will be starting to scale and set of sitting here like we were nine months ago talking about all the great things. We can do we've actually done them now and tested them we have.
Bill or interesting things actually show specific things to show potential strategic partners. So I think the financial advisor to ask your question as a board decision based on let's put it structure in place to deal with all this want management to keep going on doing what it's doing not be distracted and says there is so much interest let's see what the.
Its way is to optimize shareholder value.
And accelerate strategy.
Got it that's super helpful. Thank you I guess, just switching over into the bar Dolby business now great to see.
The 100000 subscribers our year to date, there, obviously, you're gaining some nice traction in the marketplace can you talk about sort of what you're seeing in terms of mix of how you're attracting.
Students to the platform is it more would you say, it's more heavily weighted towards online channels or are you seeing a benefit or impact from the in store and the college bookstore footprint that you that you bounce.
Hey, you're running this is can you.
The primary acquisition channels still remains the holidays for US which was comprised of both of our physical store footprint sold at point of sale in the stores and websites we operate on behalf of our skin Park.
And the four as result of primary in store the primary source of acquisition.
It is starting to build as Mike referred to in his speech that is a longer term strategy of an institutional few other thing we haven't really started to focus on but right now primarily in store.
Got it that that's right.
And in terms of what you're seeing I guess and obviously, it's it's still very early in sort of as you are building. This business, but maybe you can talk about sort of a combination of all spring semester and what you're seeing thus far in fall semester. What are you seeing in terms of sort of usage your average utilization from students with BARDA b.
I mean, we're seeing increased usage and time on the platform for the active users received increased.
People really focusing on the question and answer capabilities. So as you get into exam peak periods, Lucy very peak usage in and around mid terms, even now as we're heading into final exam season, you can see the question volumes. Pete. So you know the usage is continuing to increase the content library to continue.
Ladies and kind of on site increases so all all leading indications in shipyards related usage are trending very nicely and frankly ahead of where we would have thought.
Excellent and then just one more for me and just I guess, maybe it's more of a broader macro question. Here recently, there was some announced price increases at San gauge I think in early November that they were sort of pushing to college bookstores can you talk about what sort of impact this could have on the retail business.
For Barnes and noble and how this potentially impacts your your viewpoint moving forward on on the potential merger between engage in Mcgraw Hill. Thanks.
Yes, that's a pretty broad broad question.
It's more than seven gauge I think it right. This is Mike I'll, let Barry chime in on this as well but.
No.
The the publishers and their pricing has been kind of all over the place.
There's a lot of competition from all different providers that that they and we haven't experienced in the past and I think they've tried a lot of different thanks.
Like that this is another example of something else.
Hi, I think that.
No I don't want to comment on lead the proposed merger that's under regulatory review between engage in Mcgraw Hill.
We are relatively agnostic when it comes to the public shares our job really is where an extension of the schools that we serve which they hire us to go out and procure the content. So were aged another school we operate by contract.
So that's an important thing to understand and when.
Okay.
Things come out in the press like they did today were knocked us and others are taking positions on the merger because they're citing some of the.
Some of the practices that lets engage and others are are engaging going on on pricing made those can be looked at in a number of different ways, but but ultimately the prices cat, but prices can't go down and maintain all apart.
Pricing forever. So thats why first date inclusive access makes so much sense is that by bundling up.
And by bundling curriculum into an inclusive axis solution.
The penetrations go up not just for us, but for the publishing partners that we work with and the schools from share that revenue and then the beautiful thing is that the students end up getting substantial discounts say, 30% discounts on average what we've seen thus far and.
So it works for everybody so for a publisher or whether its engaged or someone else to say.
The bookstore, if that's the price that's really not the case, we don't set the price the prices set by the publisher, we share and we share the margin and that type of fed but at some point in time Something's got to give it they're going to meet the objectives of affordability offer the schools, which we're very focused on we think the best solution.
To try to collaborate with publishers as we're doing in many cases.
And as our clients are demanding which is really the important point is that this is what our customers want our customers are under all kinds of financial questions on their own and they're under pressures to deliver affordability and better curriculum and what we're hearing and we interact with.
Our customers our schools at the highest levels, including faculty, but also with the administration. The Chancellor Provost et cetera is they want these kinds of packages that gives students substantial discounts and and they don't want to have to deal with all the different pricing schemes that various publishers are trying to.
So for all at the students and faculty and in many cases confusing that.
So it's our challenge to work with the publishers during this changing kind of transformative environment to make sure they understand what our customers want and that were representing our customers and that in our foot footprint a match stores. The best thing for them to do this to.
Listen to the customer and work with us.
Excellent. Thank you very much.
Your next question comes from Craig can be with Sidoti Your line is open.
Hey, guys. Thanks for taking my question can you share with us any color.
Just where community colleges are at within the portfolio, just assuming they're probably taking a bigger portion.
The brunt of the enrollment declines and probably have a lower merchandise mix any color there on how that's doing versus.
The typical say four year colleges.
Yes.
Greg community colleges continued to be this is Barry growth.
Thank you to be in the low 20% of ARPU portfolio.
No actually seen.
Well in moments is down in many of our community colleges, we'd see improvements in trends.
As we've been able.
Implement significant first date programs that have really made a difference as far as increasing our market share and growing our course materials business.
I think Mike Mike said, it well I mean, our number one priority focus is developing more affordable solutions for cost materials working with the publishers who is our schools.
We've made some tremendous progress this year with the growth of our first a program and the introduction of our first a complete.
We may be in meetings with our clients and our customers we realized that there number one priority.
We believe we have the tools.
Systems and people wherewithal to be able to respond to that ultimately that will drive increased volume.
As Tom talked to relative to.
The future of course materials.
Okay, great just because the sorry, just this is Tom just to the community College representative usually around 25% of the total revenue, it's probably closer to 20 or 21% now.
Okay, and I guess, just bigger picture they've been early adopters and some of your some of your offerings correct.
Yes, with with the terms of Okay got it got it and then just I guess just moving onto I'd just one more just on.
The textbook solutions. When you said it peaked at 100000 any color on may be writing solutions offerings, where that's where the subscriptions are right on that.
Or is that included in the hundred thousand.
No not included in 100000 nuclear the 100000 is our gross acquisition. So it's not American current activity, we haven't disclosed sort of the gross subscriber activity for the overall writing systems. We also just to be clear.
The writing solutions business, the essays business, we bought with student brands as one but we also this semester soft launch a part will be writing and we've got very good reviews, but an aggressive marketing push with that should be expected in the spring, but we haven't disclosed that number Greg.
Okay perfect. That's helpful. Thanks, a lot.
[noise] again to ask a question. Please press star one on your telephone Keypad. Your next question comes from Alex Fuhrman with Craig Hallum Capital. Your line is open.
Hi, Thanks for taking my question I wanted to ask about some of the partnerships that you launched recently urban Outfitters 18. The champion can you talk about how some of those partnerships are going what the potential might be just scale those up to more locations and then just thinking about your portfolio of college bookstores.
Here, how many of those locations are candidates to have that type of partnership do you think.
Hi, Alex Barron Grover.
Ill.
Thank you shot at it off the bat.
You know those programs are very exciting for us.
The concept shops, which are.
KPN as well as just.
Actuation and other the merchandise has done great job of bringing back excitement visual merchandising into our stores, increasing but trafficking, giving us great reviews from our clients and our customers.
As well as our vendor partners urban Outfitters was a great opportunity. It's sitting in 10 stores today again, great excitement great mediate great for as traffic in this so our.
Certainly you would imagine that that is resonates very well on in a large state what private school, probably not the most relevant in the community College, where we may have other programs. So we continue to look to expand our network of vendors and suppliers.
Or is that want to showcase their crop their product to the 18 to 24, you will both in store and online.
And are very excited about the impact is having to our business and how its transforming the whole retail experience in our stores.
Okay.
Yes.
So the question try to answer the question directly this is Mike I mean, the each has very saying he answered it very completely I take but that each each store is different each school is different.
And there as you are saying and implying some larger stores.
Lend themselves to.
The real estate, that's available et cetera lenses led to less they lend themselves to partnerships that you don't necessarily as Barry said have another other other stores, but you know that's the point is we try to treat each each partnership.
Differently in terms of selling very clear targets with and expectations in case the eyes as about so the expectations I think have been met in every case.
This year of all the things that we've tried we said in his speech that concept stores or about 70 stores. So that that's a that's a pretty good representation of above of distribution. So we can gather the data and see whether or not we want to expand that into into more stores at it.
Different level.
Yes, so full for example, smaller smaller footprint that type of thing.
Yes, and just taking on that.
Alex but we're also piloting is a more streamlined version for opinion or new college that has a different customer base. So well the concept and presentation style and that's more aligned with a community college customer.
And over time as course materials.
The physical footprint required decreases with more things going digitally it certainly opens up the opportunities this space for us to be able to bring in more concepts more products.
And really make this a retail destination spot or the for the community.
Okay. That's really helpful. Thank you.
There are no further questions queued up at this time, a turn the call back over to Tom Donahue.
Thank you and thank you for joining today's call. Please note that our next scheduled for release will be our fiscal 2023rd quarter earnings call on or about March. There are 2020. Thank you have a good day.
This concludes today's conference call you may now disconnect.