Barnes & Noble Education Inc
NYSE:BNED
Earnings Call Analysis
Q2-2024 Analysis
Barnes & Noble Education Inc
During a dynamic fiscal period, the company expressed gratitude towards its team's agility and resilience, orchestrating a successful operational outcome despite the fluctuating environment. The Equitable Access Program, specifically First Day Complete, performed exceptionally, with revenues increasing by 52% to $136 million. This revenue performance bolstered confidence in the strategic shift toward subscription-like B2B models, revealing an inflection point with such revenues nearing half of the course material revenues. The transition promises enhanced revenue visibility and operational efficiency, forecasting higher EBITDA per store.
The company is implementing a forward-looking strategy to further enhance efficiency and reduce operational expenses, positioning itself for more consistent and profitable growth. The quarter witnessed modest revenue growth but significant gains in adjusted EBITDA, fueled by a 39% surge in First Day Program revenues and a disciplined approach to cost reduction. Moreover, the company is actively evaluating strategic options, aiming to enhance stakeholder value and solidify its market stance for future endeavors.
The retail sector experienced a revenue increase driven by a 5.8% uptick in course material sales and an explosion of growth in the First Day programs, including a 52% rise in First Day Complete revenues. Despite the general merchandise category facing declines due to inventory delays, the strength of strategic partnerships, such as those with Fanatics and Lids, compensated partially for these shortfalls. The discipline in cost control and productivity improvements resulted in reduced selling and administrative expenses, contributing to an enhanced retail EBITDA.
The company's dedication to shifting to a profitable and predictable FDC model, combined with operational efficiencies, has resulted in top-line growth and margin expansion. While there was a slight decline in retail gross profit and margin due to markdowns and a higher mix of lower-margin digital sales, this was mitigated by efficiencies and First Day Complete's growth. On the wholesale front, steady sales and lower administrative expenses have led to a boost in non-GAAP adjusted EBITDA.
As the company maintains its fiscal 2024 expectations for an approximately $40 million adjusted EBITDA from continuing operations, the primary growth driver is anticipated to be the increased adoption of its First Day programs. This growth, coupled with cost reduction efforts, is expected to cement the long-term pathway toward financial improvement.
The company closed the quarter on a positive note, with affirmations of success in strategic implementations and a strong competitive positioning. Overall, there is a palpable sense of confidence in the strategic initiatives, team capabilities, and a well-founded belief in the promise of sustainable and profitable growth.
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Good afternoon, everyone, and welcome to our Fiscal 2024 2nd Quarter Earnings Call. Joining us today are Mike Huseby, Chief Executive Officer; Kevin Watson, Chief Financial Officer; and Jonathan Shar, Executive Vice President, BNED Retail and President, Barnes & Noble College. As referenced in our second quarter slide presentation, which can be found on our Investor Relations website, 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 content 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 now, I'll turn the call over to Mike Huseby. Mike?
Thanks, Hunter. Good afternoon, everyone, and thank you for joining us today. It's my pleasure to provide our earnings commentary today together with Jonathan and to introduce Kevin Watson, our new CFO, who joined BNED in September and is already contributing significantly to BNED's success. One year ago, we announced decisive actions to accelerate our transition to the First Day Complete model and also implemented significant cost reduction and operational efficiency initiatives to improve our profitability. We made substantial progress on these initiatives and our second quarter financial results are further proof points that our strategy is working. Before we get into the details, I'll touch on the key highlights from the quarter. First, I'd like to really thank our teams for their commitment to our company's success and their continued efforts to deliver a great experience to our students, faculty, institutions, administration, parents, alumni and strategic partners. Our team's agility and resilience enabled us to not only deliver a successful Fall Rush in a very dynamic operating environment, but also to execute on our strategic initiatives over the last year. I'm truly grateful for their hard work and commitment. Second, our innovative Equitable Access Program, First Day Complete, continues to positively impact students, higher education and our business. In the second quarter, FDC revenue increased 52% year-over-year to $136 million, and the combined First Day programs revenue reached $199 million. Our strategic transition to First Day Courseware business model has reached an inflection point. First Day and First Day Complete revenues are approaching 50% of course material revenue and revenue increases from First Day offerings exceeded the decrease in revenue from the traditional à la carte model by $30 million on a year-to-date basis. This evolution to a subscription-like B2B model significantly improves revenue and revenue visibility, which enables us to better align costs with revenue, improve inventory management and operating efficiency and ultimately achieve much higher 4-wall EBITDA per store. Next, we've improved operational efficiency and maintained top line growth despite operating in 128 fewer stores. We've achieved our planned $30 million to $35 million of annualized cost savings and as a result, consolidated adjusted EBITDA increased 28% to $50.3 million in the second quarter. Looking ahead, we've identified additional opportunities to improve efficiencies further and reduce operating expenses to continue improving our profitability and cash flow. Importantly, the actions we have taken and continue to take position us to deliver more consistent, sustainable and profitable growth in the years ahead. Shifting to our second quarter performance. Total revenue was $610.4 million, increased by $1.7 million or 0.3% compared to the prior year period. The second quarter sales increase is primarily due to the growth of our First Day Programs, which increased 39% to $199 million, partially offset by declines in the à la carte courseware sales, including lower sales from a smaller store footprint as we focus on the profitability of our stores. Second quarter adjusted EBITDA from continuing operations of $50.3 million increased by $11.1 million or 28.3%, primarily driven by a $13 million decrease and S&A expenses compared to the prior year. Before turning the call over to Jonathan to discuss our Retail segment results, I'll provide a brief comment on the strategic alternatives process. Our Board of Directors continues its ongoing review of a broad range of strategic alternatives available to the company, including, but not limited to, potential capital raises, asset divestitures, sales of business and pursuit of stand-alone growth plans. We're committed to executing on the best path forward for the company and our stakeholders to maximize value and best position our business for the future. We won't be commenting further on this until the Board of Directors has concluded that disclosure is appropriate or required. Now I'll turn the call over to Jonathan.
Thanks, Mike. Our team delivered a solid second quarter, driven by strong operating performance that enabled us to grow revenue while increasing retail adjusted EBITDA by 23%. Retail revenue growth was driven by course material comparable store sales growth of 5.8%. Our First Day programs, which increased 39% to $199 million were the primary drivers of this growth. In particular, First Day Complete revenue increased by 52% to $136 million. First Day Complete not only grew in the quarter due to the year-over-year store count growth, but comp FDC stores experienced 6.5% growth in course material sales due to increasing student participation rates, which highlights FDC's positive impact on access, affordability, convenience and academic success. Since we launched First Day Complete, we've transitioned 157 campus stores to our innovative B2B course material model, which this past fall term, encompassed enrollment of nearly 800,000 students. While this is impressive growth, we believe we are just scratching the surface. Our active dialogue with institutions and the FDC contracts already signed for spring term '24 and fiscal 2025 suggests that inclusive and equitable access is rapidly becoming the primary course material distribution model. Given the strength of our pipeline, we remain confident in our ability to successfully accelerate the scaling of FDC and the long-term growth and sustainable financial benefits of the equitable access model. Turning to general merchandise. Comparable store sales growth declined by 1.7%. The decrease was primarily due to declines in trade books and cafe and convenience items. These 2 categories were most impacted by the delayed inventory receipts we discussed with you last quarter. Partially offsetting the decline was a 0.5% increase in emblematic sales. During the quarter, the benefits from our Fanatics and Lids relationship were on full display at our schools. For example, at the Ohio State University book store, lines began forming around the block at 4:30 a.m. to participate in an exclusive in-store launch of Ohio State branded lululemon merchandise. I continue to be amazed at how our teams provide our students, parents, faculty staff and alumni with unique products and experiences that raise the bar in differentiating Barnes & Noble College Runbook stores. As we've shared with you before, our commitment to growing profitability is at the heart of our ability to serve our students and institutions in a manner that they deserve and expect. It's been gratifying to see cost discipline, productivity and efficiency embedded into our culture will continue to provide an outstanding experience for our campus partners. As a result, second quarter retail selling and administrative expenses decreased by $12.9 million year-over-year and 210 basis points as a percent of revenue to 12.9% from 15%. Adjusted EBITDA increased by $8.9 million.
I'll now turn the call over to Kevin to discuss our financial results in more detail.
Thanks, Jonathan, and good afternoon, everyone. It's great to be on the call with you today. It's been an exciting time since joining Barnes & Noble Education back in September. The momentum behind our shift to a more profitable and predictable FDC model, combined with our focus on operating efficiencies presents a compelling opportunity to create a sustainable long-term value for our stakeholders. As such, I'm looking forward to contributing to the continued success of our transformation. Turning to the fiscal 2024 2nd quarter results and related matters. Consolidated second quarter revenue from continued operations of $610.4 million, grew by 0.3% or $1.7 million. Consolidated adjusted EBITDA grew by 28.3% or $11.1 million to $50.3 million. The combination of top line growth, improving operating efficiencies and further progress on our cost savings initiative actions drove a 180 basis point increase in EBITDA margin to 8.2%. During the quarter, total Retail segment revenue increased by $700,000 or 0.1% to $599.3 million driven by a 5.8% increase in comparable store course material sales, offset by 1.7% decline in comparable store general merchandise sales. Course Material sales growth was due to increase in the First Day and First Day Complete revenues, which increased 39% to $199.2 million with revenues from these subscription-like programs approaching 50% of our course material revenues our course material business is becoming a much more stable and predictable business. Second quarter retail gross profit of $125.5 million, decreased by $4 million or 3.1%. Retail gross margin of 20.9%, decreased by 70 basis points from the prior year period. Retail Gross sale margins decreased due to a decline in course materials gross margin due to higher markdowns including markdowns related to closing of underperforming and unprofitable stores as well as higher percentage of lower-margin digital course material sales and lower commissions for emblematic general merchandise. These decreases were partially offset by lower contract costs as a result of the shift to digital and First Day models and the growth of higher-margin First Day Complete revenue. Retail EBITDA increased by $8.9 million to $48.3 million due primarily to a $12.9 million year-over-year reduction in selling and administrative costs offset by a $4 million reduction in gross profit. Moving on to wholesale. Sales for the quarter were essentially flat at $21 million. Wholesale gross profit was $6.1 million or 29% of sales in the second quarter of fiscal 2024 compared to $5.5 million or 25.8% of sales in the second quarter of fiscal 2023. The increase in gross profit and gross margin rate was due primarily to lower markdowns and lower product costs, partially offset by an increase in the returns and allowances. Wholesale selling and administrative expenses for the quarter decreased by 9.7% to $3.5 million. The decrease was primarily due to cost savings initiatives comprised of lower payroll and an incentive plan compensation expense. The lower S&A drove wholesale non-GAAP adjusted EBITDA to $2.6 million, an increase of $1 million. Moving on to the balance sheet. Our cash balance was $15 million at the end of the quarter with outstanding borrowings of $234 million as compared to borrowings of $250 million in the prior year period and $278 million in the first quarter. CapEx decreased by $5.3 million to $4 million from $9.3 million due primarily to a continued focus to reduce spending and capture additional efficiencies. Regarding guidance, we're maintaining our fiscal 2024 adjusted EBITDA from continuing operations expectation of approximately $40 million. The year-over-year increase in consolidated adjusted EBITDA is expected to be driven by growth in the company's retail segment, primarily due to growth in the company's First Day programs and the impact of the cost reduction actions the company has executed and expects to continue to implement. With that, I'll turn the call over to Mike for closing comments.
Thanks, Kevin. In closing, we had another solid quarter, and we are making excellent progress against our strategic priorities. We're all extremely energized by what our team has accomplished in such a short period of time and even more so and where we are headed as a company. We are confident in our strategy, our highly capable and motivated team and our strong competitive position to continue the successful execution of our strategic focus on sustainable and profitable growth. Thank you for participating today. And now I'll turn the call over to the operator so we can take your questions.
[Operator Instructions] Your first question comes from the line of Ryan MacDonald with Needham & Co.
This is Matt Shea on for Ryan. Congrats on the strong quarter here. A couple of questions from me, maybe to start. So nice to see 6 additional wins for the spring term for the First Day Complete model. But thinking about the rest of the year, are there additional campuses in the pipeline for spring '24, or is there just not enough time left in the year for those deals to still close? And then thinking about the flip side of that question and depending on the commitment timing, if not spring, are you seeing incremental commitments for fall of 2024, or how is that trending relative to your expectations?
Yes. Thanks for the question. It's Jonathan. And we're actually really excited about the number of transitions we have for spring. It's consistent with past trends and then the pipeline, we're really encouraged, as we said in our remarks, by the pipeline of schools that have either already committed or are on the verge of committing for a fall term '24 launch, which would be our fiscal '25. So the pipeline is robust. We're having hundreds of conversations with institutions and the value proposition of affordability, access, convenience, which ultimately is leading to enhanced student outcomes continues to resonate on campuses throughout the country. So incredibly excited about the pipeline and the accelerated growth of our First Day Complete program.
Okay. Got it. That's helpful color. I mean, so it sounds like with the conversations, or within the remaining university partners, conversations are trending well. But maybe for those that have not yet to make a decision, is there any sense of mix you have for the customers or university partners that are going to opt out or churn away from the program?
No, not at this point. I think all the conversations are really positive, and I would say it's not a matter of if, it's really a matter of when. And those are detailed discussions we have with each of our campus partners in terms of when we would launch the program, when they communicate tuition and/or fee changes in -- within their academic calendars each year. And so it's incredibly positive. We've had great momentum in terms of what we've done and the number of campuses that we're now running First Day Complete with. And as I said before, we expect that to accelerate going forward.
Okay. And then last question for me. Just thinking about some of the newer programs and cohorts this fall, understanding it's no longer an opt-in model, but rather an include or opt-out model, you noted last quarter, it was too early to gauge those opt-out rates in the new cohort of schools. Now that you're a little deeper into the semester, how have those opt-out rates trended? And how do those kind of compare to your internal expectations?
Yes. We refer to it, and we did it in our comments as a participation rate and the number of students that are participating, and the participation rates are aligned with and even exceeding our expectations at our schools this fall. And what we've seen is that, and again, I mentioned this, not only do we see strong participation rates overall, but as schools participate in FDC year-over-year, those participation rates at those schools are actually improving as students who are freshener, sophomore experience FDC, understand the convenience, the affordability aspect, the impact it has on their academic success and the rates continue to get better with each year for each of those cohorts, which is a really exciting development and even highlights more upside in the First Day Complete model for us and our campus partners.
Our next question comes from the line of Alex Fuhrman with Craig-Hallum Capital.
If I'm not mistaken, I believe you said that First Day Complete dollar revenue growth was more than enough to offset the decline that you saw in the quarter in dollars in à la carte course materials. If I'm not mistaken, I think this is the first time that you guys have said this. Does this more or less mean that you've turned a corner, and from this point going forward, courseware material -- required materials revenue should be growing.
Yes, Alex, it's Mike. Exactly right. That's -- the numbers I cited were year-to-date, increases in the First Day and First Day Complete combined program revenues versus the decline. If you look at Y in an axis and think about that on a curve, we have crossed that line now, where the model change has inflected at the top line and that top line inflection, reversing the trend of years and years, of courseware declines, although we've been able to post some courseware growth because of First Day Complete, it's very clear now that with the acceptance by the market of the equitable access, inclusive access models that when you combine those together, that we're reversing that trend of courseware sales declined from à la carte kind of traditional à la carte model, that's huge. And it's clear evidence that the strategy -- the right strategy is working. And the other benefit is it's a much more predictable revenue stream. So that allows us to rightsize our cost structure and our CapEx with more certainty in advance as we approach each business cycle.
Okay. That's really helpful. And certainly sounds like a big milestone to have reached that point. So congratulations to you and the whole team that I know has been working on that for years to get to that moment here. Certainly understand that having more predictable and recurring revenue should help you on the cost side. I did want to just ask you about the comment in the press release, I guess, given the nature of how some of these early deals were struck. It sounds like you're not actually collecting any cash until after the drop ad dates. Can you just talk to us about that dynamic a little bit more? Does it perhaps counterintuitively mean that you might actually need a larger credit facility over time as First Day Complete becomes a bigger share of revenue and more of the cash collection is deferred to farther into the semester?
I don't think it speaks to the size of the credit facilities and working capital timing issue that we've improved a lot in terms of our ability to collect receivables much more quickly. Under the old traditional model you're collecting at the point of sale at the cash register from students, but you really couldn't predict what that was going to be when you have a contract and in advance, you have a fairly tight range of being able to forecast what the take rates are, what the participation rates are, I should say, you know what the price per credit hour is becomes much more predictable, and I guess the other thing that I would say about the transition and working capital is that we're really transitioning the company to a B2B revenue model as opposed to B2C.
That's what the First Day, First Day Complete really is. So it really lines up the financial model we have with the operating model we have. We're a contract service provider where our real strength is the relationships and the contracts with exclusivity provisions that we enter into with the schools. And so putting that financial model on more of a B2B basis really makes sense because we're dealing with the school on a business basis and structuring the contracts and transferring that model to more of a we build you school, we collect from you, and they can see the benefit of it. We can see the benefit of it, and it becomes much more of a joint partnership working to optimize that courseware delivery model.
Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now disconnect.