Q3 2020 Earnings Call
Right and welcome to Barnes and noble Education's third quarter fiscal 2020 earnings conference call.
This time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone.
If you're a fire any further assistance. Please press star zero I would now like to turn the call over six years per speaker today, Tom Donahue Chief Financial Officer. Please go ahead Sir.
Thank you good morning, and welcome to our fiscal 2023rd quarter earnings call. Joining us today are my keeps me CEO and chairman Lisa Mount President Barnes <unk> Noble College Johnson show, our executive Vice President be any be retail and client solutions for news my whole <unk> president of digital students solutions as well.
The members are a senior management team.
Also joining us today, then in Illinois, our newly appointed Vice President of corporate Finance and Investor Relations, Andy will be taking over this portion of the call moving forward Andy.
Thanks, Tom Hi, good morning, everybody.
Before we begin trade for 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 conference this call or the property important knowledge occasion, and or not or rebroadcast or use by any other party without the prior written consent form snowball education.
During this call we 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 those contained in our press release, some public filings with the Securities and Exchange Commission.
The company disclaims any obligation to update any forward looking statements that may be made or just kind of going to call.
And now I'll turn the call over to my excuse me.
Thanks, Eddie Thanks, Tom Good morning, everyone and thanks for joining us today.
As evidenced by our third quarter results the higher industry continues to evolve at a rapid pace and we continue to adapt our offerings to ensure that both beauty de at our customers right a path for mutual success.
We have a sound strategy in place to meet the demands in the changing industry and we are adding significant proof points weekly that confirm we are on the right Pat.
In our third quarter, we continue to execute on our strategic priorities, which include.
Growing or high margins, yes, that's business by leveraging our stores based to scale Garvey subscriptions.
Growing our share of course material adoptions true PNC first day DNC first they complete and other new digital models.
Stabilizing now increasing revenue from new business wins to grow our footprint of managed stores and strengthening in improving our important general merchandise business.
As paragraph going focused on accelerating execution of our strategic imperatives. We've also made some important changes to our leadership team that will allow us to best leverage the specific skills each of our senior leaders have and better align our cost structure with current business trends.
Lisa, Maryland has been promoted from her C O position to president of Barnes <unk> Noble College in this role she will have overall responsibility for the profitability and growth at Barnes <unk> Noble College.
Jonathan Sharpen previously served as senior Vice President revenue in product development will now serve as executive Vice President.
The any de retail and client services.
Jonathan you have overall responsibility for the profitability growth our retail segment.
Jonathan and Lisa working closely with our outstanding field leadership has demonstrated that they understand how to deliver what our campus partners need to be successful.
They will lead our BMC and retail teams to success as we are now well position to scale the delivery of our digital suite of solutions.
In addition, Jonathan and Lisa will work with our MBS and other leaders to realize further synergies across our different business units, ensuring that be any d. is leveraging all of its unique asset divestment of each of our customers.
This effort also includes working closely with Kanuj Malhotra, and our DSSD to continue to improve the market awareness and execution of Barlow begin store sales, which is an important element of our strategy for growth and enhanced shareholder value.
We continue to improve our broadly suite of services, providing students with 24 seven on demand access the academic assistance. This quarter. We're excited to launch an updated that will be website, which brings together our vertically learn and Barbie right products more cohesively under one domain.
Can see new design check it out at Www Dot Myrtle Beach Dot com.
In addition, this quarter, we began to see increased barnaby customer aquas position through FCO sales channel we are actively building.
We're encouraged by the results we've seen with FCO, thus far and we will continue to improve upon it to drive further customer acquisition, both within and all also outside of our store footprint.
Within our stores, we're implementing actions for process improvement and better execution.
While we are proud of the work our field teams are doing to get Bart, albeit students has we're confident that we can do even better.
For the spring rush period, including the month of February probably gain more than 50000 gross new subscribers. The majority of that again came from our stores.
Our year to date basis, we acquired more than 150000 grossly subscribers, including the month of February.
Our stores remain a vital driver a successful BTD. In addition to the sales channel they provide for growth driving solutions such as Bobby our stores also serve as the foundation for our relationships with colleges and universities nationwide.
We continue to add value for current and prospective partner institutions, which coupled with our updated go to market strategy.
Has driven significant new business wins this year.
Year to date, we have contract to open new stores with over $110 million, a new business grow sales or approximately 50 million net after store closings.
Also this new contract net revenue will flow through fiscal year, 2021, which begins in less than two months.
We're also focusing on ways to realize greater profitability from our new stores more quickly without sacrificing the quality of service that is so important to our campus relationships.
The schools, we serve are responding positively to the services and solutions, we offer to help them and their ongoing efforts to drive affordability access at achievement.
For example, our adoption that inside portal for IP has seen continued success this quarter as we scale this solution to additional partner institutions.
He is also helping to substantially increase submitted adoptions.
Further campus affordability initiatives and AD revenue for both BTD and our partner institutions.
We are pleased with the ongoing success this key solution and its rollout at campuses nationwide.
Hey, IP is also a key component and successful scaling of our first a complete program a new course material mile that addresses affordability and access across all courses at an institution by bundling the cost of materials into tuition and or fees.
Hey, IP enables the school to submit all adoptions in advance so that we can order you appropriate materials in aggregate and then deliver those materials on an individual student basis.
VNC first incomplete, which we piloted and a handful of institutions in fiscal year 20 has proven to be highly innovative and delivery affordability access a convenience for students.
Based upon the success of this program, we now have significant and increasing client interest implementing VNC first day complete.
We expect to see four times to five times growth and the number of institutions participating in fiscal 21.
And we have a growing pipeline of first they complete schools that we projected result in a multiple growth rate of this model in fiscal 2002.
This strong customer demand has not been limited to anyone segment of our client footprint. It's ranged from for your public in top tier private institutions to community colleges of all sizes.
Importantly, this program enables us to significantly reduce course material cost for students while ensuring they are properly equipped for their classes on the very first day of class.
VNC first day completes his quickly emerging as a true game changer for us.
Given the significant benefits is providing our campus partners and their students.
While also providing BTD with a much improved and sustainable long term economic model for its course where sales.
Further our major publishing partners are now collaborating with us more closely on digital delivery because our schools are demanding the benefits from these models, which should also increase publisher sell through penetrations.
Another important growth pillar in our plant springboards off of our upcoming lots of Bmcs New E Commerce platform.
We believe our new ecommerce experience will drive substantial value for the students and campus communities, we serve which we expect to meaningfully increase revenue for our general merchandise business beginning in fiscal year 2021.
While our general merchandise business currently generates substantial revenue for be any D. A relatively low percentage of those sales are attributable to our ecommerce channels. We expect this change in a positive way.
As we expect us to change excuse me in a positive way as we introduced our new ecommerce sites. These sites will be hyper personal hyper local and truly customize the shopping experience for students alumni and fans.
We look forward to introducing this important new capability to our camper campus partners later as later this summer.
The NTD is relentlessly focusing on a number of growth initiatives that will help us drive further value far as usual partners as well as for the students and faculty we serve.
Our strategy has been validated by the proof points successes, we've seen thus far.
We are taking actions daily to accelerate execution and achieve scale of our new courseware general merchandise and barley offerings.
As previously disclosed our board has engaged independent financial advisor to assist in a review of strategic opportunities to accelerate our execution and to enhance shareholder value.
We're not a position to provide additional information regarding the review at this time, we look forward to providing you with updates as they become relevant.
Finally, we have taken steps to implement a meaningful cost reduction program to mitigate current downward revenue pressure as we pivoted delivery models aimed at higher penetration of the courseware market.
This cost reduction program is expected to streamline operations and decision making time frames.
Maximize productivity and enhance profitability.
Tom will discuss this program further in just a moment.
Pivoting our company from a physical retail centric service provider to an industry leader that provide innovative custom physical and digital solutions.
Developed institutions and directly to students has required profound change over the past two years and our people processes and technological capabilities.
The investments we have largely already made but also continue to make to accomplish this pivot our clearly being validated by our marketplace.
I'll buy institutions and by students.
We're accomplishing this while continuing to prudently allocate capital to maintain a solid financial position, including healthy levels of free cash flow generation.
While our cost reduction program is required during this period of transformation. Our primary focus is on innovating delivering and growing useful and scalable courseware general merchandise and digital learning solutions that will benefit our customers provide personal growth opportunities for our employees and stabilize.
Reverse recent current sales and EBITDA trends.
With our growth initiatives gating positive significant momentum coupled with signet significant cost reduction actions, both taken and plan. We expect stabilization over the next 12 months and meaningful cash flow growth beginning in fiscal year 22.
We're confident in our ability to achieve the objectives, we are working towards and it'd be any deals ability to remain innovative leader in this dynamic marketplace with that ill turn it over time for the financial review.
Thank you Mike.
Please note that the third quarter ended on January 20, Fiveth 2020, consistent 13 weeks.
All comparisons will be to the third quarter fiscal 2019, unless otherwise noted.
Total sales for the quarter were 502.3 million compared with 548 million in the prior year.
This decrease of 45.7 million or 8.3%. So it's comprised of 40.1 million decrease from the recent retail segment and 11.5 million decrease from the wholesale segment.
Partially offset by a $1.2 million increase from the DSS segment.
Comparable store sales in the retail segment decreased 7.3% for the quarter as compared to a decrease of 8.3% in the prior year period.
Consistent with prior years, the spring rush period extended beyond the quarter due to later school openings in the continued pattern of students buying course materials leader in this semester.
Factoring in the fiscal Martha February comparable store sales at the end see decreased 5.7% on a year to date basis.
Comparable course material sales for the quarter decreased 9.3%.
As compared to a prior year decrease of 11.7%.
Course material sales continued to be impacted by lower average selling prices with approximately 16% of the decrease in the corner due due to lower pricing.
General merchandise comparable store sales for the quarter decreased 0.7% compared with a 1.6% increase in the prior year.
Net sales for the wholesale segment were 67 million, a decrease of 11.5 million or 14.7% as compared to the prior year period.
The decrease is primarily due to the shift from physical textbook textbooks to digital products, resulting in a decrease in customer demand.
GSS sales were 6.4 million in the quarter, an increase of 1.2 million or 22.9% as compared to the prior year period. The increase is primarily due to the increase sales in the bar will be subscriptions.
The consolidated gross margin for the quarter was 23.6%.
Down from 24.3% in the prior year period.
This is primarily attributable to the decreases in the wholesale segment, resulting from an unfavorable sales mix and inventory markdowns.
Selling and administrative expenses in the third quarter decreased by 4.8 million or 4.3% compared with the prior year period. The decrease was primarily the result of lower payroll and operating expenses and retail wholesale and corporate services, partially offset by an increase in infrastructure cost and productivity.
Element cost in the retail segment and ongoing cost associated with the development of BARDA when the DSS segment.
Our cash balance at the end of the quarter was 9.8 million a decrease of 12.2 million as compared to 22 million in the prior year period.
It was 65.9 million outstanding borrowings compared with 70.1 million and outstanding borrowings in the prior year period.
Our current and projected liquidity remains strong despite declining sales trends in physical course materials and the significant investments, we're making strategic change in this initiatives.
In fiscal 2020, we expect the average debt to be approximately 120 million compared with 145 nine in the prior year.
Our peak borrowings of approximately 200 million were hit during the summer and fully repaid during the fall rush, we expect additional borrowings until the end of the fiscal year, a similar pattern to fiscal 2019.
Capex for third quarter was 7.6 million compared with 8.6 million in the prior year.
Currently our retail segment operates 1400 36 College University in K through 12 school bookstores comprised of 772, physical bookstores and their E commerce sites as well as 664 virtual bookstores.
As of today Weve contracts to open additional 12 stores in fiscal year 2020, with three additional known closings. This will bring our total physical and virtual store count to 1400 45 locations Natus closed stores.
As announced in this mornings press release, we are implementing a significant cost reduction program designed to streamline operations maximized productivity and drive profitability.
Certain elements of this plan to recently been implemented while other more meaningful actions are planned for fiscal 2021, which begins in May 2020.
As a result of the recently enacted personnel related elements of this plan, we expect to recognize a restructuring charge of $10 million to $15 million during the fourth quarter fiscal 2020.
We expect this component of the program to produce an annualized run rate savings of approximately $8 million to $12 million. The majority of which is expected to be realized beginning in fiscal 2021.
For fiscal 2020, we continue to expect adjusted EBITDA to be between 80 and 85 million.
Capital expenditures are now expected to be in a range of 35 to 45 million.
We expect free cash flow to be between $30 million to $40 million as compared to 39.7 million in fiscal 2019.
With that we open the call for questions. Operator, please provide instructions for those interested in asking a question.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from Ryan Macdonald from Needham Your line is open.
Yes. Good morning, everyone. Thanks for taking my questions I guess to start out when we follow up on the cost reduction program. You mentioned that you've already implemented a few changes can you talk about what some of those changes were and then as we're going forward into the end of the fiscal year here, maybe in specific areas of the business, where you think that you can sort of.
Optimize some of the spend thanks.
Hey, Ryan it's Mike I'll start off then Thomson elaborate but we've been involved in reducing costs.
Over the course of the last 12 18 months. This is a more focused.
Program that involves different elements that involves.
Involves our people and involves looking at as the way we're doing business in terms of various vendor relationships. We have it's very comprehensive so I would say first off we have.
Brought our cost down already because this is this is a much more significant kind of programmatic.
Action that we're we've already started taking and.
We will continue to ramp up.
Yeah. Ryan This is Tom I was just add that.
The initial focus obviously is look what we announced this morning is really on.
On the streamlining of operations and maximizing productivity and.
Right now, it's really focused in the retail segment in the core business as we look to rationalize how the business is done and really adjusted for the digital.
Changes that have been happening as it relates the course materials and and how that will impact going forward, what what's the business looks like what stores looks like and how we really operated the business.
That will be on what do you.
Yeah.
Sounds good Okay, and then switching over to the digital segment of the business great to see that the gross subscribers continue to increase into the spring semester can you talk about though given that the quarter saw within sort of a busy time with mid terms in finals from last semester. What you saw in terms of.
Usage trends during that time for Bard Ob and then perhaps what sort of retention rates, you're seeing from students after sort of the first month of sign up with the promotional month there. Thanks.
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Ryan This is commute.
The usage rates as measured by you and any activity content views time on size up all sort of been peaking there as high as they've ever been that's also a reflection of having more people sort of we're chasing them stay on the site, but even on an individual basis, we see much more productivity in terms of question usage.
Good.
Textbook solution views and others. So the metrics are all very healthy and.
Pointed to buy the surveys and other work we do that students are finding value in it.
Do so resonate we think we're very disruptively priced in the market relative to the competitive side. So we think.
The value proposition is holding strong and we continue will continue at a rate in terms of product development content and service development. We're very very focused on Q and experienced getting down response times and not sort of thing.
I'm sorry. Your second question was on retention in terms of retention I mean, we haven't what we've said sort of publicly disclosed is that the overall retention is around 20% less consistent with what we've seen our student brands business Im sorry, turning this 20%.
And that's the free to paid month, we haven't really talked about that but thats not dramatically different than the monthly turnover.
Okay got it said declared by so it's it's about 20% churn and then Retentions remained relatively consistent from sort of the free month to the months after that.
Yeah, it's slightly higher but it's not dramatically so.
Okay excellent Okay, and then just one more for me.
Within the retail business and as you're speaking to book store managers in the current semester, we started to see any changes related to foot traffic at all obviously, given sort of the fear and concern around Corona virus at all and and does that have a potential impact to sort of same store sales, particularly in the agenda.
No merchandise area moving forward. Thanks.
This is Mike Lisa good answer this more specifics I think it's just too early to.
So our spring Ross was basically completed by the time that the Corona virus.
Really.
Became public.
In a big way has started to infiltrate the United States. So I don't think you know if you're looking at its all real time, we're all learning every day.
There is nothing that we see right now right Thats having.
A significant impact on the business, but obviously that could change overtime.
At this thing takes off were in kind of the same both lot of other businesses are in that we are domestic so we'd all cross border other than.
Some of our of our student brands.
Activity is cross border over the internet, but over the left but we don't.
As of now we're thinking through doing contingency planning et cetera.
Hope to the best prepare for the worst on on supply chain for general merchandise and things like that but as of now and Lisa you can update us, but I don't.
There is anything that has affected this fiscal quarter, we would expect to really materially affect the rest of the fiscal year.
This is lease I would agree with that we've been working closely with the supply chains monitor any impact.
And the good news is we're not seeing any material impact for the balance for fiscal year.
Excellent. Thanks for taking my question.
Your next question comes from Alex Fuhrman from Craig Hallum Capital. Your line is open.
Great. Thanks for taking my question, Andy Nice to it and I just speak with you again.
Likewise, thanks, so much Alex.
So I wanted to ask about this first day complete offering can you give us a sense.
The uptick you've seen in the schools, where it's been rolled out what percentage of students do you have a sense have been taking advantage of it and specifically do you have a sense of who has been using yet whether thats been by year of school or domestic versus international I'm, just curious how we should.
About that as that gets gets rolled out to more tools.
Yes, hey assets Jonathan Char.
So first day completes his as a new course material model that as we said in the end the remarks that addresses affordability and access and really convenience, but bundling course materials across all courses for all students I had an.
Institution as part of two lesion and or fee. So it really touches every one.
At the schools that we serve currently as we said, we launched ads and a handful of schools and with really incredible results in terms of savings for students and convenience and access and based on that on the demand for the product on.
Those proof points has been really significant and and the scaling for fiscal 21, we expect to see about four to five times the number of institutions and that could continue to grow and are fairly significant way in slide 22.
Okay. That's helpful. Thanks.
The thing Alex This is Mike the thing about first a complete also is that it makes sense not just for us in schools and makes sense for the publishers.
And the publishers.
As you can see from their results that they put out our are challenged on adoptions and even digital sales. This this provides a model that allows penetration rates to go from so in our case 30, 35% up to close to 100%.
And.
Our approach to that is because of the benefits that this is giving to the schools.
We are economics improve substantially where it open book with the schools were talking about protect none of our downside risk their downside risk and also share some of the upside so thick enough flexibility. That's why it's so appealing to the schools that we serve because it gives them more flexibility while passing through substantial 30 to 40.
For some cost savings to students.
And.
And so what we're really this is really coming from our customers, which makes a conversation with the publishers.
You know easier in a way because this is not something that were necessarily pushing although we've got tools developed to make it easy to use and easy to implement.
But this is what customers want this to satisfy all their objectives and thats helpful that it also works for the publisher because there are obviously, providing a lot of the content.
So content comes from other sources, but a lot of it comes from the publisher so and just to clarify it's across both digital and physical content. So this is not just at a digital content solution. This is across all course materials and requires no change in Apple TV here.
Which is why one of the Reis other drivers why it's being embraced by so many institutions.
Thats it Thats an important point, that's an important point as does our first day program is more of course, but course digital only program first a complete is all courseware physical and digital together.
Just an example of how we could use all of our assets together, we are unique set of assets, including MBS, which can do fulfillment of the physical side and this will this will help MBS as business as it scales as well so.
Great Thats really helpful. Thank you.
As a reminder to ask a question. Please press star one.
Okay.
We have no further questions I would now like to turn call over to any mills Lee for closing remarks.
Great. Thank you and thank you everyone for joining us on today's call. Please note that our next schedule financial release will be our fiscal 2024th quarter and fiscal yearend earnings call on or about June 20, Fiveth 2020 have a great day everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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