Q1 2024 Barnes & Noble Education Inc Earnings Call

We successfully closed the amend and extend of our credit facilities on July 28.

These amendments provide us with the necessary financial flexibility and operating runway to actively pursue a more permanent capital structure to complete our business model transformation power.

However, certain vendors delayed shipping inventory until we receive and applied liquidity enhancements provided by the amendments.

Our store teams supported by MBS on our retail shared services teams.

We have been working nonstop expedite receding and presents such inventory per sale to mitigate any impacts of such delays on our customers or our early rush period sales.

Our second key initiative is the acceleration of our equitable access program.

First day complete which is one of the cornerstones of our long term profitability growth plan.

In the first quarter first day complete revenue increased 55% year over year and first day by course revenue grew 27%.

The growth of our first day models drove total course material sales up by eight 4%.

Now I will turn the call over to Jonathan Shar President of retail to discuss the significant impact first day complete is having on students higher education and on our business.

Thanks, Mike.

It's been an exciting fall back to school season, thus far as we now have 157 campus stores using our first day complete subscription like model, representing enrollment of nearly 800000 undergraduate and postgraduate students a 46% increase over the fall of 2000.

'twenty two.

Based upon the current tree and drop enrolment and participation levels, we expect SBC billings for the fall term to be up more than 46%.

Which will be recognized as GAAP revenue, primarily in the second quarter with a smaller relative amount recognized in our third quarter of fiscal year 2024.

As I visited any campus stores over the last few weeks, it's clear that FTC are equitable access model is having a very positive impact on the student experience, which is why FCC's acceptance in the market has such positive momentum.

The marketplace reaction to FTC strongly supports our strategy and conclusion that FTC will be the primary course material distribution model in the near future.

As we shared with you last quarter.

Based on survey results from our Barnes <unk> Noble College insights platform students reported overwhelmingly that through first day complete they had a better customer experience, we are better prepared saved money and ultimately achieve improved academic success. These.

These benefits have been on full display about this fall rush.

For students acquiring required textbooks and course materials is one of the first task they need to accomplish at the beginning of each new academic term.

First day complete has turned the initial path with items into a welcoming positive event due to the ease of the first day complete process, leveraging our proprietary technology and commitment to service.

As an example, and importing at state University, which just launched FTC. This fall term.

Student nominated the Barnes <unk> Noble College bookstore team for a heart of a horned award, which recognizes campus community members that go above and beyond and service excellence for how welcoming quick and easy the FCC program made acquiring course materials.

The wafer state complete has transformed the student experience is striking and provide further motivation to work with all our partner institutions.

Elevate their adoptions to the first day complete model.

We believe we are best positioned to deliver on the equitable access model and continue to be the clear marketplace leader.

We've invested in advanced proprietary software such as our student facing and personalized FTC customer platform the.

The adoption in insights portal for faculty and academic leadership.

And the seamless integrations, we have with an institution systems like registration.

<unk> information Erp's learning management systems and single sign on.

Additionally, MBS is a critical component of our FTC fulfillment engine with unmatched warehousing and logistics capabilities and the industry's largest single source of affordable used textbooks.

<unk> unique mix of assets and capabilities, coupled with our experience in executing at scale have allowed us to provide flexible and customized solutions for the colleges and universities, we serve innate.

Enabling us to add a record number of schools to the first day complete model. This fall.

First day complete also provides economic benefit to be any day.

Since inception, our first day complete model has delivered increased predictability higher revenue and improved gross margins and EBITDA.

At our school post transition.

To demonstrate this we examined the cohort of stores that transition to first day complete in the fall of 2022 from the Ala Carte model in the fall of 2021.

On slide nine of our Investor presentation, you can see that when a cohort of stores moved to first day complete their course material sales increased by 82% year over year due to the ease of the subscription like service and the much higher sell through rate versus the Ala Carte model taking.

Taking this a step further the gross profit dollars of this cohort nearly doubled increasing by 96% and drove a 200 basis point improvement in the gross profit margin to approximately 31% from 29%.

Furthermore, as schools use FTC year after year, we are able to increase student participation rate.

And as a result, the gross profit dollars of first day complete stores in fall of 2022 that also operated FCC in the fall of 2021 increased by five 2% in fiscal year 2023.

All of this of course is only possible through the talent and passion of our <unk> team.

I'd like to recognize and thank some of our outstanding operating executives and their teams like Brian Stark built Dampier Lessors, Mead Johnson, <unk> and others for their outstanding leadership and commitment to serving our clients and customers.

It's inspiring to see our team members, who are committed to our mission of serving all worked to elevate their lives through education.

Now I'll turn the call back over to Mike to review our results in more detail.

Thanks, Jonathan.

Turning to our focus on the first quarter results and related matters.

Consolidated first quarter revenue from continuing operations of $264 2 million grew by three 7% or $9 5 million.

Consolidated adjusted EBITDA grew by 21, 8% or $7 5 million to a negative $26 8 million.

As a reminder.

Our first quarter is a seasonally low volume period, primarily consisting of summer classes graduations and preparation for fall rush.

Fiscal 2024 first quarter total retail segment revenue increased by $9 million or three 8% to $245 5 million driven by an eight 4% increase in course material revenue and strong graduation and supply products sales.

Within course material, our total first day and first day complete revenues increased 37%.

First quarter retail gross profit of $50 3 million decreased by $3 7 million or six 9%.

While retail gross margin of 25% decreased by 230 basis points from the prior year period.

Of course materials gross margin declined due to higher markdowns, including markdowns related to closed stores as well as a higher percentage of lower margin digital course materials sales.

These decreases were partially offset by lower contract costs, resulting from contract renewals and a favorable sales mix of higher margin graduation products.

Additionally, as noted last quarter.

First quarter retail gross margins were impacted by lower contractual Commission emblematic general merchandize sales as part of the fanatics and lids partnership agreements.

Effective August one 2023 under the terms of the July 2023 term loan credit agreement Amendment. The commission rates for emblematic general merchandise increased for an estimated one year period.

Each of these trends and margin impacts are reflected in the guidance we have provided.

Retail EBITDA increased by $6 1 million to negative $18 9 million due to increased revenue offset by a lower gross margin as noted and the $9 $8 million year over year reduction in selling and administrative expense I mentioned earlier.

Importantly.

We believe we've adjusted and we will continue to adjust the cost structure of the retail business to fundamentally change the profit profile of the business.

This was evident in our lower volume first quarter and we expect these expense reduction benefits to continue during our much higher volume second and third quarters.

Moving onto wholesale.

First quarter sales increased by $1 7 million or four 6% to $38 8 million.

The increase was primarily due to higher gross sales of $5 1 million compared to the prior year period, partially offset by higher returns and allowances of $3 4 million.

Wholesale gross profit was $5 8 million or 14, 9% of sales in the first quarter of fiscal 2024 compared to $6 9 million or 18, 6% of sales in the first quarter of fiscal 2023.

Gross profit and gross margin rate decreased in the first quarter of fiscal 2024, primarily due to higher product costs and an increase in our returns and allowances, partially offset by lower markdowns.

First quarter wholesale selling and administrative expenses decreased by 18% to $3 4 million.

This decrease was primarily due to cost savings initiatives comprised of lower payroll incentive plan compensation expense.

Wholesale non-GAAP adjusted EBITDA for the quarter was $2 4 million down by $360000 due to the lower gross margin.

Moving onto the balance sheet and cash flow our cash balance was $7 7 million at the end of the quarter with outstanding borrowings of $278 million as compared to borrowings of $259 million in the prior year period.

Cash flow used in operating activities increased due to timing of payables to vendors and increased receivables related to increased adoption of our first day programs in the summer term.

Merchandise inventories were down 17% or $79 4 million to $384 2 million versus the prior year.

This reflects the delay in inventory delivery from the first quarter to the second quarter that I discussed earlier.

First quarter capital expenditures decreased by $3 3 million to $4 2 million from $7 $5 million due primarily to lower store build outs and internal systems spend.

Regarding guidance, we are maintaining our fiscal 2024, adjusted EBITDA expectation of approximately $40 million.

While the inventory delays during the first two weeks of fall rush resulted in lower sales than expected. We believe the current and expected first day sales and our disciplined management of store payroll and other costs will limit the financial impact of the delayed inventory receipts.

Before closing I want to thank departing board members, Emily Chew and Dan D. Matteo for their contributions to the company.

We are pleased to welcome two new directors, Steve <unk> and Ray Wallander to the <unk> Board.

Both new directors bring fresh perspectives and highly relevant experience to be any dis continued transformation.

And we look forward to working closely with them.

In addition, we are very pleased to announce this morning that Kevin Watson is joining us as our new executive Vice President and Chief Financial Officer effective Tomorrow.

As you get to know Kevin I'm confident you will agree that he is a strong addition to our senior management team and a very important time.

And <unk> strategic transformation.

In summary.

We had a solid first quarter and we're encouraged by further scaled proof points that our strategy is working.

Our first day complete equitable access model is having a significant positive impact on students institutions and <unk>.

Our cost reduction and efficiency actions are improving profitability.

And we are on the path to consistently improving adjusted EBITDA and cash flows.

I want to thank our people, who daily show through their actions and unwavering commitment to our mission.

<unk> and each other.

The field and operating teams that Jonathan mentioned as well as our corporate affairs and legal team under Mike Miller Senior leadership are.

Our exceptional treasury team led by Jason Stankowski, and Joel R&D, and our finance and accounting teams led by CMO. Paul on units Downs have all made significant contributions.

Others that are instrumental positioning us for success this fall and beyond.

We believe in our opportunity to create value for all stakeholders.

Our model transformation is clearly prove that this opportunity is within our grasp at scale.

What really excites us is a significant market opportunity that's still in front of us and how well positioned we are to translate that opportunity to increase and sustainable value.

I'll now turn the call over to the operator to open the line for questions.

Operator.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and your first question comes from the line of Ryan Macdonald from Needham Your line is open.

Alright, Thanks for taking my questions, maybe just to start on the clarification on the on the inventory delays can you just provide a little more color about where where you were feeling that most whether it was on the course materials side around the emblematic or general merchandise side.

What if any knock on effects, we should expect as a result of that for the fall fall rush.

Yes, Ryan. Thanks, we wanted to point this out we don't consider this to be any impact on our guidance for the year, but we do want it and we did want to mention it because it.

It's probably obvious if you look at our balance sheet at the end of July we had a huge payables balances.

Working to complete the amend and extend which we did on July 28 that became effective on the 31st when we got our clean opinion from our outside auditors.

There was a lot of pent up cash that needed to be released to creditors, whether they were.

Vendors partners, whether they were publishers or in general merchandize fault.

We got that done fairly quickly. Unfortunately, the delay was not in the two <unk>.

Just weeks.

The first two weeks of August in other words are not the most significant start dates for fall rush that starts to happen really in the third week in the fourth week of August and then.

We had labor day and right after like where we are right now.

So.

To answer your question directly.

Priority was making sure that we got all the.

Of course material.

Vendors cleared off first.

In general the publishers reacted very very swiftly and were very helpful. In terms of getting the inventory released to us.

There were there were other categories of general merchandise.

That we we did prioritize quite as highly in terms of.

Could stores and convenience and food and beverage and that type of thing, but nonetheless, we develop all of it pretty much in the first two weeks of <unk>.

August because we want the in store experience for the students when they come in a rush to be a complete one so we don't want to overplay. This I don't think this is going to have a significant impact on our fall rush financial results are on the year, but.

Something that is so obvious we thought we had to mention it.

So it's across the board, but we did prioritize moving in courseware and related supplies that kids needed to get back to school or students need to get back to school.

And then the other categories of general merchandise.

<unk> taken being taken care of in parallel what we're not prioritized in terms of payments quite is quite highly.

Alright, I appreciate the color on that on first day complete great to see.

The interesting and good results there I'm curious as you've gone into the fall rush here first would've opt in rates looked like amongst the student population on the newer newer cohort of schools that have started and then as we think about pipeline development for spring.

2024, how that continues to develop and what what you've got kind of lined up for the spring rush as well. Thanks.

Yes, Brian it's Jonathan Thank you for the thanks for the question.

And.

In the first day complete model. There is just to clarify there are sort of two models one is.

<unk> built into tuition at certain schools.

There isn't a opt out and then we have where it.

So this is of course charge and Steve can opt out of those so we don't have an opt in model per se, it's either included or opt out.

For the school going to opt out opt.

Opt out period runs through the AD drop period, which we havent hit and many of the institutions, yet which will come over the next few weeks. So we don't really know although the.

The initial view is that partition participation rates are strong and when things were seeing is.

The second and third years than an institution run. This first day complete and Theres cohorts that have experienced that that participate patient rates grow or opt out rates decline over time. So that's an exciting sort of metrics that we're tracking and and something that we've seen to be <unk>.

Positive so far this year, although we haven't hit those AD drop period, So don't know for sure where it will land, but but some good trends and what we're seeing with first day complete this based on the overall experience.

And impact that it's having on the on the student experience and driving affordability and providing access to materials for all the students at those institutions.

And maybe just on the second part of that.

Pipeline for spring 'twenty four how is that looking so far.

Yes.

<unk> saw.

<unk> still with many schools to launch first day complete for spring and in fact, we have some signed amendments and agreements already in place.

And then we're having still daily hundreds of conversations with schools focused on launching in the next academic year, which would be a year from now in fall of calendar 2024, which is which is really exciting. So those conversations are active they are accelerated.

And I'm really optimistic about the continued growth of institutions participating in first day first day complete.

And it's really based on the impact that we've seen on student outcomes access affordability and convenience.

Thanks, So maybe just one more from me for Mike.

I think you talked about 117 fewer stores year over year and doing a nice job of driving.

Having more profitable.

Business off of despite fewer stores can you give us a sense of what the runway looks like here for additional store wind downs and sort of how much how much is there left to go in terms of.

Sort of winding down those unprofitable contracts and when we might sort of hit the trough I guess of impact and start to benefit on the other side of this.

Yes, that's a great question, it's something that we look at it constantly as you know Ryan our overall strategy is based on serving stores profitably.

Continuing to work with stores to improve profitability. So the trough as you call. It it was really going to be dependent upon our success in converting some stores many stores to first day complete and thereby increasing our profitability and getting it at a level. That's a good long term health.

Relationship for both us and the school.

And as you said our store count was down 117, and that included 67 physical to virtual stores versus a year ago. So that is evidence that we're following the strategy that's reflected in the results.

In terms of giving you.

<unk> on the runway and that type of thing, we're not going to do that but we'll do it each quarter.

Because above of what I've just mentioned, it's very dependent upon as John said as John said, we're engaged in a lot of conversations with schools still about not just.

Converting to first day complete but the other economic terms that impact our relationship with the commission rate that we paid in schools.

For control and doing a great job our field teams are doing a great job of controlling the payroll. So there are different levers, we can pull to achieve profitability in the stores.

So how successful we are in pulling those levers renewing contracts and.

Making that strategy work is going to be is going to answer. The question of where is the trough I mean, we expect to go to a lower number of stores.

Next year than where we are this year, but at some point in time as first day complete penetration as I would call. It our sell through really becomes a much higher percentage.

Should start adding back to that number of stores at some point I don't know when that's going to happen but.

Our expectation is that all stores will be on some form of equitable access at some point in time.

Yeah.

Thanks for taking my questions and I'll hop back in the queue.

Thanks, Brian .

Your next question comes from the line of Alex Fuhrman from Craig Hallum Capital Group. Your line is open.

Hey, guys. Thanks for taking my question can you talk a little bit about what the impact has been on general merchandise sales at schools that have transitioned to first day complete is there been any sort of a negative traffic impact just from having fewer students, making that first trip to the bookstore.

To shop for their book.

And then would love to just kind of further unpack.

Your comments about driving really strong merchandise sales on a smaller number of bookstores and can you just kind of help us understand what was driving that increase obviously this is a seasonally.

Slower period of the year for you, but just trying to understand what that is going to look like as we get into the rest of the year.

Alex It's Mike I'll make one general comment and then Jon has been spending a lot of time in our stores through a rush.

Can pick it up.

First off.

Art fewer students driven to the store through first day complete if anything there are more.

Most of those programs results in students coming in to pick up their first day complete package of courseware.

On or before the first day so.

As opposed to.

Moreover, a random who's going to show up when from a student perspective.

It's fairly predictable in terms of store traffic in terms of.

The scale of students that are showing a pickup per se, so and I don't think our our results.

<unk> analyzed would not indicate that we have any falloff.

General merchandise sales kind of on a per student basis, as we change the model, but I'll, let John .

More details now.

That's exactly right, we're actually seeing more students come into the store post transition to first day complete based on the fact that we're serving nearly all of the students at that institution and.

And the primary sort of fulfillment channel is in store pickup we can shift the materials to students if they select but most of them from a convenience standpoint.

Come into the store and pick up their materials or go through the process in real time, and <unk> picked an and.

Their materials for them for distribution, so it's actually an opportunity through some of the merchandising strategies and cross merchandising strategies that we have to increase the sales.

Everything else in the store like general merchandize items.

That we sell.

Two to students as part of that visit so we're actually optimistic that that's going to have a positive positive impact and and just from a store traffic.

<unk> alone so.

We think that the model works well with the other parts of our business that we are looking to continue to drive growth.

Okay. That's really helpful. And then just the other part of the question just thinking about the strong merchandise sales despite the.

The pretty significantly smaller number of.

Hub stores that you were operating during the quarter I mean can we interpret that to mean that your.

<unk>, both kind of long standing profitable stores.

We're experiencing really strong increases in sales during the summer months or was it part of that maybe just driven by the fact that the the 100 something doors that you are no longer operating were just pretty small contributors to merchandize.

Yes, I think it's a combination of both of those and as we called out in some of the prepared remarks, we had a very strong.

Summer early summer first quarter, and graduation products, which was somewhat of a surprise us quite frankly, we plan on we did a lot of great things.

Our merchandising group to make that happen, but if you recall last year in the spring of spring and summer of 'twenty. Two there are many schools that actually had commencement ceremonies to include more than just one graduating class because of the impacts of Covid and the fact that many many schools.

Werent able to walk graduating classes in prior years, so even with that as a benchmark the graduation products.

Perform.

Better year over year and much better in accordance.

Of course with our expectations. So that was a big part actually of the contribution.

General merchandise growth as it relates to the other categories.

We continue to see good performance, but congratulation was one that really stood out for us in the first quarter.

The other thing I would say is that.

It impacts both the digital kind of a digital weighting of sales and the margin.

Also the number of students on campus has been where many.

Many schools this year that had.

The online virtual courses this summer.

More than actually in that number we expected so even with that and not having as many students on campus for the summer.

General merchandise sales as well.

Yeah.

Okay. That's really helpful. Thank you.

And we have reached the end of our question and answer session. I will now turn the call back over to Mr. Hunter Blankenbaker for some final closing remarks.

Great. Thank you Rob that does conclude our call and we're going to get back to fall rush here.

Look to forward to speaking with you in early December on our second quarter call. Thank you.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

Okay.

Yeah.