Barnes & Noble Education, Inc. (BNED) Q3 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Barnes & Noble Education Earnings Call. At this time, for opening remarks and introductions, I would like to turn the call over to Andy Milevoj, Vice President, Corporate Finance and Investor Relations. Please go ahead.

Good morning, and welcome to our fiscal 2021 third quarter earnings call. Joining us today are Mike Huseby, CEO and Chairman; Tom Donohue, CFO; Jonathan Shar, Executive Vice President, BNED Retail and Client Solutions; Lisa Malat, President of Barnes Noble College; and David Henderson, President of MBS.

Thanks Andy, and thank you all for joining us this morning. Nearly one year ago today, colleges and universities nation-wide began closing their campuses due to the COVID-19 pandemic. Shortly after, we would close down our campus stores, protecting the safety and well being of our employees and our customers. Last March, none of us could have anticipated the year to come, nor the challenges we would face as this pandemic continued on. Many students assumed that though they would be finishing their spring term remotely, they would be back on campus by the summer of 2020. Now in the spring of 2021, many still have yet to return. The challenges of this past year required tremendous fortitude and adaptability from both us and our partners. It also provided a significant opportunity for BNED to showcase the value we provide to institutions. This past year, it became more apparent than ever that the solutions we offer can help institutions address challenges that have grown exponentially in the midst of a global pandemic, driving affordability, access and ROI for students. Further, our ability to customize these solutions to unique needs of each college and university has not only demonstrated our value, but also, what differentiates us in the marketplace. Highlighting the importance of equitable access, affordability and an improved student experience, our First Day and First Day Complete programs have grown significantly this fiscal year, and we see this growth continuing to rise rapidly as a value proposition and impact on student outcomes becomes even more relevant. To-date, we have agreements with 31 campus stores to support the BNC First Day Complete program in Fall Term 2021, representing over 160,000 in total undergraduate enrollments, which is up from 12 campus stores and 43,000 in total undergraduate enrollments in the fall term 2020.

Thanks, Mike. Please note that our fiscal 2021 third quarter ended on January 30, 2021 and consisted of 13 weeks. All comparisons will be to the prior year period, unless otherwise noted. Total sales for the quarter were $411.6 million, compared with $502.3 million in the prior year. This decrease of $90.7 million or 18.1% was comprised of a $70.3 million decrease from the Retail segment, a $27.5 million decrease from the Wholesale segment and a $0.8 million increase from the DSS segment. BNED's fiscal 2021 third quarter results were significantly impacted by the ongoing COVID-19 pandemic as many schools continue to adjust their learning model and significantly reduce their on-campus activities in response to the pandemic. While our textbook business continues to be fairly resilient in the current environment, reduced on-campus activities and social distancing protocols continue to significantly affect our general merchandise business. Retail comparable store sales declined 19.9% during the quarter, comprised of an 8.1% decline in textbook sales and a 46% decline in our general merchandise business. These declines were partially mitigated by BNC's rapidly growing First Day offerings where a student is charged for course materials by the institution through a fee or included in tuition. These sales grew 107% to $46.4 million during the quarter. Consistent with prior years, the Spring Rush period typically extends beyond the quarter due to later school openings and students buying course materials later in the semester. Factoring in the fiscal month of February, comparable store sales for the Retail segment decreased 26.7% on a year-to-date basis. Net sales for the Wholesale segment decreased $27.5 million or 41.1% to $39.5 million, primarily due to lower sales, especially at non-BNC bookstores, partially offset by lower returns and allowances. Additionally, results have been impacted by the significant reduction of on-campus textbook buyback opportunities due to COVID-19 safety protocols. We expect the lack of on-campus buyback programs during fiscal '21 to impact Wholesale's availability of used book inventory supply in fiscal '22. DSS sales grew $0.8 million or 12% to $7.2 million, benefiting from the growth in bartleby subscriptions. Bartleby subscriptions revenue increased 53% to $2.6 million, while Student Brands revenue decreased 3% to $4.6 million. The consolidated gross margin rate for the quarter was 17.2% compared to 23.6% in the prior year period.

First question comes from Ryan MacDonald. Please go ahead.

Great to see some of the progress on the digital initiatives, and I guess that's where I'll start. When we look at the opportunity for First Day and First Day Complete, great to see we're now up to 31 stores representing 160,000 potential students. Can you sort of explain and tell us how that rolled out to students? Do you expect as we get to fall '21 that all students or a vast majority of students will be able to take advantage of that or will this be a rolling approach with new incoming classes?

Ryan it's, yes Jonathan Shar. Thanks for the question. With the 31 campus stores where we had agreements reached, all of those campus stores are participating starting in the fall in First Day Complete. So it is not a rolling - sort of rolling launch. That is how course materials will be delivered to those students at those campuses starting in fall or some of those are continuing from faults from the 12 that we had in fall term 2020. So all of those campuses are participating, and as mentioned, we are continuing to work with a significant number of additional campuses to secure agreements to launch First Day Complete for fall term 2021 over the next 30 to 60 days.

Excellent. And then - and my follow-up question is really, just getting a sense of what you're hearing from your university partners as you progress through the spring? Obviously, a greater mix of maybe some on-campus - students being on-campus, but maybe not necessarily taking classes in-person as much as? So, what are you hearing in terms of potential for graduation ceremonies on-campus towards the later this spring and then expectations, I guess, as we start planning for fall 2021? Are you hearing more of a greater mix of universities willing to do more in-person learning? Thanks.

Yes, Ryan, it's Mike. I think that what we're hearing from campuses is for fall 2021 substantially more on-campus, in-person learning, but no doubt, they're going to continue to blend in based on what they've learned to the extent it's sufficient or maybe it's effect - more effective for certain classes or certain students that have requirements, more flexibility blend in virtual. In terms of graduation, I'll let Lisa - Lisa can handle that one.

Thanks Mike. Overall, I agree with Mike's assessment on the fall. Every day Ryan, we are getting good news and good feedback from our universities about their plans for - not just optimism, but their plans for reopening in a much more normalized rate for fall semester. Residents like having the majority of classes in-person. So that's good news. Universities right now are making their decisions on graduation and orientation. More and more schools are scheduling in-person orientations and bringing back student tours, which were really good to see. And for graduation, we're still seeing a mix, but even schools that are opting not to do in-person, vast majority are moving forward with virtual - graduations, which we're working to take full advantage of.

We have a question from Alex Fuhrman with Craig-Hallum Capital. Please go ahead.

Great, thanks very much for taking my question. I wanted to ask a little bit more about the general merchandise business and the partnership with Fanatics. I mean, you guys have always done a really good job with the emblematic apparel business, but Fanatics is possibly the best in the world at this? So what are your stores going to look like when students are back on campus in the fall semester that might be different than what they've seen in the past? And as you think about the next couple of years, how big could that business really get for you?

I'll answer in general and then Lisa can talk about what the stores are going to look like. We announced this partnership in December. So we're now in the process of implementing it with Fanatics and Lids, Lids is an affiliate of Fanatics. As you know, it has some real expertise in providing data analytics around trend and sales performance on licensees and product styles and that type of thing. They have 1,200 of their own stores and manage other stores, as we said in the script. But I think that - what's important to understand and what Fanatics and Lids both understand is that, we're really representing the brand of the schools. So the schools have a lot of input into what those stores look like, and they will have a lot of input as will our people into what the stores will sell and how they represent the brand, that the school wants to represent. What we're really leveraging here is we're taking advantage of our focus on understanding the schools in local, personalized marketing and relationships with the students. And we're taking advantage of Fanatics' expertise in e-commerce and technology as well as in marketing and in Lids in terms of their in-store expertise and their access to some of the licensees that we have. But incremental access to additional licensees, that both Fanatics and Lids had to expand the assortment and eventually, we have a go-to-market strategy also. I'll let Lisa talk about. That's an offense part of the strategy with this new partnership.

Great, thank you Mike. In terms of the stores, everything that Mike said is accurate in terms of we're really bringing together the best of both companies. Certainly, our deep understanding and knowledge of each of our individual campuses and what sells. And the intel, we have from our students and campus partners together with the really deep technology and data capabilities that the Fanatics Lids partnership is going to bring to the table. So in terms of how our stores are going to look, we're not expecting major wholesale changes, but certainly, we are going to grow to have an even sharper and more expanded product assortment that hopefully is going to continue to speak to our customers whether they are an incoming freshman or in a one back to campus for the big game. So that's really - how we look at the stores, especially for the fall. In terms of the go-to-market strategy, we’re getting a very, very good response from the market in terms of the power of this partnership, bringing together all the capabilities and the brand to Barnes & Noble College with Fanatics. Our sales organizations have been hurdling and identifying targets and really how we can start to paint a new North Star for the industry and help universities continue to promote their brand and really grow their revenue.

And then if you wouldn't mind, can you kind of tell us a little bit more about how fiscal 2022 could unfold? Obviously, the first couple of month or quarters - are going to be under significant COVID pressure, but it sounds like you have the confidence to say that you think fiscal 2022, is going to be EBITDA positive at this point? How profitable could it be? What are some of the things that could kind of determine how the year goes? I know you mentioned that textbook availability just from buybacks in the spring is going to have some impact in the fall. Can you kind of walk us through the different scenarios that could play out in the year ahead?

Well, this is Mike. I'll just talk in terms of general. First off, the reason we wanted to put some comments in the outlook regarding, obviously 2021 is continuing to be impacted. It's been a really, really tough year, but it's also been a year that - accelerated changes that allowed us to - and forced us in some ways, but allowed us to get our cost structure in a much more variable basis, and that will continue to benefit us in fiscal year 2022. But the things we're really counting on for fiscal year 2022 to get us to EBITDA positive. We're at this point very confident about it, is the vaccines and their impact on getting students back on campus, opening up sporting events, getting fans in the seats during game days and that type of things. As you can see from our results that, we've kind of held our own on the courseware side, where we've been hit very, very hard this past year on general merchandise. So, general merchandise turning around not just from the change in the on-campus population, but also everything that that brings with it, people coming et cetera. And increases in online sales as well for the emblematic clothing, and that's where Fanatics and Lids come into, is making this change now should really help us in concert with moving to our own e-commerce system, help to improve our e-commerce sales quite a bit. Because those patterns of buying are permanently changed, as we all know, and they're headed towards ever-increasing reliance on e-commerce or digital sales. So, the timing of the partnership really, I think kind of been better. We have the time now to implement it and get it up and running for many schools in the summer and then the rest of the schools in the fall. So we're doing that. It's important to understand we’re doing that rollout in concert with - the rollout of our new e-commerce system as well so that we have a. user experience that's fairly seamless. In addition to general merchandise, we're counting on and very confident about the growth of bartleby and its contribution financially. It's starting to become much more significant on a relative basis. We have a new leader in place that's going to help us get some place to write that, et cetera. But we have substantial momentum even in the spring over the fall in terms of the traffic and the subscribers. So we don't expect learning to go back to completely in-person. The virtual models and the hybrid models are going to continue and students are going to continue to want to take advantage of bartleby's anytime anywhere capabilities to help them with their homework and writing needs and the other needs that we're going to address to the evolution of the product that's rapidly going on. And obviously, as Jon talked about, First Day and First Day Complete and the momentum we have behind those is another important contributor to margin. Our focus is really on margin and cash flow. The Fanatics deal will result in more of an agency relationship in terms of us being commissioned on the sales. So we'll have to explain that as we get better visibility into the quarters when that starts to happen, but we expect growth in margin and cash flow as a result of that partnership. Bartleby and the new courseware delivery models we're putting in place, a lot of it is dependent upon. There is still some uncertainty about COVID protocols and what's going to happen in the fall. But right now we're - from what we're hearing and what we're seeing with the vaccines even on the variance we're very optimistic that the fall '21 is going to be, I won't say back to normal, which is what we've said, but very, very strong compared to what we saw this past fall. I’ll now ask either Jon or Lisa can - or Tom can hop in on that answer.

And to answer your question, Alex, about how high EBITDA could get, we're not going to give specific guidance on that. I mean, you can see where the losses are running for the nine months. And as we said, COVID could continue to add to that loss in the fourth quarter because it's abating, but it's not - the pattern has already been set for this fiscal year and this semester. But we did want to put it in context, that's a fairly significant - very significant recovery from where we were and a lot of that's due to the fact that we do have a cost structure that will sustain on a much more variable basis coupled with much higher expectations in terms of general merchandise and revenue and margins in bartleby.

And next question comes from Rory Wallace with Outerbridge Capital.

What a big announcements over the last three months, I guess, since the last call. So congrats on everything that you achieved for the shareholders and for the business. Mike, I was wondering if you could talk a little bit about David Nenke specifically. Just what he brings to the table. I know it's only his second day today. But just to the extent you can speak about why he is the guy? And also kind of what the long-term vision and opportunity is there for him to kind of take DSS to the next level?

Yes, Rory. Thanks. We're excited about having David join us generally. So we were fortunate we had a process that exposed us to a number of what I would call very strong candidates and David emerged as a very clear choice, our number one choice. And we had a lot of people, including some of our board members involved in the process of interacting with David during that process. In terms of answering some of the questions on vision and strategy and that type of thing, I mean, that's exactly why we have David. So he can help, take some time and see what we're doing and capitalize on the momentum that's already been achieved. And we'll have a lot more to report on, I guess, I would say vision and the strategic decisions as he gets in and understands the business and we all interact on what we want the strategy for bartleby to be in the future. What bets we want to place to want to do what we're doing now, some things we want to do differently. But David has got outstanding track record and it's very proven in terms of leading, and not just leading, but developing from scratch digital retail subscription-based businesses at Amazon. I think we put this out in the press release where we talked about David's background in developing the grocery business. And he did some other things there in terms of convincing the Amazon senior management to take on some of the competitors in terms of storage and photos and then the Explore business which he was running when he left Amazon. Talking to senior management of Amazon in the process, I can tell you that his - and also peers of his and also subordinates across the board has outstanding references. And he has finance background, but then we got into marketing and operations. He has proven himself across the board. And our key DSS leaders were also involved in talking to him during the process. So I'm very confident that he'd fit with our current team, which we have a great team that he is inheriting. He can also choose to supplement that team. But right now our team has been doing a great job. It's built a lot of momentum. And they got a chance to meet each other during the process, which is important I think and I think the chemistry was excellent. And so I think he'll hit the ground running. And I know he has already been working hard over the last couple of weeks to get up to speed. So he's going to be a great fit for us and we're very excited to have him lead that business.

Congrats on the hire and that all sounds great. I guess, moving to First Day and bartleby in terms of the financial contribution. As I think about the growth trajectory of those over the coming quarters, it seems like bartleby traffic continues to be very strong just from tracking that. And with the growth in First Day Complete, is it fair to say that we shouldn't at least expect that growth to slow down? I would imagine bartleby could actually start to show some acceleration on a year-over-year basis and potentially First Day too, but I just want to make sure that I'm thinking about that properly.

Yes. If your question - can you rephrase your question about growth and slowing down. I'm not sure - I mean, it sounds like you agree that the growth in bartleby will continue. Was your reflection more about First Day or kind of...

Yes. The way that I'm modeling it, it seems like the bartleby trajectory is on a traffic basis have been very, very strong. And as we start to cycle some of the comps from last year where you had reduced selling in-store, which was leading to just kind of a lower conversion rate on the gross additions. Is it fair to think that we might see bartleby revenue accelerate?

Well, as I just said, talking about fiscal year '22 without getting into specifics or guidance on bartleby, we're counting on bartleby continuing to grow and its relative contribution to margin will be higher than its relative contribution to revenue growth because it's such a high margin business, right? So yes, I think one of David's first jobs in terms of working with the team and setting strategy and confirming is to make sure that we have a product that will create a sustainable relationship with subscribers. It's a fairly high churn business because of the nature of the cohorts going to school, but there are ways to increase the relationship life, the LTV of the product, which our team is working on in terms of the features and functionalities its building into it, making it much more attractive to use over the course of a four year and beyond education and for continuous learning. But we want to make sure that the way we're marketing it, selling it and increasing usage of it importantly, we want usage of the product to go up, which will help with the churn and will also help with the LTV. Anyway, yes, we expect bartleby to go up in terms of increased revenues. We've said that, I think we've been on record for that for - since we started. And bartleby is evolving into being a much more competitive product versus some of the larger companies, which is important point to understand. And as the competitive nature of its product increases through the features and functions here being added, we would expect that to attract more customers from the competition to take market share. So - and as Jonathan said, First Day, First Day Complete, you can see First Day grew substantially 107% year-over-year. And that's important because that's digital-only. First Day like courses digital-only. And as there is more and more movement to digital, we don't want to forget about First Day, the product have it overshadowed by First Day Complete, although First Day Complete is digital and physical all in one solution and it's, from our perspective, kind of the panacea for students in terms of cost savings and accessibility and also to make life easier for the schools. But we expect both of those to continue to grow. And as Jonathan said, we're continuing to work with a substantial number of schools in our pipeline to implement First Day Complete.

Yes. And then following on that, I guess for you and Jon, with the enrollment being up the four times, it's great to see for complete through the fall. And I guess, when I think about the number of falls you're still juggling as far as potential wins in the next couple of months, is that a material number of schools and students so you could potentially still enroll in those programs?

So the answer is yes, but we're not going to project it. It's a difficult sales process during COVID in some respects, even though it's such an obvious - to the outside, it's such an obvious win, win, win, because of the benefits it brings to students and schools. But what you find in your learnings in terms of how you go through the sales process is that it's a big model change and many schools will expand the vote on the model change to a number of constituencies. So that - we're learning from that in terms of how we approach it and that type of thing. But the point is, it's a long - it's a fairly long sales cycle. Having said that, we've been through that sales cycle now for - with a large number of schools over the past year. And so we're confident that we're going to continue to grow that multiple substantially and probably even for the fall, but we can't say that with certainty yet. The 31 is signed agreements. We have other verbal commitments, but we're not counting those. Can't count those chickens until we really have a signature on the, and it's a metaphor, on the dotted line. So I'll let Jon embellish on that, but it seems we're be doing a great job on it. And very, very focused on making it easy for schools to switch by having tools in place like AIP and IAESTE download and all the other things we've talked about in prior calls.

Yes. Thanks, Mike. And Rory, as you pointed out, in terms of the impact from a student perspective, the floor is really four times growth year-over-year as we enter the fall. And we are working with many institutions that as Mike referenced, we don't have signed agreements, but we are moving forward and starting implementation. Many institutions have April Board of Trustees meetings where tuition and fees for the next academic year get approved and signed off on. So that's part of the cycle with some of the schools as long as just continuing to work with them on a fairly long sales cycle. But very optimistic that we will build on that four times multiple of growth for the fall and then beyond. The impact that this model can have on student outcomes and student academic success is really powerful and something that our clients are asking us to support more and more. And the more - sort of a more case studies we have and proof points of the impact of the model, the faster that will drive growth into this new course material delivery model.

Yes. Thanks a lot, Jon. And then one for Lisa on new business. Just in terms of the wins so far, I think it's $84 million net, up from $71 million I believe last quarter. And I'm just curious how exciting is it to have the Fan-Lids partnership in the mix as you compete on some of these other deals that are in play? And how are you thinking about the opportunity for new business once COVID normalizes here hopefully in F '22?

Yes. Well, I think that what Mike and Tom has been referencing about the accelerated need for change due to COVID is really helping us propel new businesses as schools just continue to recognize this is not something they can run on their own. As Jonathan inferred about, just the increasing importance for student outcomes in ROI, schools are just continuing to look for us, in particular, because of our ability to truly customize everything we do for our schools, nothing we do is cookie cutter. So that aligned with the new Fanatics relationship, we're hearing very, very good comments in the marketplace. And one of the reasons is just the ability to bring together different campus constituencies. So where there are relationships today with athletics, the ability to bring together all these different departments to really maximize not just the revenue from sales, but also the licensing revenue and our ability to really had a focused business because of the technology Fanatics is going to bring to the table as well as their data capabilities. So we think it's going to continue, Rory, and it's going to be an exciting selling season.

Yes. The other part of that is relationships, which is real key, is that Fanatics was already in the NCAA space in a fairly big way, especially with the larger Part 5 schools. And so they have some relationships mainly through the athletic department with some schools that we don't have, and we have relationships clearly that they don't have. So putting those together and leveraging each other's relationships and then also putting the power, as Lisa said, of the two relationships together, we can help form a bridge, so to speak, between athletics and the academic side for benefits that they can't get otherwise. It's a very, very powerful go-to-market strategy and we're seeing it's starting to pay some dividends already. We did see that in the third quarter actually in one specific proposal in January that we won. So it's very exciting offensively from a strategic perspective as well as there were some defensive elements which we discussed in the last, I think in the last call around Fanatics getting into this space in a big way.

Definitely. And then just a last question for Tom on - just a couple of modeling questions. So the expenses are normally down more - or this quarter they were down sequentially versus FQ2. And I guess, how much of that is just kind of bringing people back in preparation for a more normalized environment versus growth investments versus anything else that I might not be thinking about what are modeling expenses?

Yes. I think you're right, Rory. It's more of a seasonality. As we sit back here in early March and look back at the Spring Rush, I think - and we tried to say this in the prepared remarks that January was probably more a better month for the Spring Rush than necessarily February. So a lot of that payroll and the store level expenses were geared towards the activity we saw on our campuses in terms of students purchasing. So it's probably a little heavier in January than perhaps it should be, but that's just really us reacting to the needs of the retail footprint.

Okay. And then just a final one on the First Day, specifically First Day Complete and a rev rec around that. So you've been breaking out the First Day revenue every quarter, which has been extremely helpful I think to investors. But when I think about the next quarter and the number you'll end up reporting in the growth, is there anything to think about as far as when those deals are getting rev rec because it seems like that very high growth trajectory should definitely continue in your FQ4. I just want to make sure that I'm thinking about it right?

Are you referring to First Day or First Day Complete or both?

Well, I'm really referring to both, but also on Complete, I know that that's billed differently because it's obviously the system-wide sales as opposed to the more transactional First Day.

Yes. So typically the way we recognize the rev rec, Rory, is over the course of the semester for both products.

Okay. So there is nothing to think about as far as why growth wouldn't continue to be very strong in the next quarter?

I don't know that - I don't necessarily think the revenue recognition is tied to growth in that sense is what I think you're implying.

Yes. I was just wondering if you billed it all in one quarter, for example, because the semester can stretch over a couple of quarters. So I'm just wondering -

Yes. You got.

Yes. So it gets billed ratably or it gets billed all in one quarter?

It will get billed over the semester. So if the semester goes over two quarters and it's recognized throughout - for instance, if semester starts in January and ends in April, we'd billed through January through April and recognize it.

Got it. Okay. Thanks. Sorry if it's exceeding question. But thanks a lot and good luck guys. I really appreciate it.

Yes. Thanks, Rory.

And at this time, I will turn the call over to Mr. Milevoj.

Great. Thank you. And thank you all for joining us for today's call and your continued interest in BNED. Please note that our next call is scheduled to be held on or about July 1 to report our fourth quarter and year-end earnings. With that, we wish everybody a great day. Thank you.

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