Q3 2023 Barnes & Noble Education Inc Earnings Call
So a portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to our host Hunter Blankenbaker, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to our fiscal 2023 third quarter earnings call.
Joining us today are Mike used the CEO .
Tom Donohue CFO Jonathan.
Jonathan Shar Executive Vice President B E retail and President Barnes <unk> Noble College.
David Anderson President of MBS.
Before we begin the call I'd like to remind you that statements. We make on today's call are covered by the safe Harbor disclaimer contained in our press release and public documents.
Contents of this call are the property of Barnes <unk> noble education and are not for rebroadcast or use by any other party without prior written consent of Barnes <unk> Noble education.
During this call we will make forward looking statements with predictions projections and other statements about future events.
These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission.
The company disclaims any obligation to update any forward looking statements that may be made or discussed during this call.
And now I'll turn the call over to Mike Houston.
Thanks, Hunter and good morning, everyone. Thank.
Thank you for joining us today.
I want to start today's call by thanking our <unk> team members.
I consider our journey over the last three years.
The operating environment has been anything but predictable or easy.
While we are certainly seeing some green shoots we are still well below pre pandemic enrollment levels. Nonetheless, our teams have adapted and responded with resolve and innovation <unk> challenges and actions, we have taken to meet them, including a significant reduction to our head count in December .
Despite the uncertain macro environment and specific challenges we address.
Our team continues to rise education every single day to deliver for the students educators and institutions we serve.
I am both grateful and proud of our people and their tremendous efforts.
Through their efforts, we continue to innovate and adapt our unique platform to the rapidly changing higher education market.
As we discussed with you last quarter, we did not see the expected improvements in the operating environment in the fall rush period.
And recognize the need to take Swift and decisive actions.
We began undertaking a broad set of measures to manage our cost structure and improve our execution.
While some of the strategic initiatives, we are implementing will take time and results won't be linear we are taking the appropriate actions to deliver consistent and profitable long term growth.
Our third quarter results reflect the early benefits of these actions.
We delivered consolidated topline growth of 11%.
We expanded our gross margins and significantly grew adjusted EBITDA on a year over year basis.
First day complete revenue grew 76% and we made meaningful progress in the discussions with our institutional partners to accelerate market adoption of the FTC model.
Before providing more detail on those discussions let's review our high level financial results.
Total retail segment revenue increased 12, 4% to $421 2 million fueled by strong first day complete first day by course.
General merchandise sales.
The traditional Ala Carte course material model continued to decline, albeit at a much lower rate than we saw in the fall 'twenty to rush.
Special recognition goes to our in store teams that continue to explore ways to improve execution to drive sales. This includes providing better in store support.
Partnering on collecting more adoptions enhanced content sourcing through MBS and significant system enhancements to receive and fulfill orders faster.
Results on a same store basis were encouraging.
Retail gross costs that our sales increased five 9%.
Material same store sales grew seven 4% driven by the continued momentum of our first day complete offering.
General merchandise same store sales increased two 3% aided by strong performance in logo general merchandise and cafe and convenience.
Third quarter retail EBITDA was $6 2 million, a $21 6 million year over year increase.
As we announced last quarter.
We are taking decisive and aggressive actions to significantly adjust staffing and related costs based on the trends we experienced in the fall rush.
This quarter, we saw the initial and partial quarterly positive impact of these cost savings initiatives, which we began implementing in December .
We continue to focus on reducing costs and operating more efficiently.
DSS revenues decreased four 5% to $9 million as we shifted our priorities to optimize return on our existing assets.
With a much more rigorous approach to profitability.
The team has executed quickly and well on our initiatives to optimize our marketing spend.
<unk> improved conversion rates and lower content development costs.
While investing in the continued optimization of our Seo capabilities.
Within our U S. Bartleby operations after several months of declining traffic and lower gross subs.
January subscriber growth was positive.
As well publicized recently learning market is evolving at a rapid pace.
Within BFS, we're focused on building differentiated capabilities, leveraging our years of AI experience.
We continue to use AI to enrich and curate content to.
It provides contextually relevant results to learners to.
To optimize the teaching path for our subject matter experts.
And to do demand analysis at scale for example.
We are using open AI API to help our experts answer questions faster and at a lower cost and.
In addition.
We're harnessing the power of large language models, including <unk> III to create tools that will guide our students through their own riding experience and teach them to be better writers.
We strongly believe that the future of AI in higher education is to support students learning journey, but never to substitute for it.
Moving on to wholesale.
Revenue increased five 2% during the quarter after more than two years of decline.
During the quarter, we saw an easing of supply constraints and more textbook purchasing opportunities, enabling us to fill increasing demand at VNC and other bookstores.
Additionally, we believe the recent consolidation in the wholesale textbook market provides a larger opportunity for MBS to meet that continued demand of physical courseware materials and.
And further highlights the unique competitive differentiation and MBS as wholesale capabilities provide could be any day.
Now, let's take a deeper look at first day complete our number one strategic priority.
In December we kicked off a journey to accelerate the transition of the schools, we serve to our subscription like FCC model.
While we are still relatively early in this process I would like to provide some color on our conversations.
The SEC strategy and overall communication plan has created urgency and prioritize discussions on campuses across our footprint.
We are in active dialogues with hundreds of institutional partners regarding first day complete and we're encouraged by the progress we're making.
We plan to provide more specificity on our expected fall 2023 first day complete enrollment growth in connection with our year end earnings release in June .
Some schools, where we required a fall of 2023 FTC launch has committed to FTC.
But I've asked us to FERC adoption until the fall of 2024, primarily due to their internal processes and governance constraints.
In cases, where we could run the store at an acceptable profitability level.
We're working with the schools to provide a bridge year to make the transition in fall 2024.
As expected certain schools chose not to make the transition to FTC with us.
We're taking a disciplined approach to protect the integrity of the FTC conversion strategy and accordingly.
We are winding down our relationships with the schools that have a different vision for their institution.
In fiscal 2024, our total score count is expected to be lower than today, but our store platform will be more profitable and better positioned for future growth.
Our commitment to growing profitability is the key to strengthening our ability to serve our students and institutions in a manner that they deserve and expect.
We remain confident in our ability to successfully accelerate the scaling of our SEC model and the long term growth and sustainable financial benefits of the equitable access model.
In summary.
After the initial round of conversations with schools, we are confident that accelerating the shift to FTC is the right move for all parties.
The access achievement mental health and affordability benefits to students are clear.
Economic benefits institutions received are compelling.
And the much more predictable higher margin revenue growth as a critical part of it <unk> successful path forward with our institutional partners, whose success and ours are truly shared.
In closing.
Our third quarter provides evidence that we are moving in the right direction and regaining positive momentum.
We're highly focused on improving our operational and financial performance as we continue to put the most significant of our environmental operating challenges over the last several years in our rearview mirror.
We will also have headwinds such as the broader issues facing all businesses today that we need to diligently advantage. However.
As we finished fiscal 2023 and looking ahead to fiscal 'twenty four we are.
In a much improved position than we.
Over the last three years.
I am confident that the actions we are taking along with the progress we have made put us on the right trajectory to achieve more predictable and sustainable growth and profitability.
I am excited about the road in front of US as we continue to build a stronger more resilient and more profitable business model and company aimed at unlocking long term value for our shareholders.
Now I'll turn the call over to Tom to discuss the quarter in more detail.
Thanks, Mike.
Please note that the third quarter of fiscal 2023, consisting of 13 weeks ended on January 28 2023.
All comparisons will be to the third quarter of fiscal 2022, unless otherwise noted.
Total consolidated sales for the quarter were $447 1 million, an 11% increase to retail and wholesale segment sales increased 12, 4% and five 2% respectively. While the DSS segment sales decreased by four 5%.
Retail gross comparable store sales increased five 9% during the quarter.
Gross comparable course material sales were up seven 4% driven by the rapid growth of our first day offerings.
Dnc's inclusive and equitable access programs increased revenue by 59% to $121 million during the quarter.
As compared to $76 1 million in the prior year period.
Within this FTC revenues increased 76% to $67 million.
Gross comparable general merchandise sales increased two 3%.
General merchandise sales benefited from strength in logo emblematic sales as well as Kathryn and convenience.
Net sales for the wholesale segment increased five 2% to $38 9 million.
The increase was primarily due to a slight easing of supply constraints, which improved our ability to meet customer demand.
The increase was offset by higher returns and allowances as well as the continued shift from physical textbooks to digital products.
DSS sales of $9 million decreased by <unk> 4 million or four 5%.
As Mike discussed the DSS team is taking a more rigorous approach to profitable growth and cash generation.
As a result of the operating model changes we made in December .
S reach cash flow breakeven in January we expect to maintain this discipline and continue to achieve free cash flow breakeven in fiscal 2024.
Third quarter consolidated gross profit was $104 2 million an increase of 19, 8%.
<unk> gross margin rate was 23, 3% compared to 21, 6% in the prior year period.
This was primarily due to higher retail gross margins, which benefited from an increase in higher margin FTC and general merchandise sales.
Consolidated selling and administrative expenses were down $2 million.
Consolidated selling and administrative expenses as a percentage of revenue decreased to 22, 3% from 25, 2% in the prior year.
The decrease is to lower payroll and compensation expense for long term incentive awards.
As well as a partial quarter benefit from the actions to optimize our cost structure and streamline our operations that we announced in December .
Since initiating the cost reduction activities in December we achieved approximately $7 million to $8 million of run rate savings in the third quarter compared to our prior plan, which assumed a return to a more normal higher volume operating environment.
We continue to expect 30% to $35 million in annualized run rate savings once fully implemented which includes $10 million to $15 million in FY 2023.
We recorded a restructuring charge of $6 million, primarily related to severance and other termination benefits $1 5 million of the charge was in retail.
0.9 million was in wholesale.
$1 8 million was in the DSS segment and $1 7 million was in corporate services.
During the quarter, we evaluated our store level long lived assets in the retail segment for impairment as a result of this impairment testing, we recognized a $6 million noncash.
Noncash charge.
Moving onto the balance sheet.
Our cash balance was $11 1 million at the end of the quarter with outstanding borrowings of $285 6 million.
As compared to borrowings of $200 4 million in the prior year period.
Receivables increased to $277 5 million, a $27 3 million increase from the prior year.
This increase is mostly due to the timing of receivables associated with the significant growth of our first day offerings at <unk>.
Schools generally remit payment for students enrolled in first aid courses after the students drop dead date.
As a result, the third fiscal quarter, which has been a source of cash has shifted to the fourth quarter.
As noted in our press release, we worked with our existing bank group to amend and extend our existing asset backed facility and term loan. The ABL maturity was extended through August of 2024, and the term loan was extended through December of 2024.
Capex for the quarter was $6 3 million, a $5 8 million decrease from the prior period.
This decrease was due to reduced store buildout and product and system development.
At the end of the quarter, our retail segment operated 1388 College University and K 12 school bookstores comprised of 785, physical bookstores and their e-commerce sites as well as 603 virtual bookstores.
As we continue to execute on our FTC strategy and simplify our cost structure to create a more efficient operating model. Our total store count is expected to be lower than today, but.
But our store platform will be more profitable and better positioned for future growth.
Moving to guidance given our results to date and our expectations for the fourth quarter. We continue to expect FY 2023, adjusted EBITDA of $20 million to $30 million.
With that we will open the call for questions.
Operator, please provide instructions for those interested in asking a question.
Yeah.
Secondly, I would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason you would like to remove a question. Please press star followed by two again to ask a question press Star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question Bill.
We will pause here briefly ask questions are registered.
The first question is from the line of Ryan Macdonald with Needham You May proceed.
And Mike and Tom Thanks for taking my questions and congrats on a nice quarter here great to see all the progress that's being made.
And I wanted to start on first day complete.
As in the Investor presentation, a lot of great detail in terms of the number of potential students and sort of the market opportunity there.
You think about sort of the strategy for accelerating the adoption and the cohorts can you talk about sort of how quickly you think you can move.
Each of the cohorts two to first day complete and then.
We think about that 4 million students that you mentioned in the.
Presentation.
The potential opportunity.
Much of that do you expect to be able to retain as you kind of make this transition.
Yeah.
Hey, Ryan it's Jonathan Shar, Thanks for the question and.
We're really excited about.
The progress, we're making on <unk> first day complete the growth we've had to date.
And then all of the conversations we're having post that.
The launch of our acceleration strategy.
I think from just highlighting where we're at and where we're going broadly.
We're having substantive conversations with like hundreds of institutions.
<unk> first day complete.
And it's really exciting to see the alignment on how the model and really enhance student outcomes and support their key objectives.
Driving.
Greater affordability convenience and access for their students.
So we're excited about that it's really as we announced a multiyear journey. Our focus is on driving the majority of our institutions to that model.
All term of 24, our fiscal 'twenty five.
And we're confident we're making great progress against that in the cohorts strategy.
It has been.
Really effective so we're excited about that excited about we're going we've seen.
Many of the institutions that we're marching towards and focus on our fall 'twenty three launch.
Really excited about the model really happy with the service and support and product Assortments that were providing for that for their campus on campus community.
But as Mike mentioned asked for a bridge to be able to get through the consensus building in the governance, that's required and approvals that are required to move to this.
As a subscription like model or course material.
Acquisition and distribution and we've been able to do that and move those over.
Ridge is something that's profitable.
For for running the store and an acceptable level of profitability and a great sort of sign of partnership and then allow us to work with us tools to implement the model for the following semester, so making really good progress.
On all of that and continuing to have great conversations every day with our institutions and prospective institutions about the model.
Yes, Ryan if I could just add one thing.
Your question about how many of the and the illustrative slide in the Investor presentation, we used $4 million and if you look at the footnote kind of explains why that's four.
And it's a ballpark area and we knew when we launched this strategy of requiring.
Many schools to go to first day complete on a more accelerated basis because all.
On the cart model, just wasn't working for them or for us quite frankly.
That we were going to lose some of those those school, but that's that's.
Positioning us as I said in my comments.
To have a platform of schools.
Whether it's more or less students that's much more profitable.
We anticipate that the platform will go down from where it is today, but then we expect to be able to build it back up on a different basis.
And the bridge here that John's describing as evidence that we're not going to shoot ourselves in the foot so to speak.
And if there are situations, where we can manage through one more year for some schools because they just can't you can't get there in a year.
We have a very very profitable relationship.
For a year by for example, not paying any commission or charging a management fee or whatever it is that gets worked out with each of the schools because theres. So many discussions in the reach the rates different and we're not doing this to the schools. We are doing this with them and that requires conversation each one of their preferences. So yes, I don't think.
We can give you a number but how many of the $4 million will be there.
Fall of 'twenty, three 'twenty, four but im very confident it can be a more profitable sustainably profitable company with this approach.
Super helpful color I appreciate it and then as we think about I guess the pathway to getting in terms of the transition process, what sort of timeline are we looking at for the full transition to be reflected I know you talked about.
<unk> schools that are interested giving them up until fall of 2024, which is in your fiscal 'twenty five.
There's a bit of a runway on that but in terms of the schools that are unwilling how quickly do you think that those come out of the model as we start to think about over the next 12 to 24 months.
Yes, I think that there are some that are already coming out of the model that we.
We've notified exercised.
<unk> a communication with as we have the right to under our contracts.
So some some have already moved in anticipation of going to a different solution than fall of 'twenty three.
100 proposal.
This past year, and we're still involved but part of the conversation that John is talking about.
<unk>.
R R.
In the proposal stage.
And Brian it's Jonathan.
Not all of our stores are targeted for FTC or where that is the priority conversation we have many stores within our portfolio that.
Are performing really well we're driving.
A high sell through.
Enrollment on course material today, and driving significant GM sales as we showed in the lease we grew our general merchandise sales logo products cafe convenience what are the drivers of that and so it's not every school in the portfolio that.
That is in a cohort for conversion to FTC I, just want to make that clear.
Clear, but it is the majority of our institutions and then new business with new business.
Going into the company using an FCC model.
From day, one so some of that has happened.
In the spring University of Memphis.
Would have been an example of that they renew a new client that we picked up and they started with US from day, one using first day complete and that that's our objective.
Our real objective is to get as many schools using this model because it's the best model for students. It's the best model for the schools with the best model for Us as a publisher.
Using a model that <unk>.
Allows you to sustain the level of service that you want.
And it gives us that.
Improvement in access and outcomes is really what we should be all about that's our mission.
The fact that it benefits us financially really just manifest.
The right thing for us to be doing.
No that's really helpful clarification I appreciate that maybe.
One more for me just shifting to the DSS segment. It was interesting to hear that you talk you talk about how youre sort of integrating and utilizing <unk>. So I think to try to weave that into the offering I'm.
I'm curious as you think about the Bartleby business and in the broader DSS business. We've obviously seen a pretty wide adoption usage amongst students of GPT curious if youre.
What youre seeing from a competitive perspective, there if that's driving any any pressure as those students sort of only using GBP versus.
Bartleby study tool or other study tools, what are you seeing sort of in that segment of the business. Thanks.
Well, obviously I think there's been you can't turn on.
Any kind of a media outlet without seeing some form of discussion.
Almost every hour about open AI chat GBP three.
So every competitor in this space.
<unk> itself student brands in particular, so there's a lot there's a lot of.
Application for open AI for.
For example, a student brands has been building into their product.
Some time.
DSS is pivoting.
I would say quickly to incorporate <unk> and other large language models into the mix that.
It helps to drive speed and efficiency. It also reduces costs.
Subject matter experts, where theyre entering questions for Bartleby subscribers on Q&A.
Partial answer to your question is that we did have positive subscriber growth for <unk> in January we talked a lot about the direction. It was it was taking last year and how we pivoted bartleby to a much more.
But much more of a very sharp focus on profitability efficiency and kind of getting back to more of the basics on pricing competition to that type of thing. So there is a.
We will have some some information coming out some news coming out about.
Some products that we've developed for helping faculty to identify young users.
Open AI.
Zero of patriotism detection tool that.
<unk> brands is actually in the process of really think there'll be a separate.
<unk> of that immediate next week.
We didn't we didn't let it go today, we said one of areas such as important announcements but.
Yes, I think that you'll find that.
<unk> been around for a while.
<unk> is a phenomenon and it's got to do.
100 million users in two months.
That's been affect everybody's traffic across their website that has a competitive product for some time.
But I think we feel.
Comfortable and confident in the value proposition that we have being different than.
Then just kind of.
Plain vanilla opening open AI chat TVT.
Use case for that.
We see tremendous value in incorporating this technology into what we are.
Right.
Excellent. Thanks for the call I'll hop back in the queue.
Thanks, Brian .
Thank you Mr Mcdonald.
The next question comes from the line of Alex Fuhrman with Craig Hallum. You May proceed.
Hey, guys. Thanks for taking my question.
As you kind of move to this all first day complete model can you give us a sense of at this point how many schools have have said they are definitely not going in that direction and as you kind of move through this transition is there an opportunity to maintain perhaps a scaled down.
Relationship with some of these schools, whether these are opening virtual bookstore or selling general merchandise or is it really more just.
Going to be walking away from some of these less profitable relationships and really focusing on the best ones.
Mike I think we will answer the question more specifically in June when we have a real Sally.
What the efforts are in terms of how many schools, we're going to have for fall of 'twenty three on first day complete perhaps those that.
The store count so to speak.
That didn't go that way that have a different vision et cetera. So I don't I don't think we're going to get into that today, because it's really in process.
We're not we're not trying to be evasive on that it's true that there are so many conversations that are in process still that F&B F&B to resolve it in terms of your other question second part of your question, Yes, there are different ways to skin the cat so speak to achieve profitability.
Quite frankly, many of the stores and we try to manage our business on a portfolio basis.
Many of the stores that we were.
Requiring consider going to the FTC and fall of 'twenty, three very strongly requiring at where we exited the relationship are probably not those stores, where it's going to make sense for us to try to carve out some kind of.
No other parcel relationship in hopes of making them profitable it's possible, but as John said there are some that are going through a bridge here, which is a different story, where theyre going to agree to go to first day complete in fall of 'twenty, four and under the bridge here.
We'll go to some kind of.
And economic change that will allow us to service that and be profitable.
But.
I don't think.
There is.
There is a possibility that somebody goes to a virtual only.
But.
Most of these are going to be model shifts.
They may not be a fall of 'twenty, three but there'll be involved 24, all will be exiting.
Or.
I'll further Alex it's Jonathan and I think the.
Positives.
That positive outcome of the acceleration of the conversation is in hundreds of conversations. We've had is that theres not a lot of marketplaces resistance in terms of the value proposition.
<unk> first day complete that there seems to be pretty universal alignment on that it's just about the prioritization from a campus perspective.
And that's what we're trying to help those campuses do is drive urgency.
<unk> drive prioritization to be able to implement the new model and so on.
I'm really encouraged about the alignment.
<unk>, we can make on student outcomes and supporting providing a more affordable solution for students and institutions is a important topic on all campuses.
So it's really about partnering with our institutions, helping guide that discussion moving them to a solution that ultimately is going to have a really significant impact whether thats.
A much more convenient model that supports greater student wellbeing affordability or just access to materials and having materials on day, one that's driving improved academic success at an institution. So I think it's really about partnership driving people supporting the process.
And I'm getting too and goal.
There is a lot of sort of mutual alignment on the value proposition and the ability to shift this model.
Okay. That's really helpful. Thank you and then if I could just ask one more it.
It looks like if you just kind of strip out what you've reported and what you are guiding to Youre looking for adjusted EBITDA in Q4 to be more than it has in Q3, which is typically not always but for the most part over the last 510 years that has not been the case.
Or are we still kind of in this post COVID-19 reopening period, where your typical seasonality maybe doesn't apply or can we maybe interpret that to mean that maybe some of your efforts to enhance profitability are working and should carry forward into next year.
Yes, Alex My couple of things first off the FTC.
Program has scaled quite a bit year over year and some of that revenue.
Thus fall into the fourth quarter.
The way that.
The way the way that itself or the way that it gets earned.
And book.
The other part of it is as you said.
The cost management measures we disclosed.
The in year benefit we estimate it would be something like $10 million to $15 million with about $7 million to $8 million this quarter.
So thats kicking in for a full quarter for the first $5 in the fourth quarter.
So we're continuing to take measures beyond what we did in December that will help to impact the fourth quarter as well and Tom you might want to comment yes.
That's right.
Alex I think given given where we are in a year, we still feel confident were within the range, but we might be towards the lower end of it.
Okay. That's really helpful. Thank you guys.
Thank you Mr. Chairman once again to ask a question. Please press star one.
Okay.
Yeah.
And no additional questions waiting at this time, so I will pass the call back to Hunter Blankenbaker for any further remarks.
Okay, great. Thanks, Dan and thanks, everyone for joining us today and certainly for your continued interest in Vienna.
As a reminder, our fourth quarter earnings will be in late June and thanks again for joining today.
Yeah.
Okay.
That concludes today.
And Novo education fiscal 2023rd quarter earnings Conference call. Thank you for your participation you may now disconnect your lines.