Earnings Call Transcript - BNED Q4 2023

Operator, 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. 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, Vice President of Investor Relations

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, EVP of Corporate Development and Affairs, Chief Legal Officer

Thank you, Hunter, and good morning, everyone. We appreciate you joining us today. Despite the challenging operating environment in fiscal 2023 and results that fell short of our expectations, we made substantial progress in transforming and strengthening the business for sustainable, profitable growth. In the second half of fiscal '23, we took decisive steps to reduce our cost structure and enhance operational efficiency throughout our organization. We aligned our costs with revenue in what we believe is the new normal following the pandemic. We also accelerated the transition of the schools we serve to our more profitable subscription-like First Day Complete equitable access model. This model is quickly becoming the industry standard for institutions, faculty, publishers, and most importantly, students. In fiscal '23, First Day Complete grew by 88%, and we onboarded a record number of schools for the fall '23 term. Through this innovative model, we've shifted the momentum in the course material business and have seen course material revenue growth for two consecutive years. Furthermore, we divested our Digital Student Solutions business to sharpen our focus on capital allocation as we continue transitioning to First Day Complete and expanding our general merchandise business. Lastly, as shared last week, we bolstered our liquidity and financial standing to expedite the execution of our strategy, benefiting BNED's students, educators, faculty, alumni, fans, employees, and shareholders. As part of the agreement, we extended the maturity of our debt facilities, modified certain covenants, and adjusted other agreements that had limited our operational efficiency. We are pleased to have constructively resolved these matters with our financial stakeholders and strategic partners, preserving value for our investors and allowing us to explore the best long-term opportunities for the company. With the significant changes implemented in fiscal '23, we are entering fiscal '24 as a more efficient organization, with a clear focus on our strengths and growth opportunities, well-positioned for profitability in the coming years. With that context, I will provide a review of our fourth quarter and fiscal '23 financial results before handing it over to Jonathan Shar for an overview of our strategic initiatives for fiscal '24. After that, I will discuss our fiscal '24 guidance and closing remarks. Now let's look at our results. Consolidated fiscal '23 revenue from continuing operations reached $1.5 billion, marking a 3.2% increase. Consolidated adjusted EBITDA rose by $2.2 million to a negative $8.1 million. Turning to our Retail segment, total fiscal '23 retail revenue increased by $52.1 million, or 3.6%, to $1.5 billion, driven by robust sales in First Day Complete, First Day [indiscernible] courses, and general merchandise. Total course materials revenue rose by 1.8%, supported by a 48% increase in First Day and First Day Complete revenues, although this was partially offset by a 9.4% decline in traditional a la carte sales. The higher growth in First Day and First Day Complete revenues represented about 33% of course material revenue in fiscal '23. Looking ahead to fiscal '24, First Day and First Day Complete are expected to comprise nearly all course material revenue, enhancing predictability in our course material business. Total retail gross comparable store sales in fiscal '23 grew by 3.2%. Retail gross comparable course material sales rose by 0.4%, and general merchandise gross comparable store sales increased by 8.6%, buoyed by strong performance in emblematic general merchandise and cafe and convenience sales. Fiscal '23 retail non-GAAP adjusted EBITDA reached $10.6 million, a $2 million increase primarily due to the revenue growth of $52 million, though this was offset by higher cost of sales and selling and administrative expenses. In the fourth quarter, retail sales totaled $235.4 million, a decrease of 4.1%, attributed mainly to a 3.1% decline in course material sales and a 6.5% drop in general merchandise. Within course materials, a 60% increase in FDC revenue was counterbalanced by a 9.9% decrease in a la carte sales. A total of 116 campus stores adopted BNC's First Day Complete courseware delivery program during the spring '23 term, representing $580,000 in total enrollment. In general merchandise, growth in cafe and convenience was negated by declines in supply products and emblematic sales. The year-over-year drop in emblematic sales was due to a lower commission rate resulting from the Fanatics and Lids agreement, which includes a commission rate adjustment as the relationship develops. Fourth-quarter retail selling and administrative expenses declined by $3.8 million, or 5.2%, compared to the prior year period, thanks to the company's initiatives to enhance efficiencies, simplify the organizational structure, and reduce nonessential costs and lower incentive compensation expenses. The fourth-quarter retail non-GAAP adjusted EBITDA was negative $10 million, compared to $4.2 million in the same quarter last year. This decline was driven by lower fourth-quarter revenue and reduced gross profit, which reflected a shift in buying behavior from physical textbooks to lower-margin digital course materials in our a la carte model. Additionally, higher inventory reserves, an increase in product shrinkage, and elevated markdowns adversely affected gross margin by approximately $6.5 million compared to the same quarter last year. Moving on to wholesale, fiscal '23 revenue dipped by 5.2% to $106.4 million. In the year's first half, supply constraints due to a lack of used book inventory and the shift towards digital course materials resulted in year-over-year declines in revenue. However, in the latter half of the year, we saw supply constraints ease and more opportunities for textbook purchases, enabling revenue growth in the third and fourth quarters. Fiscal '23 wholesale non-GAAP adjusted EBITDA edged down to $3.2 million from $3.8 million in the previous year. Looking ahead to fiscal '24, we are confident in our ability to drive top-line growth through our key initiatives in general merchandise and First Day Complete. We remain committed to disciplined expense management and will continue to streamline our core cost structure to enhance revenue and adjusted EBITDA.

Jonathan Shar, Executive Vice President, BNED Retail, President, Barnes & Noble College

Thanks, Mike, and good morning, everyone. I'll begin today with one 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 utilizing First Day Complete for the upcoming fall 2023 term. This represents undergraduate and now postgraduate enrollment based upon the positive response of the program of approximately 800,000 students, 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, 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 one 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, EVP of Corporate Development and Affairs, Chief Legal Officer

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 the 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 selling and administrative 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 underperforming 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 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.

Operator, Operator

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

Alex Fuhrman, Analyst

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 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 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, Executive Vice President, BNED Retail, President, Barnes & Noble College

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 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, Vice President of Investor Relations

Alex, this is Hunter. I want to make a comment. Our overall strategy is centered on driving profitability, which is our core focus. We are actively engaging with schools to facilitate that transition. There may be cases where we close stores; for instance, we closed 127 stores in FY '23. While we did open some, the net was 63. Ultimately, profitability is our primary goal. That's all I have.

Alex Fuhrman, Analyst

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 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 fine-tuning 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, Executive Vice President, BNED Retail, President, Barnes & Noble College

No. No. We'll continue to have and continue with 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 subscription 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 that's why we're really focused on that, making incredible progress, and we'll continue to see that accelerate.

Alex Fuhrman, Analyst

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-add dates. But I imagine at this point, most of your residential schools 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.

Jonathan Shar, Executive Vice President, BNED Retail, President, Barnes & Noble College

Yes, Alex, it's really too early for us to tell at this point. And we'll have a lot more visibility into that in the next 30 to 60 days. But at this point, it's still too early and most institutions need to get through their drop periods to really have that number locked down. But you get more and more visibility as classes start and you're in that first and second week as well. So unfortunately, a little too early for that at this point.

Alex Fuhrman, Analyst

Sure. No, that makes sense. And then I guess, at this point, we're pretty much one quarter into the year. I know the summer term is generally obviously a low volume period for you guys is not a lot of people on campus. But what have you seen on the general merchandise side of the business to the extent that there has been traffic in your stores, have people been gravitating? You mentioned carrying more of an assortment of non-emblematic as well as emblematic apparel. Is that something that you've seen a lot of demand and interest for? Is that something that's been selling this summer?

Jonathan Shar, Executive Vice President, BNED Retail, President, Barnes & Noble College

Yes, we're seeing really good demand for general merchandise in various categories and we're really excited about the assortment and what we have ready for consumers and really well-merchandised in our stores for consumers for this back-to-school period. But general merchandise and the opportunity to continue to see growth in general merchandise is something that we're focused on, excited about, and think that we're really well positioned to continue to see growth. And then there are some components of that that we've seen over the last couple of months. But really, it's about back-to-school and rush and being prepared for that, which we are, and we think our growth initiatives and focus really have us right now operating from a position of strength in that business.

Hunter Blankenbaker, Vice President of Investor Relations

And Alex, the only thing I might add to that is, you're right, we're well into the first quarter; it's not done. When we laid out our guidance that we just provided, we incorporated those first-quarter trends into the guidance. So some of that commentary around general merchandise growth and having good progress thus far on store profitability is all incorporated into the guidance. And so we're moving on track here.

Operator, Operator

Our next call comes from Mr. Ryan MacDonald with Needham.

Ryan MacDonald, Analyst

Maybe on the First Day Complete transition, just to clarify, is the guidance for fiscal '24 today, inclusive of the expectation of incremental schools churning? And I'd just be curious what you're seeing thus far through the transition in terms of the mix of schools that have chosen to adopt versus those that are choosing to churn?

Jonathan Shar, Executive Vice President, BNED Retail, President, Barnes & Noble College

Yes. Ryan, thanks for the question. It's Jonathan. Yes, the fiscal '24, our plan and guidance include all of our First Day Complete assumptions. All of our total store assumptions, both new store opens and closes for the year. And so it all factors that in, inclusive of the new stores transitioning to First Day Complete in the spring as well beyond the 157 that we referenced that are supporting the program this fall. So that is built into the model. And in terms of sort of what we're seeing in terms of transitions, I would say that we're really excited about what we saw. And as we mentioned, we had a record number of stores in terms of growth in terms of stores to get to the 157 and we're continuing to add to that, already have others transitioned. We did close certain stores that were unprofitable and couldn't get to that model this fiscal year but as Hunter said, as we've referenced, we're really focusing on profitability, and that is what is built into our fiscal '24 plan and guidance.

Ryan MacDonald, Analyst

I appreciate the increased focus on profitability. As we think about the amended and extended credit facility, can you talk about sort of the updated terms there? And then what sort of flexibility does this give you over the next 12 months? And are there any milestones that you need to hit, I guess, as you're progressing towards the updated extension deadline?

Jason Snagusky, SVP and Treasurer

Ryan, this is Jason. I'll answer that. The amended extend that we undertook stretched out the maturities of both the ABL and the term loan. The ABL is now out until the end of December of 2024. The term loan has stretched out through March of 2025. I would say that the additional covenants that we now have are nothing that we haven't been managing through previously. We've been managing through this for the past few years. And everything that we are doing now is just managing and monitoring through this current agreement. This agreement has also provided us ample liquidity and additional liquidity to allow us to fund our operations from day one of that signing. So a lot of what we did with our current bank group was obvious support that they showed us, but this is a bank group who understands our business and has worked with us since 2015.

Mike Miller, EVP of Corporate Development and Affairs, Chief Legal Officer

And I would just add, Ryan. This is Mike Miller. I would just add that the new amend and extend gives us the flexibility and the support and the growth platform not just for fall rush, but through spring rush as well, which, as you know, is our most critical seasons. So it gives us the runway to really pivot and continue this turnaround and really see the success of our initiatives with First Day Complete and then general merchandise really take hold. As far as milestones, as you know, there are two new board members that will be added to the Board and who will be constituting a strategic alternatives committee and that is in short order within the next week or so, they need to be appointed to the Board. So that's the most imminent milestone that we have.

Ryan MacDonald, Analyst

Okay. That's helpful color. I appreciate that. On the Fanatics and Lids partnership, I noticed the comment during the call about sort of a changing of the commission structure there. Can you just provide a little bit more color about what the changes are there? And then, I guess, how you're feeling about the growth and the potential profitability of that partnership moving forward?

Hunter Blankenbaker, Vice President of Investor Relations

Mike, why don't you take the first part of that question and maybe Jonathan can tag on the second part of that.

Mike Miller, EVP of Corporate Development and Affairs, Chief Legal Officer

Yes, sure. So there were adjustments from both the e-commerce and in-store revenue share arrangements for the next year as the business continues to mature and the strategic partnership continues to mature. So there were adjustments to the revenue percentages that were made, and they will refer after 12 months.

Jonathan Shar, Executive Vice President, BNED Retail, President, Barnes & Noble College

Yes. And then from a business trajectory standpoint, as we said in for fiscal '23, our general merchandise gross comparable store sales increased almost 9%. And really that was aided and that strong performance aided by emblematic general merchandise and some of the other non-emblematic businesses, but we're really excited about the growth that we saw, the impact of the product assortment, and the differentiated product assortment, really unmatched customer experience, both in-store and online. I think there will be really significant growth in that business as we go forward for fiscal '24 and beyond. So we're very excited from a business trajectory standpoint, from how the assortment is reflecting the local sort of demands of each store and also national trends, and that combination is really powerful and proving to be really powerful. Exciting new brands we're introducing into the mix. And so we expect that to continue to be a growth driver and really continue to be a strategic advantage for us with our stores as they help sort of to help build their brands and create an exciting destination on campus for visitors to come and really have a must-visit place on campus and you're on campus and online. So we're really excited, and we think that it's going to continue to see growth, and it's a very strategic initiative for us to leverage the power of the partnership.

Jason Snagusky, SVP and Treasurer

And before we leave that point, I just wanted to say that both Fanatics and Lids and our partners at Vital Stores really we're true partners with BNED through the amend and extend process and really helped get that done through various amendments to our current agreements with them. So on behalf of the management and the Board, we are very thankful for their continued support and partnership.

Operator, Operator

I will now turn the call back over to Mr. Hunter Blankenbaker, Vice President of Investor Relations, for closing remarks.

Hunter Blankenbaker, Vice President of Investor Relations

Great. Thanks, Maria. That completes our call today. We're going to go focus on our fall rush, and we look forward to having our first quarter earnings call in early September. Thanks, everybody.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.