Barnes & Noble Education Inc (BNED) 2016 Q1 法說會逐字稿

Good day and welcome to the Barnes & Noble Education first quarter 2016 earnings conference call. Today's conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Tom Donohue. Please go ahead.

Thank you. Good morning and welcome to Barnes & Noble Education's fiscal 2016 first quarter earnings call. Joining us today are Max Roberts, CEO; Patrick Maloney, President of Barnes & Noble College; Barry Brover, CFO; as well as other members of senior management.

Before we begin, I would remind you that this call is covered by the Safe Harbor disclaimer contained in our press release and public documents and is the property of Barnes & Noble Education. It is 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 may be discussed during this call.

At this time, I will turn the call over to Max Roberts.

Thanks, Tom, and good morning everyone. The Company has successfully completed the previously announced separation from Barnes & Noble, Inc. on August 2. We began trading as a separate public company on August 3. As an independent public company, we believe we now have the financial structure, operational platform and strategic vision to grow our business for our customers and shareholders. We continue to execute our core strategies where our primary business focus is to increase sales in our existing bookstores, increase market share by winning new accounts, grow our digital learning platform and pursue strategic opportunities through acquisitions and partnerships.

We are pleased with our performance in the first quarter, with sales increasing by 5.9% and our comparable sales increasing by 1.8%. In the fiscal first quarter, general merchandise sales increased by 7.3%. We continue to drive traffic to our stores and our e-commerce sites during the non-rush season. We provide our customers with exciting selections of emblematic clothing and gifts from vendors such as Under Armour, Nike and Adidas. First-quarter general merchandise sales benefited from a strong graduation season, including sales of regalia and diploma frames. We saw sales increase in our convenience, fresh foods and cafe businesses as we improved our assortment and introduced new, relevant products to our customers.

New business wins during the quarter continued to be strong, as we opened 21 new stores while closing only 9 stores, bringing our total store count to 736. These 21 new stores represent approximately $45 million of estimated annual sales. The 9 closures were primarily smaller and unprofitable stores and satellite locations near the main campus. In addition, we've signed contracts for another 7 new stores, with estimated annual sales of $10 million, and we expect these stores to open in fiscal 2016. This brings the total estimated annual sales for new stores in fiscal 2016 to $55 million.

We continue to develop Yuzu, our digital education platform. Our digital capabilities play an important role to our future growth and opportunities for two reasons. First, it is a key solution for prospective colleges and universities that seek to provide their faculty and students a richer and more dynamic educational content. Yuzu has been an important part of our success in winning new contracts. Second, it puts us in a position to be a leading provider of digital course materials to faculty and students as the marketplace accelerates in the delivery of digital content.

I would like to also take this time to welcome Jay Chakrapani, our new Chief Digital Officer. We recently hired Jay to continue to lead our digital platform and strategy. Jay brings a wealth of digital experience and capability from his previous employers, including McGraw-Hill and Intel. While at McGraw-Hill Education, Jay led their efforts in developing McGraw-Hill's Connect program, growing it from inception to hundreds of millions in annual revenue. This class platform supported over 3 million students a year, generating over 25 billion data points to feed personal learning experiences for students. We are excited that nearly 200,000 faculty are connected through our proprietary platform FacultyEnlight. FacultyEnlight allows faculty to research, discover and select the most affordable course materials for their students. We've experienced significant engagement, which has deepened our relationships with the faculty and the campuses we serve.

In addition, we continue to monetize our access to the 5 million students on our campuses by partnering with brands to reach the college demographic. These are exciting programs that offer great value to our students. For example, starting this past July and running through August, we partnered with Visa Checkout to bring their online checkout service to students nationwide, simplifying the purchasing process while offering students opportunity to save money on their textbooks and back-to-school purchases. Students are now returning to campus for the fall semester and our store teams could not be more excited and ready to serve the more than 5 million students and their faculty nationwide.

We are well-positioned, with a complete selection of print and digital course materials as well as everything students need for academic success. Our stores and e-commerce sites deliver convenience, choice and value, whether students want print or digital course materials, and for either sale or rent. Our digital marketing and promotional plans for the semester are in full gear. Our social hub events have kicked off with our new student VIP shopping event, with close to 400 campuses partipating. Our student booksellers are welcoming new customers and communicating our message of affordability and that the campus bookstore is a complete support system.

With that, I will turn it over to Barry Brover for our financial review.

Thank you, Max. This morning we released our first-quarter results for fiscal 2016. Please note that the first quarter ended on August 1, 2015 consisted of 13 weeks and is presented on a carve-out basis, since the Company was still part of Barnes & Noble, Inc. at quarter's end.

The SEC rules for carve-out financial statements differ in certain respects from the segment reporting requirements and accordingly these standalone carve-out financial statements that are being reported differ rom the segment reporting that is being included in the Barnes & Noble financial statements for the quarter ended August 1, 2015. Please note, all comparisons will be to the first quarter of fiscal 2015, which is also presented on a carve-out basis unless otherwise noted.

During the quarter, we identified that the long-term tax liability associated with the LIFO reserve was incorrectly deemed contributed to parent company capital as an intercompany liability, along with other tax liabilities assocated with our operations. This liability belongs to the Company. We believe it is remote that the long-term tax payables associated with the LIFO reserve will be payable in the foreseeable future. Accordingly, $58.3 million and $63.5 million were added to long-term liabilities and removed from parent company investment for the periods of August 2, 2014 and May 2, 2015 respectively. This correction, which we believe is not material, has no impact on pre-tax income, net income, earnings per share or the amounts reported in the statements of cash flow.

Total sales for the quarter were $239 million compared with $225.7 million from the prior year. The increase of $13.3 million or 5.9% was driven by sales from new stores and strong general merchandise sales in a non-rush quarter. The first quarter of our fiscal year typically has the lowest revenue of any of our quarters, due to the seasonality of the business. For the quarter, our general merchandise sales increased over the prior period by $6.9 million or 7.3%, pushing our comp store sales growth to 1.8% for the quarter.

Gross margin increased by $4.2 million to $51.5 million or 8.9%, 60 basis points as a percentage of sales for the quarter. The margin increase was primarily the result of a favorable sales mix, including a favorable mix of used textbook rentals and recognizing previously deferred higher-margin textbook rentals.

Selling and administrative expenses increased by $5.4 million or 6.7% to $86.7 million, 30 basis points as a percentage of sales. This increase was primarily due to higher store payroll and operating expenses, mostly in new stores, in this low-volume sales quarter. Yuzu expenses, including occupancy and selling and administrative expenses, were $6.7 million for the quarter, as compared to $6.1 million in the prior year. This increase is consistent with our previously provided guidance that Yuzu expenses would be approximately $2 million higher in fiscal 2016 compared with fiscal 2015.

As a result of these factors, our EDBITDA loss increased by $1.2 million to $35.2 million for the quarter compared to a loss of $34 million in the prior year. The effective tax rate for the first quarter was 44.2% compared with 43.6% in the prior year. The fiscal first-quarter net loss of $26.9 million or $0.65 per share compared with a net loss of $26.2 million or $0.71 per share in the prior year.

The balance sheet continues to be a source of strength, with no debt outstanding at the end of the quarter and $16 million of cash. On August 3, the Company entered into a five-year $400 million ABL credit facility with a group of lenders. This facility replaces the $1 billion credit facility that the Company had access to as part of Barnes & Noble, Inc.

Our business is subject to seasonal fluctuations and this is reflected in the balance sheet at quarter end. At the end of the first quarter, inventory and payables are typically at a peak for the year, as we are building inventory for the fall rush period.

CapEx for the first quarter was $11.8 million compared with $9.3 million in the prior year. The increase of $2.5 million was primarily due to an increase in the number of store renovations related to both new store contracts and renewals of existing stores. Currently our store count is 736, having opened 21 new stores while closing 9 in the quarter. We will be opening another 7 stores based upon the new contracts signed to date. Looking ahead further into fiscal 2016, we still expect comparable store sales to increase by approximately 1% and capital expenditures to be approximately $55 million, primarily for new and existing stores and systems.

With that, we will open the call for quarters. Operator, please provide the instructions for those interested in asking a question.

Thank you. (Operator Instructions). Alex Fuhrman, Craig-Hallum Capital Group.

Thank you for taking my question and congratulations on the spinout and a very nice quarter here. I wanted to ask about your outlook for the fall semester. I mean, it seems like general merchandise was a very strong-performing category for you here in the first quarter. Is that something you would expect to continue as you move more into your peak period throughout the year over the next couple of quarters? At this point, now that you have August and some of September under your belt, I was wondering if you could comment on how the key rush season went and if it's too soon to have a good sense of how your textbook sales will show up for the quarter?

Thank you, Alex. The general merchandise, we are extremely excited about our assortment and what is out there in the stores and we think it's a very important part of the business and sales continuing throughout the year. As far as the rush, we will not comment. It's early in the rush and we are making no comments as to where we are at right now.

Okay, thanks. Thinking about the school pipeline that you have coming, certainly if you look at it on a dollar basis of new business won, it seems like the pace of growth has accelerated here over the last couple of years. Can you comment a little bit on what is driving that? It seems like obviously there's a lot of schools out there that are still running their bookstores by themselves independently. Has something tipped the landscape where more and more of them are looking to partner with Barnes & Noble Education? I'm curious if maybe it's as Yuzu has maybe become a more relevant platform for you, is that something that is helping to open new discussions with schools? What could the outlook look like for the next couple of years in terms of adding new schools?

We feel very good about the pipeline. The things that have traditionally driven in recent years continue to drive the schools to outsourcing, which is the converstion to digital, the ability to -- as source of funding is challenged in higher ed, schools are looking for better opportunities, we come in and traditionally maximize the sales and give them a higher revenue stream as if they operated differently. Patrick Maloney, our President of Barnes & Noble College, is also here. I'll let him add to that, too.

The other major thing that happened over the last few years was the emergence of the rental business. An independent college, an institutional one doesn't really have a good program for that. So that, again, has led schools to look to outsource to us.

Great. That's very helpful, thank you. Lastly, if I could just ask about gross margin -- another strong quarter here in the July quarter on the gross margin line. It seems like that's being driven in large part by the shift towards general merchandise. Can you comment on how, if you were to see that same level of mix shift into general merchandise, is that about the extent that you think gross margin could rise for the balance of the year? I'd be curious to kind of where you could see gross margin shaking out over the next couple of years, given the pipeline of new product you have on the general merchandise side and the shift in the business towards rentals.

The improvement in the margin is a function of our sales mix, with the strong general merchandise sales to a large extent driven by our emblematic clothing and gift sales. In addition, our rental program and the strong rentals and specifially the youth rentals, which carries the highest margin of our rentals. Those two are the major contributing factors to the improvement in margin this year as well as what you've seen in the prior years.

That's very helpful. Thank you very much and good luck.

(Operator Instructions). Ethan Steinberg, SG Capital.

Hi. Thanks for taking the question. Just curious on the extra cost from the spinoff. Is there a way you can help us think about what that was in the quarter and then how to think about that for any subsequent quarters?

The cost as it relates to the spin has not been incurred. The financial statements that are presented are on a carve-out basis. To the extent the spin costs are material going forward, we will look and evaluate disclosing them in future releases.

Then can you help us think about just how the costs could look or what the costs could be from just being a separate public entity?

You know, I think the costs would be typical of what you would expect for a company of our size that is being spun and being operated as a separate public company.

Was that fully reflected in the quarter income statement?

The income statement was prepared on a carve-out basis, which takes into account an allocation of expenses from Barnes & Noble, Inc., the parent, and is not necessarily reflective of what the expenses would be on a standalone basis. You will see that the expenses that were allocated as part of the carve-out are greater than what was shown in the segment reporting.

I got it. That's what I'm really asking is, is the whatever's accrued in there on a carve-out basis pretty similar or going to be much -- will there be much of an added cost headwind from being public once you are fully standalone?

We will evaluate the reporting of that on a going-forward basis (multiple speakers).

Then the merchandise sales being up 7.3% sounded or looks great. I don't have what the trend on that had been. Had that been growing faster or slower than that? Can you just walk us back a couple of quarters?

The trend for the full year last fiscal year for general merchandise in our comps was plus 4.7%.

For the last 12 -- the trailing 12 months?

For the trailing 12 months, correct.

Got it. Okay. And I guess what Alex was asking makes sense to me, too. If that mix -- if that continues to grow a decent amount faster on top of rental income, or rental revenue growing faster, I assume that would be positive to that blended gross margin percentage.

Yes.

Yes, those are the two strongest margins.

Got it. And then, I'm also just curious on the 1% same-store sales guidance. Can you talk about what are some of the assumptions behind that?

We're not disclosing the individual assumptions behind that and (multiple speakers) on a going-forward basis, on a quarterly basis, as the sales are annualized.

Okay. Well, great. Thank you for taking the questions. Congrats on the carve-out.

Thank you very much.

Thank you.

(Operator Instructions). We have no further questions in queue. I would now like to turn the conference back over to Tom Donohue for any additional or closing remarks.

Thank you, and thank you for joining today's call. Please note that our next scheduled financial release for our fiscal 2016 second-quarter earnings will be on or around December 8. So thank you for joining and have a good day.

This does conclude today's conference call. Thank you all for your participation. You may now disconnect.