Q2 2024 Barnes & Noble Education Inc Earnings Call
Participants
Hunter Blankenbaker; VP, Corporate Communications & IR; Barnes & Noble Education, Inc.
Mike Huseby; CEO; Barnes & Noble Education, Inc.
Jonathan Shar; EVP, BNED Retail & President, Barnes & Noble College; Barnes & Noble Education, Inc.
Kevin Watson; EVP & CFO; Barnes & Noble Education, Inc.
Matt Shea; Analyst; Needham & Company, LLC
Alex Fuhrman; Analyst; Craig-Hallum Capital Group LLC
Presentation
Hunter Blankenbaker
Thanks, operator. Good afternoon, everyone, and welcome to our fiscal 2024 second quarter earnings call. Joining us today are Mike Huseby, Chief Executive Officer; Kevin Watson, Chief Financial Officer; and Jonathan Shar, Executive Vice President, BNED Retail and President, Barnes & Noble College.
As referenced in our second quarter slide presentation, which can be found on our Investor Relations website. I'd like to remind you that statements we make on today's call are covered by the Safe Harbor disclaimer contained in our press release and public documents. The content of this call are property of Barnes & Noble Education and are not for rebroadcast or use by any other party without prior written consent, 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 on 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. Company disclaims any obligation to update any forward looking statements may be made or discussed during this call. And now I'll turn the call over to Mike. Mike?
Mike Huseby
Thanks, Hunter. Good afternoon, everyone, and thank you for joining us today. It's my pleasure to provide our earnings commentary today together with Jonathan and to introduce Kevin Watson, our new CFO, who joined BNET in September and is already contributing significantly to be energy success. One year ago, we announced decisive actions to accelerate our transition to the First Day Complete model and also implemented significant cost reduction and operational efficiency initiatives to improve our profitability. We made substantial progress on these initiatives and our second quarter financial results are further proof points that our strategy is working.
Before we get into the details, I'll touch on the key highlights from the quarter. First, I'd like to really thank our teams for their commitment to our company's success and their continued efforts to deliver a great experience to our students, faculty institutions, ADMINISTRATION, parents, alumni and strategic partners. Our team's agility and resilience enabled us to not only deliver a successful fall rush in a very dynamic operating environment, but also to execute on our strategic initiatives over the last year. I'm truly grateful for their hard work and commitment.
Second, our innovative equitable access program per se simply continues to positively impact students, higher education and our business. In the second quarter, FTC. revenue increased 52% year over year to $136 million and the combined first day programs revenue reached $199 million. Our strategic transition to First State courseware business model has reached an inflection point First Day and First Day Complete revenues are approaching 50%. Of course, material revenue and revenue increases from first-day offerings exceeded the decrease and revenue from the traditional ala carte model by $30 million. On a year-to-date basis, this evolution to a subscription like B2B model significantly improves revenue revenue visibility which enables us to better align costs with revenue, improved inventory management and operating efficiency and to ultimately achieve much higher four-wall EBITDA per store.
Next, we've improved operational efficiency and maintained top-line growth. Despite operating in 128 fewer stores, we've achieved our plan to $30 million to $35 million of annualized cost savings. And as a result consolidated adjusted EBITDA increased 28% to $50.3 million in the second quarter.
Looking ahead, we've identified additional opportunities to improve efficiencies further and reduce operating expenses to continue improving our profitability and cash flow. Importantly, the actions we have taken and continue to take positions us to deliver more consistent, sustainable and profitable growth in the years ahead.
Shifting to our second quarter performance. Total revenue was $610.4 million, increased by $1.7 million or 0.3% compared to the prior year period the second quarter sales increase is primarily due to the growth of our first aid programs, which increased 39% to $199 million, partially offset by declines in the a-la-carte courseware sales, including lower sales from a smaller store footprint as we focus on the profitability of our stores.
Second quarter adjusted EBITDA from continuing operations of $50.3 million increased by $11.1 million or 28.3%, primarily driven by a $13 million decrease in S&A expenses compared to the prior year before turning the call over to Jonathan to discuss our retail segment results, I'll provide a brief comment on the strategic alternatives process. Our Board of Directors continues its ongoing review of a broad range of strategic alternatives available to the Company, including but not limited to, potential capital raises, asset divestitures, sales of business and pursuit of stand-alone growth plans. We're committed to executing on the best path forward the company and our stakeholders to maximize value and best position our business for the future. We won't be commenting further on this until the Board of Directors has concluded that disclosure is appropriate or required. Now I'll turn the call over to Joe.
Jonathan Shar
Thanks, Mike. Our team delivered a solid second quarter, driven by strong operating performance that enabled us to grow revenue while increasing retail adjusted EBITDA by 23%. Retail revenue growth was driven by coarse material comparable store sales growth of 5.8%. Our first state programs, which increased 39% to $199 million were the primary drivers of this growth. In particular, First Day Complete revenue increased by 52% to $136 million. First Day Complete not only grew in the quarter due to the year-over-year store count growth, but comp FTC. stores experienced 6.5% growth. In course, material sales due to increasing student participation rates, which highlights STC.s, positive impact on access affordability, convenience and academic success. Since we launch First Day Complete, we've transitioned to 157 campus stores store, innovative B2B course material model, which this past fall term encompassed enrollment of nearly 800,000 students while this is impressive growth, we believe we are just scratching the surface, our active dialogue with institutions and the FTC contracts already signed for spring term '24 and fiscal 2025 suggests that inclusive and equitable access is rapidly becoming the primary course material distribution model. Given the strength of our pipeline, we remain confident in our abilities to successfully accelerate the scaling of C and the long-term growth and sustainable financial benefits of the equitable access model.
Turning to general merchandise comparable store sales growth declined by 1.7%. The decrease was primarily due to declines in trade books and cafe and convenience items. These two categories were most impacted by the delayed inventory receipts we discussed with you last quarter, partially offsetting the decline was a 0.5% increase in emblematic sales during the quarter. The benefits from our Fanatics and Lids relationship were on full display at our schools for example, at the Ohio State University bookstore once began forming around the block at 4:30 AM to participate in an exclusive in-store launch of Ohio State branded lululemon merchandise. I continue to be amazed at how our teams provide our students, parents, faculty staff and alumni with unique products and experiences. It raised the bar in differentiating Barnes & Noble College run bookstores as we've shared with you before, our commitment to growing profitability is at the heart of our ability to serve our students and institutions in a manner that they deserve and expect it's been gratifying to see cost discipline, productivity and efficiency embedded into our culture while continuing to provide an outstanding experience for our campus partners. As a result, second quarter retail selling and administrative expenses decreased by $12.9 million year over year and 210 basis points as a percent of revenue to 12.9% from 15% adjusted EBITDA increased by $8.9 million. I'll now turn the call over to Kevin discuss our financial results in more detail.
Kevin Watson
Thanks, Jonathan, and good afternoon, everyone. It's great to be on a call with you today. It's been a exciting time since joining Barnes & Noble Education back in September. The momentum behind our shift to a more profitable and predictable FDC model, combined with our focus on operating efficiencies, presents a compelling opportunity to create a sustainable long-term value for our stakeholders. As such, I'm looking forward to contributing to the continued success of our transformation.
Turning to the fiscal 2024 second quarter results and related matters. Consolidated second quarter revenue from continuing operations of $610.4 million grew by [three tenths of a percent] or $1.7 million. Consolidated adjusted EBITDA grew by 28.3% or $11.1 million to $50.3 million. The combination of top line growth, improving operating efficiencies and further progress on our cost savings initiative actions drove a 180 basis point increase in EBITDA margin to 8.2% during the quarter, total retail segment revenue increased by $700,000 or one-tenth of a percent to $599.3 million driven by a 5.8% increase in comparable store force materials sales, offset by a 1.7% decline in comparable store general merchandise sales course material sales growth was due to increase in the First Day and First Day Complete revenues, which increased 39% to $199.2 million, with revenues from the subscription like programs approaching 50% of our coarse material revenues, car coarse material businesses becoming a much more stable and predictable business. Second quarter retail gross profit of $125.5 million decreased by $4 million or 3.1%. Retail gross margin of 20.9% decreased by 70 basis points from the prior year period. Retail gross sale margins decreased due to a decline in coarse materials gross margin due to higher markdowns, including markdowns related to closing of underperforming and unprofitable stores, as well as higher percentage, a lower margin digital course materials sales and lower commissions for our emblematic general merchandise. These increases were partially offset by lower contract costs as a result of this shift to digital and First Day models and the growth of higher margin First State complete revenue.
Retail EBITDA increased by $8.9 million to $48.3 million, due primarily to a $12.9 million year-over-year reduction in selling and administrative costs offset by a $4 million reduction in gross profit.
Moving on to wholesale, sales for the quarter were essentially flat at $21 million. Wholesale gross profit was $6.1 million or 29% of sales in the second quarter of fiscal 2024 compared to $5.5 million or 25.8% of sales in the second quarter of fiscal 2023. The increase in gross profit and gross margin rate was due primarily to lower markdowns and lower product costs, partially offset by an increase in the returns and allowances.
Wholesale selling and administrative expenses for the quarter decreased by 9.7% to $3.5 million. The decrease was primarily due to cost savings initiatives comprised of lower payroll and incentive plan compensation expense. The lower SG&A drove wholesale non-GAAP adjusted EBITDA to $2.6 million, an increase of $1 million.
Moving onto the balance sheet, our cash balance was $15 million at the end of the quarter with outstanding borrowings of $234 million as compared to borrowings of $215 million in the prior year period and $278 million in the first quarter, CapEx decreased by $5.3 million to $4 million from $19.3 million due primarily to continued focus to reduce spending and capture additional efficiencies.
Regarding guidance we are maintaining our fiscal 2024 adjusted EBITDA from continuing operations expectation of approximately $40 million. The year-over-year increase in consolidated adjusted EBITDA is expected to be driven by growth in the Company's retail segment, primarily due to growth in the Company's first stage programs and the impact of the cost reduction actions. The company has executed and expects to continue to implement. With that, I'll turn the call over to Mike for closing comments.
Mike Huseby
Thanks, Kevin. In closing, we had another solid quarter and we are making excellent progress against our strategic priorities. We're all extremely energized by what our team has accomplished in such a short period of time and even more so and where we are headed as a company, we are confident in our strategy, our highly capable and motivated team and our strong competitive position to continue the successful execution of our strategic focus on sustainable and profitable growth. Thank you for participating today. And now I'll turn the call over to the operator, so we can take your questions.
Question and Answer Session
Operator
(Operator Instructions) Ryan MacDonald, Needham & Co.
Matt Shea
Hey guys, this is Matt Shea on for Ryan. Thanks for taking the questions and congrats on the strong quarter here. A couple of questions from me maybe just start. So nice to see six additional wins for the spring term for the First Day Complete model. But thinking about the rest of the year, are there additional campuses in the pipeline for Spring '24? Or is there just not enough time left in the year for those deals to still close? And then thinking about the flip side of that question. And depending on the commitment timing, if not spring leasing incremental commitments for fall of 2024, how is that trending relative to your expectations?
Jonathan Shar
Yes. Thanks for the question. It's Jonathan. And I think we feel we're actually really excited about the number of transitions we have for spring. It's consistent with past trends and and then the pipeline. We're really encouraged, as we said in our remarks, by the pipeline of schools that have either already committed or are on the verge of committing for a fall 20 -- fall term '24 launch, which would be our fiscal '25. So the pipeline is robust. We're having hundreds of conversations with institutions and the value proposition of affordability, access, convenience which ultimately is leading to enhanced student outcomes, continues to resonate on campuses throughout the country. So incredibly excited about the pipeline and the accelerated growth of our first state complete program Okay, got it.
Matt Shea
That's helpful color. I mean, so it sounds like, you know what the conversations are within the remaining university partners. Conversations are trending well, but maybe for those that have not yet to make a decision. Is there any sense of mix you have for customers or university partners that are going to opt out or churn away from the program as you know, not at this point.
Jonathan Shar
I think all the conversations are really positive. And I would say it's not a matter of if it's really a matter of when and those are detailed discussions we have with each of our campus partners in terms of when we would launch the program when they communicate tuition and or fee changes on in within their academic calendars are each year and so on. So it's incredibly positive. We've had great momentum in terms of what we've done and the number of campuses that we're now running First Day Complete with and as I said before, we expect that to accelerate going forward.
Matt Shea
Okay. And then last question for me. Just thinking about some of the newer programs in cohorts this fall understanding it's no longer an opt-in model, but rather and include or opt-out model, you noted last quarter, it was too early to gauge those opt-out rates in the new cohort of schools and now that you're a little deeper into the semester, how have those opt-out rates trended and how do those kind of compare to your internal expectations? Thanks, guys.
Jonathan Shar
Yes, we refer to it as we did in our comments as a participation rate and the number of students that are participating and the participation rates are aligned with and even exceeding our expectations it at our schools this fall. And what we've seen is that and again, mentioned this not only do we see strong participation rates overall, but as schools participate in SDC year over year. Those participation rates of those schools are actually improving as students who are freshmen or sophomore experienced. Sec understand the convenience, the affordability aspect, the impact it has on their academic success and the rates continue to get better with each year for each of those cohorts, which is a really exciting development and even highlights more upside in the first day, complete model for us and our campus partners.
Matt Shea
Appreciate the color, and congrats again, guys.
Operator
Alex Fuhrman, Craig-Hallum Capital.
Alex Fuhrman
Hey, guys. Thanks for taking my question here. If I'm not mistaken, I believe you said that first a complete dollar revenue growth was more than enough to offset the decline that you saw in the quarter in dollars in a-la-carte course materials. I I if I'm not mistaken, I think this is the first time that you guys have said this on the does this more or less mean that you've turned a corner and from this point going forward, courseware material required materials revenue should be growing?
Mike Huseby
Yes, Alex, it's Mike. Exactly right that some of the numbers I cited were year to date, some decreases in the First Day and First Day Complete combined program revenues versus the decline, if you had if you look at Hawaiian and access and think about that on a current, we have crossed that line now, whereas the model change it has inflected at the top line and that top line inflection of reversing the trend of years and years of courseware declines, although we've been able to post some some courseware growth because the First Day Complete fits very clear now that with the acceptance by the market of the equitable access, inclusive access models, that when you combine those together that we're reversing that trend of courseware sales declines from a-la-carte kind of a traditional a-la-carte model.
That is huge. And it's clear evidence that the strategy, the right strategy is working and the other benefit is it's a much more predictable revenue stream. So that allows us to rightsize our cost structure and our CapEx along with more certainty in advance as we approach each business cycle.
Alex Fuhrman
Okay. That's really helpful. Thank you for that. And certainly sounds like a big milestone to have reached that point. So congratulations to you and the whole team that I know has been working on that for years to get to that moment here on the certainly understand that having more predictable and recurring revenue, should it should help you on the cost side.
And I did want to just ask you about the comment in the press release. I guess given the nature of how some of these early deals were struck, it sounds like you're not actually collecting any cash until after the drop add dates. Can you just talk to us about that dynamic a little bit more? Does it perhaps counterintuitively mean that you might actually need a larger credit facility over time as First Day Complete becomes a bigger share of revenue and more of the cash collection is deferred to farther into the semester?
Mike Huseby
Yeah I think it speaks to the size of the credit facilities and working capital timing on issue that we've improved a lot in terms of our ability to collect receivables much more quickly on under the under the old traditional model, you're collecting at the point of sale at the cash register from students, but you really couldn't predict what that was going to be when you have a contract and in advance, you have a fairly tight range of being able to forecast what the what the take rates are, what the participation rates are, I should say, you know what the price per credit hour is, what becomes much more predictable.
And I guess the other thing that I would say about the transition and working capital is that, um, you know, we're really transitioning the company to a B2B revenue model as opposed to B2C, and that's what the first day First Day Complete really is. So it really lines up the financial model we have with the operating model we have we're a contract service provider where our real strength is the relationships and the contracts with us, exclusivity provisions that we enter into with the schools.
And so you're putting that financial model on a more of a B2B basis really makes sense because we're dealing with the school of business basis and structuring the contracts and transferring that model to more of a value school we collect from you. And I know they can see the benefit of it, we can see the benefit of it, and it becomes much more of a joint partnership working to optimize. Of course, we're a delivery model.
Alex Fuhrman
Okay. That's really helpful, guys. Thank you very much.
Operator
Ladies and gentlemen, that concludes today's conference call. Thank you all for joining, and you may now disconnect.
