Barnes & Noble Education, Inc. (BNED) is a leading provider of educational products and services, operating 1,272 college, university, and K-12 school bookstores across the United States. The company has a rich history of innovation, serving as a trusted partner to academic institutions and delivering essential educational content, tools, and general merchandise to millions of students.

In the fiscal year ended April 29, 2023, BNED reported annual revenue of $1,567,135,000 and a net loss of $66,756,000. The company's annual operating cash flow was -$5,122,000, and its annual free cash flow was -$19,192,000. These financial results reflect the challenges faced by the higher education industry, as well as BNED's strategic initiatives to adapt to the evolving market landscape.

Business Overview

BNED operates through two primary segments: Retail and Wholesale. The Retail segment manages the company's physical and virtual bookstores, offering a wide range of products and services, including course materials, general merchandise, and digital content. The Wholesale segment is one of the largest textbook wholesalers in the country, centrally sourcing and distributing new and used textbooks to physical and virtual bookstores.

One of BNED's key strategic priorities is the expansion of its innovative BNC First Day® equitable and inclusive access programs, which provide faculty-required course materials to students on or before the first day of class at below-market rates. These programs, consisting of First Day Complete and First Day, have been instrumental in reversing the historical trend of declining course material revenues, as the growth of these offerings offsets declines in traditional à la carte courseware sales.

During the second quarter of fiscal 2024, BNED's First Day Complete revenue increased by 52% year-over-year to $136 million, while the combined First Day programs revenue reached $199 million, accounting for nearly 50% of the company's course material revenue. This shift towards a more predictable, subscription-like business model has enabled BNED to better align its cost structure and improve operational efficiency.

Retail Segment Performance

In the second quarter of fiscal 2024, the Retail segment reported revenue of $599.3 million, a 0.1% increase compared to the prior-year period. This growth was driven by a 5.8% increase in comparable store course material sales, primarily due to the strong performance of the First Day programs, which offset a 1.7% decline in comparable store general merchandise sales.

Retail gross profit for the quarter was $125.5 million, a decrease of $4 million or 3.1% year-over-year. Retail gross margin declined by 70 basis points to 20.9%, primarily due to higher markdowns, including those related to the closure of underperforming stores, as well as a higher percentage of lower-margin digital course material sales and lower commissions for emblematic general merchandise. These decreases were partially offset by lower contract costs associated with the shift to digital and First Day models, as well as the growth of higher-margin First Day Complete revenue.

Retail selling and administrative expenses decreased by $12.9 million, or 13.7%, to $77.2 million, driven by cost savings initiatives, including reductions in comparable store payroll, corporate payroll, and infrastructure and product development costs. As a result, Retail adjusted EBITDA increased by $8.9 million, or 23%, to $48.3 million.

Wholesale Segment Performance

The Wholesale segment reported revenue of $21 million in the second quarter of fiscal 2024, essentially flat compared to the prior-year period. Wholesale gross profit increased to $6.1 million, or 29% of sales, compared to $5.5 million, or 25.8% of sales, in the prior-year quarter. The improvement in gross margin was primarily due to lower markdowns and product costs, partially offset by higher returns and allowances.

Wholesale selling and administrative expenses decreased by 9.7% to $3.5 million, driven by cost savings initiatives, including lower payroll and incentive plan compensation expenses. As a result, Wholesale adjusted EBITDA increased by $1 million to $2.6 million.

Liquidity

As of the end of the second quarter of fiscal 2024, BNED had $15 million in cash and $234 million in outstanding borrowings, compared to $250 million in the prior-year period and $278 million in the first quarter. The company's capital expenditures decreased by $5.3 million to $4 million, reflecting its continued focus on reducing spending and capturing additional efficiencies.

BNED's liquidity position and capital structure remain areas of focus, as the company navigates the evolving higher education landscape and the ongoing impact of the COVID-19 pandemic. The company's Board of Directors is currently reviewing a broad range of strategic alternatives, including potential capital raises, asset divestitures, and the sale of the business, to best position BNED for the future.

Outlook

For fiscal 2024, BNED is maintaining its 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 Retail segment, primarily due to the continued expansion of the company's First Day programs and the impact of the cost reduction actions implemented.

BNED's strategic transition to the First Day Courseware business model has reached an inflection point, with First Day and First Day Complete revenues now approaching 50% of the company's course material revenue. This evolution towards a more predictable, subscription-like model has enabled BNED to better align its cost structure and improve operational efficiency, positioning the company for more consistent, sustainable, and profitable growth in the years ahead.

Risks and Challenges

BNED faces several risks and challenges in the evolving higher education landscape, including:

1. Increased competition from alternative course material providers, such as publishers and digital platform companies, that are bypassing the traditional bookstore distribution channel. 2. Potential regulatory changes that could impact the company's equitable and inclusive access models. 3. Ongoing disruptions and changes in student enrollment and campus activities due to the lingering effects of the COVID-19 pandemic. 4. Volatility in the capital markets and the company's ability to access financing to support its strategic initiatives and liquidity needs. 5. Potential non-renewal of managed bookstore contracts and higher-than-anticipated store closures.

Despite these challenges, BNED's strong competitive position, innovative product offerings, and focus on operational efficiency position the company to navigate the changing market dynamics and continue its transformation towards a more sustainable and profitable business model.

Conclusion

Barnes & Noble Education, Inc. is at a pivotal moment in its history, as it navigates the evolving higher education landscape and implements strategic initiatives to drive sustainable growth and profitability. The company's innovative BNC First Day programs have been instrumental in reversing the historical trend of declining course material revenues, while also improving the affordability and accessibility of educational content for students.

BNED's focus on operational efficiency and cost savings has enabled the company to improve its financial performance, with the Retail segment delivering strong adjusted EBITDA growth in the second quarter of fiscal 2024. As the company continues to execute on its strategic priorities, it remains well-positioned to capitalize on the growing demand for equitable and inclusive access to educational resources, ultimately delivering long-term value for its stakeholders.