Barnes & Noble Education, Inc. (BNED) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Barnes & Noble Education Fiscal 2020 Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Michael Huseby [ph]. You may begin.

Good morning and welcome to our fiscal 2020 fourth quarter and year end earnings call. Joining us today are Mike Huseby, CEO and Chairman; Tom Donohue, CFO; Jonathan Shar, our Executive Vice President, BNED Retail and Client Solutions; Lisa Malat, President of Barnes & Noble College; Kanuj Malhotra, President of Digital Student Solutions; and David Henderson, President of MBS. Before we begin today’s call, I would remind you that the statements we will 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 the property of Barnes & Noble Education and are not for rebroadcast or use by any other party without prior written consent of Barnes & Noble Education. During this call, we will be making 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 maybe made or discussed during this call. At this time, I will turn the call over to Mike Huseby.

Thanks, Andy and thank you everyone for joining us today. I hope that you and those close to you are all doing well and staying safe. I will begin today’s call with a quick update on the strategic review process and then turn to our fiscal 2020 performance. With the assistance of its financial and legal advisers, our Board of Directors continues with its previously announced review of strategic opportunities. As I will discuss further in a few moments, we have made great progress on many of our strategic initiatives throughout fiscal 2020 and this review process is designed to accelerate the execution of our strategic initiatives and enhance value for BNED’s shareholders. We have not set a timetable for the conclusion of the review and do not intend to comment further unless and until the Board has approved a specific course of action or otherwise determine that further disclosure is appropriate. And now, I will provide our business overview. As with most businesses, COVID-19 has had an unprecedented and profound impact on our industry and our company. During the onset of the pandemic, our priority was to ensure the safety of our employees and customers. I am extremely proud of our entire organization’s efforts and dedication to serve our campus partners throughout this challenging time, while also focusing on their personal safety and work and life adjustments. In the middle of a pandemic, we adapted quickly to continue serving our students and faculty, while simultaneously closing our campus stores as our clients sent students home to shelter-in-place with their families. Our response was only possible due to the strategic investments that we have made in our e-commerce platform, virtual fulfillment capabilities and digital solutions that have enabled us to offer customizable and increasingly valuable solutions to our campus partners during a period of significant disruption to the traditional learning model. We have developed customer solutions that can be quickly customized, help our schools to adapt. We have also reconfigured our cost structure and organization to be more nimble. These changes will allow us to adapt to the profound environmental change accompanying COVID and we currently believe manage our liquidity to weather this storm. As Tom will discuss further this morning, he led the organization’s efforts to reduce our cost structure and to preserve liquidity and the strength of our balance sheet through quick and decisive actions to ensure we get through this crisis and emerge from it with a solid foundation. The education industry continues to evolve rapidly that has never been more true than right now. Throughout the past few years, we have seen the evolution of this industry to digital products, services and delivery and the increased emphasis on affordability, access and achievement at colleges and universities nationwide. We have continued to grow and adapt our solutions with this in mind ensuring that we are evolving alongside this industry that we serve. During fiscal 2020, BNED underwent a great deal of growth and transformation as we continue to focus on the rapid execution of our strategic initiatives, which include: growing our high margin DSS business by leveraging our store base to scale Bartleby subscriptions; growing our share of course material adoptions through BNC First Day, BNC First Day Complete and other new digital models; stabilizing and now increasing revenue from new business wins to grow our footprint of managed stores; strengthening and improving our important general merchandise business and the ongoing optimization of MBS’ virtual and wholesale assets with Retail’s business. We have made tremendous progress in each of these areas and as we enter the fourth quarter, believe we are on target to meet our objectives, including our fiscal 2020 guidance. The onset of the COVID-19 pandemic presents unprecedented challenges for us all, including the institutions we serve. In March, as stay-at-home orders were implemented nationwide we saw the majority of our college campuses closed down. Students were sent home to finish the reminder of their spring semester virtually. In mid-March, we closed majority of our campus book stores nationwide in line with the actions of our partners and to protect the safety of both our employees and our customers. Our business experienced significant impacts as a result of these store closures. Though the fourth quarter is a relatively low revenue quarter for BNED, our high margin general merchandise business was severely impacted as a result of canceled and/or deferred events such as March Madness and formal graduation ceremonies that traditionally drives significant merchandise sales in the quarter. Despite these significant challenges, BNED continues to effectively and creatively serve our customers. BNED has acquired and built the unique set of assets allowing us to adapt and pivot rapidly to respond to our customer’s needs. Through the combined strengths of our different businesses, we possess the ability to offer unique solutions with the many challenges COVID-19 presents. Within DSS, for example, our Bartleby suite of solutions continues to provide students with the means to access academic support whenever and wherever they needed. This became increasingly valuable as students were sent home for the semester and less with limited resources for support. Campus tutoring and writing centers closed and traditional office hours no longer available to them. Through Bartleby, we are able to support students through the remainder of their spring semester, including finals with free access to Bartleby’s learns, Q&A service and Bartleby write. As a result, Bartleby peak spring traffic was 10x greater than the prior year. Even prior to the pandemic, Bartleby continue to prove its value as a tool to supplement in classroom learning and has seen significant improvements across all relevant metrics. Pre-COVID spring traffic was over 9x higher than the prior year. We continue to grow and scale this offering throughout fiscal 2020 aiding 170,000 subscribers. This represents over 200% growth over fiscal 2019 new subscribers. Additionally, post-COVID, we have seen traffic consistently increase driving significant organic web acquisition growth, validating our SEO strategy, which we expect to become an increasingly greater contributor of user acquisition. The need and increasing demand for on-demand learning platforms like Bartleby is evident. We continue to actively pursue new avenues to scale and accelerate awareness and distribution of Bartleby’s platform to ensure that all students have access to the support they need whenever and wherever they needed. Within our Retail segment, we have continued to provide unmatched service for our clients these past few months. An important factor and our ability to do so is because of the synergies achieved with our retail and wholesale segments. When we closed our stores in March, thanks to our dedicated store managers and members of their teams, we continued to fulfill both courseware and merchandise orders placed on our schools e-commerce sites. Additionally, orders from our e-commerce sites are fulfilled by individual stores. For example, an order placed on the Rutgers’ bookstore website will be filled and shipped by an employee of Rutgers’ bookstore. While we continue to utilize this fulfillment method, we needed a different solution that would allow us to fill larger upcoming summer term courseware orders at our schools without the risk of delays. The solution came from our Missouri-based MBS team, which has continued to operate with three shifts of dedicated team members as an essential business throughout this pandemic. Together, BNC and MBS responded very quickly, flipping the switch at a few short weeks to transition more than 300 of our stores as compared to only 4 stores last year through a custom store solution, or CSS model. We developed the technology to seamlessly deploy the CSS model just last August in anticipation of fulfilling more student orders directly. Through the CSS model, a customer places their courseware order on a bookstore website and that order is then directed to the MBS warehouse, which fills and ships the order directly to the customer. This back-end solution is unnoticed by the customer, but ensures there is no service delay. No competitor can replicate the solution. It underscores the strength of the virtual and fulfillment capabilities that MBS provides for the company and allows us to support customers through a difficult and uncertain time. We are also able to support our partners’ course material needs throughout this pandemic with our BNC First Day inclusive access model. The benefits of First Day, including lower cost of digital courseware, higher sell-through, increased student readiness and seamless digital delivery were incredibly relevant prior to the pandemic. Following campus closures in the spring with many schools uncertain that they would be reopening in time for the summer term, these benefits became even more critical for faculty and students. We saw a sizable increase in adoptions of First Day by course for the summer as it allows faculty to ensure their students would have seamless and timely access to their course materials regardless of where they were. Fiscal 2020 First Day revenue increased 91% on a year-over-year basis. We are also very focused on growing our new and very promising First Day Complete solution. While 4 campuses utilized the Complete access model in fiscal 2020, we already have 11 campus partners planning to utilize Complete in the upcoming fall term with many more planned for calendar 2021. The Complete model is adopted by entire institution which drives substantially greater adoption rates for the bookstore, enhances revenue for the schools and ensures students have access to all of their materials at a substantially reduced cost by the first day of class. In addition, publishers who supply the content have significantly higher sell-through rates. This is truly a winning solution for all who participate, which is why First Day Complete is getting so much market traction. When our current team established BNED’s current strategy not quite 3 years ago, we identified inclusive access courseware sales models like First Day and First Day Complete as one of our foundational must-haves for long-term success. Both First Day and First Day Complete are proving to be the right strategic path for us to have invested in and follow as they allow us to attack and we believe to eventually reverse historical long-term trends in courseware revenue declines. Importantly, the very sticky software and processes necessary to implement these exciting new models have already been developed and are rapidly being deployed into our existing clients and our major selling points with new business clients. Our AIC software, our ability to personalize our marketing and sales with each student by seamlessly relating to each school’s student information system and our just released new e-commerce system for both courseware and merchandise have all been designed to work together seamlessly, with an emphasis on easy to use and high value experiences. Despite the COVID curveball, we have all been thrown, we remain very encouraged about the value these new inclusive access models drive for our campus partners, faculty and students and we expect to see accelerated growth of these models. As schools are forced to deal with the financial fallout of the pandemic, our contractual model of sharing revenue and providing once useful, now necessary management tools and information for schools to better run their businesses will increase the value we bring to our relationship with them. Looking to the upcoming fall term, great deal of uncertainty still remains. Some campuses will extend their virtual learning for another semester. Others are introducing short-term – shorter terms and/or hybrid learning models. With this in mind, the launch of our new e-commerce platform is incredibly timely. As we have seen these past few months, the importance of a seamless e-commerce experience is critical in retail right now. We have spent this fiscal year building out the new e-commerce platform, which will provide a superior hyper-personal, hyper-local shopping experience for our customers. In the first quarter, we are excited to begin launching these sites on schedule. We will continue to implement the new sites for our customers on a rolling basis throughout fiscal year 2021. We are confident these sites will deliver increased high margin general merchandise sales for BNED in addition to providing even greater value for our partner institutions and their students, alumni and fans. Our ability to quickly adapt to our clients’ most pressing concerns both throughout this year and in the midst of a global pandemic is the reason we continue to win new business. In fiscal 2020, we signed $110 million in new business with new physical and virtual bookstores opening in a diverse range of campuses, including Western Kentucky University, Front Range Community College, and the City Colleges of Chicago. We are pleased to join these campus communities and many others and look forward to further expanding our store footprint to serve an even greater number of students, faculty and alumni nationwide. On a net basis, we generated approximately $45 million in new business as we look to prune some underperforming stores and less profitable contracts that were awarded to competitors. I am very proud of all that BNED accomplished this year in executing our planned initiatives and in pivoting these past few months to ensure service to our customers went relatively uninterrupted. The implications of this pandemic still remain very uncertain, but we believe we are well positioned to continue serving our campus partners and students with an ability to adapt to the changes that COVID-19 may bring to the education landscape. As we prepare for the safe reopening of our campus stores, our operations team has developed a comprehensive reentry program that incorporates social distancing guidelines from the CDC and the WHO to best promote the safety and well-being of staff and customers at each of our campus store locations. This includes frequent sanitizing of high-touch services, implementing social distancing measures, including reduced occupancy and incorporate other preventative measures such as sneeze guards, contactless payment and curbside pickup areas. We plan to reopen our campus stores based on national, state and local guidelines and of course in partnership with school administrations and the protocols that they implement. As it relates to our financial position, we expect COVID to continue to significantly impact our business during fiscal 2021. As Tom will review in just a moment, we took a number of actions throughout the fourth quarter to reduce expenses and preserve liquidity. These are incredibly difficult decisions to make, but were necessary to ensure sufficient liquidity given the impact of the pandemic. Before I turn it over to Tom, I would like to take a moment to thank each and every one of our clients who have all shown tremendous fortitude throughout this pandemic and help to ensure that students nationwide are continuing their learning uninterrupted. I would like to express my unlimited appreciation to our BNED teams. From those who quickly transition to remote working, for those in the warehouse and field that continued showing up to work each day, I am sincerely grateful for all of your hard work and commitment to BNED. With that, I will turn it over to Tom for the finance review.

Thanks Mike. Please note that fiscal 2020 was a 53-week year for us consisting of 14 weeks for the quarter and 53 weeks for the year as compared to 13 weeks and 52 weeks in the prior year. All comparisons will be to the fourth quarter of fiscal 2019 unless otherwise noted. Comparable sales comparisons exclude the impact of the additional week. As Mike discussed, entering the fourth quarter in addition to executing on our strategic initiatives, we are also on plan to achieve our financial targets, including EBITDA of $80 million to $85 million for the year. As I will review in our financials momentarily, our fourth quarter sales were significantly impacted by COVID-19 and we took immediate actions to mitigate the impact of the sales declines and preserve liquidity through expense reductions. As a result of our immediate actions, we believe we have sufficient liquidity to operate our business without a need to raise additional capital. Total sales for the quarter were $256.9 million compared with $334.4 million in the prior year. This decrease of $77.5 million or 23.2% was comprised of an $81.4 million decrease from the retail segment somewhat offset by a $4.7 million increase in the wholesale segment and a $1.1 million increase from the DSS segment. Comparable store sales in the retail segment decreased 34.7% in the quarter as compared to a 0.9% increase a year ago. Comparable store sales declined 9.9% for the full year. Schools began to close their campuses and send students home beginning in mid-March. In coordination with the schools, we closed our campus stores as schools shut their campuses. This had an impact on our ancillary textbook sales that occur post rush season and a far greater impact on our general merchandise business as many sporting events and graduations were cancelled two significant contributors to the business during the fourth quarter. Comparable textbook sales decreased 8.3% for the quarter as compared to the prior year increase of 0.9%. For the full year, comparable textbook sales declined 8.4%. On a full year basis, textbook sales continued to be impacted by lower unit sales and lower average selling prices. General merchandise sales decreased 52.4% for the quarter and 11.9% for the full year. Wholesale segment sales were $18.8 million for the quarter increasing $4.7 million. Net sales for the full fiscal year were $198.4 million, declining $25 million or 11.2%. For the full year, wholesale sales were down primarily due to lower demand. DSS sales were $6.6 million in the quarter compared to $5.5 million in the prior year period. Sales for the full year were $23.7 million as compared to $21.3 million in the prior year. The consolidated gross margin rate for the quarter was 25.5%, down from 35.1% in the prior year period. This was primarily attributable to the loss of our higher margin general merchandise sales and occupancy de-leveraging. The consolidated gross margin rate for the full fiscal year was 23.9% as compared to 25.9% in the prior year period. Selling and administrative expenses in the fourth quarter decreased by $11.3 million or 11.5% compared with the prior year period and decreased $19.4 million or 4.6% for the full fiscal year. This decrease was primarily due to lower store payroll and operating expenses partially offset by the ongoing investments we are making in developing Bartleby. We recognized $15.3 million and $18.6 million of restructuring and other charges during the fourth quarter and fiscal ‘20 respectively. Of the $18.6 million, $12.7 million was related to severance and other termination and benefit cost associated with several management changes and the elimination of various positions as part of our cost reduction initiatives, $2.8 million was for professional service cost, and $2.7 million was for a non-cash actuarial loss related to a frozen retirement plan, the balance related to stores and facilities. As I mentioned earlier, as we began to fully understand the unprecedented impact that COVID would have on our business preserving cash and liquidity became paramount. We immediately reduced cost, furloughed the majority of the retail workforce, cut CapEx spend and deferred IT projects along with a number of other initiatives to preserve liquidity. We will maintain our laser focus on managing costs throughout fiscal ‘21 as we continue to manage in a COVID environment. We plan to take additional actions to reduce cost and operate more efficiently. Additionally, fiscal ‘21 will benefit from the cost reduction initiatives that were implemented in the back half of fiscal ‘20. Due to all the uncertainty that COVID presents in the near and intermediate term, we are not providing fiscal ‘21 EBITDA guidance. We do expect that COVID will continue to have a significant impact on our business towards fiscal ‘21. Based on our current assumptions and as a result of our cost reduction actions, we believe we have sufficient liquidity to operate our business without a need to raise additional capital. Our cash balance at the end of the fiscal year was $8.2 million as compared to $14 million in the prior year period. There was $174.7 million in outstanding borrowings compared with $133.5 million in outstanding borrowings in the prior year period. This increase is primarily attributable to the lost sales resulting from COVID, coupled with the purchase of certain general merchandise that did not materialize as a result of canceled athletic events. We expect to have a net working capital benefit in fiscal ‘21 as we cycle through these events and sell through the merchandise. CapEx for the fourth quarter was $9.4 million compared with $14.7 million in the prior year. CapEx for the full fiscal year was $36.2 million as compared to $46.4 million in the prior year. Decreases in CapEx were due to reduced store systems and DSS segment spend. Currently, our retail segment operates 1,419 college university and K-12 school bookstores comprised of 772 physical bookstores and 647 virtual bookstores. As of today, we have contracted to open an additional 68 stores in fiscal 2021 with 42 known closings. This would bring our total physical and virtual store count to 1,445 locations. With that, we will open the call for questions. Operator, please provide instructions for those interested in asking a question.

[Operator Instructions] Your first question comes from the line of Ryan McDonald from Needham. You may begin.

Hey, good morning, Mike, Tom and team. Thanks for taking my questions. I guess as we are thinking about the fall semester, how should we think about one, the actual impact from perhaps reduced store foot traffic with fewer students on campus? And then I guess on the expense side, how are you sort of looking to optimize to sort of run that maybe at a breakeven level perhaps and adjust accordingly? Thanks.

Ryan, this is Mike. I will take the first part of that question, maybe Tom can take the second part. In the first part, Lisa Malat wants to jump in if she can, but in terms of the impact of reduced store traffic is something that we are very focused on, obviously, we are talking about it a lot. We have a pre-opening plan that we discussed – we will discuss in more – discuss in more detail in the 10-K, but we have a pre-opening plan for those stores where our campus partners have said they are opening stores and we expect to comply with all the local regulations. So yes, we do expect in those situations even when there is a store opened, because the campus is open, which is probably going to be the case in the majority of the campuses we serve. We will have some capacity restrictions and that type of thing. What we are doing is working very creatively with the schools try to reach students, alumni and faculty that normally would be in the stores on a virtual basis. As we discussed, we just are in the process of just because recently, in fact, in the last 2 weeks launched the first of the new websites for the new e-commerce platform that will help us as we continue to roll it out, but we are doing a lot of other things to be more specific in terms of reaching out to the administration of the school. I think the main – one of the main points is that this COVID crisis has really affected the financial status of our campus partners and one of the things that we bring with the business model we have in terms of sharing a percentage of the revenue from our sales whether it’s in a physical or a virtual sense e-commerce or in the stores we share a percentage of our revenue with each of the schools. So, our interests are very, very aligned with working together with the schools very creatively to drive as much revenue through our contracts as we can, because those schools are all in need of that, that funding as well. So, Lisa, I don’t know if you want to comment any further on that?

No, I mean, I think you said it. I mean, we are having very productive conversations with our campus partners based on what Mike just said, on how do we work together to mitigate the traffic losses and make sure that we are providing all the creative solutions we can for continuity of sales. Certainly, even the existing e-commerce site has been really a workhorse for us, and we are continuing to drive a lot of business through that. The expansion of our direct-to-consumer drop-ship program is really helping us now mitigate the sales loss on general merchandise as well. And we will continue to work with campus partners to think creatively working on putting together bulk purchasing opportunities for incoming freshmen, etcetera, where we can sell general merchandise in new and creative ways.

That’s a good point Lisa on drop-ship because that’s a capability we didn’t have last fall. So on a comp basis and looking at capabilities that are new, there is a lot of new things that have been done. That’s a really important one that we put in place in the last 12 months.

Got it. That’s helpful. And in terms of the Bartleby usage and sort of the DSS business, obviously, it’s great to see some of the increased usage throughout the spring here. Can you talk a little bit about what you saw in terms of spikes in usage following campus closures into April and May? And then perhaps what you learned from that and how you are using that for preparing for the fall launch for Bartleby as well?

Hey Ryan, this is Kanuj. We saw – there were very positive trends, as we have noted, pre-COVID really related to our SEO strategy and things we were doing to get outside the footprint as well as executing in the footprint. But post-COVID, in particular, call it, April to March, there was a dramatic rise in traffic and usage on the order of 50% increase in traffic just for the month of April. So the trends – it’s a very seasonally low period, as you know, in the summer, but they are still vastly above what we saw the previous year. And I think it’s a combination of just Bartleby getting out there more and being recognized and the value proposition being used by more students, as well as the obvious impact from learning at distance. So what we are doing in terms of getting ready for the fall, we continue to sharpen the SEO strategy and optimization of our content libraries as well as thinking about expanding new content partnerships, other avenues for distribution and just getting the value proposition, which we think is competitive and leading-edge relative to the competitive set, which you know well. So it’s an enormous value to use Bartleby for these students, almost half to a third less depending on the platform you’re using. So we continue just to really get it out there and create the awareness and the usage. We have continued with free offers as well. The free offers have not impacted the paid subscriptions, and we are seeing general strength across all metrics, whether it’s traffic, usage and conversion.

Alright. Then just one final one for me, it’s great to see the momentum with First Day and First Day Complete. Can you just talk about how the conversations with universities are beginning to change now that we are sort of moving more of a shift to digital and online with universities? And perhaps how this new deal you signed with the division to schools creates an additional opportunity for First Day over time? Thanks.

Jon?

Hey Ryan, it’s Jonathan Shar. Yes, the value proposition as Mike said, of affordability, access and convenience was extremely relevant for our customers pre-COVID, but is now even more critical. And I think that the conversations have definitely accelerated as that access and immediate access in driving down the cost of course materials becomes even more important. So we are having lots of discussions. We think there’s lots of potential to continue the growth, which as we stated was approximately 91% year-over-year in fiscal ‘20, and we expect significant growth in fiscal ‘21 and beyond.

Yes. And First day Complete, Ryan, I think that the other important thing is we have really I think gotten through to the publishers on both First Day and First Day Complete in terms of a common voice – from the customer our institutions is really saying, this is – these are models we want, and because of that, we are able to go to the publishers and convince them that when they are dealing with us in our footprint, their sell-trough’s as publishers for digital and First Day and then in total for First Day Complete, are going to be much higher if we cooperate together and work together on that. And I think this environment, as Jon saying, has also improved that cooperation, which is important because, as you know, there’s opportunity for us to be disintermediated by direct pub sales. And so that’s another important point. I think First Day Complete we have very aggressive goals for calendar fall ‘21, which is in fiscal ‘22. The goals that we have this year, I think what we saw is that when COVID first hit on First Day Complete and some of the new things we are doing, the initial reaction by some schools was to pull back because they didn’t think they had the mind share to make all the changes that needed to be made. I think then they quickly transitioned into, hey, wait, these are changes that we need to make in this new environment. So it’s been gaining quite a bit of momentum in the form of school signing up for both this fall and committing, recommitting for the spring of this fiscal year and then especially for for fall of next year when we really expect to see First Day Complete take off.

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

Great. Thanks for taking my question. I wanted to ask about Bartleby. It seems like you are continuing to see good momentum there. What’s your outlook there for this year and your strategy for marketing that product when it might be harder to market it in-store. Do you feel confident that it’s reached a critical math that you can continue that momentum into the upcoming school year?

So the strategy really remains, Alex. This is Kanuj. Obviously, there is an impact from not having sort of that physical nexus as optimized as it was pre-COVID. We don’t know how much the web sales pick up for that within the footprint. But the footprint – there are some headwinds in the footprint. But the SEO and the paid acquisition outside the footprint has been far outpacing what it was. It’s outpacing our results. It’s really firing on all cylinders. So it’s up multiples for what it is. So we overall, where I sit now, I would still expect growth. We are trying to figure out how best to get after the students in our footprint in the COVID environment. And we have some ideas. There’s also some – there’s a lot of work being done on figuring out what I would call alternate and strategic points of distribution above and beyond. It’s very clear from the traffic trends. If you look at what we got in April that we are either taking share or expanding the TAM, likely, we are taking share from the competitive set, and people are recognizing Bartleby. So what the SEO strategy, which has always been in the long-run view we think is going to be the predominant acquisition channel. That’s certainly making up for some of the weakness that we may have with COVID, with not having the stores fully operational.

Okay, great. That’s really helpful. And then can you just talk about the normal pace of business for you in terms of winning new school agreements here? I would have to imagine the willingness for schools, certainly the economics of outsourcing are no less appealing, perhaps a lot more appealing given the pandemic, just in terms of the actual logistics of getting the right people together, getting these agreements kind of signed and move forward. Do you feel that the environment is conducive to moving forward with these kind of agreements? Do you still think that you are going to be heading toward kind of net store growth here over the next few years?

Yes, I’ll answer. This is Mike. I’ll answer that initially, and then Lisa can jump in, who heads up our new business sales group, they report to her. But I think in this environment, as we said, our interests are totally aligned with the increased need for schools to help out their own financial position. If you think of these 5,000 or so higher ed institutions that are out there and how they’ve historically operated and the impact that COVID has had on their financial picture, many of them are taking very creative steps to solve it, but also the complexity that is being introduced by this environment with a much more heavy reliance on virtual and digital, that is driving more – I think, more schools to move to an outsourced model like ours. And specifically to your question, we are not seeing a slowdown of any magnitude in terms of being able to meet on a virtual basis, and in some cases, in-person now. Our team has done very well so far in fiscal year ‘21, adding new business and has a very healthy pipeline. So I think that maybe contrary to intuitive conclusion that schools might want to slow down in this environment, they’re doing just the opposite because they have an increased sense of urgency to outfit themselves with the tools and the partners that they need and also the financial benefit that we bring through our contracts. I don’t know, Lisa, if you want to add to that?

No, I think you nailed it. We are still having very productive conversations even for schools’ re-openings, where we are waiting for a couple of decisions to be made. I personally have been on four or five Zoom presentations with schools. And as Mike said, it’s the alignment of the revenue model, but just our ability to pivot and adapt and support whatever might come this year, right? Because we all know it’s very fluid. Has been a really, really important conversation as we meet with different schools.

Great. That’s really helpful.

Even with some of our existing clients that are, what you call top-tier schools, I think that – who are used to having heavy store traffic, not just from students but from outside from either within the community or in some cases, from tourists, this just shines the light on the need to have really outstanding e-commerce and digital capability. So this conversation has really been expanded to our entire client base.

That’s terrific. Thanks, guys.

Operator, are there any other questions?

Your next question comes from the line of Rory Wallace from Outerbridge Capital. Your line is open.

Hey everyone. Thanks for being on the call, taking my question. And understand very unprecedented times and appreciate everything you have been doing to help the company navigate them. My first question I want to ask is, in your earnings release, you talk about having 11 campuses signed up for fall compared to four for First Day Complete in the past year. And as you know, we really share your enthusiasm about the opportunity and understand that a lot of the software work in terms of getting those SIS integrations with AIP has been done. We think there might be a longer-term opportunity around even plugging Bartleby into that and certain LMS platforms into that as well. But you are looking at 800 physical stores, 1,500 total school relationships. So I think given the total market size and the product value proposition, especially as you have mentioned how COVID has actually only increased that value proposition. I think us and all shareholders would like to see what the road map looks like as far as how you scale this product to reach hundreds of schools over time as opposed to a dozen today. And so I guess my question is, what are some of those specific steps that you and Jon, Mike, are taking around really accelerating the go-to-market for First Day so that this can start to really transform the company from a revenue and EBITDA standpoint?

Yes, I think it’s a great question. It’s something that we obviously are very focused on. You have to keep in mind that when we did the four schools in the fall of 2019 last year, those were pilots. And they were very relatively small schools, although Onondaga, which is a SUNY school, was fairly sizable with about 5,000 or 6,000 students. But this is still being done quite manually and the processes and systems required to support it weren’t in place. As you just indicated, there are different tie-ins. And what Jon and his team have been doing and the whole retail organization have been doing is getting schools signed up to our adoption and insights portal and the necessary SIS and also LMS tie-ins with the SIS, in particular, is basically just an export file of daily information that allows us to personalize the experience the way we need to and understand the courseware flow. That’s being rolled out now. And as you know, it’s a very seasonal business. And to your point of – I made the comment that we really expect to see this take off. We are not disclosing the exact number of institutions or the amount of revenue in fall of next year, fall of calendar ‘21, fiscal year ‘22 that we expect to see, but we have a very aggressive target. We are not even giving guidance on this year. I don’t think we are going to look out in this kind of an environment and start providing a road map or guidance in this – at least in this call. We may do it later in the year, Rory, depending on how things go. We have got to get through a little bit more time further to the fall to see what actually happens with our business before we start providing road maps and targets that are – we are trying to provide as much general guidance as we can about what we think is going to happen. But I think the context I would give you to your question, which I said is a great question, is that a year – a little over a year ago, none of this really existed. A lot of these things didn’t exist. Bartleby really started up and was launched in January of ‘19. As you know, the new sales initiatives took off last year, the First Day Complete and First Day, which, as Jon said, grew 91% year-over-year, First Day by course, which is another important element of inclusive access. Getting schools to switch to a concept like First Day Complete requires examples in a market of how it’s working. We started to provide those proof points and examples in our pilots last fall, and we are adding to that. May not sound like going from four to 11 is much, but you have to also look at the size of the schools, and the impact that’s going to have on being able to point to different kinds of schools that are larger than the ones that we accomplish this in, in our pilots. So yes, we expect to see substantial growth, a multiple of 11, fairly high multiple of 11 mid-to-high level of 11 next fall. It’s a key priority for the company. It’s what we are all pushing on. And Jon, to your question, has actually brought in some very great outside help on the go-to-market strategy and execution, very detailed operational execution to make sure that we are driving this internally as quickly as we can. I don’t know, Jon, if you want to add anything to that?

Yes. And also – yes, it’s a great question, Rory. And we actually have schools within this fiscal year that are targeting spring term launches. So it’s not just 11 for this fiscal year. There are schools that are very interested and with what’s going on with the reopening plan had to defer to a spring release as well. So we will have more this fiscal year. And then as Mike said, a high multiple going out, we have really put a disciplined sales and marketing structure, go-to-market approach and resources against driving the pipeline and converting a lot of interest into signed amendments for this new model, which as we have talked about during the call, the value proposition of affordability, immediate access and then – and really incredible convenience for students is more impactful and important than ever.

Yes. To be clear, we obviously are very focused on our our short-term plans, as Tom said, in terms of managing liquidity, being responsible getting through this year, adding new business, continuing to do all the things that we are doing with First Day and First Day Complete, not to mention what Dave and his team are doing with MBS and fulfilling virtually at full capacity, having run three shifts since March in Columbia, Missouri to do that. But if you look out in our out years, we aren’t going to give specific guidance, but it’s – to be very clear, we are highly relying on these initiatives, First Day Complete and the impact on our general merchandise business of our new eCommerce system to provide growth. And in the case of courseware, actually reverse the trend of the decline in courseware revenues over time without getting specific as to which years. But that’s a trend that’s been in place for many, many years over a decade finding revenue units and then average prices more recently. But the First Day Complete model as you know provides a substantial increase in sell-through from something like 35% to 95% or so. And with it, at the same time, substantial cost savings to students, but it provides substantial increases to our margins, which we are also going to share with the schools. But that scale plan First Day Complete and First Day is absolutely critical to our long-term future and we have probably said as much as we can say on this call about the roadmap at this point in time. But I think we will see what happens with everything that’s going on with the company in terms of the strategic process and also this fall. And if it’s appropriate, we can be more specific about roadmaps once we get a better footing around all the uncertainty that’s affecting all of us over the next 6 months or so.

Yes. Thank you, Mike and Jon. And I guess following on that with the uncertainty, you are 10 weeks into your July quarter at this point and we saw basically a $40 million negative EBITDA impact from what expectations were pre-COVID in your April quarter. So I guess as things stand now, what color can you share with investors? You are not a particularly back-end loaded business typically. So what are you able to disclose as far as the EBITDA trends for this current quarter and understanding it’s always a light quarter because it’s summer?

Yes. I will ask Tom to answer that. I don’t think we are going to disclose much, but maybe he can provide some color.

Yes. Thanks, Rory. It’s difficult at this point to say the trends that we saw in the back half of the fourth quarter continue to the summer. We were able to transition for summer classes the fulfillment out of MBS and Missouri that will help mitigate some of the sales fall off that we saw in the fourth quarter for the summer. But it is a light quarter and really, quite honestly, it’s going to be more about managing the expenses. And I think we have done a – what we would consider a pretty good job at this point with the furloughs that took place in early April and we are only bringing people back as needed to support the stores, if there’s ongoing tasks and fulfillment that needs to be done out of the stores. But more importantly, if the sales aren’t there, the people aren’t coming back. So I think it remains to be seen. We haven’t closed the books for June yet. So I wouldn’t use May as much of an indicator for the quarter at this point in time.

Okay. And I understand your consistent commentary around liquidity and I see on your balance sheet that you do indeed seem to have adequate liquidity. But I guess, have you – I guess have you explored sort of different scenarios around how things shake out around fall. I think the reason your shares seem to be trading at a $100 million market cap with normal EBITDA of above $80 million and high free cash flow is that I think there is implicit market concern in your ability to maintain liquidity. So I guess what more color can you share around your level of confidence there and maybe any discussions that you have had that would lend themselves to support in our view?

Yes. I think as it relates to liquidity, Rory, we are planning and it’s really focused on the expense side of the equation for us is really making sure that we have the right adaptive model as it relates to the stores and the retail segment as to make sure that we have enough people there, but make sure we don’t have too many and don’t be ahead of sales if you think they are coming. And really, it’s that maniacal focus on not spending like we normally would spend, not gearing up in terms of getting the inventory in that we might normally get in on the textbook side as well as the GM side. So it’s a very maniacal approach as we look at the expense side, not only of what we spend on people, what we spend on contracts, but it really comes down to managing the inventory as well. And you’ve looked at it from that perspective and got comfortable with the outlook that we see. It’s very difficult in this environment, and I don’t know, care who you are, nobody is going to be able to forecast what the fall is like even at this point in time. It’s a very fluid situation as it relates to enrollment. It’s a very fluid situation as it remains to how those schools are going to adapt and operate. So we think we have done a lot and we will continue to do more in terms of the expense cutting and that’s really the focus that we have had.

Okay. I appreciate that, Tom. And then I guess, lastly, as we think about the future of the business and the First Day opportunity in Bartleby, which are – and also the merchandise e-commerce initiatives, which are sort of the three ways that I think about the growth pillars of the company. I think it would be very helpful if you would consider providing more granular information for investors quarterly. So for example, with First Day, you are basically moving from transactional B2C retail to institutional subscription sales. Obviously, those types of revenues come in at much higher multiples in the public markets. So we think, over time, creating a breakout of First Day revenue and EBITDA is very logical, if you’ve looked at companies that have done this internationally. It’s led this significant inflection in their multiples moving from single-digits into the teens. And then around the general merchandise segment, we saw in this quarter how extremely high margin business for you which cuts both ways when it’s strong or when it’s not, but with the next-generation e-commerce initiative that you have cited as being very important for that business, we think it would be appropriate to start breaking out e-commerce revenues each quarter as compared to the revenues generated in store. And then finally, on Bartleby, I think obviously the subscriber number on a gross basis is a nice thing to have, gross acquisition basis. And then the usage we were able to track as well that it’s gone significantly higher. But over time, I think Chegg does report their total subscribers and subscription revenues each quarter, which has allowed investors to sort of gauge the traction there and value the business over time. So we think, obviously, it’s very nascent. But to the extent you are able to break out any more granular metrics, whether it’s even efficiency metrics around LTV to CAC, or gross churn, those types of things can help the market to assign you a higher multiple because you are currently trading like a distressed retailer and you actually have two transformational opportunities that I think you owe yourself and the shareholders to shine more light on.

Yes, I think those are good points. We will take them under consideration. We’ve done a lot to actually change the structure of the company within the last 12 months and going back. As you know, we actually created DSS as a separate segment to start to do that as the product started to develop. So it’s a step in the evolution to become more granular and the disclosure as those kinds of metrics that you are citing start to scale. Breaking them out before they are scaling, there is some – there are different considerations. Obviously, if they are not material, it doesn’t give you a baseline, but as they start to scale, I would agree with you that those are helpful things to consider. So I appreciate the comments.

Okay, yes. Well, I appreciate it guys. Thank you.

Thanks, Rory.

Your next question comes from the line of Nick Dempsey from Barclays. Your line is open.

Yes, good morning guys. We are seeing publishers’ pricing of e-books and digital content coming down year after year as they try to boost up their units and win something back from the secondhand market and the rental market. I have got two questions in relation to that. As the mix shifts toward digital, is there a risk that publishers could push students to their own sites to avoid the percentage stake from retail in a larger way? And the second one is, as the price of e-books in particular starts to come in a little bit closer to print rental pricing, is there a risk that you guys could be stuck with quite a lot of print books in the system, and could you have to start lowering your price on print rental in response to that?

Hey Nick. This is Mike Huseby. I’ll take the first question, and I’ll probably ask Dave Henderson to take the second question, which ties into our relationship with VitalSource and a couple of other points. In terms of publisher disintermediation, that’s something – for digital, it’s something we’ve been dealing with for a long time. We have contracts with the three largest publishers to ingest their digital content through First Day. Importantly, our contracts with the schools provide us with exclusivity rights for courses that are posted in [indiscernible] LMS whether they are digital and also for physical sales of courseware. The way our business is structured, is not like a typical retailer, we have contracts that we enter into that in exchange for us providing a percentage of the revenue we earn to the schools. And as I mentioned, that’s becoming more and more important as they deal with their financial – increased financial issues in COVID and beyond. But those contracts in exchange for the percentage of revenue we get, we also get, generally, and in many cases, exclusivity, which we enforce with the publishers. So well, our discussion with the publishers is not an antagonistic one. Sometimes it is, but most of the time, we are enforcing our contracts. But more lately, as I mentioned earlier, Nick, if you were on the call, I think the cooperation with the publishers around First Day and First Day Complete win schools give us the mandate to go to inclusive access models, our cooperation with them has been overtly very good because what happens is the publishers are losing adoptions, just like we have been losing adoptions to competition such as other digital sources, or OER, or an Amazon, or other marketplace, even though we match those prices. And this gives the publishers a vehicle to increase their sell-through in a First Day Complete scenario, for example, to work almost 100% from wherever they are. And the pricing is discounted, but the volumes are so much higher that it makes sense for the publishers to go in with us in terms of packaging their digital content, because it’s what the universities want too. The schools are trying to achieve affordability objectives and accessibility objectives, especially now with all the focus on socioeconomic parity. And they can’t do that by allowing the faculty to just direct the purchase of courseware. It has to be managed. So we are giving them the tools to manage it so they can achieve cost-savings rates on their First Day Complete of 40% to 50%, while we and the publishers actually do much better because of the increased sell-through. We also share those economics with the school, which allows them to benefit. So this is, as we’ve described before, really a win-win-win. That doesn’t mean we are not going to see especially in the current environment, you have publishers out developing virtual courses with schools. But the agreements we have with the publishers we deal with thousands of them, not just the top three. But in those – in the footprint that we serve, let’s listen to the customer, let’s work together, let’s give them the benefits that they are asking because it benefits all of us. Otherwise, we are sending – we are doing business through lawyers, enforcing our rights and which we do, if we have to. But that level of activity has really subsided quite a bit since we’ve been able to have a much better conversation with the new leadership of a couple of the publishers and then the existing leadership of one of the other ones. So that’s a risk, no doubt, but I think we are finally using a model that brings us all together for the benefit of our mutual customer. On e-book pricing, Dave, why don’t – maybe I will let Dave handle that one.

And Mike, to build on our inclusive access branded First Day, with our campus partners, what they are, in essence, looking for is a single and elegant service solution for their students, which we provide with our platform, which is powered by VitalSource. And with that new arrangement that we came into last summer, we have seen much more cooperation with the publishers and participating with us. Again, coming to that campus desire of a single experience for the student rather than differentiated and multiple routes that they would have to take to get their product. You had asked about the physical side and the risk of being stuck with inventory. So I’ll break that into two components. Obviously, when we are buying to our retail divisions, physical stores and virtual, any new product that we are buying from publishers, we are obviously buying to our anticipated demand on what we’ve seen over the course of the history with that client. And of course, product purchase from the publishers is returnable. So the risk on that product is quite low. From a wholesaling standpoint, which is dealing with off-priced used product, a product that is able to be acquired and sold for less than publisher net pricing that of course is a speculative business. And to Tom’s point earlier, we have been very – we review this day in and day out as to the demand and what we are anticipating with the impact of COVID and enrollments and what’s going on this fall. So we’ve been very watching our acquisition of that product very closely and have scaled it to where we believe we are going to see things move, not only for the fall, but of course, for the rush period that occurs in January and February of ‘21. I hope that answers your question.

That’s great. Thank you very much.

Yes, I think one of the questions that was asked earlier that we didn’t really – I think maybe Ryan asked it on the vision to conferences and some of the things we are doing, where we are going after entire conferences, athletic conferences in the context of trying to offer them package deals, so to speak, and represent them, that will obviously help us I think, in terms of aggregation. And Rory went through, I think, did a good job of kind of giving his view of just consistent with ours and what our growth pillars are. We’ve talked about on the inclusive access models for courseware, general merchandise and e-commerce and Bartleby. The one he left out was new business, which is really the platform for all of that. And someone else asked about that earlier, but those are really the four growth platforms. And the reason I bring that up is, this business that we are running is nothing like the business we were running three years ago. Since then, we have acquired MBS, we have acquired digital capabilities, we have converted from a service-based to a product-based company and we are just at that point, I think as Rory suggesting, where we can start to present ourselves differently as we start to scale all these things we’ve been working on. But I was hoping I would never have to use the word transformation again, but we are still in the transformation. But I think we are – if it were a baseball game, I would say we are probably in the seventh inning of that, maybe we would have been a little later had it not been for COVID, but I think it’s also helped us accelerate it. So either way, we are getting through this transformation, but investors should not look at who we were two years ago and three years ago in the trends and think that’s where we are going to be in 12 to 18 months. It’s going to be a very different company based on the capabilities we built in for digital as some of the questions have pointed out in some of the new products that we’ve described uncover. And we are very confident in that. So if you look at, as Kanuj calls them, our key competitors, and the multiples and the values they enjoy, I think Rory’s comments about how we display information once we start to scale are very valid, we’ll look at that. And I think that if you are looking at the company, you should look at it through a lens of what has been done in just the last 12 months, last 18 months to position us as we come out of COVID, which Tom and his team and others are doing a very good job of managing us through from a liquidity perspective. So I wanted to make that point really in response to Nick’s question about publisher disintermediation because it’s always there, but it’s been there for a long time. I would say that we are dealing with that. I’m not losing sleep over that the way I was even 12 months ago. We still keep our eye on it. It’s still a concern. It’s still a competitive threat, but we have come a long way in a lot of respects dealing with all those kind of fundamental issues.

Your last question comes from the line of Ryan Vaughan from Needham. Your line is open.

Hi, thank you. I will try to be quick here. Just a follow-up. It was encouraging to hear you have sufficient liquidity. You don’t need to raise capital. Just to follow it up on a question on a couple of callers ago. So can you just tell us what the revolver availability is today? And any sort of covenants that we need to be monitoring over the next few quarters? And then just the second part of that, the increase of the, call it, the $40 million swing you had mentioned, your loss of sales, totally understandable, but also you repurchased a bunch of that product that we should get back in 2021. Can you give us some sort of idea what that net working capital benefit looks like, $5 million, $20 million, just something along those lines? Thanks so much.

Yes. Ryan, this is Tom. So the ABL is in place, it matures in 2024, $400 million facility. It’s an asset-based lending facility. The covenants are more driven toward the inventory or the assets that are available for the lending. So that’s really always not like your typical cash flow facility where you have EBITDA and things of that you have to meet. That’s not the case here. It’s all based upon availability. And we probably have a slightly higher borrowing as we peak. We have always peaked in July and early August in terms of borrowings from where we were at year end, probably $30 million to $40 million higher than where we were at the $175 million level at this point in time, so approximately half the facility is still available for use. And my point about the working capital is we were geared up for these events in the spring and these graduations that didn’t take place in terms of our readiness and preparedness at the retail level. And these things for the most part didn’t get delayed, they were just really canceled. So assuming we cycle those next spring, which is really the point I was trying to make on the working capital. Assuming we cycle those next spring and then happen then we will have a net working capital benefit and it’s a little difficult to quantify at this point in time given the uncertainty that exists in the level, but that’s really all I was trying to point out is that not only did we miss the sales, but we were prepared for them and they just didn’t happen. So assuming those events cycle next year we will have a net working capital benefit.

There are no further questions at this time. I will turn the call over to Andy for closing remarks.

Great, thank you. And thank you all for joining us on today’s call. Please note that our next scheduled earnings release will be our fiscal 2021 first quarter release on or about September 4. We hope everyone remains healthy and safe. Operator, this will conclude today’s call.

This concludes today’s conference call. You may now disconnect.