Barnes & Noble Education, Inc. (NYSE:BNED) Q4 2023 Earnings Call Transcript

Barnes & Noble Education, Inc. (NYSE:BNED) Q4 2023 Earnings Call Transcript August 4, 2023

Barnes & Noble Education, Inc. misses on earnings expectations. Reported EPS is $-0.7 EPS, expectations were $-0.6.

Operator: Thank you for standing by. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Barnes & Noble Education Fiscal 2023 Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Hunter Blankenbaker, Vice President of Investor Relations. Mr. Blankenbaker, please go ahead.

Hunter Blankenbaker: Okay. Great. Thanks, Maria, and good morning, everyone, and welcome to our fiscal 2023 fourth quarter earnings conference call. Joining us today are Jonathan Shar, Executive Vice President, BNED Retail, and President, Barnes & Noble College; Mike Miller, our EVP of Corporate Development and Affairs, and our Chief Legal Officer; and Jason Snagusky, our SVP and Treasurer. Mike Huseby, our Chief Executive Officer, will not be on the call today due to a family emergency. 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. The contents of this call are property of Barnes & Noble Education and are not for rebroadcast or used by any other party without prior written consent of Barnes & 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 so with that, I’ll now turn the call over to Mike Miller.

Mike Miller: Thanks, Hunter, and good morning, everyone. We appreciate you joining us today. While the operating environment remained challenging in fiscal 2023 and our results did not meet our expectations. We made significant progress to transform and strengthen the business for sustained profitable growth. In the second half of fiscal ’23, we took decisive action to reduce our cost structure and increase operating efficiency across all aspects of our business. We appropriately aligned our costs with revenue in what we believe is the new normal of the post-pandemic operating environment. We also accelerated the transition of the schools we serve to our more profitable subscription like First Day Complete or FDC equitable access model.

The equitable access model is rapidly becoming the industry standard for institutions, faculty, publishers and most importantly, students. In fiscal ’23, FDC grew 88%, and we added a record number of schools for the fall 23 term. Through this innovative equitable access program, we’ve changed the momentum of the course material business and have grown course material revenue for 2 consecutive years. Additionally, we divested our Digital Student Solutions business to deepen our focus on capital allocation on our continued transition to First Day Complete and growing our general merchandise business. And lastly, as disclosed last week, we strengthened our liquidity and financial position to accelerate the execution of our strategy for the benefit of BNED’s students, educators, faculties, alumni fans, employees and shareholders.

Under the terms of the agreement, we have extended the maturity of our debt facilities amended certain covenants and modified certain other agreements that restricted our ability to operate efficiently. We are pleased to have worked constructively to reach a resolution with our financial stakeholders and strategic partners that preserves value for our investors today and enables us to evaluate the best long-term opportunities for the company. Given the significant changes we made to our business in fiscal ’23, we are entering fiscal ’24 a more efficient company with a clear focus on our greatest strength and opportunities and well positioned for profitable growth over the next several years. With that as a backdrop, I’ll provide a review of our fourth quarter and fiscal ’23 financial results before turning it over to Jonathan Shar to review our fiscal ’24 strategic initiatives.

Following that, I’ll discuss our fiscal ’24 guidance and closing remarks. Now let’s turn to our results. Consolidated fiscal ’23 revenue from continuing operations of $1.5 billion grew by 3.2%. Consolidated adjusted EBITDA grew by $2.2 million to negative $8.1 million. Moving on to our Retail segment. Fiscal ’23 total retail revenue increased by $52.1 million or 3.6% to $1.5 billion, driven by strong First Day Complete, First Day [indiscernible] course and general merchandise sales. Total course materials revenue increased 1.8%, driven by a 48% increase in First Day and First Day Complete revenues, offset by a 9.4% decline in the traditional a la carte model. The higher growth, First Day and First Day Complete revenues comprised approximately 33% of course material revenue in fiscal ’23.

In fiscal ’24, First Day and First Day Complete will approach the majority of course material revenue, which provides enhanced predictability in the course material business. Total retail gross comp store sales in fiscal ’23 increased 3.2%. Retail gross comparable course material sales grew 0.4%, and general merchandise gross comparable store sales increased 8.6%, aided by a strong performance in emblematic general merchandise and cafe and convenience. Fiscal ’23 retail non-GAAP adjusted EBITDA of $10.6 million increased $2 million, primarily due to a $52 million revenue increase, offset by higher cost of sales and selling and administrative costs. For the fourth quarter, retail sales of $235.4 million decreased 4.1%, due primarily to a 3.1% decline in course material and a 6.5% decrease in general merchandise.

Within course materials, a 60% increase in FDC revenue was offset by a 9.9% decrease in a la carte sales. 116 campus stores utilized BNC’s First Day Complete courseware delivery program during the spring ’23 term at institutions representing $580,000 in total enrollment. Within general merchandise, growth in cafe and convenience was offset by declines in supply product and emblematic sales. The year-over-year decline in emblematic sales was driven by a decrease in the commission rate as part of the Fanatics and Lids agreement, which calls for an adjustment in commission rates as the relationship matured. Fourth quarter retail selling and administrative expenses decreased $3.8 million or 5.2%, and compared to the prior year period due to the company’s initiatives to drive efficiencies, simplify organizational structure and reduced nonessential costs and lower incentive compensation expense.

Fourth quarter retail non-GAAP adjusted EBITDA was negative $10 million as compared to $4.2 million in the prior year period. Retail non-GAAP adjusted EBITDA declined due to lower fourth quarter revenue and lower fourth quarter gross profit, which included a shift in the mix of buying patterns from physical textbooks to lower-margin digital course materials within the company’s a la carte course material model. Additionally, higher inventory reserves, an increase in shrink and higher markdowns impacted gross margin by approximately $6.5 million versus the fourth quarter of last year. Moving on to wholesale. Fiscal ’23 revenue decreased 5.2% to $106.4 million. In the first half of the year, supply constraints from the lack of used book inventory and the shift to digital course materials caused revenue to decline on a year-over-year basis.

In the back half of the year, we saw an easing of supply constraints and more textbook purchasing opportunities, enabling us to fill increasing demand at BNC and other bookstores. This enabled wholesale revenue growth in the third and fourth quarters. Fiscal ’23 wholesale non-GAAP adjusted EBITDA declined slightly to $3.2 million from $3.8 million in the prior year. Turning to fiscal ’24. We’re confident in our ability to grow the top line through our primary growth initiatives, general merchandise and First Day Complete. We are also fully committed to disciplined expense management and we will continue to optimize our core cost structure to drive increased revenue and adjusted EBITDA. I’d now like to turn the call over to Jonathan to take a deeper look at our 2024 growth initiatives.

Jonathan Shar: Thanks, Mike, and good morning, everyone. I’ll begin today with 1 of our key growth initiatives, first Day Complete. Feedback from students, faculty, administration and academic leadership on First Day Complete continues to be excellent. In May, through a proprietary research platform, Barnes & Noble College Insights, we conducted a survey with students who participated in the First Day Complete program during the spring 2023 semester. These students reported overwhelmingly that through the subscription-like course material model, they had a better customer experience, were better prepared and ultimately achieved improved academic success, confirming BNC’s equitable access program is making a positive impact on student outcomes.

Some key insights from the survey include 83% of survey participants said the program had a positive impact on their classroom success, 86% said they were better prepared for the academic term, 75% stated it helped them achieve better grades, 91% stated that they found it convenient to have their course materials bundled, and 78% stated that First Day Complete increases the likelihood they will continue their education at their current school. With this perspective in mind, it’s not surprising that we added a record number of schools for the 2023 fall semester. Currently, 157 campus stores are committed to utilize First Day Complete for the upcoming fall 2023 term. This represents undergraduate and now post graduate enrollment based upon the positive response of the program of approximately 800,000 student, a 46% enrollment increase versus the fall of 2022.

Additionally, several schools have already committed to launching FDC in January in the spring 2024 semester and we already have signed commitments for fall ’24, plus a robust pipeline of hundreds of schools that are discussing making the transition to FDC next academic year. Beyond our equitable access offering, we also see a great opportunity to continue to grow our general merchandise business. We made significant progress throughout fiscal 2023 on our emblematic product assortment merchandising execution and seamless omnichannel retail experience through our strategic partnership with Fanatics and Lids, which led to an impressive 8.6% growth in gross comparable store sales in general merchandise. We are entering fiscal 2024 and our fall rush period from a position of strength that will allow us to continue to differentiate BNED schools, ensure their brands continue to resonate with their extended campus communities and continue to implement initiatives that allow us to further innovate and optimize assortment for the unique needs of our customers.

In addition to strengthening our emblematic offering, we continue to evolve and amplify our non-emblematic general merchandise business. One initiative we are particularly excited about is the launch of Be Well, Be You. Stress and anxiety on college campuses is a large and growing issue. According to the latest student voice survey from Inside Higher Ed and College Pulse, reinforced students say that stress negatively impacts their ability to focus, learn and succeed academically, and that reducing stress is their #1 health goal. Our Be Well, Be You collection offers a wide range of health and wellness products, as well as on-campus and online educational events to help the campus community live with less stress and more joy. Within wholesale, MBS became the primary supplier for more than 100 additional accounts due to 1 of its largest competitors exiting the market.

As a result, we expect fiscal 2024 wholesale revenue to modestly grow for the first time in 2 years. NBS has established itself as the lead provider in the industry, and the team is excited to play a bigger role in supporting higher education and meeting the long-tail demand of physical course materials. From an expense standpoint, we are committed to ongoing efficiency and cost discipline. The team has built a deep rigor on managing staffing levels and other components of store payroll, which is our largest expense line item. We have established payroll guidelines aimed at maximizing sales while staying within our allocated payroll budget. By implementing these guidelines, we believe our stores will be better positioned to achieve their sales targets while maintaining financial discipline, and we are already seeing the positive results.

And now I’ll turn the call back over to Mike to discuss our guidance and closing remarks.

Mike Miller: Thanks, Jonathan. Moving on to guidance from continuing operations. As we execute on our growth and cost reduction initiatives, we expect total consolidated revenue to be slightly higher year-over-year driven by the growth of First Day Complete and general merchandise, offset by declines in an a la carte course materials. Gross profit dollars will be higher, however, we expect gross profit margin to be flat to down relative to fiscal 2023, driven by the continued shift to digital and physical. We expect S&A dollars to be down year-over-year as we realize the full year benefit of our cost reduction initiatives and maintain cost discipline, including payroll and closing on profitable stores. Given these factors, we expect fiscal 2024 non-GAAP adjusted EBITDA to be approximately $40 million.

Before closing, I want to recognize our outstanding employees across the country who have helped drive significant change to transform our company. They have done this while keeping the Barnes & Noble Education mission front and center as we continue to support our students and institutions. This past year revealed the true character of BNED and its values. Finally, in connection with our recent credit facility agreement, we announced that we are continuing the ongoing review of strategic alternatives available to the company to ensure we are maximizing value and best positioning our business for the future. BNED plays an extremely valuable and valued role within the higher education ecosystem. — and we are committed to executing on the best path forward for the company and our stakeholders.

We will not be commenting further on this until the Board of Directors has concluded that disclosure is appropriate or required. We believe we have taken the right steps to position BNED on the path towards sustainable, profitable growth and delivering value for our shareholders over the long term. Underpinning all of our actions is our commitment to helping colleges and universities meet and exceed their highest priority goals and remove barriers for students by providing greater access, affordability, convenience and ultimately, greater academic success. We are very excited about the next phase of BNED’s journey, and we’re looking forward to sharing this vision with you. That concludes today’s prepared remarks. And now we’ll take any questions you may have.

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Q&A Session

Operator: Our first question comes from the line of Alex Fuhrman, Craig-Hallum Capital Group.

Alex Fuhrman: Great progress it sounds like on the First Day Complete side of things, getting more schools signed up for the upcoming fall semester, and it sounds like you’re expecting First Day and First Day Complete to be the majority of required courseware material sales this year. Can you walk me kind of through, not to immediately, as you’re giving guidance for this year, start thinking about next year. But can you walk me through kind of what the next few years look like in terms of the transition to getting substantially all of your schools on the First Day Complete in the future. Should we expect there to be meaningful churn in the school? Can you kind of update us on kind of how that transition to being substantially all First Day Complete is going and how long that will take?

Jonathan Shar: Yes, Alex, it’s Jonathan. Thanks for the question. We’re really excited about the growth of First Day Complete, as we said during the call. We have 157 campus stores committed to First Day Complete for this fall and several more already committed to launching in the spring term within this academic in fiscal year and even discussing it with many more and already, as we noted, have schools contractually committed to the following year and having discussion with hundreds of other schools. And so we expect that to continue to grow significantly, not only for the balance of our fiscal ’24, but starting in fall semester 24, which is our fiscal ’25 and really driven by the fact that we’re scaling, we saw a record number of new campus stores being added, and really, it’s about the impact it’s making in higher education for all the key stakeholders and the fact that it’s having a significant positive impact on student outcomes.

And so our teams are having conversations every day with clients that are very student-centric and focused on impacting growth and working through those transitions. And we expect to continue to transition schools, have the majority of our campuses on First Day Complete, and continue to grow just based on the positive impact for really everyone in the ecosystem, institutions, ourselves, publishers, and most importantly, the students.

Hunter Blankenbaker: Alex, this is Hunter. I just want to kind of comment 1 thing. And if you think about — I think you heard this a lot through the prepared remarks, but our overall strategy is really based on just driving profitability. And that is a core focus of ours. So we’re really engaging with the schools to make that transition. And there may be instances where we close stores, right? We closed 127 stores in FY ’23. We obviously opened some, so net was 63, but really, profitability is our main driver here. So just that’s all I have.

Alex Fuhrman: That’s really helpful. I guess part of what I’m trying to understand here is, it’s been a little while since we’ve had an update just given the timing of your fiscal year and the negotiations you guys have been doing on the on the credit side of things. I guess I’m trying to understand, is it still the intention to be substantially out of the a la carte required materials business 1, 2, 3 years from now as you guys have kind of gone through your P&L with a finetuning comb over the last 4 or 5 months, is there maybe more of a willingness to keep some of those stores open in certain or keep some of the required material businesses open a la carte in some more of those instances? Or should we expect that this is basically the last year you’re going to have a la carte required materials in a significant way?

Jonathan Shar: No. No. We’ll continue to have and continue some institutions from an a la carte basis. As Hunter said, we’re really looking at the profitability of stores on an individual basis and that there are stores that are profitable, and we’re driving growth based on initiatives like we referenced during the call in general merchandise that are helping us grow the profitability of those stores. So we will continue to support stores and the a la carte course material model. But the industry is moving really quickly to the model. We’re leading the way and the industry leader in that. But across the entire higher education landscape, that’s where the model is moving based on the impact. So we’re focused on having discussions every day even with stores and clients that have profitable stores and really strong general merchandising businesses that are growing, there’s interest in moving to that model.

So we’re committed to that, and we’re committed to helping achieve the highest priority goals of our customers and to very consistently. One of those goals is enhancing the student experience and student outcomes. And so that’s why we’re really focused on that, making incredible progress, and we’ll continue to see that accelerate.

Alex Fuhrman: Okay. That’s really helpful. And then do you guys mind just commenting on what you’re seeing just in terms of enrollment at your partner schools. And I guess we won’t know for sure until you get past some of these drop ad dates. But I imagine at this point, most of your residential tools must know how many kids are moving into the dorm later this month. So anything to call out positive or negative in terms of enrollment trends for this year? And curious if you’re starting to see a return of more international college students.