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 2022 Fourth Quarter and Year-end Earnings Call. Joining us today are Mike Huseby, CEO; Tom Donohue, CFO; Jonathan Shar, Executive Vice President, BNED Retail and President, Barnes & Noble College; David Henderson, President of MBS; and David Nenke, President of DSS. Before we begin the call, I would like to remind you that the statements we make on today's call are covered by the safe harbor disclaimer contained in our press release and public documents. The contents of this call are 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 make forward-looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any forward-looking statements that may be made or discussed during the call. Please note that we will be referring to slides during Tom's financial review portion of the earnings call. For those of you joining via webcast, you should see the slides as part of the webcast. For those joining via phone, you can access the slides on our corporate website at investor.bned.com, under the Events and Presentations section. And now I'll turn the call over to Mike Huseby.

Thanks, Andy, and good morning, everyone. As we entered into fiscal 2022, we are relatively optimistic that high vaccination rates, coupled with strong vaccine efficacy, would help curb the spread of COVID and return most schools to a traditional on-campus environment for learning, social activities and events. Unfortunately, both a fall and spring semesters were disrupted by different variants of the virus. Further affecting our performance, higher education continued to experience enrolment declines. According to the National Student Clearinghouse Research Center, undergraduate enrolment declined 4.7% this spring as compared to a year ago. And even more startling the undergraduate student body is now 9.4%, or nearly 1.4 million students, smaller than before the pandemic. Further exacerbating these trends, based on a recent NACS Faculty Watch report, course material sales have also been diminished due to faculty assigning fewer course materials for their classes. On average, faculty adopted 4.1 materials for 3.8 courses versus 6.0 materials in 2020. Despite these headwinds, we are highly encouraged by the progress that we've made against our key strategic initiatives in fiscal '22 that include expanding the footprint of our inclusive access offerings, growing our general merchandise business through our partnership with Fanatics and Lids, and growing our subscriber base for our digital student solutions offerings. As we continue to focus on supporting student success via our institutional partnerships, we're constantly examining the best ways to meet students where they are on their academic journey. Our key initiatives are directly aligned with improving student outcomes through access, affordability and achievement, which is why they are resonating as strongly as they are in the marketplace. Additionally, First Day by Course and First Day Complete provides schools with a solution to reverse the long-term declines in course material sales. In fiscal '22, our inclusive access offerings contributed…

Thanks, Mike. And good morning, everyone. As Andy mentioned earlier, please note that I will be referring to slides in our financial review presentation, which are available on our corporate website. This morning, I'll start with a brief overview of our fiscal '22 results and then share insights on the transformation within our course material business and why we are so excited by the results we've experienced with our inclusive access offerings, First Day and First Day Complete. Before we dive into the financial review, I want to point out that we restated our fiscal year 2021 results by $8 million as we identified certain out-of-period adjustments related primarily to the recognition of an income tax benefit related to the recording of an additional deferred tax valuation allowance, totaling approximately $7.5 million and restructuring and other charges related to severance costs totaling approximately $0.5 million for the 13 and 52 weeks ended May 1, 2021. It is very important to note that this restatement did not impact any of our non-GAAP EBITDA figures we typically review or our net cash flows. Now let's begin the financial review. Our fiscal 2022 4th quarter and year-end periods consist of 13 weeks and 52 weeks, respectively, ended on April 30, 2022. All comparisons will be to the respective fiscal 2021 period, unless otherwise noted. Total sales for the quarter were $260.8 million compared with $222.8 million in the prior year. Sales benefited from the significant improvement in our Retail segment as to the prior year period. On a gross comparable store basis, retail sales increased 32.6% comprised of a 4% increase in course material sales and a 63.2% increase in our general merchandise business. Our textbook sales benefited from our rapidly growing First Day offerings which collectively grew over 150% to $35.1 million…

[Operator Instructions] Our first question today comes from Ryan MacDonald with Needham.

And I appreciate the additional color on the First Day and First Day Complete data as well. Maybe starting with that question around those product offerings. You reported $106 million of First Day Complete revenue and $128 million of this First Day Courseware. When you look at the opportunity to add incremental campus stores or universities over time, how much of that $128 million do you think can be converted to First Day Complete over time?

Yes. Ryan, it's Jonathan. Thanks for the question. We do have campuses that we convert to First Day Complete that had robust First Day by Course programs. But then we also had some that had no First Day at all. So I think we'll continue to see that trend up over time as we're scaling the number of implementations of First Day Complete which, for this fall, we have commitments for 112 stores and that represent -- approximately 547,000 in undergraduate enrolment. And so people continue to see that trend over time, but we're going to have stores that have first day by course that transition, and we'll see stores that have robust programs like we've seen in the past.

And then when you think about the variables that also go into sort of the first day complete revenue calculation, opt-in rates obviously sounding very strong. I think you said 98%. But what trends are you seeing in terms of, one, on the credit hour side for students; and then two, on pricing. And I think at the Analyst Day, you originally talked about around $25 per credit hour. I think we've seen some universities comment $20, maybe that's driven by the shift to digital. But I just would love your thoughts on what you're seeing in terms of that mix of price per credit hour and the number of credit hours students are taking.

Yes. In terms of the pricing, what we provided was illustrative, just to give direction at the time. And we do it on a like we do and how we support our institutions on a very one-to-one each institution is a little bit different. We actually price individually based on sort of the overall credit hour mix and weighted average of the book list. So it really does vary pretty widely. But I think that it's in line with our expectations and where we're at. And the pricing relates to also the cost. So -- those 2 things are in lockstep when we're looking at the modeling. So the pricing is certainly customized, but I think it's aligned with our expectations. And from a credit hour and overall credit hour standpoint, I think it's what we've seen that it's aligned with what we reported and what we're pulling from the national reporting on enrollments and the consistency with enrollments. And Ryan, the other thing on pricing, just -- we look at that annually with each of our partners to see what their book list looks like, what the pricing of the -- kind of the cost of the content is, what the mix is. So it can change and often does change each year for each individual partner because it is so customized. And we do a lot of work making sure that, that is the right price for that right student and the overall weighted average mix of the course list, the book list that faculty selects and that's per -- every year, that gets locked in and set. So it sort of adjusts with the adjusting both cost and mix of books that are used at an individual campus.

Yes, really appreciate the color, Jonathan. And then maybe just last one, Mike, for you. Maybe stepping back more broadly, I know a lot of the discussion and your focus on the investment community has been sort of this trajectory and working back towards prepandemic levels when you think about adjusted EBITDA. As you look into the fall and maybe into -- more broadly into fiscal '23, what would you say are sort of the gating factors to getting back towards those levels fully when you think about sort of the mix of what we're seeing more broadly in enrollments versus the supply chain headwinds that we're experiencing as well?

Yes, that's something we think about all the time. I think that Tom touched on it quite a bit in his comments. But in terms of getting back to pretty cold. If you look at the Investor Day presentation, I think the number you would land at is like $75 million to $80 million, something like that. One of the big factors in that is really the change in the wholesale EBITDA that's occurred because of lack of supply of used books also greater demand in digital, which is driving our first day business by wholesale for prospective purposes, they generated $35 million of adjusted EBITDA in fiscal 2019 as compared to $3.5 million in fiscal '22. So, if wholesale fiscal '23 adjusted EBITDA were comparable to what we generated in fiscal '19, you can see that in our outlook, we'd already be approaching those pre-COVID levels. So a lot of this has to do with when you're comparing to pre-COVID, a lot of it has to do with the wholesale drop. So, what that does is it means that -- a couple of things. First off, wholesale, we think we basically said in our outlook, I think that we think it's going to be close next year to where we are this year. We don't expect it to improve in essence, is what we've said. It puts more -- obviously more weighting on the improvement that we expect in our largest core business, the retail business, which is why we spent so much time talking about it today. and showing and now that we have in fiscal year '22, really, the first year of scale on our First Day Complete business, we can show the cohort analysis and compare it to the prior year, we can also show the…

Our next question comes from Alex Fuhrman with Craig-Hallum.

I wanted to unpack the guidance a little bit more. You've got First Day Complete starting to generate a pretty meaningful share of revenue now and growing very nicely. And it sounds like general merchandise is performing at record levels right now, given the Fanatics and Lids partnership. And yet we're still looking for EBITDA to be down pretty significantly from pre-COVID level. Can you talk about -- a little bit about kind of numerically bucket by bucket where that's coming from? Is there an expectation that enrollments are going to continue to be under pressure or at least not increase this year? Can you talk about your expectations for enrolment that's baked in there? And then can you try to size up for us a little bit the magnitude of the decline in wholesale in EBITDA? I mean, is that what's really driving the majority of the shortfall relative to pre-COVID levels?

I just tried to address that with the prior question and speaking to the decline in wholesale EBITDA which is really the last full year pre-pandemic is fiscal 2019 when wholesale generated and contributed $35 million of EBITDA to our consolidated number versus $3.5 million this year. So, you can do that math. That's a $32 million decline in wholesale EBITDA, and we're guiding to $30 million to $40 million. If we're fairly pass through at the same level, the wholesale EBITDA this year as we were in 2019, would essentially be at a pre-COVID level. Now we're not obviously counting on that, as we said in our -- Tom said in his comments, and we also said in the outlook. We expect wholesale not to improve significantly. We expect DSS to be pretty much where it was this year because we're continuing to invest in that business and grow our new institutional product and the product itself improve the product itself. So a lot of the growth we expect to come from retail -- in terms of the headwinds, we've tried to describe what the enrolment figures are the difference between pre-pandemic and even 2020, when I think I said that the number of students -- undergraduate students is down something like 9% -- 9.4%, I think I said. So, the beauty of First Day Complete is that it takes our sell-through, as Tom was demonstrating in the slides, in retail from something like 30% to what we think should be between 80% and 90%, and that's what we're seeing today. John and his team have put in some new thought process where we can manage the opt out of First Day Complete more ourselves than leaving it to the schools, which should help drive the opt out rate…

Okay. That's really helpful. And then if we could just touch on new business and new contract opportunities for new book stores. I mean how does that rank for you in terms of your priorities for capital and time compare that to the opportunity to keep growing First Day Complete and invest in the digital business? How much of a priority are going after new bookstore wins over the next few years?

And that's a really, really great question. I think that we're being very careful in how we allocate our capital. Many of the new stores that we're looking at go hand in glove with the First Day Complete strategy. If we're not considering as they go on for the complete the first year, if that makes sense, then in many cases, it's year 2. We're not deploying a lot of capital into new stores. We just opened 5 new stores in Notre Dame in March. And those capital costs were co-funded by our great partners at Fanatics and Lids. And other than that, we're not -- we have some maintenance capital and that type of thing. But because of the shift in our model, which is really focused on First Day Complete, from a Courseware perspective, and then the Fanatics Lids partnership from a GM perspective, we're being very careful how we allocate capital. We do want to allocate capital to DSS to keep that growing and competitive because -- that's important to our strategy, the bundling of our digital self-study suite of services into our First Day Complete offering. It's something that David and his team working with John and retail are very, very focused on. And we think the return on invested capital is there to warrant allocation of capital to DSS. But we're not interested in really adding a lot of new stores just to add new stores. In fact, we're pairing out stores, pruning stores so to speak, that we think should be on FTC that are not going there. And we'll probably see a big increase in that what I would call kind of the bottom part of our store portfolio as we head into the end of '23 and '24.

Yes. I mean, the only thing that I would add to that is that because of the product and the differentiated product offerings that we have through emblematic clothing and gifts and the enhanced product assortment and user experience, both in-store and online, through Lids and Fanatics as well as First Day Complete offerings that we have, there is significant demand for schools we don't serve to work with us. And so -- we have been very successful in transitioning those self-operated stores and stores operated by other vendors to us. I think it's the third year in a row of over $100 million in gross sales and new business wins. And while we're going to continue to work with campus, bring new campuses on. We're going to do it in a very digitally responsible way as Mike said, but there's still a lot of demand because of the differentiation in our product offering and the value we're adding. And especially for campuses that really want a partnership with us to have us, to work with us, to support their key goals and objectives and their key priorities which I think we've been able to demonstrate that we can do. So I think there's a lot of exciting new business to be had out there, and we're working on are schools, but just in a slightly different way.

[Operator Instructions] At this time, we have no further questions. So Andy, I'll hand back to you to conclude.

Great. Thanks, Emily, and thank you all for joining us on today's call and your continued interest in BNED. Please note our next scheduled financial release will be our fiscal 2023 first quarter earnings release in September. Have a good day, everyone.

Thank you for joining our call today. This concludes today's event, and you may now disconnect your lines.