Q1 2022 Barnes & Noble Education Inc Earnings Call
Business.
As we navigated through the pandemic, we've been successful in accelerating the execution of our strategic initiatives.
Proving our offerings for our campus partners.
And managing our liquidity position, so that we entered fiscal 'twenty, two and a position of strength.
Our inclusive access courseware offerings first day and first day complete are becoming widely recognized with an increasing velocity of adoption as programs that provide improved student outcomes through equitable access enhanced convenience and improved course material affordability.
Our partnership with fanatics and lids combines our innovative academic offerings with an unparalleled merchandise assortment and best in class Omnichannel customer experience.
We expect this greatly enhanced experience and expanded offerings to increase sales of our higher margin logo and emblematic products as we continue to roll it out over our store footprint in the coming months.
Our direct to student digital Bartleby offering continues to gain market share as we add new features and functionality and better understand our customers' needs to continue to build this extremely valuable resource for students as they navigate new hybrid learning models.
On their own each of these offerings provide significant benefits to schools and students we serve.
Collectively we believe we provide an unmatched offering and compelling value proposition that simply can't be replicated in the marketplace.
As we prepare to welcome students back on campus for the 2021 to 'twenty two academic year. We're very excited to provide advanced course material delivery solutions across student choice and inclusive access model all designed to support improved student outcomes through access convenience and affordability.
VNC first day and first day complete our innovative models of course material delivery that address equitable access across an entire institution by ensuring that all students are prepared for learning by the first day of class, while also substantially improving affordability through lower costs.
<unk> first day digital course materials like FX or publisher courseware are adopted by a faculty member for a single course.
And students receive their materials through the schools learning management system.
<unk> first day complete is an innovative model of course material deliveries that addresses equitable access across an entire institution by ensuring that all students are prepared for learning by the first day of class.
For campuses utilizing the first day complete model the cost of course materials are bundled into tuition <unk> fees.
And the campus bookstore oversees the distribution of physical and digital course materials for all students on or before the first day of class.
Through a concierge style service students can choose to pick up all of their physical materials, either at the bookstore or have them shifts while digital materials are accessible through an institution's learning management system.
When students have access to their learning materials at the startup class. They can engage with of course content from day, one ensuring that there are no gaps in learning.
In a survey we conducted with more than 400 students utilizing first day complete.
We found that 74% of students that the program help them to be better prepared academically.
70% of students that it had a positive impact on their classroom success.
While 62% of students responded that first day complete help them to achieve better grades.
Amongst the additional top benefits of first day complete cited by students where convenience and time savings.
Of those surveyed 84% said they like the convenience of having their course materials bundled and deliver to them through this program in.
In addition, <unk>.
85% stated that the program saves them time.
A representative response from students who surveyed was.
I like that I don't have to think about doing everything to get my course materials everything was already ready for me.
In addition to student benefits.
First day complete is very attractive to our campus partners and enables them to address student outcomes through equitable access enhanced convenience and improved affordability.
Why this model has been adopted across a broad spectrum of the schools, we serve from small private colleges to large public universities and multi campus community College systems.
This value proposition resonates with all schools, including our virtual school partners with whom we are actively discussing first day complete and beginning to test its application in the virtual market.
As we learn more we'll keep you posted on this incremental opportunity.
Additionally, as schools compete with one another for enrollment it also becomes an attractive competitive advantage, which we believe will lead to additional demand for this offering.
For the current fall term first day complete will be offered in institutions with undergraduate enrollment of over 300000 students up from 43000 students last fall.
Representing a year over year growth multiple of approximately seven times looking forward based on the accelerating demand for this solution. We expect continued strong growth for both first day and first day complete.
As students and visitors returned to campus and begin to attend campus events like sporting events prospective student tours and alumni weekends.
We're excited to view, our new general merchandise offerings, resulting from our strategic partnership with fanatics and lift we expect this partnership which will provide an enhanced product assortment and significantly improved omnichannel experience to not only grow sales and cashless stores, but to also increase our customer relationships with a total addressable market.
By growing sales to alumni and other fans.
When we entered into this strategic partnership.
Our goal is to not only grow sales within our existing store base through an enhanced offering but to also boost our value proposition and in turn grow the footprint of our schools.
We're already realizing this benefit and we're thrilled to announce in June our newly formed partnership to serve the University of Notre Dame.
Beginning next year Barnes <unk> Noble College will manage all course materials retail and online operation for the University of Kansas retail stores, while drawing heavily on our partnership with fanatics and lids, given the large emblematic merchandise sales of Notre Dame.
This partnership combines the power of Barnes <unk> noble colleges academic solutions, and our established retail expertise with fanatics and lids, new and innovative in store and E. Commerce retail solutions that we are already actively collaborating on with Notre Dame leadership.
Importantly, we are now partnering with two best in class industry leaders that are significantly greater scale in this segment, allowing us to mitigate some of the COVID-19 related supply chain challenges that are affecting many other businesses in the manufacturing and retail industries.
Providing best in class retail experiences for our existing campus partners and new client top tier universities is precisely why we entered into a partnership with fanatics and lids.
Our selection by Notre Dame sends a strong message to both our current campus partners.
And also a prospective new partners that together, we are truly best in class retail partners, both in store and for E Commerce.
Turning to our DSS business, our Bartleby suite of solutions continues to exhibit its rapid growth.
DSS revenue for the quarter was $11.0 million growing 41% over last year, representing the highest dollar revenue growth recorded for the DSS segment since its formation.
Primarily generated over 66000, new gross subscribers this quarter, representing more than 100% growth over the same period last year with revenue increasing 86%.
As students and institutions are excited to return to an on campus learning experience. This fall, we believe that the significantly increased use of online learning and supplemental tutoring tools over the past year has forever changed the landscape of higher education and the need for flexibility in the post pandemic world.
We expect bartleby to continue to grow and become even more relevant with this heightened need for support outside of the classroom we expect.
Significantly better performance of in store sales of Bartleby. This year, given the substantial return to on campus learning.
In response to these trends, we continue to invest in and strengthen our powerful DSS offerings.
During the first quarter, we launched math solver, a new Bartleby product feature that is powered by our partnership with Wolfram Alpha and allows students to do on demand real time access to learn how to solve all types of mouth problems in algebra freak out calculus anymore.
Introducing this new feature insurers have bartleby continues to grow with the students that serve adding functionality that can meet the urgent and growing demand even better support students in this subject area.
We are seeing positive growth and momentum in our student brands riding health business, which is also contributing to the overall DSS revenue growth.
The student brands business, which attracts a global audience of over 25 million students per month across four languages and focuses on assisting students of the writing process has reversed what were declining trends by focusing on long tail SCO and machine learning assisted optimization efforts to increase reach and potential subscribers.
Yeah.
These efforts have been successful in driving an increase in both unique visitors and also active paid users.
While our success lies in driving growth and margin contributions from our growth initiatives.
We also continually to carefully manage our cost and liquidity by leveraging both our partnership relationships and a more flexible cost structure, we engineered over the last approximately 18 months.
During those 18 months, we were presented with significant challenges that we had to adapt to and overcome.
While challenges remain certain of them such as supply chain and fulfillment and logistics are improving weekly and we believe they will continue to improve to allow us to meet the increased pent up demand that we're seeing as fall rush starts.
I am extremely proud of our organization significant progress they have made on our strategic initiatives and our complete dedication to serving our customers and each other.
As we begin the critical current fall rush period, and look for the rest of this fiscal year 'twenty two and beyond.
We're excited to welcome students back to campus and to once again serve our campus partners in person.
Covid will continue to evolve and require our attention.
And wireless trajectory is difficult to predict.
I'm confident in our company's ability to adapt adjust and serve our campus partners, providing unparallel service and the safest possible manner.
With that I'll turn it over to Tom for the financial review.
Thanks, Mike.
Please note that the first quarter of fiscal 2022, consisting of 13 weeks ended on July 31, 2021, all comparisons will be to the first quarter of fiscal 2021, unless otherwise noted.
As Mike highlighted the first quarter is a low revenue quarter for the company consisting primarily of summer courses. We are encouraged by our first quarter results as sales rebounded, especially within our general merchandise business.
As the majority of our campus stores were opened as compared to the prior year.
Since we're primarily learning remotely and a majority of our stores were closed in response to Covid.
Total sales for the quarter were $248.0 million compared with $204 million in the prior year.
This increase of $44.0 million or 18% was comprised of $58.0 million increase in the retail segment.
$43.0 million decrease from the wholesale segment and a $6.0 million increase from the DSS segment.
Retail comparable store sales increased 49, 8% during the quarter comprised of a 21, 9% increase in textbook sales and 118, 4% increase in our general merchandise business, which benefited significantly from the reopening of most of our campus stores.
These results were further bolstered by the NCS rapidly growing first day offerings, where students charged for of course materials by the institution through a fee are included intuition with sales nearly tripling to $27 million during the quarter.
As a reminder per our agreement with fanatics and lids logo and emblematic product sales are now accounted for under the agency accounting method.
Which <unk> receives a percent of sales for the logo and emblematic sales online and in store.
Each sales channel in store and online has its own commission rate, which will change as it relationship matures.
Our comparable sales reflect the actual retail selling price or tender received for the products sold under the agency model rather than solely the commission received.
Whereas GAAP sales on our P&L reflect the commission received.
Currently we have entered our fall rush period and are cautiously optimistic by the results we have experienced over the first few weeks.
Net sales for the wholesale segment decreased $43.0 million or 44, 6% to $49.0 million, primarily due to the shift of course material sales from wholesales CSS model back to the retail campus stores.
As a reminder, when campus stores were closed a year ago, we pivoted to providing students with of course materials to wholesale CSS model.
Additionally, in the quarter there was a decline in both supply and customer demand, partially offset by lower returns and allowances.
DSS sales grew $6.0 million or 41, 4% to $11.0 million due to the increase and Bartleby in student brands subscribers.
The consolidated gross margin rate for the quarter was 24, 9% compared to 15, 1% in the prior year period.
This was primarily due to the favorable sales mix of higher general merchandise products, coupled with lower inventory reserves and lower markdowns.
Partially offset by higher contract costs as a percent of sales.
Our selling and administrative expenses increased by $18.0 million or 23, 1% compared with the prior year as we reopened most stores and brought employees back to serve students as compared to the prior year period, when we furloughed many employees in response to Covid related temporary store closures.
At the end of the quarter, our cash balance was $13.0 million with outstanding borrowings of $210.0 million as compared to borrowings of $240.0 million in the prior year period.
Our current liquidity position remains strong despite last year's challenging climate Capex.
Capex for the quarter was $15.0 million compared with $8.0 million in the prior year with the increase coming primarily from product systems and development cost.
Currently our retail segment operates 1429 College University and K 12 school bookstores comprised of 784, physical bookstores and their e-commerce sites as well as 645 virtual bookstores.
With that we will open the call for questions. Operator, please provide instructions for those interested in asking a question.
At this time, if you would like to ask a question Crestar one on your telephone keypad again that it's time to number one. Your first question comes from the line of Ryan Macdonald with Needham.
Hey, good morning, Congrats on a great quarter and thanks for taking my questions.
I wanted to ask about what youre seeing thus far in terms of first day complete take rates.
From the students that are starting to return to campus, presumably youre starting to see those orders come in.
For the upcoming fall semester in and I know you talked about expectations of about an 80% take rate at the Investor day, but it was much higher last fall. So just just would be curious to hear any commentary around those opt in rates thus far.
Yeah, Brian This is Mike I'll, let let John Shar handle that one.
Yeah. Thanks, Thanks, Brian It's Jonathan.
First day complete and our execution to date has been really strong we're seeing across the 65 campus stores that are are supporting first day complete.
Strong student adoption and.
And really strong fulfillment and execution from our stores both across the physical materials that they're ticking up as well as digital we have a lot of institutions that have now included the fees.
Eating their tuition and therefore, it would be 100%.
Adoption across the board and then certain institutions that included as a course charge.
<unk> can opt out so we don't have all the data.
As of yet, but it looks really strong and really excited by the execution the feedback we're getting from students.
Well as the campuses that we serve and really proud of the execution of our teams to get the materials in the hands of students on or before the first day of class, which is ultimately, allowing them to enhance student outcomes and really improve the overall student experience.
Hey, Brian It's Mike I think the only thing I would add to that and as John said, it's early in the in the <unk>.
The rush to get all the data is disclosed but.
We have situations with large.
Community College state systems.
They've decided to go ahead and completely fund the cost of courseware through their cares Act funding.
Which means 100% of the students will be getting their books for free.
No opt out and in some cases they are doing this for two years.
It's an interesting thing that we are analyzing on a very specific basis to make sure. We help those schools that need help to spend that money that they've received from the government. There is a lot of money thats flowed into certain schools and they have to spend it within a certain timeframe.
<unk> courseware is one of the allowed expenditures for them. So that's that's working out really well for many of the schools that have received the government funding is to use that funding to go ahead and pay for the cost of courseware for all their students and in those situations, there's no opt out so.
So I can't say enough about first day complete and the team John and his entire team the whole company, that's gotten behind this and the level of execution and another interesting thing about this Ryan is that in that same community College system. I was just I was just saying 76% of adoptions are digital.
Which is great in terms of the convenience for the students and also for us because it reduces the fulfillment effort that goes into our.
Satisfying the demand.
So.
It's really served as a competitive advantage for many schools.
That's accelerating demand because other schools are seeing that.
And we're actually seeing growth in enrollment in some of the schools that are.
Pitching books are free and those types of programs. So they are using it as a competitive.
Response.
So that they can put themselves on an equal footing with those students that are those schools revenue that are using it as a competitive advantage.
Yes.
That's really helpful color I think an interesting dynamic for sure on the state funding aspect I'd be curious as Youre looking to the spring semester I know you've been working on an additional universities to start.
<unk> launched with first day complete in January can you just provide an update on sort of how that's trending in terms of additional schools coming on to the first day complete.
Okay.
Yes, John I want to address that yeah, yeah, absolutely yeah, we actually already have schools that are committed to launch first day complete.
Within this academic year and for the spring term and and so that's really exciting and having I would say conversations across our footprint and with prospective clients on launching first day complete next academic year already so I'd say.
The impact of what we're seeing and the number of key studies and relevant institutions across four year private four year public two year community College systems is allowing for really relevant examples of us.
For other schools, and we're seeing great impact on student outcomes, and it's leading to a lot of discussion. So yes. We have we will grow within this fiscal year. The number of campus stores running first day complete and really excited about the prospects for the future just based on the number of conversations we're having and the.
NAND for this offering.
Excellent and then just perhaps one more from me great to see the strength in DSS, both across student brands and Bartleby.
Talked about the new math solver tool.
Launching this summer just curious as youre thinking about the fall semester in terms of marketing and packaging that solution, new offering them that silver is a bundled in.
Core Bartleby in is this pricing change.
On that solution at all thanks.
David <unk> as our president of DSS will address them.
Yes.
Included in subscriptions.
We launched it and as you mentioned in June yet.
Controlled rollout.
Once we buy them now.
Now available to all customers.
And the adoption and usages.
Coming around the levels that we expected that.
<unk>.
Yes.
Excellent. Thank you very much.
Your next question comes from the line of Alex Fuhrman.
Great. Thanks, very much for taking my question nice to see.
Being finally.
Looking at looking like they're opening up here.
Wanted to ask a couple of things first of all I'll start with the fanatics and lid partnership 10 can you talk a little bit about now that the Boston the master is.
Getting into the rush period here, what is different about the in store merchandising experience today than it would have been a few years ago before that that partnership is it is it more about the quality and breadth of the assortment and can you help us understand that a little bit better and similarly, if you can address the E com.
<unk>.
<unk> how is it different today than it would've been a few years ago and I know, it's really early obviously in the in the rush here, but are you starting to see a response to the new assortment.
I'll just make some general comments. This is Mike on your questions, Alex and I'll turn it over to.
Jonathan to get to get more specific but with respect to your first question on the <unk> partnership and the merchandising and the appearance of the stores.
Your question is versus a few years ago.
It came a long way even even prior to the.
Our partnership with fanatics and lids.
In terms of our focus on on really.
<unk> on a very specific kind of local basis within each.
Schools School store so.
The incremental benefit of fanatics.
<unk> and lids merchandising problems, obviously with that segment of that merchandising emblematic and logo apparel that they specialize them.
It's the quality.
It's more of the breath of the assess the assortment and especially in COVID-19 their ability to access directly through manufacturers and in some cases in their own in their own brands.
We've used.
The inventory that we probably wouldn't have been able to access as readily or at least not in the quantities as we can with them as a as a partner. So when you walk into the stores youre going to see a different assortment of wider assortment and I think trending towards and some some of the larger school.
As more of a high end assortment.
A larger percentage of apparel, that's higher and in nature than what we've had.
And different brands, a much wider assortment of brands newer brands more exciting brands from a demographic perspective for students. So that's one thing.
And.
In terms of.
The details behind that I'll, let John talk about it but it's it's really been a huge.
Citing benefit for us thus far.
Yes.
I just wanted to echo what.
Mike said that it's really about the quality and breadth Alex of the product assortment.
In the stores that we're really excited.
About and it will only be enhanced.
And become better.
From a retail experience standpoint for our customers and then on the e-commerce side and the integration of the fanatics platforms seamlessly into our bookstore websites, we're incredibly excited.
About that very optimistic.
And.
On the impact that is going to have and the early results are really encouraging.
For the 14 sites, where we've integrated that experience already having an impact and post rush will be transitioning within this calendar year, the balance of our sites to that experience and it's.
Hey.
The build out of what we're calling our spirit shops for logo emblematic products on the web is truly best in class leveraging the fanatics platform mobile first.
Incredible sort of user experience that that we just can't wait to get to rolled out to all of our schools and have an impact on all of our customers.
Great. That's really helpful. Thank you for that and then if we could just think about you returned to profitability here.
I can appreciate the fact that there is still.
We're still early in the recovery and there's a lot of unknowns ahead.
But you talk about being EBITDA profitable. This year, obviously Q1 of this year.
Certainly reflected pandemic conditions.
We enter the fall semester can you give us a sense of how close here are your campus partners to being what you would fully considered to be back up and running and what does that mean for your profitability. This year or at least the run rate that youre going to be on it as the year starts to wind down.
Yes.
Talk about that in general terms, and then maybe Tom and Tom Jonathan can jump in with them.
Their insight, but it's a great question is what we think about every day is what we've been thinking about for the last few months getting ready for the rush and as you might expect it's different.
Different situations, but in general we are seeing.
Widespread.
Almost ubiquitous not quite but return to in person learning students on campus.
So big to be keys are going to be if you look at what's going to happen in the fall its first off.
As everyone coming back on campus under what conditions.
And really important for us as it relates to general merchandize sales, which as you know Alex was what really hurt us last year.
As having fans attend the sporting events, because we sell a lot of general merchandise on game day or in anticipation of game day, and the days leading up to those games. So having the fans in the seats and on campus, having the alumni come back to campus to attend the games.
That would be important so that's that's so far.
Our information is that it's moving forward.
At or near full capacity.
Honestly, we are concerned about the impacts of the Delta variant.
Whether that's going to get any of that thus far I think as you can see that.
It hasn't had a huge impact but.
Obviously, keeping an eye on it.
Think about it we don't have blinders on and then I think the other thing I would say, we just talk about the impact of the fans Vanadic lids partnership so I'm, making sure that the supply chain disruptions we continue.
To work on that.
Closely with them and they are a representative making sure.
We've seen tremendous demand snapback in demand in our stores and also online that we have as much inventory as we can when we can get to meet that demand.
No.
Those things are going to be key as we as we enter fall, but I think in general.
What we see across the <unk>.
<unk> and our group of schools that we serve is a return to and particularly U S. Students international students coming back are lagging but.
The gaps in the international students for example, preventing the elite schools are being filled by U S. Students in many cases and in some cases international students actually stayed in the U S are getting back to school. So the mix of U S and international students is something we're watching but.
Where our biggest concern right now actually is keeping up with the demand for general merchandise in our stores and online given some of the <unk>.
Not just supply chain issues, but also the transportation issues in that supply chain.
Thus far we feel okay with that we'd like to be further along than we are particularly in some of our.
Sure.
I'd say less power five schools, but we're getting there and I think that's what's really exciting about the impact of the partnership is going to have a big impact I think on us in the near term.
As Covid wanes in the supply chain issues get figured out I think it's going to it's going to be very very clear as John said the results are encouraging and E. Commerce are very encouraging for those 14 schools and also in stores I think we're going to see the impact.
Even more so than most of us think.
So.
They are coming back to school.
This was our largest week for rush. This week in terms of the number of stores this week and last week and.
We're seeing we're seeing large demand.
I just want to make sure we can satisfy that demand. So we're doing everything we can working with our partners to get.
If you get everything in store and Thats one of the beauties of first basically.
Digital courseware is that it's really helping us helping us in the industry and the students to make sure that we don't we don't have quite as much reliance on physical.
It needs to be in the store physically get the courseware.
Students, so John and Tom probably won't answer that question different insights.
Hey, it's Jonathan.
Building on what Mike is saying, we're really encouraged.
With the sort of return to campus.
And.
The vast majority.
As Mike said of our schools Wilkening students back having residential life.
In person classes, and and visitors and traffic on campuses so far.
The key will really be and it's to be determined but we're optimistic.
The sporting events football weekends at many of our campuses and then having that continue through the fall so as of now things look.
Really good.
We are ready to satisfy that demand and that traffic when people return to campus for.
Events throughout the fall.
Yes.
Good morning.
Yes, one thing I would add is that nothing.
Nothing nothing really slowed down much in fact, a lot of things accelerated in the last 12 months in anticipation of.
The ongoing.
Need and demand for students who want to be on campus. I mean, a perfect example of that is harvard's opening up a beautiful new bookstore.
This coming week.
We co invested alongside Harvard and Harvard Coop.
The.
That's just an example of the fact that.
Nobody is nobody is really pulling back to the contrary, we're making the investments very wisely, but everybody is doing everything they can to attract students in a very responsible basis keeping safety is the first priority, obviously is where I'll have to do that to make sure that students are coming back on campus and feel welcome and.
We really have almost two freshman classes this year because the freshman class from last year really didn't get to experience. This so that's creating.
A higher level of demand than perhaps we have seen in a while.
Yeah.
Yeah.
Great. That's good to hear thanks, very much everyone.
Yeah.
Again, if you would like to ask a question press star one on your telephone keypad again that is star and the number one.
Okay.
And there are no further questions at this time I will now turn the call back over to Andy Miller for closing remarks, great.
Great. Thank you and thank you all for joining us on today's call and your continued interest in <unk>.
Please note our next scheduled financial release will be our fiscal 2022 second quarter earnings release in early December we hope everyone has a great day. Thank you.
This concludes today's conference call you may now disconnect.
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