Barnes & Noble Education Inc (BNED) 2016 Q4 法說會逐字稿

Good day and welcome to the Barnes & Noble Education fourth-quarter 2016 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Thomas Donohue. Please go ahead, sir.

Good morning and welcome to our fourth-quarter and full FY16 earnings call. Joining us today are Max Roberts, CEO; Patrick Maloney, President of Barnes & Noble College; Barry Brover, CFO; and Kanuj Malhotra, Chief Operating Officer Digital Education, as well as other members of our senior management team.

Before we begin, I would 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 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 statement that may be made or discussed during this call.

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

Good morning and thank you for joining us today. As we reported this morning, our fourth-quarter sales were approximately $295 million, an increase of almost $21 million or 7.6% over the prior period, and a net loss of $2.8 million. Our fourth-quarter adjusted EBITDA was $19 million, an increase of $5.9 million over the prior year. For FY16, sales were in excess of $1.8 billion, representing 2% growth, and adjusted EBITDA was $80.5 million.

We made excellent progress in FY16. We signed $64 million of new business from 39 new stores, bringing our total store locations to 751. We have continued this momentum into the FY17 and the current pipeline for new business remains strong.

In FY17 we've been awarded a large amount of new business in the first 60 days of this year and expect to open 32 new stores, representing approximately an additional $110 million of new business. These new accounts include universities such as Georgetown, UConn, UNC Chapel Hill, and they represent a record season for new store contracts awarded.

Overall, higher education is extremely focused on increasing student recruitment, retention, success, and outcomes. As a result, colleges and universities are transforming their social and academic experiences. This is more than just replacing a portion of their physical course materials with digital textbooks.

Schools need, expect and require complete solutions that will empower their students and faculty and drive success in and outside of the classroom. Our acquisition of LoudCloud, together with our 751 stores, puts us in a unique position to help in this transformation by providing integrated solutions with print and digital products to the faculty, students, and schools we serve.

Sales and rental of printed textbooks will remain a core driver of revenue for us. Printed textbooks are still the format of choice for most students, and we continue to look for ways to increase the profitability of our textbook business. As our new business success reflects, the pipeline for our services remains strong as colleges and universities continue to look for ways to manage the complexities of the course materials and to also improve services.

To complement our print book offering, our digital platform, which is significantly enhanced by our recent acquisition of LoudCloud, will provide us tools to compete effectively for digital courseware, OER content, and services sales. With LoudCloud we can provide personalized education through a cloud-based, software-as-a-service platform that enables educators to monitor and improve student success.

Given the strength of our existing relationships with over 500 schools, 245,000 faculty, and more than 5 million students across 751 locations, we can move quickly and effectively to scale our business in this very fragmented market. We now have significant opportunity to deepen our relationships by leveraging the assessment and analytical capabilities that LoudCloud provides.

Importantly, our platform also provides us flexibility to adjust and grow our digital offering in an efficient, low-cost way, to complement our printed textbook sales and rental business. For example, we transitioned the Yuzu digital platform to VitalSource, in order to reduce our digital expenditures, while at the same time providing students an improved e-reading experience. Faculty Enlight, which is another important and growing service we offer, is now being used by over 245,000 faculty to more effectively search and adopt digital content.

Our ability to partner with schools to support and promote their brand strengthens and deepens our relationships with administration, faculty, alumni, parents and students. As part of these partnerships, we created a school clothing and gift website called True Spirit. The True Spirit website had been implemented for 20 schools to provide an alternative for fans and alumni to shop online. These sites extend our reach directly to parents, alumni, and school fanatics, and create additional sales, branding, and marketing opportunities for us and our partners.

Last week we announced the acquisition o Promoversity, which is a custom promotional merchandise supplier and e-commerce storefront solution. This acquisition allows us to better customize our e-commerce solutions to drive increased demand and sales and more effectively promote our partners' individual brands. We bought Promoversity for approximately $2 million, a portion of which is based on an earnout. The company has a modest amount of revenue and EBITDA.

In addition, we are effectively increasing traffic and time spent in our stores by broadening our cafe offering. At the end of this year we operated 80 cafes and 18 standalone convenience stores. Our initiatives to build a general merchandise category in-store and online through school branded e-commerce sites, as well as on-campus at sporting events and other events, have been a source of growth we expect to continue.

Our comparable sales for the quarter increased 4.5%. Our strong fourth-quarter comparable sales increase includes the result of the later spring rush sales. And spring rush sales above textbooks and general merchandise extended into the fourth quarter.

Comparable sales for the full year declined by $31.7 million or 1.9%, which is in line with our guidance of a decline of 2%. It?s widely publicized, we're continuing to see declines in community college enrollments with approximately 24% of our sales coming from community colleges. This group represents the majority of the comparable sales decline for the year. Comparable store sales excluding community colleges decreased 0.3% for the full fiscal year or $3 million below last year.

We believe the enrollments for two-year community colleges are counter-cyclical to the employment outlook. While long-term growth projections for higher education predict enrollments increasing to 23.8 million students by 2023, that's an increase of over 2 million students from today. We believe there will be short-term fluctuations and the enrollments at two-year community colleges may continue to decrease for the next 12 to 24 months.

For the full year our textbook sales decreased 3.8% on a comparable basis, impacted by community college enrollment, while our general merchandise sales increased by 2.6%, driven by our sales of emblematic clothing and gifts, as well as our increased sales in graduation products.

As we reflect on FY16, we've made solid progress in many areas as we have executed on our standalone strategy, increased sales by 2%, and continued to sign new business and increase market share. In response to the impacts of lower community college enrollments on our business, we're taking action in FY17 to improve our sales results.

Our key strategies to grow sales are increase the sales of publisher-hosted content in our stores and on our website to gain a greater share of this growing market; grow our digital sales and margins from the sale of digital content and services through our LoudCloud platform; improve our competitive response in our stores by accelerating our online marketplace programs and competitive pricing; and, finally, continue to creatively adjust our general merchandise assortments to meet the ever-changing needs of our customers. As these initiatives begin to take hold, we expect total sales for FY17 to grow by 2% to 4% and for comparable store sales in FY17 to be approximately flat to 2% lower than FY16.

We are also extremely focused on expense management. As Barry will detail in a few minutes, we've made progress in the fourth quarter of 2016 and will continue to drive efficiencies at the individual store level, as well as our corporate offices as we look to tailor our expense structure to respond to our revenue outlook. For FY17, we expect our adjusted EBITDA to increase by approximately 12% with capital expenditures of approximately $50 million.

With that, I would like to turn it over to Barry Brover for the financial review.

Thank you, Max. And good morning. Please note in my remarks this morning all comparisons will be to the fourth quarter of FY15, unless otherwise noted.

Total sales for the quarter were $294.8 million, an increase of $20.8 million or 7.6%. Total sales for the full fiscal year were $1.81 billion, compared with $1.77 billion from the prior fiscal year, an increase of $35 million or 2%. This increase is reflective of $77 million of sales from new stores, partially offset by closed stores of $9.4 million, and a comparable store sales decline of $31.7 million. As Max said, comparable store sales increased 4.5% for the quarter and decreased 1.9% for the fiscal year.

For the quarter textbook revenue increased $5.4 million in comparable stores, primarily due to the later spring rushes. For the full year, comparable textbook sales decreased 3.8% or $43.9 million.

For the quarter, our general merchandise sales in comparable stores increased over the prior period by $3.5 million or 2.9%. Including new stores, our general merchandise sales for the quarter were $125 million and are $541 million for the full fiscal year. They continue to be an increasing percentage of our sales and generate high gross margins.

Our rental income for the quarter was $75 million, relatively flat with the prior year. For the full year, rental income was $228.4 million, again, relatively flat when compared with the prior fiscal year. Rental income continues to be a very important part of our value proposition to our students and contributes high margins that continue to increase. We continue to maintain our strong list of approximately 80% of course- required titles available for rent at competitive pricing, and a large percentage of our rentals are used textbooks, which generates our highest margins as many of these books were also previously rented.

Gross margin for the quarter was $106 million, an increase of $4.9 million or 4.9% due to higher sales. The gross margin was 36%, down 90 basis points from the prior year. The gross margin for the full year was 25.1%, up 10 basis points from the prior year. The improved textbook margins from textbooks sold and rented, along with a favorable sales mix of selling more higher-margin general merchandise, were partially offset by higher costs related to our college and university contracts.

Selling and administrative expenses increased $0.7 million or 0.8% to $88.6 million for the fourth quarter. For the fourth quarter, selling and administrative expenses were 30.1% of sales compared with 32.1% of sales in the prior-year period. In addition to benefiting from the sales increase, our continued focus on expense management resulted in the improved expense leverage.

For the full fiscal year, selling and administrative expenses increased $15.7 million, 4.4%, to $375.2 million. The increase was due to higher store payroll and operating expenses in net new stores of $8.8 million; higher payroll and operating expenses in comparable stores of $2.1 million; $5 million of corporate, payroll and infrastructure costs, including standalone public Company costs. In addition, we incurred $2.4 million in transaction costs related to business development including the recently completed acquisitions.

Digital expenses, including Yuzu, and expenses associated with LoudCloud, included in occupancy and selling and administrative expenses, were $4.1 million for the quarter, as compared to $7 million in the prior-year period. The $2.9 million reduction is the result of the digital restructuring and lower cost structure associated with the digital transformation previously discussed. This brings the total digital spend on a year-to-date basis to $24 million, a $2.2 million decrease over the prior-year period.

During the fourth quarter we recorded restructuring costs of $8.3 million related to reduction in staff and closing of our offices in Mountain View, California and Redmond, Washington. The full-year restructuring costs and impairment charges are $8.8 million and $12 million, respectively, related to the digital restructuring previously disclosed. The cash impact of these charges is approximately $5.1 million.

We would expect to incur an additional $2 million in the first quarter of FY17 related to the cost of severance, retention, and other restructuring costs, including facility exit costs in California and Washington. We had previously indicated that the total restructuring costs spread over the fourth quarter of 2016 and the first quarter of 2017 would be $8 million to $10 million. We now expect this amount to total approximately $11 million and to be completed in the first quarter of 2017.

Our adjusted EBITDA was $19 million for the quarter, an increase of $5.9 million compared to the prior year. For the full year, adjusted EBITDA was $80.5 million, a decrease of $3.5 million from the prior year.

The effective tax rate for the fiscal fourth quarter was 41.9%, compared with 278% in the prior year. The current period reflects the impact of federal and state income taxes on income from operations, impacted by the effect of certain non-deductible expenses including the impairment charges noted earlier.

Fourth-quarter net loss was $2.8 million or $0.06 per diluted share, compared with a net loss of $0.3 million or $0.01 per diluted share in the prior-year period. Adjusted earnings was $3.3 million compared to a net loss of $0.3 million in the prior-year period.

Full-year net income was $0.1 million or $0.00 per diluted share, compared with $19.1 million or $0.33 per diluted share in the prior fiscal year. Adjusted earnings was $15.5 million compared with $19.1 million in the prior fiscal year.

The current year's fiscal quarter has 47.2 million diluted shares outstanding, while the prior year had 39.9 million diluted shares outstanding. The current period reflects the dilution of the previously disclosed Series J preferred shares converted at Barnes & Noble, Inc. in July 2015, prior to the spin, partially offset by the share repurchase program that was approved by the Board of Directors in December 2015.

We repurchased 865,427 shares in the fourth quarter for approximately $8.5 million, and for the full fiscal year we repurchased 1,715,269 shares for $16.6 million. Our balance sheet continues to be strong with no debt outstanding and $29 million of cash at the end of the fiscal year. The previously reported prior year cash balance was decreased by $14.9 million as a result of an immaterial balance sheet correction which decreased both cash and accounts payable in the prior fiscal year.

The decrease in FY16 cash as compared with the revised prior-year cash amount is a result of inter-Company funding that occurred from our former parent from July 2015 to the date of the spin, stock repurchases, and the LoudCloud acquisition. For the full fiscal year, cash flow from operations was $82.8 million, a $65.1 million increase as compared to the prior year, benefiting from the timing of inter-Company funding from Barnes & Noble, Inc. prior to the spin and changes in deferred taxes.

During the quarter we did not borrow under our credit facility. Merchandise inventories increased by $15 million as compared to the prior year, mostly attributable to new stores. After the spring rush selling season was completed and reflective in our year-end inventory results, the unsold returnable new and used inventory was returned to the publishers or distributors.

Our accounts payable decreased by $3 million from $155 million to $152 million. Capital expenditures for the fourth quarter were $13.1 million compared with $13.3 million in the prior-year period, and on a full-year basis were $50.8 million, compared with $48.5 million last year.

Turning to FY17, currently, based upon contracts signed to date, we expect to open 32 stores in 2017 while closing 12 stores. Full-year 2017 to date signings, net of closings, is approximately $86 million in sales. Based upon the store opening dates, we would expect to realize approximately $70 million of sales during FY17.

For FY17, we expect revenue to grow at 2% to 4%, while comp store sales to be flat to down 2%. We expect adjusted EBITDA to increase by approximately 12%. In addition, capital expenditures will be approximately $50 million for the fiscal year.

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

(Operator Instructions)

We'll take our first question from Mark Rosenkranz with Craig-Hallum Capital Group.

Great. Thanks for taking my questions and congrats on a really nice fourth-quarter and full-year 2016. I just want to start off talking about the store openings. You say you're opening 32 and closing 12 on the year. What kind of sense are we getting in terms of timing on those? Is that more first-half weighted? Could you just discuss a little more on the timing of those stores?

The vast majority of the stores that -- the 32 stores, would be opened prior to the fiscal rush, so we will get a large percentage of the annual sales. And the 12 closings, a number of which, as you've heard in the past, are primarily satellites and remote locations, those closings will happen, again, prior to the fall rush, or as we speak.

We've had a great year. The schools are seeing the innovative solutions for the condition for the stores. They're seeing different products and opportunities they have with Promoversity's True Spirit, the Glossary, to bring a localized event to their campus. And it's been one of our best years ever.

Great. Thanks. That's helpful. Switching gears, talking about the guidance, the 2% to 4% sales growth and the comp growth of down 2% to flat, could you discuss a little more what kind of assumptions you make in that? You mentioned the community colleges, you're seeing a similar environment for the next 12 to 24 months. How about four-year? Could you maybe just talk about the kind of assumptions going into those guidance terms?

We haven't provided guidance overall by type of school, but as Max alluded to in his remarks, we would expect some volatility and continued softness in enrollment in community colleges. And we will continue to drive and look for sales opportunities to grow in the sector of schools outside of community colleges.

We saw last year the small amount of decrease that we had in the other schools. Overall, the significance was in the community colleges. We have plans to grow our sales. We believe the on-publisher platform digital content will provide us a lift in sales.

We see services that we can offer through LoudCloud, but, at the same time, provide new accounts and new business on the top-line basis. But we are managing the business on an expense basis to be prepared for the community college enrollments. And we overall believe that we'll have a lift in EBITDA and continue to manage the business around this one- to two-year circumstance.

Okay. Great. Last question from me, I was wondering if you could just talk a little more about the Promoversity. It seems like it's a natural extension of the business. How wide-ranging will that be? Will that be in most stores? Could you just discuss a little more about what you saw there and what opportunities you see?

First of all, one of the reasons we've had a great year is because we operate the business on a local campus basis. We build a brand at the universities that we serve, and we create an affinity for that school through events and also through services and product that we offer.

Promoversity is perfect. It builds the school's brand. It gives the school the ability to have a localized opportunity for promotional merchandise. And, also, it ties very well in with our True Spirit which continues to build the brand with alumni and athletics.

It's important to note that Promoversity has been a partner of ours for several years. It's a very well-known company to us. It operates on most of our campuses today, providing that customized logo material for different clubs and societies on the campuses that we serve.

And by acquiring them we're going to be able to really ramp up their ability to supply all of our campuses through promoting -- the type of promoting their services to all of our schools that we serve. They're currently on 200 campuses (inaudible) about.

Okay. Great. Thanks for taking my questions and congrats on a really nice quarter and year.

We'll take our next question from Greg Pendy with Sidoti.

Hey, guys, thanks for taking my call. Just wondering, can you give a little bit of color, maybe I missed it, but on the price matching strategy that you guys pilot tested. We learned about it last quarter. I think you rolled it out on about 11% of the campuses and you mentioned that you're going to take measured approach. Any color on how that's been going and how we should think about that over next year?

We were on 90 campuses and rolling out to 400. I'll let Patrick talk a little about the mechanics of it.

It's too early to measure it. We're very early into the year. Some of the schools have become increasingly a smaller part of our annual sales. But the program is up in our stores -- most of our stores, and we will be actively matching Amazon and BarnesandNoble.com in like product in our stores.

From our test of the 90 schools, we are looking to have positive results and increases in margin and unit sales over the prior year in stores that we're promoting this in. It really gives our customers the confidence to go ahead and pick up the book. The price match is good through the first week of classes.

So, all the books that we'll be taking orders for through our websites over the summer months, students can shop with us with confidence, knowing that if they come in the first week of school and pick up their order and they can find a better price on Amazon.com from their retail site. This does not pertain into the marketplace pricing that both BarnesandNoble.com and Amazon operate. This is from product that is sold by and shipped from Amazon or BarnesandNoble.com.

A lot of the marketplace is previous editions and very deeply discounted. We're not matching it. And our test results were we lifted overall sales volume in the stores that we tested it in and improving gross margin dollars. That's why we continue to roll it out. We will watch it very, very closely to make sure those two things continue to occur.

Okay. Great. That's helpful. And then one last question. Can you just give us a little color on LoudCloud and what the opportunities that might be? I think it's been mentioned that maybe in the K through 12 and also in the for-profit colleges, how that looks. Is that something that we could think about in the next year or two or is that further down the road?

I'll let Kanuj talk a little bit about the roll out and the opportunities. But, first of all, it has been very, very important in our new account acquisition strategy this year. For example, we have the community college at Ocean County, New Jersey. That was very important in their decision to go with us.

We see it as almost table stakes in operating college book stores, and that was a lot of the rationale behind the acquisition. Schools are looking for solutions and recruitment, retainment -- and retention and outcomes of students, and that platform provides that, and that was part of the rationale.

Our primary focus is to introduce it to our existing customers as well as match that in new account acquisitions. Primarily our focus is on higher ed. Opportunistically and selectively we are in continuing discussions with a lot of the for-profit sector. Especially in the for-profits, retention is a key driver of profitability and our analytic solution lays up well against that need.

K-12 is more opportunistic by nature, but I think there's so much opportunity in our existing footprint and other schools that we don't serve in higher ed, and that's where we're focusing most of our time. We spent a lot of time introducing it to our existing accounts and rolling it through systematically all our regions and territories.

Okay. Great. That's helpful. Thank you.

(Operator Instructions)

It appears there are no further questions at this time. Mr. Donahue, I'd like to turn the conference back over to you for any additional closing remarks.

Thank you. And thank you for joining today's call. Please note that our next scheduled financial release will be our FY17 first-quarter earnings call on or about September 8. Thank you and have a good day.

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