Barnes Noble Education Inc

Elements of Results of Operations

Our condensed consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). The results of operations reflected in our condensed consolidated financial statements are presented on a consolidated basis. All material intercompany accounts and transactions have been eliminated in consolidation.

Our sales are primarily derived from the sale of course materials, which include new, used, rental and digital textbooks. Additionally, at college and university bookstores which we operate, we sell general merchandise, including emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. Our rental income is primarily derived from the rental of physical textbooks. We also derive revenue from other sources, such as sales of inventory management, hardware and point-of-sale software, and other services.

Our cost of sales primarily includes costs such as merchandise costs, textbook rental amortization, warehouse costs related to inventory management and order fulfillment, insurance, certain payroll costs, and management service agreement costs, including rent expense, related to our college and university contracts and other facility related expenses.

Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include long-term incentive plan compensation expense and general office expenses, such as merchandising, procurement, field support, and finance and accounting. Shared-service costs such as human resources, legal, treasury, information technology, and various other corporate level expenses and other governance functions, are not allocated to a specific reporting segment and are recorded in Corporate Services as discussed in the Overview-Segments discussion above.

Results of Operations - Summary - Continuing Operations(a)

(a)Adjusted Earnings, Adjusted EBITDA, and Adjusted EBITDA by Segment are non-GAAP financial measures. See Use of Non-GAAP Measures discussion below.

(a)Represents the percentage these costs bear to the related sales, instead of total sales.

Results of Operations - Discontinued Operations

On May 31, 2023, we completed the sale of assets related to our Digital Student Solutions (“DSS”) Segment, which met the criteria for classification as Assets Held for Sale and Discontinued Operations. The results of operations related to the DSS Segment are included in the condensed consolidated statements of operations as “Loss from discontinued operations, net of tax.” The cash flows of the DSS Segment are also presented separately in our condensed consolidated statements of cash flows. For additional information, see Part II - Item 7. Management's Discussion and Analysisin our Annual Report on Form 10-K for the fiscal year ended April 27, 2024.

Results of Operations - Continuing Operations - 13 weeks ended July 27, 2024 compared with the 13 weeks ended July 29, 2023

First quarter fiscal year 2025 revenue decreased by $0.7 million, or 0.3% to $263.4 million, primarily driven by a net decrease in physical locations, many of which were closures of under-performing stores, offset by higher comparable stores sales and new store sales resulting from 32% growth in our BNC First Day® programs. As discussed below, net loss was $(99.5) million, inclusive of a loss on extinguishment of debt of $(55.2) million, compared to a net loss of $(50.0) million in the prior year period. Adjusted EBITDA improved by $5.2 million to $(20.7) million from $(25.9) million last year (See Use of Non-GAAP Measures discussion below). Lower selling and administrative expenses of $10.5 million primarily related to cost saving and productivity initiatives and growth in our BNC First Day® programs were primarily responsible for the improvement.

Sales

The following table summarizes our sales for the 13 weeks ended July 27, 2024 and July 29, 2023:

The sales decrease during the 13 weeks ended July 27, 2024 is primarily related to lower sales resulting from closed stores, offset by higher comparable store sales and new store sales primarily due to our BNC First Day® programs. The components of the sales variances for the 13 week period is reflected in the table below.

(a) Logo general merchandise sales for the Retail Segment are recognized on a net basis as commission revenue in the condensed consolidated financial statements. For Retail Gross Comparable Store Sales details, see below.

(b) Service revenue includes brand partnership marketing, shipping and handling, and revenue from other programs.

(c) Other includes inventory liquidation sales to third parties, marketplace sales and certain accounting adjusting items related to return reserves, and other deferred items.

(d) Eliminates Wholesale sales and service fees to Retail and Retail commissions earned from Wholesale. See discussion of intercompany activities and eliminations below.

Retail

The following is a store count summary for physical stores and virtual stores.

During the 13 weeks ended July 27, 2024, we opened 30 stores and closed 111 stores in the Retail Segment, with estimated net annual sales of $(71) million. The Company’s strategic initiative is to close under-performing and less profitable stores.

Generally, sales are impacted by revenue from net new/closed stores, conversion to BNC First Day® programs, increased campus traffic, and an increase in the number and timing of on campus activities and events, such as graduations, athletic events, alumni events, merchandising and marketing programs, and prospective student campus tours.

Retail sales decreased by $4.2 million, or 1.7%, to $249.7 million during the 13 weeks ended July 27, 2024 from $245.5 million during the 13 weeks ended July 29, 2023.

•Product sales and other increased by $3.2 million, or 1.4%, to $237.2 million during the 13 weeks ended July 27, 2024 from $233.9 million during the 13 weeks ended July 29, 2023.

◦Course material product sales increased by $13.6 million, or 9.8%, to $152.1 million during the 13 weeks ended July 27, 2024, compared to $138.5 million in the prior year period. The increase was primarily due to the growth of our BNC First Day® programs, which increased by $19.6 million, or 32%, to $81.4 million, offset by a decline of $5.0 million in a la carte courseware sales, including lower sales resulting from closed stores.

◦General merchandise product net sales decreased by $12.1 million, or 13.7%, to $76.5 million, compared to $88.7 million in the prior year period, primarily due to closed stores, lower graduation product sales due to timing of spring graduation events shifting to the fourth quarter of fiscal year 2024 from the first quarter of fiscal year 2025, and lower emblematic product sales. Retail Gross Comparable Store Sales for general merchandise decreased by $7.5 million, or (5.9)%, compared to the prior year period as discussed below.

◦Service and other revenue increased by $1.8 million, or 26.2%, to $8.5 million, compared to $6.7 million in the prior year period, primarily due to higher marketplace sales.

•Rental income for course materials increased by $1.0 million, or 8.6%, to $12.5 million during the 13 weeks ended July 27, 2024 from $11.5 million during the 13 weeks ended July 29, 2023 primarily due to the growth of our BNC First Day® programs, offset by closed stores and the shift to digital products.

Retail Gross Comparable Store Sales

To supplement the Total Sales table presented above, the Company uses Retail Gross Comparable Store Sales as a key performance indicator. Retail Gross Comparable Store Sales includes sales from physical and virtual stores that have been open for an entire fiscal year period and does not include sales from permanently closed stores for all periods presented. For Retail Gross Comparable Store Sales, sales for logo general merchandise fulfilled by Lids, Fanatics and digital agency sales are included on a gross basis in Retail Gross Comparable Store Sales compared to a net basis as commission revenue in our condensed consolidated financial statements.

We believe the current Retail Gross Comparable Store Sales calculation method reflects management’s view that such comparable store sales are an important measure of the growth in sales when evaluating how established stores have performed over time. We present this metric as additional useful information about the Company’s operational and financial performance and to allow greater transparency with respect to important metrics used by management for operating and financial decision- making. Retail Gross Comparable Store Sales are also referred to as “same-store” sales by others within the retail industry and the method of calculating comparable store sales varies across the retail industry. As a result, our calculation of comparable store sales is not necessarily comparable to similarly titled measures reported by other companies and is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP.

The increase in course material sales was primarily due to the growth of BNC First Day® affordable textbook access programs (as discussed above), offset by declines in a la carte courseware sales. The decrease in general merchandise sales are primarily related to lower graduation product sales due to timing of spring graduation events shifting to the fourth quarter of fiscal year 2024 from the first quarter of fiscal year 2025, lower sales related to cafe and convenience products, trade books, and supplies product sales.

Retail Gross Comparable Store Sales variances by category for the 13 week periods are as follows:

Wholesale sales decreased by $4.6 million, or 11.8% to $34.2 million during the 13 weeks ended July 27, 2024 from $38.8 million during the 13 weeks ended July 29, 2023. The decrease is primarily due to lower gross sales of $10.2 million, partially offset by lower returns and allowances of $5.6 million compared to the prior year period.

Cost of Sales and Gross Margin

Our cost of sales increased as a percentage of sales to 82.1% during the 13 weeks ended July 27, 2024 compared to 80.8% during the 13 weeks ended July 29, 2023. Our gross margin decreased by $3.4 million, or 6.8%, to $47.2 million, or 17.9% of sales, during the 13 weeks ended July 27, 2024 from $50.6 million, or 19.2% of sales during the 13 weeks ended July 29, 2023.

Retail

The following table summarizes the Retail cost of sales for the 13 weeks ended July 27, 2024 and July 29, 2023:

The following table summarizes the Retail gross margin for the 13 weeks ended July 27, 2024 and July 29, 2023:

For the 13 weeks ended July 27, 2024, the Retail gross margin as a percentage of sales decreased as discussed below:

•For the 13 weeks ended July 27, 2024, Retail Product and other gross margin decreased (160 basis points), primarily due to lower margin rates (125 basis points) for course materials due to higher markdowns, including markdowns related to closed stores and higher inventory reserves, unfavorable sales mix (100 basis points) due to lower general merchandise sales, primarily from graduation product sales and closed stores, and the shift to digital course materials, offset by lower contract costs as a percentage of sales (65 basis points) related to our college and university contracts as a result of the shift to digital and First Daymodels and lower performing school contracts not renewed.

•For the 13 weeks ended July 27, 2024, the Retail Rental gross margin as a percentage of sales increased driven primarily by higher rental margin rates, off by an unfavorable rental mix and higher contract costs as a percentage of sales related to our college and university contracts.

The cost of sales and gross margin for Wholesale were $29.1 million, or 85.0% of sales, and $5.1 million, or 15.0% of sales, respectively, during the 13 weeks ended July 27, 2024. The cost of sales and gross margin for Wholesale was $33.0 million or 85.1% of sales and $5.8 million or 14.9% of sales, respectively, during the 13 weeks ended July 29, 2023. The gross margin rate increased during the 13 weeks ended July 27, 2024 primarily due to lower warehouse costs.

Intercompany Eliminations

During the 13 weeks ended July 27, 2024 and July 29, 2023, our sales eliminations were $(20.5) million and $(20.1) million, respectively. These sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale.

During the 13 weeks ended July 27, 2024 and July 29, 2023, the cost of sales eliminations were $(14.8) million and $(14.6) million, respectively. These cost of sales eliminations represent (i) the recognition of intercompany profit for Retail inventory that was purchased from Wholesale in a prior period that was subsequently sold to external customers during the current period and the elimination of Wholesale service fees charged for fulfillment of inventory for virtual store sales, net of (ii) the elimination of intercompany profit for Wholesale inventory purchases by Retail that remain in ending inventory at the end of the current period.

During the 13 weeks ended July 27, 2024 and July 29, 2023, the gross margin eliminations were $(5.7) million and $(5.5) million, respectively. The gross margin eliminations reflect the net impact of the sales eliminations and cost of sales eliminations during the above mentioned reporting periods.

Selling and Administrative Expenses

During the 13 weeks ended July 27, 2024, selling and administrative expenses decreased by $10.5 million, or 13.5%, to $67.0 million from $77.5 million during the 13 weeks ended July 29, 2023. The variances by segment are discussed below.

Retail

During the 13 weeks ended July 27, 2024, Retail selling and administrative expenses decreased by $7.5 million, or 10.8%, to $61.7 million from $69.2 million during the 13 weeks ended July 29, 2023. This decrease was primarily due to a $3.1 million decrease in closed stores payroll and related operating costs, cost savings initiatives comprised of a $4.4 million decrease in corporate payroll expense, infrastructure and product development costs, and a $1.0 million decrease in comparable store payroll expense and related operating costs, partially offset by a $1.0 million increase in new store payroll expense and related operating costs.

During the 13 weeks ended July 27, 2024, Wholesale selling and administrative expenses decreased by $0.2 million, or 5.8%, to $3.2 million from $3.4 million during the 13 weeks ended July 29, 2023. The decrease was primarily due to cost savings initiatives comprised of lower payroll expense.

Corporate Services

During the 13 weeks ended July 27, 2024, Corporate Services' selling and administrative expenses decreased by $2.8 million, or 56.9%, to $2.1 million from $4.9 million during the 13 weeks ended July 29, 2023. The decrease was primarily due to lower payroll expense and lower incentive plan expense related to the resignation of our Chief Executive Officer on June 11, 2024.

Depreciation and Amortization Expense

Depreciation and amortization expense increased by $2.8 million, to $13.1 million during the 13 weeks ended July 27, 2024 from $10.3 million during the 13 weeks ended July 29, 2023. The increase was primarily attributable to capital additions and accelerated intangible amortization related to closed stores, offset by lower depreciable assets and intangibles due to the store impairment loss recognized in Fiscal 2024.

Loss on extinguishment of debt

On June 10, 2024, our existing Term Loan credit agreement lenders converted approximately $34.0 million of outstanding principal and accrued and unpaid interest into our common stock. We recognized a loss on extinguishment of debt of $55.2 million during the 13 weeks ended July 27, 2024 in the condensed consolidated statement of operations in connection with the Term Loan debt conversion which represents the difference between the Common Stock fair value issued upon conversion and the net carrying value of the Term Loan, plus unamortized deferred financing costs related to the Term Loan. As a result of the Term Loan Debt Conversion, the Term Loan and its related documented was terminated. There were no Term Loan debt conversions in the comparable prior period. See Item 1. Financial Statements - Note 5. Equity and Earnings Per Share and Note 7. Debt.

Restructuring and other charges

During the 13 weeks ended July 27, 2024, we recognized restructuring and other charges totaling $3.6 million comprised primarily of $2.0 million of severance primarily related to the resignation of our former Chief Executive Officer on June 11, 2024, $1.1 million related to severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction initiatives, and $0.5 million for legal and advisory professional service costs for restructuring and process improvements and other charges.

During the 13 weeks ended July 29, 2023, we recognized restructuring and other charges totaling $4.6 million comprised primarily of $3.5 million of professional service costs for restructuring and process improvements, and $1.1 million of severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction initiatives.

Operating Loss

Our operating loss was $(91.7) million during the 13 weeks ended July 27, 2024, compared to operating loss of $(41.7) million during the 13 weeks ended July 29, 2023. The increase in operating loss is due to the matters discussed above. For the 13 weeks ended July 27, 2024, operating loss, excluding the $55.2 million of loss on extinguishment of debt and the $3.6 million of restructuring and other charges, discussed above, was $(32.9) million (or (12.5)% of sales). For the 13 weeks ended July 29, 2023, operating loss, excluding the $4.6 million of restructuring and other charges, discussed above, was $(37.1) million (or (14.0)% of sales).

Interest Expense, Net

Net interest expense decreased by $0.6 million to $7.6 million during the 13 weeks ended July 27, 2024 from $8.3 million during the 13 weeks ended July 29, 2023. Interest expense decreased primarily due to the June 10, 2024 debt financing transaction, lower borrowing and lower interest rates.

Income Tax Expense (Benefit)

We recorded an income tax expense of $0.1 million on pre-tax loss of $(99.3) million during the 13 weeks ended July 27, 2024, which represented an effective income tax rate of (0.1)% and we recorded an income tax benefit of $(0.01) million on a pre-tax loss of $(50.0) million during the 13 weeks ended July 29, 2023, which represented an effective income tax rate of 0%. The effective tax rate for the 13 weeks ended July 27, 2024 is materially consistent with the prior year comparable period.

Net Loss from Continuing Operations

As a result of the factors discussed above, net loss from continuing operations was $(99.5) million during the 13 weeks ended July 27, 2024, compared with $(50.0) million during the 13 weeks ended July 29, 2023.

Adjusted Earnings (non-GAAP) is $(41.5) million during the 13 weeks ended July 27, 2024, compared with $(44.4) million during the 13 weeks ended July 29, 2023. See Adjusted Earnings (non-GAAP) discussion below.