meeting with our independent registered public accounting firm and our management regarding our internal controls, critical accounting policies and practices, and other matters;
discussing with our independent registered public accounting firm and our management earnings releases priorFurther, although we continue to their issuance;
overseeing our enterprise risk assessment and management;
overseeing our internal audit function;
reviewing and approving related party transactions (see “Certain Relationships and Related Transactions” below); and
overseeing our compliance program, response to regulatory actions involving financial, accounting and internal control matters,implement internal controls and riskprocedures designed to protect our proprietary and confidential information, and non-deidentified customer and employee personal data, including sensitive personal data, in order to comply with privacy and information security laws, and regulations, our facilities, and systems may be vulnerable to security breaches and other data loss, including cyber-attacks. Such a security breach or data loss could lead to negative publicity, damage to our reputation, exposure to litigation and liability, theft, modification or destruction of proprietary information and personal data, damage to or inaccessibility of critical systems, manufacture of defective products, production downtimes, operational disruptions and remediation and other significant costs, which could adversely affect our reputation, financial condition and results of operations.
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Computer malware, viruses, hacking and phishing attacks could harm our business and results of operations.
We are increasingly dependent upon information technology systems, infrastructure and data. Our computer systems may be vulnerable to service interruption or destruction, malicious intrusion, ransomware and cyber-attacks. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, denial-of service, social engineering, ransomware and other means to affect service reliability and threaten data confidentiality, integrity and availability. Our key business partners face similar risks, and a security breach of their systems could adversely affect our security posture. While we continue to invest in data protection and information security technology to prevent or minimize these risks and, to date, we have not experienced any material service interruptions and are not aware of any material breaches, there can be no assurance that our efforts will prevent service interruptions, or identify breaches in our systems, that could adversely affect our business and operations and/or result in the loss of critical or sensitive information, which could result in financial, legal, business or reputational harm.
Defects, errors, installation difficulties or performance issues with our point-of-sales and other systems could expose us to potential liability, harm our reputation and negatively impact our business.
Our wholesale business sells and services point-of-sales systems to its college bookstore customers. These systems are complex and incorporate third-party hardware and software. Despite testing and quality control, we cannot be certain that defects or errors will not be found in these systems. In addition, because these systems are installed in different environments, we may experience difficulty or delay in installation. Our products may be integrated with other components or software, and, in the event that there are defects or errors, it may be difficult to determine the origin of defects or errors. Additionally, any difficulty or failure in the operation of these systems could cause business disruption for our customers. If any of these risks materialize, they could result in additional costs and expenses, exposure to liability claims, diversion of technical and other resources to engage in remediation efforts, loss of customers or negative publicity, each of which could impact our business and operating results.
We rely upon third party web service providers to operate certain aspects of our service, and any disruption of or interference with such services would impact our operations and our business would be materially and adversely impacted.
Amazon Web Services (“AWS”) and other third-party web service providers provide a distributed computing infrastructure platform for business operations, or what is commonly referred to as a “cloud” computing service. We have architected our software and computer systems so as to utilize data processing, storage capabilities, and other services provided by AWS and other providers.
We rely on third-party software and service providers, including AWS, to provide systems, storage and services, including user log in authentication, for our website. Any technical problem with, cyber-attack on, or loss of access to such third parties’ systems, servers or technologies could result in the inability of our students to rent or purchase print textbooks, interfere with access to our digital content and other online products and services or result in the theft of end-user personal information.
Our reliance on AWS or other third-party providers makes us vulnerable to any errors, interruptions, or delays in their operations. Any disruption in the services provided by AWS could harm our reputation or brand, adversely impact consumers, and/or cause us to lose revenues or incur substantial recovery costs and distract management policies.from operating our business.
Any disruption of or interference with our use of AWS or other third-party service providers would impact our operations and our business would be materially and adversely impacted.
AWS may terminate its agreement with us upon 30 days' notice. Upon expiration or termination of our agreement with AWS, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete.
Risks relating to Applicable Laws and Regulations
Laws and regulations have been and may be enacted in the future that restrict or prohibit use of emails or similar marketing activities that we currently rely on.
Our marketing and sales efforts are centered around an active digital community, which includes engaged email subscribers, text messaging, interest-based online advertising, recurring billing and our continuous dialogue with customers on our school-customized social media channels. For example, the following laws and regulations may apply:
•the CAN-SPAM Act of 2003 and similar laws adopted by most U.S. states pertaining directly or indirectly to commercial email regulate unsolicited commercial emails, create civil and criminal penalties for emails containing fraudulent headers and control other abusive online marketing practices;
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•the U.S. Federal Trade Commission (the “FTC”) has guidelines that impose responsibilities on companies with respect to communications with consumers and impose fines and liability for failure to comply with rules with respect to advertising or marketing or sales practices they may deem misleading or deceptive;
•the Telephone Consumer Protection Act of 1991 (“TCPA”) restricts telemarketing and the use of automated telephone equipment. The BoardTCPA limits the use of Directors has adoptedautomatic dialing systems, artificial or prerecorded voice messages and SMS text messages. It also applies to unsolicited text messages advertising the commercial availability of goods or services. Additionally, a written charter setting outnumber of states have enacted statutes that address telemarketing. For example, some states, such as California, Illinois and New York, have created do-not-call lists. Other states, such as Oregon and Washington, have enacted “no rebuttal statutes” that require the functionstelemarketer to end the call when the consumer indicates that he or she is not interested in the product being sold. Restrictions on telephone marketing, including calls and text messages, are enforced by the FTC, the Federal Communications Commission, states and through the availability of statutory damages and class action lawsuits for violations of the Audit Committee,TCPA;
•The Restore Online Shopper Confidence Act (“ROSCA”), and similar state laws, impose requirements and restrictions on online services that automatically charge payment cards on a copyperiodic basis to renew a subscription service, if the consumer does not cancel the service;
•The California Consumer Privacy Act (“CCPA”) became effective on January 1, 2020, with enforcement commencing on July 1, 2020. CCPA, as amended, provides California consumers the right to know what personal data companies collect, how it is used, and the right to access, delete and opt out of sale of their personal information to third parties. It also expands the definition of personal information and gives consumers increased privacy rights and protections for that information. The California Privacy Rights Act (“CPRA”) took effect on December 16, 2020, and became fully operative on January 1, 2023. CPRA amends and adds to CCPA by strengthening rights of California consumers, further restricting business use of consumer personal information, and establishing a new government agency for enforcement;
•The Virginia Consumer Data Protection Act (“VCDPA”), similar in scope to CCPA, went into effect on January 1, 2023. VCDPA is the second U.S. state-level consumer privacy law after CCPA, but unlike California, will not apply to employees and business contacts, nor provide for a private right of action. VCDPA also defines the “sale” of personal information narrowly, including only exchanges for monetary consideration;
•Colorado is the third state to enact a comprehensive data privacy statute, the Colorado Privacy Act (“CPA”). CPA takes effect on July 1, 2023. Although similar in scope to VCDPA, CPA defines “sale” of personal information in the same manner as CCPA, which includes any exchange for monetary or any other valuable consideration;
•The Connecticut Data Privacy Act (“CTDPA”) also takes effect July 1, 2023. CTDPA protects a Connecticut consumer acting in an individual or household context, but does not protect an individual acting in an employment context.
•The Utah Consumer Privacy Act (“UCPA”) adopts the VCDPA’s definition of “sale” of personal information. UCPA goes into effect on December 31, 2023;
•On March 29, 2023, Iowa became the sixth state to pass a comprehensive consumer privacy law, joining Utah, Connecticut, Colorado, Virginia and California. The Iowa Consumer Data Protection Act will go into effect on January 1, 2025;
•On May 1, 2023, Indiana became the seventh state to pass similar data privacy legislation, the Indiana Data Privacy Law, which will become effective January 1, 2026.
•The Tennessee Information Protection Act, enacted on May 11, 2023, will go into effect on July 1, 2024.
•On May 19, 2023, Montana became the ninth state to enact comprehensive consumer privacy law, the Montana Consumer Data Privacy Act, which goes into effect October 1, 2024.
Even if no applicable laws or regulations are further enacted, we may discontinue use or support of these activities if we become concerned that students or potential students deem them intrusive or they otherwise adversely affect our goodwill and brand. If our marketing activities are curtailed, our ability to attract new customers may be adversely affected.
Our business could be impacted by changes in federal, state, local or international laws, rules or regulations.
We are subject to laws and regulations applicable to our business. These laws and regulations may cover taxation, data privacy, information security, our access to student financial aid, pricing and availability of educational materials, competition and/or antitrust, content, copyrights, distribution, college distribution, mobile communications, electronic contracts and other communications, consumer protection, the provision of online payment services, unencumbered Internet access to our services, the design and operation of websites and mobile application (including complying with the Americans with Disabilities Act), digital content (including governmental investigations and litigation relating to the agency pricing model for digital content distribution), the characteristics and quality of products and services and labor and employee benefits (including the costs
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associated with complying with the Patient Protection and Affordable Care Act or any legislation enacted in connection with repeal of the Affordable Care Act). Changes in applicable federal, state, local or international laws, rules or regulations relating to these matters could increase regulatory compliance requirements in addition to increasing our costs of doing business or otherwise impact our business. For example, changes in federal and state minimum wage laws could raise the wage requirements for certain of our employees at our retail locations, which would increase our selling costs and may cause us to reexamine our wage structure for such employees.
Changes in tax laws and regulations might adversely impact our businesses or financial performance.
We collected sales tax on the majority of the products and services that we sold in our respective prior fiscal years that were subject to sales tax, and we generally have continued the same policies for sales tax within the current fiscal year. While management believes that the financial statements included elsewhere in this Form 10-K reflect management’s best current estimate of any potential additional sales tax liability based on current discussions with taxing authorities, we cannot assure you that the outcome of any discussions with any taxing authority will not result in the payment of sales taxes for prior periods or otherwise, or that the amount of any such payments will not be materially in excess of any liability currently recorded. In the future, our businesses may be subject to claims for not collecting sales tax on the products and services we currently sell for which sales tax is not collected. In addition, our provision for income taxes and our obligation to pay income tax is based on existing federal, state and local tax laws. Changes to these laws, in particular as they relate to depreciation, amortization and cost of goods sold, could have a significant impact on our income tax provision, our projected cash tax liability, or both.
Risks relating to Intellectual Property
We rely on third-party digital content and applications, which may not be available to us on commercially reasonable terms or at all.
We contract with certain third parties to offer their digital content. Our licensing arrangements with these third parties do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some third-party content providers currently, or in the future, may offer competing products and services, and could take action to make it more difficult or impossible for us to license our content in the future. Other content owners, providers or distributors may seek to limit our access to, or increase the total cost of, such content. If we are unable to offer a wide variety of content at reasonable prices with acceptable usage rules, our business may be materially adversely affected.
We rely heavily on proprietary technology and sophisticated equipment to manage certain aspects of our business, including to manage textbook inventory, process deliveries and returns of the textbooks and manage warehousing and distribution.
We use a proprietary system to source, distribute and manage inventory of textbooks and to manage other aspects of our operations, including systems to consider the market pricing for textbooks, general availability of textbook titles and other factors to determine how to buy textbooks and set prices for textbooks and other content in real time. We have invested significant amounts of resources in the hardware and software to develop this system. We rely on the expertise of our engineering and software development teams to maintain and enhance the equipment and software used for our distribution operations. We cannot be sure that the maintenance and enhancements we make to our distribution operations will achieve the intended results or otherwise be of value to students. If we are unable to maintain and enhance our technology to manage textbook sourcing, distribution and inventory, it could disrupt our business operations and have a material adverse impact on our results.
Our wholesale business is also dependent on sophisticated equipment and related software technology for the warehousing and distribution of the vast majority of textbooks supplied to our retail business and others, which is availablelocated at MBS’ warehouse facility in Columbia, Missouri. Our ability to efficiently manage our wholesale business depends significantly on the Company’s website at www.bned.comreliability and capacity of these systems. The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems, especially if such events were to occur during peak periods, could adversely affect our operations, the ability to serve our customers and our results of operations. In addition, substantially all of our wholesale inventory is availablelocated in printthe Columbia warehouse facility. We could experience significant interruption in the operation of this facility or damage or destruction of our inventory due to any stockholder who requests it in writing directedphysical damage to the Company’s Corporate Secretary,facility caused by natural disasters, accidents or otherwise. If a material portion of our inventory were to be damaged or destroyed, we would likely incur significant financial loss, including loss of revenue and harm to our customer relationships.
We may not be able to adequately protect our intellectual property rights or may be accused of infringing upon intellectual property rights of third parties.
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as important to our success, and we rely on trademark, copyright and patent law, domain name regulations, trade secret protection and confidentiality or license agreements to protect our proprietary rights, including our use of the Barnes & Noble trademark. Laws and regulations may not adequately protect our trademarks and similar proprietary rights. We
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may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or diminish the value of our trademarks and other proprietary or licensed rights.
We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.
Other parties also may claim that we infringe their proprietary rights. Because of the changes in Internet commerce and digital content businesses, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain of our products, content and business methods may unknowingly infringe existing patents or intellectual property rights of others. Successful intellectual property infringement claims against us could result in monetary liability or a material disruption in the conduct of our business. We cannot be certain that our products, content and business methods do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We expect that infringement claims in our markets will increase in number. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we were found to have infringed the intellectual property rights of a third party, we could be liable to that party for license fees, royalty payments, lost profits or other damages, and the owner of the intellectual property might be able to obtain injunctive relief to prevent us from using the technology or software in the future. If the amounts of these payments were significant or we were prevented from incorporating certain technology or software into our products, our business could be significantly harmed.
We may incur substantial expenses in defending against these third-party infringement claims, regardless of their merit. As a result, due to the diversion of management time, the expense required to defend against any claim and the potential liability associated with any lawsuit, any significant litigation could significantly harm our business, financial condition and results of operations.
Our digital content offerings depend in part on effective digital rights management technology to control access to digital content. If the digital rights management technology that we use is compromised or otherwise malfunctions, we could be subject to claims, and content providers may be unwilling to include their content in our service.
In addition, the publishing industry has been, and we expect in the future will continue to be, the target of counterfeiting and piracy. We have entered into agreements with major textbook publishers to implement the textbook industry’s Anti-Counterfeit Best Practices. These best practices were developed as a mechanism to assist publishers and distributors in the eradication of counterfeit copies of textbooks in the marketplace. While we have agreed to implement the Anti-Counterfeit Best Practices and have in place our anti-counterfeit policies and procedures (which include removing from distribution suspected counterfeit titles) for preventing the proliferation of counterfeit textbooks, we may inadvertently purchase counterfeit textbooks, which may unknowingly be included in the textbooks we offer for sale or rent to students or we may purchase such textbooks through our buyback program. As such, we may be subject to allegations of selling counterfeit books. We have in the past and may continue to receive communications from publishers alleging that certain textbooks sold or rented by us are counterfeit. When receiving such communications, we cooperate, and will continue to cooperate in the future, with such publishers in identifying fraudulent textbooks and removing them from our inventory. We may implement measures in an effort to protect against these potential liabilities that could require us to spend substantial resources. Any costs incurred as a result of liability or asserted liability relating to sales of counterfeit textbooks could harm our business, reputation and financial condition.
We do not own the Barnes & Noble Education, Inc., 120 Mountain View Blvd., Basking Ridge, New Jersey 07920.
The memberstrademark and instead rely on a license of that trademark and certain other trademarks, which license imposes limits on what those trademarks can be used to do.
In connection with the Audit Committee currently are Dr. David A. Wilson (Chair), Emily C. Chiu, Daniel A. DeMatteo, David G. Golden and Lowell W. Robinson who joined the Audit Committee in July 2020. In addition to meeting the independence standards of the NYSE listing standards, each member of the Audit Committee meets the independence standards established by the SEC for audit committee members and our Corporate Governance Guidelines. The Board of Directors has also determined that each of Dr. Wilson, Ms. Chiu, Mr. DeMatteo, Mr. Golden and Mr. Robinson is financially literate for purposes of the NYSE listing standards and has the requisite attributes of an “audit committee financial expert” as defined by regulations promulgated by the SEC and that such attributes were acquired through relevant education and/or experience. The Audit Committee met eight (8) times during Fiscal 2020.
Executive Officers
See Part I, Item 1 of this Form 10-K for certain information regarding the Company’s executive officers and other key employees.
Corporate Governance Guidelines and Code of Business Conduct and Ethics
The Board of Directors has adopted Corporate Governance Guidelines applicable to the members of the Board of Directors. The Board of Directors has also adopted a Code of Business Conduct and Ethics applicable to the Company’s employees, directors, agents and representatives, including consultants. The Corporate Governance Guidelines and the Code of Business Conduct and Ethics are available on the Company’s website at www.bned.com. Copies of the Corporate Governance Guidelines and the Code of Business Conduct and Ethics are available in print to any stockholder who requests them in writing to the Company’s Corporate Secretary,Spin-Off, Barnes & Noble, Education, Inc., 120 Mountain View Blvd., Basking Ridge, New Jersey 07920.
ITEM 11. EXECUTIVE COMPENSATION
Unless otherwise stated, granted us an exclusive, perpetual, fully paid up, non-transferable and non-assignable license to use the compensation tables included in this section reflect amounts paid or payable or awards granted to our named executive officers (“NEOs”) by the Company under the Company’s compensation planstrademarks “Barnes & Noble College,” “B&N College,” “Barnes & Noble Education” and programs during Fiscal 2018, Fiscal 2019 and Fiscal 2020.
Summary Compensation Table
Name and Principal Position | Fiscal Year | Salary (1) | Bonus (2) | Stock Awards (3) | Non-Equity Incentive Plan Compensation (4) | All Other Compensation (5) | Total | |||||||||||||||||||||
Michael P. Huseby (6) | 2020 | $ | 1,089,423 | $ | — | $ | 1,979,996 | $ | 247,500 | $ | 37,040 | $ | 3,353,959 | |||||||||||||||
Chairman and Chief Executive Officer | 2019 | $ | 1,100,000 | $ | — | $ | 1,858,467 | $ | 1,501,500 | $ | 36,105 | $ | 4,496,072 | |||||||||||||||
| 2018 | $ | 866,923 | $ | 250,000 | $ | 3,299,995 | $ | 1,320,000 | $ | 38,425 | $ | 5,775,343 | ||||||||||||||||
Barry Brover (7) | 2020 | $ | 610,000 | $ | 445,000 | $ | 329,994 | $ | 305,000 | $ | 23,657 | $ | 1,713,651 | |||||||||||||||
Executive Vice President, Operations; Executive Vice President, Barnes & Noble College | 2019 | $ | 560,962 | $ | — | $ | 536,310 | $ | 462,583 | $ | 37,268 | $ | 1,597,123 | |||||||||||||||
| 2018 | $ | 535,000 | $ | — | $ | 749,996 | $ | 314,982 | $ | 38,370 | $ | 1,638,348 | ||||||||||||||||
Thomas D. Donohue | 2020 | $ | 500,000 | $ | — | $ | 329,994 | $ | 42,500 | $ | 12,670 | $ | 885,164 | |||||||||||||||
Executive Vice President, Chief Financial Officer | 2019 | $ | 462,462 | $ | — | $ | 223,466 | $ | 212,333 | $ | 13,050 | $ | 911,311 | |||||||||||||||
| 2018 | $ | 435,000 | $ | 50,000 | $ | 249,995 | $ | 143,550 | $ | 6,416 | $ | 884,961 | ||||||||||||||||
Kanuj Malhotra | 2020 | $ | 523,400 | $ | — | $ | 389,995 | $ | 327,125 | $ | 12,670 | $ | 1,253,190 | |||||||||||||||
Executive Vice President, Corporate Development | 2019 | $ | 523,400 | $ | — | $ | 625,693 | $ | 362,716 | $ | 12,750 | $ | 1,524,559 | |||||||||||||||
| 2018 | $ | 523,400 | $ | — | $ | 749,996 | $ | 591,442 | $ | 7,640 | $ | 1,872,478 | ||||||||||||||||
Michael C. Miller | 2020 | $ | 500,000 | $ | — | $ | 329,994 | $ | 42,500 | $ | 1,470 | $ | 873,964 | |||||||||||||||
Chief Legal Officer and Executive Vice President, Corporate Affairs | 2019 | $ | 496,154 | $ | 200,000 | $ | 446,927 | $ | 273,000 | $ | 16,481 | $ | 1,432,562 | |||||||||||||||
| 2018 | $ | 475,000 | $ | — | $ | 349,999 | $ | 285,000 | $ | 6,904 | $ | 1,116,903 | ||||||||||||||||
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All Other Compensation Table
Name | Fiscal Year | Long-Term Disability Insurance(1) | Life and AD&D Insurance(2) | Car Allowance | 401(k) Company Match | Cell Phone | Total Other Income | |||||||||||||||||||||
Michael P. Huseby | 2020 | $ | 13,086 | $ | 11,985 | $ | — | $ | 10,769 | $ | 1,200 | $ | 37,040 | |||||||||||||||
| 2019 | $ | 13,086 | $ | 12,065 | $ | — | $ | 10,154 | $ | 800 | $ | 36,105 | ||||||||||||||||
| 2018 | $ | 13,086 | $ | 12,108 | $ | — | $ | 13,231 | $ | — | $ | 38,425 | ||||||||||||||||
Barry Brover | 2020 | $ | 8,368 | $ | 2,889 | $ | — | $ | 11,200 | $ | 1,200 | $ | 23,657 | |||||||||||||||
| 2019 | $ | 9,461 | $ | 2,969 | $ | 12,000 | $ | 12,038 | $ | 800 | $ | 37,268 | ||||||||||||||||
| 2018 | $ | 9,950 | $ | 3,012 | $ | 18,000 | $ | 7,408 | $ | — | $ | 38,370 | ||||||||||||||||
Thomas D. Donohue | 2020 | $ | — | $ | 270 | $ | — | $ | 11,200 | $ | 1,200 | $ | 12,670 | |||||||||||||||
| 2019 | �� | $ | — | $ | 350 | $ | — | $ | 11,900 | $ | 800 | $ | 13,050 | |||||||||||||||
| 2018 | $ | — | $ | 393 | $ | — | $ | 6,023 | $ | — | $ | 6,416 | ||||||||||||||||
Kanuj Malhotra | 2020 | $ | — | $ | 270 | $ | — | $ | 11,200 | $ | 1,200 | $ | 12,670 | |||||||||||||||
| 2019 | $ | — | $ | 350 | $ | — | $ | 11,000 | $ | 1,400 | $ | 12,750 | ||||||||||||||||
| 2018 | $ | — | $ | 393 | $ | — | $ | 7,247 | $ | — | $ | 7,640 | ||||||||||||||||
Michael C. Miller | 2020 | $ | — | $ | 270 | $ | — | $ | — | $ | 1,200 | $ | 1,470 | |||||||||||||||
| 2019 | $ | — | $ | 350 | $ | — | $ | 14,731 | $ | 1,400 | $ | 16,481 | ||||||||||||||||
| 2018 | $ | — | $ | 328 | $ | — | $ | 6,577 | $ | — | $ | 6,905 | ||||||||||||||||
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2020 Grants of Plan-Based Awards Table
The following table provides additional information about non-equity incentive awards and equity incentive awards granted to our NEOs by the Company during Fiscal 2020.
| Estimated Future Payouts Under Non-Equity Incentive Plan Awards (2) | Estimated Future Payouts Under Equity Incentive Plan Awards (3) | All Other Stock Awards: Number of Shares of Stock or Units (#) | Value of Stock and Option Awards ($) | |||||||||||||||||||||||||||||||||
Name | Award(1) | Grant Date | Threshold (@ 50%) ($) | Target ($) | Maximum (@ 150%) ($) | Threshold (#) | Target (#) | Maximum (#) | ||||||||||||||||||||||||||||
Michael P. Huseby | PS | 6/19/19 | 157,143 | 314,285 | 471,428 | $ | 989,998 | |||||||||||||||||||||||||||||
| AIP | 7/18/19 | $ | 825,000 | $ | 1,650,000 | $ | 2,475,000 | |||||||||||||||||||||||||||||
| RSU | 6/19/19 | 314,285 | $ | 989,998 | ||||||||||||||||||||||||||||||||
Barry Brover | PS | 6/19/19 | 26,190 | 52,380 | 78,570 | $ | 164,997 | |||||||||||||||||||||||||||||
| AIP | 7/18/19 | $ | 305,000 | $ | 610,000 | $ | 915,000 | |||||||||||||||||||||||||||||
| RSU | 6/19/19 | 52,380 | $ | 164,997 | ||||||||||||||||||||||||||||||||
Thomas D. Donohue | PS | 6/19/19 | 26,190 | 52,380 | 78,570 | $ | 164,997 | |||||||||||||||||||||||||||||
| AIP | 7/18/19 | $ | 212,500 | $ | 425,000 | $ | 637,500 | |||||||||||||||||||||||||||||
| RSU | 6/19/19 | 52,380 | $ | 164,997 | ||||||||||||||||||||||||||||||||
Kanuj Malhotra | PS | 6/19/19 | 30,952 | 61,904 | 92,856 | $ | 194,998 | |||||||||||||||||||||||||||||
| AIP | 7/18/19 | $ | 261,700 | $ | 523,400 | $ | 785,100 | |||||||||||||||||||||||||||||
| RSU | 6/19/19 | 61,904 | $ | 194,998 | ||||||||||||||||||||||||||||||||
Michael C. Miller | PS | 6/19/19 | 26,190 | 52,380 | 78,570 | $ | 164,997 | |||||||||||||||||||||||||||||
| AIP | 7/18/19 | $ | 212,500 | $ | 425,000 | $ | 637,500 | |||||||||||||||||||||||||||||
| RSU | 6/19/19 | 52,380 | $ | 164,997 | ||||||||||||||||||||||||||||||||
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Narrative to the Summary Compensation Table“B&N Education” and the Grants of Plan-Based Awards Table
Employment Arrangements withnon-exclusive, perpetual, fully paid up, non-transferable and non-assignable license to use the Named Executive Officers
The Company has entered into an employment agreement or employment letter with each of the NEOsmarks “Barnes & Noble,” “B&N” and compensation of each of these NEOs is based on their respective employment agreement or employment letter, as the case may be, as well as their job responsibilities. The Company entered into an employment agreement with Mr. Huseby on June 26, 2015“BN,” solely in connection with the Spin-Off,contract management of college and entered intouniversity bookstores and other bookstores associated with academic institutions and related websites, as well as education products and services (including digital education products and services) and related websites. These restrictions may materially limit our ability to use the licensed marks in the expansion of our operations in the future. In addition, we are reliant on Barnes & Noble, Inc. to maintain the licensed trademarks.
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Risks Relating to our Common Stock and the Securities Market
Our stock price may fluctuate significantly.
We cannot predict the prices at which our Common Stock may trade. The market price of our Common Stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:
•actual or anticipated fluctuations in our operating results due to factors related to our businesses;
•success or failure of our business strategies, including our digital education initiative;
•our quarterly or annual earnings or those of other companies in our industries;
•our ability to obtain financing as needed, when needed, and on favorable terms;
•the terms of any financing through the issuance of additional equity or equity-linked securities;
•announcements by us or our competitors of significant acquisitions or dispositions;
•changes in accounting standards, policies, guidance, interpretations or principles;
•the failure of securities analysts to cover our Common Stock;
•changes in earnings estimates by securities analysts or our ability to meet those estimates;
•the operating and stock price performance of other comparable companies;
•investor perception of our Company and the higher education industry;
•overall market fluctuations;
•results from any material litigation or government investigation;
•changes in laws and regulations (including tax laws and regulations) affecting our business;
•changes in capital gains taxes and taxes on dividends affecting stockholders; and
•general economic conditions and other external factors.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our Common Stock.
Provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and of Delaware law may prevent or delay an amended and restated employment agreement with Mr. Huseby on July 19, 2017 in connection with his role as Chief Executive Officer and Chairmanacquisition of the Company, which could affect the trading price of our Common Stock.
Our Amended and Restated Certificate of Incorporation and our Amended and Restated By-laws contain provisions which, together with applicable Delaware law, may discourage, delay or prevent a merger or acquisition that our stockholders consider favorable, including provisions that:
•authorize the issuance of “blank check” preferred stock that could be issued by our Board effectiveof Directors to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive;
•provide special meetings of the stockholders may be called only by or at the direction of a majority of our Board or the chairman of our Board of Directors; and
•require advance notice to be given by stockholders for any stockholder proposals or director nominations.
In addition, Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder”.
These provisions may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of the Company, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their Common Stock at a price above the prevailing market price.
Our Amended and Restated By-laws designate courts in the State of Delaware as the sole and exclusive forum for certain types of September 19, 2017. The employment agreement provides severance paymentsactions and benefits upon terminationproceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our Amended and Restated By-laws provide that, subject to limited exceptions, the state and federal courts of employmentthe State of Delaware are the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (c) any action asserting a claim arising pursuant to any provision of the DGCL, our Amended and Restated Certificate of Incorporation or our Amended and Restated By-laws or (d) any other action asserting a claim that is governed by the Company without “cause”internal affairs doctrine. Any person or byentity purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice of and to have consented to these provisions. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.
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Alternatively, if a court were to find this provision of our Amended and Restated By-laws inapplicable to, or unenforceable in respect of, one or more of the NEO for “good reason” (including upon termination within twospecified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Facilities
We lease various office space in New Jersey, New York, Missouri, California, and India and we lease warehouse space in Missouri.
For our physical campus retail operations, we typically have the exclusive right to operate the official physical school bookstore on college campuses through multi-year management service agreements with our schools. In turn, we pay the school a percentage of store sales and, in some cases, a minimum fixed guarantee. These contracts with colleges and universities are typically five years following a change of control). The employment agreement has a two-year termwith renewal options, but can range from one to 15 years, and renews automatically for one year unlessare typically cancellable by either party gives noticewithout penalty with 90 to 120 days' notice.
As of non-renewal at least three months priorApril 29, 2023, these contracts for the 774 physical stores that we operate expire as follows:
| Contract Terms to Expire During (12 months ending on or about April 30) | Number of Physical Campus Stores | |||||||
| 2024 | 92 | |||||||
| 2025 | 67 | |||||||
| 2026 | 69 | |||||||
| 2027 | 74 | |||||||
| 2028 | 58 | |||||||
| 2029 and later | 414 | |||||||
Item 3. LEGAL PROCEEDINGS
We are involved in a variety of claims, suits, investigations and proceedings that arise from time to automatic renewal. The Company entered intotime in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, letters outlining employment terms with eachbenefits, personal injuries and other matters. We record a liability when we believe that it is both probable that a loss has been incurred and the amount of Messrs. Brover, Donohue, Malhotraloss can be reasonably estimated. Based on our current knowledge, we do not believe that there is a reasonable possibility that the final outcome of any pending or threatened legal proceedings to which we or any of our subsidiaries are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However, legal matters are inherently unpredictable and Miller on June 19, 2019. The employment letters provide the officers with severance payments and benefits upon terminationsubject to significant uncertainties, some of employment by the Company without “cause” or by the NEO for “good reason” (including upon termination within two years following a change of control).
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Employment Arrangements-General Provisions
Pursuant to their employment agreement or letters, the annual base salaries of Messrs. Huseby, Brover, Donohue, Malhotra and Millerwhich are beyond our control. As such, there can be no less than $1,100,000, $610,000, $500,000, $523,400 and $500,000, respectively, during the terms of their employment. Each of Messrs. Huseby, Brover, Donohue, Malhotra and Miller are eligible for a minimum target annual incentive compensation award of not less than 150%, 100%, 85%, 100% and 85%, respectively, of his base salary, as determined by the Compensation Committee. On April 1, 2020, as a result of the unusual circumstances surrounding the COVID-19 epidemic, Mr. Huseby voluntarily agreed to a temporary reduction of his base salary of 25%, effective April 13, 2020, which will continue through September 19, 2020. Mr. Huseby remains eligible to participate in the Company’s short-term incentive programs at a level commensurate with his previous salary.
The employment agreements or employment letters also provideassurance that the NEO is eligiblefinal outcome of these matters will not materially and adversely affect our business, financial condition, results of operations or cash flows.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “BNED.”
We have reserved an aggregate of 13,409,345 shares of common stock for future grants of equity-based awards underin accordance with the Barnes & Noble Education Inc. Equity Incentive Plan. With respectPlan. See Item 8. Financial Statements and Supplementary Data - Note 12. Long-Term Incentive Compensation Expense.
Repurchase of Shares
On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to Messrs. Brover, Donohue, Malhotra$50 million, in the aggregate, of our outstanding common stock. The stock repurchase program is carried out at the direction of management (which may include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and Miller,will be available for general corporate purposes. During Fiscal 2023, 2022, and 2021, we did not repurchase shares under the amountsstock repurchase program. As of such grants are determined byApril 29, 2023, approximately $26.7 million remains available under the Compensation Committee,stock repurchase program.
During the years ended April 29, 2023, April 30, 2022, and May 1, 2021, we also repurchased 347,808 shares, 239,751 shares, and 414,174 shares, respectively, of our common stock in connection with respectemployee tax withholding obligations for vested stock awards.
Dividends
We paid no other dividends to Mr. Huseby, the amount of such equity award shall have an aggregate target value of 300% of his base salary. The employment agreement for Mr. Huseby and the employment letter for Mr. Brover also provide for $1,000,000 of life insurance and long-term disability (providing for monthly payments of $12,800) payablecommon stockholders during the disability period throughyears ended April 29, 2023, April 30, 2022, and May 1, 2021. We do not intend to pay dividends on our common stock in the earlierforeseeable future and dividend payments are not permitted under current or future financing arrangements.
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Item 6. SELECTED FINANCIAL DATA
The selected financial information presented below should be read in conjunction with Item 7. Management's Discussion and Analysis of deathFinancial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.
Fiscal Year (a)(b) | ||||||||||||||||||||||||||||||||
| (In thousands of dollars, except for share and per share amounts) | 2023 | 2022 (c) | 2021 (c) | 2020 (c) | 2019 | |||||||||||||||||||||||||||
| STATEMENT OF OPERATIONS DATA: | ||||||||||||||||||||||||||||||||
| Total sales | $ | 1,543,208 | $ | 1,495,734 | $ | 1,406,516 | $ | 1,827,402 | $ | 2,013,304 | ||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | 1,193,769 | 1,152,902 | 1,176,173 | 1,404,166 | 1,505,608 | |||||||||||||||||||||||||||
| Gross profit | 349,439 | 342,832 | 230,343 | 423,236 | 507,696 | |||||||||||||||||||||||||||
| Selling and administrative expenses | 357,611 | 353,968 | 316,164 | 385,300 | 409,376 | |||||||||||||||||||||||||||
| Depreciation and amortization expense | 42,163 | 42,124 | 45,204 | 53,190 | 57,891 | |||||||||||||||||||||||||||
Impairment loss (non-cash) (d) | 6,008 | 6,411 | 27,630 | 433 | 57,748 | |||||||||||||||||||||||||||
Restructuring and other charges (d) | 10,103 | 944 | 10,107 | 18,567 | 6,836 | |||||||||||||||||||||||||||
| Transaction costs | — | — | — | — | 154 | |||||||||||||||||||||||||||
| Operating loss | (66,446) | (60,615) | (168,762) | (34,254) | (24,309) | |||||||||||||||||||||||||||
| Interest expense, net | 22,683 | 10,096 | 8,087 | 7,445 | 9,780 | |||||||||||||||||||||||||||
| Loss from continuing operations before income taxes | (89,129) | (70,711) | (176,849) | (41,699) | (34,089) | |||||||||||||||||||||||||||
| Income tax expense (benefit) | 1,011 | (9,152) | (43,280) | (9,895) | (12,263) | |||||||||||||||||||||||||||
| Loss from continuing operations, net of tax | (90,140) | (61,559) | (133,569) | (31,804) | (21,826) | |||||||||||||||||||||||||||
Loss from discontinued operations, net of tax (b) | (11,722) | (7,298) | (6,241) | (6,446) | (2,548) | |||||||||||||||||||||||||||
| Net loss | $ | (101,862) | $ | (68,857) | $ | (139,810) | $ | (38,250) | $ | (24,374) | ||||||||||||||||||||||
| Loss per common share: | ||||||||||||||||||||||||||||||||
| Basic and Diluted | ||||||||||||||||||||||||||||||||
| Continuing operations | $ | (1.72) | $ | (1.19) | $ | (2.69) | $ | (0.66) | $ | (0.46) | ||||||||||||||||||||||
Discontinued operations (b) | (0.22) | (0.14) | (0.12) | (0.14) | (0.06) | |||||||||||||||||||||||||||
| Total Basic and Diluted Earnings per share | $ | (1.94) | $ | (1.33) | $ | (2.81) | $ | (0.80) | $ | (0.52) | ||||||||||||||||||||||
| Weighted average common shares - Basic and Diluted (thousands): | 52,454 | 51,797 | 49,669 | 48,013 | 47,306 | |||||||||||||||||||||||||||
Fiscal Year (a)(b) | ||||||||||||||||||||||||||||||||
| (In thousands of dollars, except for share and per share amounts) | 2023 | 2022 (c) | 2021 (c) | 2020 (c) | 2019 | |||||||||||||||||||||||||||
| OTHER OPERATING DATA - Continuing Operations: | ||||||||||||||||||||||||||||||||
Adjusted EBITDA (non-GAAP) (e) | ||||||||||||||||||||||||||||||||
| Retail | $ | 10,640 | $ | 8,679 | $ | (66,827) | $ | 36,227 | $ | 89,094 | ||||||||||||||||||||||
| Wholesale | 3,239 | 3,782 | 18,598 | 21,567 | 35,018 | |||||||||||||||||||||||||||
| Corporate Services and Eliminations | (22,025) | (22,777) | (21,887) | (19,044) | (25,339) | |||||||||||||||||||||||||||
| Total Adjusted EBITDA (non-GAAP) | $ | (8,146) | $ | (10,316) | $ | (70,116) | $ | 38,750 | $ | 98,773 | ||||||||||||||||||||||
Adjusted Earnings (non-GAAP) (e) | $ | (74,003) | $ | (53,384) | $ | (93,890) | $ | (17,104) | $ | 26,811 | ||||||||||||||||||||||
| Capital expenditures | $ | 25,092 | $ | 33,607 | $ | 27,562 | $ | 30,767 | $ | 34,976 | ||||||||||||||||||||||
| OTHER OPERATING DATA - STORE COUNT: | ||||||||||||||||||||||||||||||||
| Number of physical stores at period end | 774 | 805 | 769 | 772 | 772 | |||||||||||||||||||||||||||
| Number of virtual stores at period end | 592 | 622 | 648 | 647 | 676 | |||||||||||||||||||||||||||
| Total number of stores at period end | 1,366 | 1,427 | 1,417 | 1,419 | 1,448 | |||||||||||||||||||||||||||
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Fiscal Year (a)(b) | ||||||||||||||||||||||||||||||||
| (In thousands of dollars, except for share and per share amounts) | 2023 | 2022 (c) | 2021 (c) | 2020 (c) | 2019 | |||||||||||||||||||||||||||
| BALANCE SHEET DATA (at period end): | ||||||||||||||||||||||||||||||||
| Merchandise and rental inventory | $ | 353,328 | $ | 323,466 | $ | 309,804 | $ | 469,649 | $ | 467,323 | ||||||||||||||||||||||
Total assets (b) | $ | 980,779 | $ | 1,071,553 | $ | 1,031,113 | $ | 1,158,138 | $ | 952,337 | ||||||||||||||||||||||
Total liabilities (b) | $ | 850,028 | $ | 843,179 | $ | 738,102 | $ | 740,387 | $ | 501,709 | ||||||||||||||||||||||
| Short-term debt | $ | — | $ | 40,000 | $ | 50,000 | $ | 75,000 | $ | 100,000 | ||||||||||||||||||||||
| Long-term debt | $ | 182,151 | $ | 185,700 | $ | 127,600 | $ | 99,700 | $ | 33,500 | ||||||||||||||||||||||
| Total stockholders' equity | $ | 130,751 | $ | 228,374 | $ | 293,011 | $ | 417,751 | $ | 450,628 | ||||||||||||||||||||||
(a)Our fiscal year is comprised of 52 or 53 weeks, ending on the attainmentSaturday closest to the last day of age 65. EachApril. “Fiscal 2023” means the 52 weeks ended April 29, 2023, “Fiscal 2022” means the 52 weeks ended April 30, 2022, “Fiscal 2021” means the 52 weeks ended May 1, 2021, “Fiscal 2020” means the 53 weeks ended May 2, 2020, and “Fiscal 2019” means the 52 weeks ended April 27, 2019.
(b)During the fourth quarter of Fiscal 2023, assets related to our Digital Student Solutions ("DSS") Segment 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 consolidated statements of operations as "Loss from discontinued operations, net of tax" for all periods presented. Certain assets and liabilities associated with the DSS Segment are presented in our consolidated balance sheets as "Assets Held for Sale" and "Liabilities Held for Sale."
(c) During Fiscal 2022, Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our NEOs is entitled to all other benefits afforded to executive officersresults of operations and employeescash flows.
(d) For additional information, see Item 8. Financial Statements and Supplementary Data - Note 2. Summary of the Company.
Under their respective employment agreements or employment letters with the Company,Significant Accounting Policies
(e) To supplement our NEOs are subject to certain restrictive covenants regarding competition, solicitation, confidentiality and disparagement. Mr. Huseby’s agreement contains non-competition and non-solicitation covenants that apply during the employment term and for the two-year period following the termination of employment.
Messrs. Brover, Donohue, Malhotra and Miller are restricted by a non-competition and non-solicitation covenant during their term of employment and for a one-year period thereafter. The confidentiality and non-disparagement covenants apply during the term of each respective employment letters of each NEO and at all times thereafter.
Employment Arrangements-Severance and Change of Control Benefits
Mr. Huseby’s employment agreement provides that he may be terminated by the Company upon death or disability or for “cause”, and by Mr. Huseby without “good reason”. If Mr. Huseby’s employment is terminated by the Company upon death, disability or for “cause,” or by the NEO without “good reason”, Mr. Huseby is entitled to payment of base salary through the date of death, disability or termination of employment. Pursuant to the letter agreement, dated April 1, 2020, between the Company and Mr. Huseby, the reduction in base salary does not apply with respect to the determination of severance and change of control benefits under Mr. Huseby’s employment agreement.
If the employment of Messrs. Huseby, Brover, Donohue, Malhotra or Miller is terminated by the Company without “cause” or by the NEO for “good reason,” the NEO is entitled, provided he signs a release of claims against the Company, to a lump-sum severance payment equal to one-time (or, in the case of Mr. Huseby, two times) (a) annual base salary, (b) with respect to Mr. Huseby, the average of annual incentive compensation actually paid to Mr. Huseby with respect to the three completed years preceding the date of termination, and with respect to Messrs. Brover, Donohue, Malhotra and Miller, the target annual incentive compensation for the fiscal year in which termination takes place, and (c) the cost of benefits.
Further, if the employment of any NEO is terminated by the Company without “cause” or by the NEO for “good reason” within two years (or the remainder of his term of employment under his employment agreement, whichever is longer) following a “change of control” of the Company, the NEO is entitled, regardless of whether he signs a release of claims against the Company, to a lump-sum severance payment equal to two times (or, in the case of Mr. Huseby, three times) (a) annual base salary, (b) with respect to Mr. Huseby, the average of annual incentive compensation actually paid to Mr. Huseby with respect to the three completed years preceding the date of termination, and with respect to Messrs. Brover, Donohue, Malhotra and Miller, the target annual incentive compensation for the fiscal year in which termination takes place, and (c) the cost of benefits. However, if such severance payments trigger the “golden parachute” excise tax under Sections 280G and 4999 of the Code, the severance benefits for an NEO would be reduced if such reduction would result in a greater after-tax benefit to him.
Except as otherwise provided by the applicable award agreement, if the successor company assumes or substitutes for an outstanding equity award such award will continueresults prepared in accordance with its applicable termsGAAP, we use the measure of Adjusted EBITDA and will not be accelerated. UnderAdjusted Earnings, which are non-GAAP financial measures as defined by the restricted stock unit award agreements, ifSecurities and Exchange Commission (the “SEC”). See
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the holder were terminated other than for “cause” at any time following a change of control, then the unvested restricted stock units underlying the award would immediately vest.
Under the award agreements executed under thecontext otherwise indicates, references to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc. Equity Incentive Plan, “changeor “BNED”, a Delaware corporation. References to “Barnes & Noble College” or “BNC” refer to our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our subsidiary MBS Textbook Exchange, LLC.
Our fiscal year is comprised of control” generally has52 or 53 weeks, ending on the same meaning as provided underSaturday closest to the last day of April. “Fiscal 2024” means the 52 weeks ended April 27, 2024, “Fiscal 2023” means the 52 weeks ended April 29, 2023, “Fiscal 2022” means the 52 weeks ended April 30, 2022, and “Fiscal 2021” means the 52 weeks ended May 1, 2021.
Overview
Description of Business
Barnes & Noble Education, Inc. Equity Incentive Plan and means any(“BNED”) is one of the following: (a)largest contract operators of physical and virtual bookstores for college and university campuses and K-12 institutions across the United States. We are also one of the largest textbook wholesalers, inventory management hardware and software providers, and a changeleading provider of digital education solutions. We operate 1,366 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content, tools and general merchandise within a dynamic omnichannel retail environment.
The strengths of our business include our ability to compete by developing new products and solutions to meet market needs, our large operating footprint with direct access to students and faculty, our well-established, deep relationships with academic partners and stable, long-term contracts and our well-recognized brands. We provide product and service offerings designed to address the most pressing issues in higher education, including equitable access, enhanced convenience and improved affordability through innovative course material delivery models designed to drive improved student experiences and outcomes. We offer our BNC First Day® equitable and inclusive access programs, consisting of First DayComplete and First Day, which provide faculty requested course materials on or before the first day of class at a discounted rate, as compared to the total retail price for the same course materials if purchased separately. The BNC First Day discounted price is offered as a course fee or included in tuition. During Fiscal 2023, BNC First Day total revenue increased 48% from the prior year period. We plan to move many institutions to First Day Complete in Fiscal 2024 and the majority of our stores by Fiscal 2025, with continued relative adoption of this model thereafter.
We expect to continue to introduce scalable and advanced solutions focused largely on the student and customer experience, expand our e-commerce capabilities and accelerate such capabilities through our merchandising partnership with Fanatics Retail Group Fulfillment, LLC, Inc. (“Fanatics”) and Fanatics Lids College, Inc. D/B/A "Lids" (“Lids”) (collectively referred to herein as the “F/L Partnership”), win new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect gross general merchandise sales to continue to increase over the long term, as our product assortments continue to emphasize and reflect changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, which we expect to be further enhanced and accelerated through the F/L Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our logo general merchandise business. During Fiscal 2023, Retail Gross Comparable Store general merchandise sales increased by 8.6%.
The Barnes & Noble brand (licensed from our former parent) along with our subsidiary brands, BNC and MBS, are synonymous with innovation in bookselling and campus retailing, and are widely recognized and respected brands in the ownershipUnited States. Our large college footprint, reputation, and credibility in the marketplace not only support our marketing efforts to universities, students, and faculty, but are also important to our relationship with leading publishers who rely on us as one of their primary distribution channels.
For a discussion of our business,see Part I - Item 1. Business.
Sale of Digital Student Solutions ("DSS") Segment
During the fourth quarter of Fiscal 2023, assets related to our Digital Student Solutions ("DSS") Segment met the criteria for classification as Assets Held for Sale and Discontinued Operations. Certain assets and liabilities associated with the DSS Segment are presented in our consolidated balance sheets as "Assets Held for Sale" and "Liabilities Held for Sale". The results of operations related to the DSS Segment are included in the consolidated statements of operations as "Loss from discontinued operations, net of tax." The cash flows of the Company; (b)DSS Segment are also presented separately in our consolidated statements of cash flows.
On May 31, 2023, subsequent to the end of Fiscal 2023, we completed the sale of these assets related to our DSS Segment for cash proceeds of $20 million, net of certain transaction fees, severance costs, escrow, and other considerations. During the first quarter of Fiscal 2024, we expect to record a changeGain on Sale of Business in the range of $2.5 million to $4.5 million. Net
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cash proceeds from the sale was used for debt repayment and provided additional funds for working capital needs under our Credit Facility.
Cost Savings Initiative
We have implemented a significant cost reduction program designed to streamline our operations, maximize productivity and drive profitability. We have taken steps to significantly reduce our workforce during non-rush seasonal sales periods, eliminated duplicate administrative headcounts at all levels, implemented improved system development processes to reduce maintenance costs. reduced capital expenditures, and evaluated operating contractual obligations for cost savings. We have achieved meaningful cost savings from this program of approximately $17 million during the year ended April 29, 2023. These initiatives are expected to provide annualized savings of $30 million to $35 million in Fiscal 2024. Management's plans over the next twelve months include the further reduction of gross capital expenditures and other cost saving measures of approximately $25 million. Management believes that these plans are within its control and probable of being implemented on a timely basis.
BNC First Day Equitable and Inclusive Access Programs
We provide product and service offerings designed to address the most pressing issues in higher education, including equitable access, enhanced convenience and improved affordability through innovative course material delivery models designed to drive improved student experiences and outcomes. We offer our BNC First Day® equitable and inclusive access programs, consisting of First DayComplete and First Day, which provide faculty requested course materials on or before the first day of class at a discounted rate, as compared to the total retail price for the same course materials if purchased separately. The BNC First Day discounted price is offered as a course fee or included in tuition.
•First Day Complete is adopted by an institution and includes all undergraduate classes (and on occasion graduate classes), providing students both physical and digital materials. The First Day Complete model drives substantially greater unit sales and sell-through for the bookstore.
•First Day is adopted by a faculty member for a single course, and students receive primarily digital course materials through their school's learning management system ("LMS").
Offering course materials through our equitable and inclusive access First Day Complete and First Day models is a key, and increasingly important strategic initiative of ours to meet the market demands of substantially reduced pricing to students, as well as the opportunity to improve student outcomes, while, at the same time, increasing our market share, revenue and relative gross profits of course material sales given the higher volumes of units sold in such models as compared to historical sales models that rely on individual student marketing and sales. These programs have allowed us to reverse historical long-term trends in course materials revenue declines, which have been observed at those schools where such programs have been adopted. We are moving quickly and decisively to accelerate our First Day Complete strategy. We plan to move many institutions to First Day Complete in Fiscal 2024 and the majority of our schools by Fiscal 2025, with continued relative adoption of this model thereafter.
For the 2023 Spring Term, 116 campus stores adopted our First Day Complete course materials delivery program, representing approximately 580,000 in total undergraduate student enrollment (as reported by National Center for Education Statistics), compared to 76 campus stores representing approximately 380,000 in total undergraduate student enrollment for the 2022 Spring Term. During the 52 weeks ended April 29, 2023, First Day Complete sales increased by $93 million to $198 million, or 88%, as compared to $105 million in the prior year period.
Partnership with Fanatics and Lids
In December 2020, we entered into the F/L Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our general merchandise business. Fanatics’ cutting-edge e-commerce and technology expertise offers our campus stores expanded product selection, a world-class online and mobile experience, and a progressive direct-to-consumer platform. Coupled with Lids, the leading standalone brick and mortar retailer focused exclusively on licensed fan and alumni products, our campus stores have improved access to trend and sales performance data on licensees, product styles, and design treatments.
We maintain our relationships with campus partners and remain responsible for staffing and managing the day-to-day operations of our campus bookstores. We also work closely with our campus partners to ensure that each campus store maintains unique aspects of in-store merchandising, including localized product assortments and specific styles and designs that reflect each campus’s brand. We leverage Fanatics’ e-commerce technology and expertise for the operational management of the emblematic merchandise and gift sections of our campus store websites.
Lids manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores, and Lids owns the inventory it manages, relieving us of the obligation to finance inventory purchases from working capital. Through the pending installation of Lids "Custom Zones" at certain stores, our stores will offer a
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differentiated shopping experience, that lets students, parents, alumni, fans, and campus clubs personalize school merchandise that’s sold in the store. These Custom Zones will drive incremental foot traffic, increase in-store dwell time, and grow sales opportunities. The installation of traffic counters at certain stores provides comprehensive store analytics that help us optimize the customer experience and business outcomes, by better aligning staffing with peak traffic hours, identifying opportunities to increase conversion, or assessing promotional effectiveness.
On April 4, 2021, as contemplated by the F/L Partnership's merchandising agreement, we sold our logo and emblematic general merchandise inventory to Lids, which was finalized during the first quarter of Fiscal 2022. Effective in April 2021, as contemplated by the F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of our logo general merchandise sales to Lids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo and emblematic general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis prior to April 4, 2021.
In December 2020, Fanatics, Inc. and Lids Holdings, Inc. jointly made a $15 million strategic equity investment in BNED. In addition to its equity investment, on June 7, 2022, we entered into a $30 million term loan credit agreement with TopLids LendCo, LLC and Vital Fundco, LLC, another strategic partner. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data.
COVID-19 Pandemic Business Impact
Our business was significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. The impact of COVID-19 store closings during Fiscal 2021 to Fiscal 2022 resulted in the loss of cash flow and increased borrowings that we would not otherwise have expected to incur. However, on campus traffic continues to grow from increased campus events and activities, as compared to the last two years. We cannot accurately predict the duration or extent of the lingering impact of the COVID-19 pandemic on enrollments, primarily at community colleges and international student enrollment, campus activities, university budgets, athletics, the continuation of remote and hybrid class offerings, and other areas that directly affect our business operations.
Segments
During the fourth quarter of Fiscal 2023, assets related to our DSS Segment met the criteria for classification as Assets Held for Sale and Discontinued Operations and is no longer a reportable segment. We have two reportable segments: Retail and Wholesale. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, are not allocated to any specific reporting segment and continue to be presented as “Corporate Services”. The following discussion provides information regarding the three segments.
Retail Segment
The Retail Segment operates 1,366 college, university, and K-12 school bookstores, comprised of 774 physical bookstores and 592 virtual bookstores. Our bookstores typically operate under agreements with the college, university, or K-12 schools to be the official bookstore and the exclusive seller of course materials and supplies, including physical and digital products. The majority of the physical campus bookstores have school-branded e-commerce websites which we operate independently or along with our merchant partners, and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. The Retail Segment also offers equitable and inclusive access programs, which provide faculty requested course materials on or before the first day of class at a discounted rate, as compared to the total retail price for the same course materials if purchased separately. The BNC First Day discounted price is offered as a course fee or included in tuition. Additionally, the Retail Segment offers a suite of digital content and services to colleges and universities, including a variety of open educational resource-based courseware.
Wholesale Segment
The Wholesale Segment is comprised of our wholesale textbook business and is one of the largest textbook wholesalers in the country. The Wholesale Segment centrally sources, sells, and distributes new and used textbooks to approximately 3,000 physical bookstores (including our Retail Segment's 774 physical bookstores) and sources and distributes new and used textbooks to our 592 virtual bookstores. Additionally, the Wholesale Segment sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 340 college bookstores.
Corporate Services represents unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources.
36
Seasonality
Our business is highly seasonal. Our quarterly results also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April.
Our retail business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters.
Retail product revenue is recognized when the customer takes physical possession of our products, which occurs either at the point of sale for products purchased at physical locations or upon receipt of our products by our customers for products ordered through our websites and virtual bookstores. Revenue from the sale of digital textbooks, which contains a single performance obligation, is recognized at the point of sale as product revenue in our consolidated financial statements. Revenue from the rental of physical textbooks is deferred and recognized over the rental period based on the passage of time commencing at the point of sale, when control of the Company;product transfers to the customer and is recognized as rental income in our consolidated financial statements. Depending on the product mix offered under the BNC First Day offerings, revenue recognized is consistent with our policies for product, digital and rental sales, net of an anticipated opt-out or (c)return provision.
Given the growth of BNC First Day programs, the timing of cash collection from our school partners may shift to periods subsequent to when the revenue is recognized. When a changeschool adopts our BNC First Day equitable and inclusive access offerings, cash collection from the school generally occurs after the student drop/add dates, which is later in the ownership of a substantial portionworking capital cycle, particularly in our third quarter given the timing of the Company’sSpring Term and our quarterly reporting period, as compared to direct-to-student point-of-sale transactions where cash is generally collected during the point-of-sale transaction or within a few days from the credit card processor. As a higher percentage of our sales shift to BNC First Day equitable and inclusive access offerings, we are focused on efforts to better align the timing of our cash outflows to course material vendors and schools with cash inflows collected from schools, including modifying payment terms in existing and future school contracts.
Sales attributable to our wholesale business are generally highest in our first, second and third quarter, as it sells textbooks and other course materials for retail distribution.
Trends and Other Factors Affecting Our Business
For a discussion of our trends and other factors affecting our business,see Part I - Item 1. Business.
Results of Operations
Elements of Results of Operations
Our 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 consolidated financial statements are presented on a consolidated basis. All material intercompany accounts and transactions have been eliminated in consolidation.
During the fourth quarter of Fiscal 2023, assets related to our DSS Segment met the criteria for classification as Assets Held for Sale and Discontinued Operations. Certain assets and liabilities associated with the DSS Segment are presented in each case, withinour consolidated balance sheets as current "Assets Held for Sale" and current "Liabilities Held for Sale". The results of operations related to the meaningDSS Segment are included in the consolidated statements of Section 409Aoperations as "Loss from discontinued operations, net of tax." The cash flows of the CodeDSS Segment are also presented separately in our consolidated statements of cash flows.
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 regulations promulgated thereunder.
Underrental 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, content development cost 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 any specific reporting segment and are recorded in Corporate Services as discussed in the restricted stock unit award agreements, “cause” generally means Overview - Segments discussion above.
37
Results of Operations Summary - Continuing Operations (a) a material failure by
| 52 weeks ended | |||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 (a) | April 30, 2022 (b) | May 1, 2021 (b) | ||||||||||||||||||||||||||
Sales: (c) | |||||||||||||||||||||||||||||
| Product sales and other | $ | 1,406,655 | $ | 1,362,380 | $ | 1,272,366 | |||||||||||||||||||||||
| Rental income | 136,553 | 133,354 | 134,150 | ||||||||||||||||||||||||||
| Total sales | $ | 1,543,208 | $ | 1,495,734 | $ | 1,406,516 | |||||||||||||||||||||||
| Gross Profit | $ | 349,439 | $ | 342,832 | $ | 230,343 | |||||||||||||||||||||||
| Net loss from continuing operations | $ | (90,140) | $ | (61,559) | $ | (133,569) | |||||||||||||||||||||||
Adjusted Earnings (non-GAAP) - Continuing Operations (d) | $ | (74,003) | $ | (53,384) | $ | (93,890) | |||||||||||||||||||||||
Adjusted EBITDA (non-GAAP) - Continuing Operations (d) | |||||||||||||||||||||||||||||
| Retail | $ | 10,640 | $ | 8,679 | $ | (66,827) | |||||||||||||||||||||||
| Wholesale | 3,239 | 3,782 | 18,598 | ||||||||||||||||||||||||||
| Corporate Services | (22,000) | (23,002) | (22,079) | ||||||||||||||||||||||||||
| Eliminations | (25) | 225 | 192 | ||||||||||||||||||||||||||
| Total Adjusted EBITDA (non-GAAP) | $ | (8,146) | $ | (10,316) | $ | (70,116) | |||||||||||||||||||||||
(a)During the holderfourth quarter of Fiscal 2023, assets related to perform his or her duties (other thanour Digital Student Solutions ("DSS") Segment met the criteria for classification as a resultAssets Held for Sale and Discontinued Operations. Net Loss from Continuing Operations excludes the results of incapacity due to physical or mental illness) during his or her employment with the Company after written notice
8
of such breach or failure and the holder failed to cure such breach or failureoperations related to the Company’s reasonable satisfaction within five days after receiving such written notice; or DSS Segment for all years reported above.
(b) any act of fraud, misappropriation, misuse, embezzlement or any other material act of dishonesty in respect of the Company or its funds, properties, assets or other employees.NEOs in the event of a change of control are set forth in the “Potential Payments Upon Termination or Change of Control Table”.
The estimated payments to be made by the Company to
Employment Arrangements-Defined Terms
“Cause,” for purposes of the employment agreementbusiness experienced an unprecedented and employment letters, generally means any of the following: (a) the NEO engaging in intentional misconduct or gross negligence that, in either case, is injurious to the Company; (b) the NEO’s indictment, entry of a plea of nolo contendere or conviction by a court of competent jurisdiction with respect to any crime or violation of law involving fraud or dishonesty (with the exception of misconduct based in good faith on the advice of professional consultants, such as attorneys and accountants) or any felony (or equivalent crime in a non-U.S. jurisdiction); (c) any gross negligence, intentional acts or intentional omissions by the NEO in connection with the performance of the NEO’s duties and responsibilities; (d) fraud, dishonesty, embezzlement or misappropriation in connection with the performance of the NEO’s duties and responsibilities; (e) the NEO engaging in any act of misconduct or moral turpitude reasonably likely to adversely affect the Company or its business; (f) the NEO’s abuse of or dependency on alcohol or drugs (illicit or otherwise) that adversely affects the NEO’s job performance; (g) the NEO’s willful failure or refusal to properly perform the duties, responsibilities or obligations of the NEO’s service for reasons other than disability or authorized leave, or to properly perform or follow any lawful direction by the Company; or (h) the NEO’s breach of the agreement or of any other contractual duty to, written policy of, or written agreement with, the Company.
“Change of Control,” for purposes of the employment agreement and employment letters, generally means any of the following: (a) the Company’s directors immediately prior to a merger, consolidation, liquidation or sale of assets cease within two years thereafter to constitute a majority of the Company’s Board of Directors; (b) the Company’s directors immediately prior to a tender or exchange offer for the Company’s voting securities cease within two years thereafter to constitute a majority of the Company’s Board of Directors. The consummation of a corporate transaction constituting a Reorganization or a Sale, if such transaction requires the approval of the Company’s stockholders, subject to certain exceptions outlined in the agreement and letters; or (c) the acquisition by any person or group (other than the executive or his or her affiliates) of 40% or more of the Company’s voting securities.
“Good Reason,” for purposes of the employment agreement and employment letters, generally means any of the following without the NEO’s written consent: (a) a material diminution of authority, duties or responsibilities; (b) a material diminution in the authority, duties or responsibilities of the supervisor to whom the NEO reports; (c) a reduction in current annual base salary or target annual bonus; (d) the relocation of the Company’s principal executive offices more than 50 miles from both New York City, New York and Basking Ridge, New Jersey; (e) a failure by the Company to make material payments under the agreement; (f) a reduction in title; or (g) a material reduction in the value of employee benefits following a Change of Control. Notwithstanding the foregoing, an NEO will only have grounds to resign for Good Reason if the NEO notifies the Company in writing with 60 days of the Good Reason occurrence, the Company does not cure such grounds within 30 days following receipt of notice, and the NEO actually resigns employment 30 days following the end of such cure period.
Resignation Letter Agreement with Mr. Brover
On February 7, 2020, Mr. Brover resigned as Executive Vice President, Operations of the Company and Executive Vice President of Barnes & Noble College Booksellers, LLC, effective as of May 2, 2020,significant impact as a result of the eliminationCOVID-19 pandemic. The impact of his positions.
In connection with his resignation,which affects the Companycomparability of our results of operations and Mr. Brover entered into a resignation letter agreement. Undercash flows.
(c)Effective in April 2021, as contemplated by the resignation letterF/L Partnership's merchandising agreement and consistent with Mr. Brover’s employment letter, Mr. Brover received, among other things, bi-weekly payments through September 30, 2020e-commerce agreement, we began to transition the fulfillment of an amount equalour logo general merchandise sales to 1.0 timesLids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the sume-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of (i) base salary ($610,000), (ii) target annual bonus for Fiscal 2020 ($610,000) and (iii) the aggregate dollar amount of the payments made or to be made in respect of employee benefits for eighteen months, totaling $1,245,000logo general merchandise sales on a gross basis in the aggregate. In addition, subjectperiods prior to the termstransition. See Retail Gross Comparable Store Sales details.
(d)Adjusted Earnings and conditionsAdjusted EBITDA are a non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.
The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales:
| 52 weeks ended | |||||||||||||||||||||||||||||
| Continuing Operations | April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Product sales and other | 91.2 | % | 91.1 | % | 90.5 | % | |||||||||||||||||||||||
| Rental income | 8.8 | 8.9 | 9.5 | ||||||||||||||||||||||||||
| Total sales | 100.0 | 100.0 | 100.0 | ||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||
Product and other cost of sales (a) | 79.6 | 79.0 | 85.6 | ||||||||||||||||||||||||||
Rental cost of sales (a) | 54.4 | 57.5 | 65.0 | ||||||||||||||||||||||||||
| Total cost of sales | 77.4 | 77.1 | 83.6 | ||||||||||||||||||||||||||
| Gross margin | 22.6 | 22.9 | 16.4 | ||||||||||||||||||||||||||
| Selling and administrative expenses | 23.2 | 23.7 | 22.5 | ||||||||||||||||||||||||||
| Depreciation and amortization expense | 2.7 | 2.8 | 3.2 | ||||||||||||||||||||||||||
| Impairment loss (non-cash) | 0.4 | 0.4 | 2.0 | ||||||||||||||||||||||||||
| Restructuring and other charges | 0.7 | 0.1 | 0.7 | ||||||||||||||||||||||||||
| Operating loss from continuing operations | (4.3) | % | (4.1) | % | (12.0) | % | |||||||||||||||||||||||
(a) Represents the percentage these costs bear to the related sales, instead of total sales.
38
Results of Operations - Discontinued Operations
During the resignation letter agreement, including Mr. Brover’s cooperationfourth quarter of Fiscal 2023, assets related to our DSS Segmentmet the criteria for classification as Assets Held for Sale and Discontinued Operations and is no longer a reportable segment. The results of operations related to the DSS Segment are included in the transitionconsolidated statements of his responsibilitiesoperations as "Loss from discontinued operations, net of tax." On May 31, 2023, subsequent to the end of Fiscal 2023, we completed the sale of these assets related to our DSS Segment for cash proceeds of $20 million, net of certain transaction fees, severance costs, escrow, and Mr. Brover’s waiverother considerations. During the first quarter of any benefitsFiscal 2024, we expect to which herecord a Gain on Sale of Business in the range of $2.5 million to $4.5 million. Net cash proceeds from the sale was entitledused for a change of control of the Companydebt repayment and provided additional funds for working capital needs under his employment letter agreement, the Company agreed to pay Mr. Brover a cash transition payment of $445,000 and a Fiscal 2020 bonus of $305,000 in cash. Mr. Brover forfeited any unvested equity awards. As a condition to payment of all of the foregoing amounts, Mr. Brover executed a release of claims in favor of the Company, BNC, and its affiliates.
Outstanding Equity Awards at Fiscal Year End
our Credit Facility. The following table summarizes the equity awardsoperating results of the Company madediscontinued operations for the periods indicated:
| 52 weeks ended | |||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||||||||||
| Total sales | $ | 35,353 | $ | 35,666 | $ | 27,374 | |||||||||||||||||||||||
Cost of sales (a) | 7,156 | 5,738 | 5,056 | ||||||||||||||||||||||||||
Gross profit (a) | 28,197 | 29,928 | 22,318 | ||||||||||||||||||||||||||
| Selling and administrative expenses | 34,137 | 29,472 | 22,116 | ||||||||||||||||||||||||||
| Depreciation and amortization | 3,155 | 7,257 | 7,763 | ||||||||||||||||||||||||||
| Restructuring costs | 1,848 | — | 571 | ||||||||||||||||||||||||||
| Transaction costs | 381 | — | — | ||||||||||||||||||||||||||
| Operating loss | (11,324) | (6,801) | (8,132) | ||||||||||||||||||||||||||
| Income tax expense (benefit) | 398 | 497 | (1,891) | ||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax | $ | (11,722) | $ | (7,298) | $ | (6,241) | |||||||||||||||||||||||
(a) Cost of sales and Gross margin for the DSS Segment includes amortization expense (non-cash) related to content development costs of $6.6 million, $5.1 million, and $4.3 million for the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively.
Results of Operations - Continuing Operations
- 52 weeks ended April 29, 2023 compared with the 52 weeks ended April 30, 2022
52 weeks ended, April 29, 2023 (a) | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | Corporate Services | Eliminations (b) | Total | ||||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||||||||
| Product sales and other | $ | 1,355,173 | $ | 106,366 | $ | — | $ | (54,884) | $ | 1,406,655 | |||||||||||||||||||||||||
| Rental income | 136,553 | — | — | — | 136,553 | ||||||||||||||||||||||||||||||
| Total sales | 1,491,726 | 106,366 | — | (54,884) | 1,543,208 | ||||||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||||||||
| Product and other cost of sales | 1,086,095 | 88,091 | — | (54,704) | 1,119,482 | ||||||||||||||||||||||||||||||
| Rental cost of sales | 74,287 | — | — | — | 74,287 | ||||||||||||||||||||||||||||||
| Total cost of sales | 1,160,382 | 88,091 | — | (54,704) | 1,193,769 | ||||||||||||||||||||||||||||||
| Gross profit | 331,344 | 18,275 | — | (180) | 349,439 | ||||||||||||||||||||||||||||||
| Selling and administrative expenses | 320,730 | 15,036 | 22,000 | (155) | 357,611 | ||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 36,737 | 5,373 | 53 | — | 42,163 | ||||||||||||||||||||||||||||||
| Impairment loss (non-cash) | 6,008 | — | — | — | 6,008 | ||||||||||||||||||||||||||||||
| Restructuring and other charges | 2,964 | 916 | 6,223 | — | 10,103 | ||||||||||||||||||||||||||||||
| Operating loss from continuing operations | $ | (35,095) | $ | (3,050) | $ | (28,276) | $ | (25) | $ | (66,446) | |||||||||||||||||||||||||
39
52 weeks ended, April 30, 2022 (a)(c) | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | Corporate Services | Eliminations (b) | Total | ||||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||||||||
| Product sales and other | $ | 1,306,310 | $ | 112,246 | $ | — | $ | (56,176) | $ | 1,362,380 | |||||||||||||||||||||||||
| Rental income | 133,354 | — | — | — | 133,354 | ||||||||||||||||||||||||||||||
| Total sales | 1,439,664 | 112,246 | — | (56,176) | 1,495,734 | ||||||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||||||||
| Product and other cost of sales | 1,040,022 | 92,464 | — | (56,243) | 1,076,243 | ||||||||||||||||||||||||||||||
| Rental cost of sales | 76,659 | — | — | — | 76,659 | ||||||||||||||||||||||||||||||
| Total cost of sales | 1,116,681 | 92,464 | — | (56,243) | 1,152,902 | ||||||||||||||||||||||||||||||
| Gross profit | 322,983 | 19,782 | — | 67 | 342,832 | ||||||||||||||||||||||||||||||
| Selling and administrative expenses | 315,124 | 16,000 | 23,002 | (158) | 353,968 | ||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 36,635 | 5,418 | 71 | — | 42,124 | ||||||||||||||||||||||||||||||
| Impairment loss (non-cash) | 6,411 | — | — | — | 6,411 | ||||||||||||||||||||||||||||||
| Restructuring and other charges | 2,118 | (2,131) | 957 | — | 944 | ||||||||||||||||||||||||||||||
| Operating (loss) income from continuing operations | $ | (37,305) | $ | 495 | $ | (24,030) | $ | 225 | $ | (60,615) | |||||||||||||||||||||||||
(a) During the fourth quarter of Fiscal 2023, assets related to our NEOs that were outstandingDigital Student Solutions ("DSS") Segment met the criteria for classification as Assets Held for Sale and Discontinued Operations. Operating Loss from Continuing Operations excludes the results of operations related to the end of Fiscal 2020. The Company has not granted any stock options. In accordance with the applicable SEC disclosure guidance, this table and the accompanying footnotes do not accountDSS Segment for any awards that may have been exercised or have vested pursuant to their terms in the ordinary course since the end of Fiscal 2020.
9
Name | Stock Award Grant Date | RSU/ PSU | Number of Shares or Units of Stock That Have Not Vested (1) | Market Value of Shares or Units of Stock That Have Not Vested (2) | Vesting Dates | |||||||||||||
Michael P. Huseby | ||||||||||||||||||
| 7/19/2017 | PSU | 82,077 | $138,710 | 7/19/20 | ||||||||||||||
| 9/19/2017 | RSU | 93,697 | $158,348 | 9/19/20 | ||||||||||||||
| 7/19/2018 | PSU | 180,834 | $305,609 | 7/19/21 | ||||||||||||||
| 9/26/2018 | RSU | 102,564 | $173,333 | 9/26/20, 9/26/21 | ||||||||||||||
| 6/19/2019 | PSU | 314,285 | $531,142 | 6/19/22 | ||||||||||||||
| 6/19/2019 | RSU | 314,285 | $531,142 | 6/19/20, 6/19/21, 6/19/22 | ||||||||||||||
Thomas D. Donohue | ||||||||||||||||||
| 7/13/2017 | PSU | 6,085 | $10,284 | 7/13/20 | ||||||||||||||
| 9/19/2017 | RSU | 7,099 | $11,997 | 9/19/20 | ||||||||||||||
| 7/19/2018 | PSU | 11,302 | $19,100 | 7/19/21 | ||||||||||||||
| 9/26/2018 | RSU | 19,232 | $32,502 | 9/26/20, 9/26/21 | ||||||||||||||
| 6/19/2019 | PSU | 52,380 | $88,522 | 6/19/22 | ||||||||||||||
| 6/19/2019 | RSU | 52,380 | $88,522 | 6/19/20, 6/19/21, 6/19/22 | ||||||||||||||
Kanuj Malhotra | ||||||||||||||||||
| 7/13/2017 | PSU | 18,256 | $30,852 | 7/13/20 | ||||||||||||||
| 9/19/2017 | RSU | 21,295 | $35,989 | 9/19/20 | ||||||||||||||
| 7/19/2018 | PSU | 31,646 | $53,482 | 7/19/21 | ||||||||||||||
| 9/26/2018 | RSU | 53,846 | $91,000 | 9/26/20, 9/26/21 | ||||||||||||||
| 6/19/2019 | PSU | 61,904 | $104,618 | 6/19/22 | ||||||||||||||
| 6/19/2019 | RSU | 61,904 | $104,618 | 6/19/21, 6/19/22 | ||||||||||||||
Michael C. Miller | 9/19/2017 | RSU | 19,876 | $ | 33,590 | 9/19/20 | ||||||||||||
| 7/19/2018 | PSU | 22,603 | $38,199 | 7/19/21 | ||||||||||||||
| 9/26/2018 | RSU | 38,463 | $65,002 | 9/26/20, 9/26/21 | ||||||||||||||
| 6/19/2019 | PSU | 52,380 | $88,522 | 6/19/22 | ||||||||||||||
| 6/19/2019 | RSU | 52,380 | $88,522 | 6/19/20, 6/19/21, 6/19/22 | ||||||||||||||
|
|
Option Exercises and Stock Vested
The following table provides(b) For additional information about the value realized by our NEOs upon the vesting of stock or stock unit awards during Fiscal 2020. The Company has not issued any stock options.
| Stock Awards | ||||||||||||
Name | Fiscal Year | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting (1) ($) | |||||||||
Michael P. Huseby | 2020 | 198,410 | $ | 667,004 | ||||||||
Barry Brover | 2020 | 62,183 | $ | 209,384 | ||||||||
Thomas D. Donohue | 2020 | 29,181 | $ | 100,985 | ||||||||
Kanuj Malhotra | 2020 | 63,357 | $ | 211,216 | ||||||||
Michael C. Miller | 2020 | 39,106 | $ | 124,178 | ||||||||
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Potential Payments Upon Termination or Change of Control (1)
Event | Michael P. Huseby | Barry Brover | Thomas D. Donohue | Kanuj Malhotra | Michael C. Miller | |||||||||||||||
Involuntary Termination or Voluntary Termination with Good Reason | ||||||||||||||||||||
Cash severance payment (2) | $ | 4,540,549 | $ | — | $ | 937,670 | $ | 1,086,371 | $ | 953,371 | ||||||||||
Accelerated equity-based awards (3) | — | — | — | — | — | |||||||||||||||
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Total | $ | 4,540,549 | $ | — | $ | 937,670 | $ | 1,086,371 | $ | 953,371 | ||||||||||
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Cash severance payment (2) | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Accelerated equity-based awards (3) | 1,838,284 | — | 250,928 | 420,558 | 313,836 | |||||||||||||||
Health benefits (4) | 6,692 | — | 0 | 6,692 | 6,692 | |||||||||||||||
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Total | $ | 1,844,976 | $ | — | $ | 250,928 | $ | 427,250 | $ | 320,528 | ||||||||||
Disability | ||||||||||||||||||||
Cash severance payment (2) | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Accelerated equity-based awards (3) | 1,838,284 | — | 250,928 | 420,558 | 313,836 | |||||||||||||||
Health benefits (5) | 12,023 | — | — | 12,023 | 12,023 | |||||||||||||||
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Total | $ | 1,850,307 | $ | — | $ | 250,928 | $ | 432,581 | $ | 325,859 | ||||||||||
Change of Control with Involuntary Termination (without Cause) or Termination with Good Reason | ||||||||||||||||||||
Cash severance payment (2) | $ | 6,810,824 | $ | — | $ | 1,875,340 | $ | 2,172,742 | $ | 1,906,742 | ||||||||||
Accelerated equity-based awards (3) | 1,838,284 | — | 250,928 | 420,558 | 313,836 | |||||||||||||||
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Total | $ | 8,649,108 | $ | — | $ | 2,126,268 | $ | 2,593,300 | $ | 2,220,578 | ||||||||||
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For the table above, the amount of potential payments to our NEOs, other than Mr. Brover, in the event of a termination of their employment in connection with a change of control was calculated assuming that a change of control occurred on the last business day of Fiscal 2020 (May 2, 2020), each NEO’s employment terminated on that date due to involuntary termination without “cause” or for “good reason” and the successor company did not assume the NEO’s equity awards. Mr. Brover’s employment was terminated effective May 2, 2020, and, in connection with that termination, he was paid the amounts described under “Resignation Letter Agreement with Mr. Brover.
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For a summary of the provisions of the employment agreements with our NEOs that were effective as of May 2, 2020 and the outstanding equity awards that were held by our NEOs as of May 2, 2020, and therefore affect the amounts set forth in the table above in the event of involuntary termination without “cause” or for “good reason” or a “change of control”, see the discussions in the “Narrativerelated to the Summary Compensation Tableintercompany activities and Grants of Plan-Based Awards Table-Employment Arrangements-General Provisions” and “Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table-Employment Arrangements-Severance and Change of Control Benefits” sections of this eliminations, see Part III,II - Item 11.
Pay Ratio Disclosure
The Company is required to provide the ratio of the annual total compensation of the Company’s CEO to the median annual total compensation of all employees under Section 953(b) of the Dodd-Frank Wall Street Reform 8. Financial Statements and Consumer Protection Act. The pay ratio information provided below is a reasonable estimate calculated in a manner consistent with Item 402(u) of SEC Regulation S-K.
For Supplementary Data - Note 4. Segment Reporting.
(c)In Fiscal 2020, the median annual total compensation of our median employee, excluding our CEO, was $6,749 and the annual total compensation of our CEO was $3,353,959. Accordingly, the ratio of the CEO’s annual total compensation to the annual total compensation of our median employee was 497:1.
To determine our median employee, the Company used the employee population of 9,309 on the final day of the payroll year, May 1, 2020. Temporary, seasonal, and part time employees make up 64% of the Company’s total population and on average work less than 15 hours per week. As permitted under SEC rules, we excluded employees in India as de minimis. We used cash compensation (base salary, overtime and cash bonuses paid during Fiscal 2020) to determine the median employee in our population.
When we include only our full time “permanent” staff as of May 2, 2020, our median employee’s annualized total compensation was $39,624 for Fiscal 2020. Under this calculation, the CEO pay ratio is 85:1. We believe this is a more representative indication of how our CEO pay compares to that of our workforce. (Note this population totals 3,365).
The SEC rules do not specify a single methodology for identifying the median employee or calculating the CEO pay ratio. Since other companies use different assumptions, adjustments, or estimates in their own calculation, disclosure and methodology is inconsistent across companies. Therefore, our CEO pay ratio is not comparable to another company’s CEO pay ratio. Our information and pay ratio calculation is a reasonable good faith estimate, based on our methodology and SEC rules as required for disclosure.
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis summarizes the material elements of our compensation program for our named executive officers (“NEOs”). For Fiscal 2020, our NEOs were:
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Executive Summary
Our executive compensation program is designed to align with2022, our business strategy to attract, retain,experienced an unprecedented and engage the talent we need to compete in our industry, and align management with stockholders’ interests. We believe our Compensation Committee has established a compensation program that reflects our businesses, compensation governance best practices and a “pay-for-performance” philosophy.
Compensation and Governance Highlights
What we do
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Executive Leadership Transition
On February 7, 2020, Mr. Barry Brover submitted his resignation as Executive Vice President, Operations of the Company and Executive Vice President of Barnes & Noble College, effective as of May 2, 2020.
Recent Actions Taken by Compensation Committee
The Compensation Committee continues to review and refine the Company’s executive compensation program to further align pay with Company performance and to ensure the integrity of the Company’s executive compensation program. The Compensation Committee considered the “say-on-pay” stockholder advisory vote held in September 2019 to be supportive of the Company’s pay practices. Approximately 88.9% of stockholder votes cast were in favor of the executive officer compensation as described in our 2019 proxy statement. Over the past few years, the Compensation Committee has been responsive to concerns raised by the stockholders and have made adjustments to the compensation program accordingly. The reaction to these changes from stockholders generally has been favorable.
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Highlights of Fiscal 2020 Company Performance
The Company has faced transformational and challenging trends in the higher education market. Given this landscape, the following are Company financial and operational performance highlights for Fiscal 2020.
Financial Highlights
Fiscal year 2020 consolidated sales of $1,851.1 million decreased 9.0% as compared to the prior year.
Consolidated fiscal year 2020 GAAP net loss was $(38.3) million, compared to a net loss of $(24.4) million in the prior year.
Fiscal year 2020 consolidated non-GAAP Adjusted EBITDA was $42.2 million, compared to non-GAAP Adjusted EBIDTA of $104.9 million in the prior year.
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Fiscal year 2020 consolidated non-GAAP Adjusted Earnings was $(21.1) million, compared to non-GAAP Adjusted Earnings of $25.4 million in the prior year.
Progressed on the execution of a number of strategic initiatives; all of which remained on target prior to the onset of the COVID-19 pandemic, which has accelerated the demand and need to scale such key initiatives.
Bartleby successes.
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eCommerce platform development. Completed initial build of the Company’s next generation eCommerce platform; recently executed selective launch with expected further roll-out throughout fiscal year 2021 to grow increased high-margin general merchandise sales.
BNC First Day Successes.
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Bookstore wins. Continued to win new business for both physical and virtual bookstores, including the University of Nevada, Reno, Western Kentucky University, Front Range Community College and The City Colleges of Chicago.
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For a reconciliation of Adjusted EBITDA to net income and discussion of the Company’s use of Adjusted EBITDA, please refer to page 49 of the Company’s Annual Report on Form 10-K for the fiscal year ended May 2, 2020.
Pay and Performance Alignment in Fiscal 2020
Annual incentives for NEOs for Fiscal 2020 were awarded mostly based on Company EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items) performance relative to a pre-defined target level. As described below in more detail, our Fiscal 2020 Company EBITDA performance was 45% of target, which yielded a payout factor of 0% of the target award allocated to the Company goal. In determining individual NEO awards, the Compensation Committee also considered individual performance against individual performance goals.
Fiscal 2020 equity grants for the executive officers were delivered in a combination of performance shares, which accounted for 50% of the target award amount for the NEOs, and restricted stock units, which accounted for 50% of the target award for the NEOs. Relative to the prior year, the Compensation Committee increased the portion of performance shares from 25% of the total to 50% of the total for all NEOs (in the prior year, only the CEO received a 50%/50% mix). This change was in response to shareholder feedback and to better align executive pay with overall performance. The Compensation Committee believes the mix of awards provides a strong link between the Company’s financial performance and executive compensation, aligns executives with the Company’s stockholders and provides an important retention tool. The performance shares will vest if and only to the extent pre-established performance goals for the two-year period covering Fiscal years 2020 and 2021 are achieved and an additional one year of time-based vesting is met. The restricted stock units vest in equal one-third increments on the first, second and third anniversary of the grant date. The performance shares granted in Fiscal year 2019 were forfeited as the performance goals for such awards for the performance period of Fiscal years 2019 and 2020 were not achieved.
Compensation Decisions for Fiscal 2021
The Compensation Committee is committed to aligning executive pay with organization performance. However, the ongoing COVID-19 pandemic is having a significant impact on schools, as they decide whether to pursue on campus or virtual learning environments for the upcoming semester and beyond. Within this context, the Compensation Committee is continuing to evaluate the most appropriate approach to executive compensation for Fiscal 2021 and will be revisited once the fall back to school period is concluded.
Compensation Philosophy and Objectives
We are engaged in a very competitive and rapidly changing industry, and our success depends on our ability to attract, motivate and retain qualified executives. Accordingly, the Compensation Committee aims to create total compensation packages that are competitive with programs offered by other companies with which we compete for talent. At the same time, our Compensation Committee believes that a significant portion of the compensation paid to our executive officers should be tied to our performance, execution of our strategic plan and the value we create for stockholders.
The Compensation Committee’s objectives are to:
attract, retain, and motivate talented executives responsible for the success of our organization;
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provide compensation to executives that is externally competitive, internally equitable, performance-based, and aligned with stockholder interests; and
ensure that total compensation levels are reflective of company and individual performance and provide executives with the opportunity to receive above-market total compensation for exceptional business performance.
Compensation Market References
In establishing compensation for Fiscal 2020, the Compensation Committee worked with Mercer, its compensation consultant, to develop a peer group for the Company and review executive compensation against that peer group. In support of its compensation philosophy, the Compensation Committee reviews the following: (a) base salary; (b) target short-term incentive; (c) target total cash compensation; (d) actual total cash compensation; (e) target or grant date fair value of long-term incentive; and (f) target total direct compensation. Executives are matched to market positions based on titles, responsibilities and contributions to the Company. The Compensation Committee reviewed compensation among the peer group companies to determine the competitiveness of pay levels and pay mix for executives. Although no other public companies are directly comparable to the Company and its businesses, the Compensation Committee considers the Company’s competitors for executive talent to be companies engaged in retail and education services. Our peer group, which is reviewed annually, includes companies that are similar in size to the Company based on revenues and market capitalization and also companies with overlapping business model characteristics (e.g., education / technology focus, combination of products and services, strong relationships with business partners, go-to-market strategy, and geographic footprint) as follows:
The Committee reviews the peer group annually and will continue to consider the Company’s current size and strategic direction in its review.
| Total Revenue (Most Recent FY, $M) | Market Cap (as of 6/30/2020, $M) | |||||||
| Peer Group Median | $ | 1,654 | $ | 1,614 | ||||
| BNED | $ | 1,851 | $ | 77 | ||||
However, peer group compensation is just one factor that is considered in determining compensation levels for our executive officers. We also consider: (a) the Company’s business performance; (b) each executive officer’s job responsibilities, experience and prior performance; (c) relative compensation among our executive officers; (d) industry-wide business conditions; and (e) the recommendations of our Chairman of the Board and Chief Executive Officer (in the case of Messrs. Brover, Donohue, Malhotra, and Miller.)
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Overview of Compensation Program Design
Elements of Pay
Our compensation structure is primarily composed of base salary, performance-based annual incentive compensation and performance-based and time-vested long-term equity incentives. The mix of Fiscal 2020 target total direct compensation was as follows:
NEOs Fiscal 2020 Target Pay Mix
Note that Target Annual Incentive reflects Fiscal 2020 target opportunity and restricted stock units (“RSUs”) and performance shares (“PSUs”) reflect Fiscal 2020 target value on the respective grant date.
Base Salary
We pay our NEOs a base salary to provide them with a guaranteed minimum compensation level for their services. An NEO’s base salary is determined by evaluating the external competitive marketplace, internal equity and individual contributions.
Named Executive Officer | Base Salary in Fiscal 2019 | Base Salary in Fiscal 2020 | Percentage Change | |||||||||
Michael P. Huseby | $ | 1,100,000 | $ | 1,100,000 | (1) | 0 | % | |||||
Barry Brover | $ | 610,000 | $ | 610,000 | 0 | % | ||||||
Thomas D. Donohue | $ | 500,000 | $ | 500,000 | 0 | % | ||||||
Kanuj Malhotra | $ | 523,400 | $ | 523,400 | 0 | % | ||||||
Michael C. Miller | $ | 500,000 | $ | 500,000 | 0 | % | ||||||
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Performance-Based Annual Incentive Compensation
Each of Messrs. Huseby, Brover, Donohue, Malhotra and Miller were granted performance-based annual incentive compensation opportunities. The target award under the Annual Incentive Plan is expressed as a percentage of base salary as set forth in the table below. For Messrs. Huseby, Brover, Donohue and Miller, the individual Annual Incentive Plan payouts were based 80% on Company performance as measured by Company EBITDA and 20% on individual performance goals. For Mr. Malhotra, the individual Annual Incentive Plan payout was based 40% on digital education EBITDA, 40% on Company EBITDA, and 20% on bartleby targets. Individual performance goals are closely linked to the Company’s business and strategic objectives and reflect the executive’s scope of responsibility, as noted below. Participants had the opportunity to earn up to 150% of the Company EBITDA component and between 50% and 150% of the individual performance goal components established for each of them.
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Fiscal 2020 Performance Targets and Actual Results. The chart below shows the payout scale on which the Company EBITDA portion of the individual annual incentive target compensation was based.
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The chart below shows the target and actual Company EBITDA results for Fiscal 2020 and actual results as a percentage of target results and target pay. Based on actual Company EBITDA, the NEOs earned a payout of 0% of the Company EBITDA component.
| Target ($) (in millions) | Actual ($) (in millions) | % Target Achieved | % Target Payout | |||||||||||||
Company EBITDA * | $ | 92.0 | $ | 42.159 | 45 | % | 0 | % | ||||||||
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Fiscal 2020 Individual Performance Results and Incentive Payouts. Our Compensation Committee determined that our NEOs had achieved the individual performance goals discussed below. Individual performance goal components accounted for 20% of the aggregate target amount. Mr. Brover was paid a Fiscal 2020 bonus of $305,000 as part of his resignation letter agreement.
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Mr. Huseby. Mr. Huseby’s individual performance goals were DSS adjusted EBITDA and bartleby subscriptions (weighted 10% each). The maximum level was achieved on DSS adjusted EBITDA (150% payout factor), while the bartleby result was below threshold (0% payout factor). Based on these results, the Committee approved an individual payout of 15% of target.
Mr. Donohue. Mr. Donohue’s individual performance goals were (1) bartleby subscriptions (weighted 10%) and (2) managing expense payables and vendor relations contracts (weighted 10%). The bartleby result was below threshold (0% payout factor) and the Committee assessed Mr. Donohue’s performance to be at target on the other goals (100% payout factor). Based on these results, the Committee approved an individual payout of 10% of target.
Mr. Malhotra. Mr. Malhotra’s individual performance goals were established based on achieving a DSS adjusted EBITDA target (weighted 40%), bartleby subscriptions (weighted 15%) and bartleby revenue growth (weighted 5%). The maximum level was achieved on DSS adjusted EBITDA (150% payout factor), while bartleby subscriptions were below threshold (0% payout factor) and bartleby revenue growth was at threshold (50% payout factor). Based on these results, the Committee approved an individual payout of 62.5% of target.
Mr. Miller. Mr. Miller’s individual performance goals were (1) bartleby subscriptions (weighted 10%) and (2) consolidating and reviewing strategic priorities, assisting with strategic initiatives, including transactions, and overseeing corporate communications (weighted 10%). The bartleby result was below threshold (0% payout factor) and the Committee assessed Mr. Miller’s performance to be at target on the other goals (100% payout factor). Based on these results, the Committee approved an individual payout of 10% of target.
Fiscal 2020 Performance-Based Annual Incentive Compensation Payment Amounts. Set forth below is a table showing target, maximum and actual Fiscal 2020 performance-based annual incentive compensation for our NEOs.
Named Executive Officer | Company EBITDA/ | Target Annual Incentive ($) | Maximum Annual Incentive ($) | Actual Company EBITDA Payout | Actual Individual Performance Payout | Actual Total Payout | Total Payout as a % of Target | |||||||||||||||||||
Michael P. Huseby | 80%/20% | $ | 1,650,000 | $ | 2,475,000 | $ | — | $ | 247,500 | $ | 247,500 | 15 | % | |||||||||||||
Barry Brover (1) | 80%/20% | $ | 610,000 | $ | 915,000 | $ | — | $ | — | $ | 305,000 | 50 | % | |||||||||||||
Thomas D. Donohue | 80%/20% | $ | 425,000 | $ | 637,500 | $ | — | $ | 42,500 | $ | 42,500 | 10 | % | |||||||||||||
Kanuj Malhotra (2) | 40%/40%/20% | $ | 523,400 | $ | 785,100 | $ | 314,040 | $ | 13,085 | $ | 327,125 | 62.5 | % | |||||||||||||
Michael C. Miller | 80%/20% | $ | 425,000 | $ | 637,500 | $ | — | $ | 42,500 | $ | 42,500 | 10 | % | |||||||||||||
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The performance-based annual incentive awards earned by our NEOs under the annual incentive plan for Fiscal 2020 are set forth in the “Summary Compensation Table” on page 5. The threshold, target and maximum incentive award opportunities for each of our NEOs for Fiscal 2020 are set forth in the “2020 Grants of Plan-Based Awards Table” on page 7.
Long-Term Equity Incentives
Long-term equity incentives are a critical component of the Company’s compensation program. They are designed to promote the Company’s long-term financial interests and growth, to attract, motivate, and retain key
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employees, and to align the interests of management with those of the Company’s stockholders. The Company grants long-term equity incentive awards under the Company’s Equity Incentive Plan (the “Equity Incentive Plan”), which is administered by the Compensation Committee. The Compensation Committee reviews, discusses and approves the types and number of awards made to senior management, including the NEOs, and approves the terms, conditions and limitations applicable to each award. The Committee delegates authority to the CEO, within pre-established limitations, to make awards to newly-hired employees or current employees who are not executive officers. Equity awards are generally granted in connection with the June Compensation Committee meeting.
In Fiscal 2020, the Compensation Committee established a target long-term incentive amount for each of the NEOs denominated in dollars. The Compensation Committee determined to make awards with a mix of performance shares, which accounted for 50% of the target award amount, and restricted stock units, which accounted for 50% of the target award amount. The Compensation Committee believes that granting a portion of the award in the form of restricted stock units is desirable because such grants immediately align the interests of our executives with those of stockholders and provide a retention incentive. In order to manage the run-rate of equity awards, the amount of long-term incentive awards granted in FY 2020 was determined using the average market value of the shares of Common Stock over the preceding approximately 12 months prior to grant date, which was greater than the actual market value of Common Stock on the grant date. This approach resulted in a significant reduction to the total shares used for NEO grants, than otherwise would have been granted had the dollar value of the award divided by the market value of the shares of Common Stock on the respective grant date been used.
Performance Shares. Performance share units are generally granted annually to each of the NEOs. Performance share units are earned and settled for shares of common stock if and only to the extent that certain pre-established performance goals are met for a two-year performance period. For the performance share units granted in Fiscal 2020, the metrics included Adjusted EBITDA and New Business. Actual results for the two-year period beginning on the first day of the fiscal year period and ending on the last day of the second fiscal year will be compared to the targeted goals to determine the number of performance share units that will be earned. The NEOs can earn up to 150% of the number of performance share units at target for performance that exceeds 115% of target. If a threshold level of performance, 85% of target is not met, all of the performance share units will be forfeited. Once performance share units are earned and held for an additional one-year period, the units will be settled for shares of common stock.
Restricted Stock Units. Restricted stock units are Common Stock equivalents that are granted to a recipient and vest after a period of time has elapsed. The restricted share units granted to the NEOs vest in one-third annual increments over the three years from the date of grant. These share units vest only if the executive is employed by the Company at the end of the vesting period or if his or her employment was terminated due to death, disability or a change in control during that period. The Compensation Committee believes the use of restricted stock units strengthens the retention aspects of the Company’s pay program, consistent with one of its key principles. The following grants were made for Fiscal 2020.
Named Executive Officer | Performance Shares at Target | Performance Shares at Maximum | Restricted Stock Units | Aggregate Award Target ($) | ||||||||||||
Michael P. Huseby | 314,285 | 471,428 | 314,285 | $ | 1,979,996 | |||||||||||
Barry Brover | 52,380 | 78,570 | 52,380 | $ | 329,994 | |||||||||||
Thomas D. Donohue | 52,380 | 78,570 | 52,380 | 329,994 | ||||||||||||
Kanuj Malhotra | 61,904 | 92,856 | 61,904 | $ | 389,995 | |||||||||||
Michael C. Miller | 52,380 | 78,570 | 52,380 | $ | 329,994 | |||||||||||
In June 2018, performance shares were granted for the two-year period covering Fiscal 2019 and Fiscal 2020. The chart below sets forth the performance targets and actual results for Fiscal 2019 and Fiscal 2020, in thousands, which resulted in 0% of the performance share target award being earned as shown in the following table:
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(in thousands)
| Weighting | Threshold | Target | Max | Fiscal 2019 Actual | Fiscal 2020 Actual | Cumulative Results | Weighted Payout | |||||||||||||||||||||||||
DSS Revenue | 25 | % | $ | 48,800 | $ | 65,000 | $ | $ | 21,339 | $ | 23,661 | $ | 45,000 | 0 | % | |||||||||||||||||
Adjusted EBITDA (1) | 25 | % | $ | 168,800 | $ | 225,000 | $ | $ | 104,942 | $ | 42,159 | $ | 147,101 | 0 | % | |||||||||||||||||
TOTAL |
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Other Components of Compensation
401(k) Plan. Each of our NEOs is entitled to participate in our tax-qualified defined contribution 401(k) plan on the same basis as all other eligible employees. The 401(k) plan provides our employees, including our NEOs, with a way to accumulate tax-deferred savings for retirement. The Company matches the contributions of participants, subject to certain criteria. Under the terms of the 401(k) plan, as prescribed by the Code, the contribution of any participating employee is limited to the lesser of 75% of annual salary before taxes or a maximum dollar amount ($19,500 for 2020), subject to a $6,500 increase for participants who are age 50 or older. As a result of the COVID-19 pandemic, in pandemic. The impact of which affects the comparability of our results of operations and cash flows.
Sales
The following table summarizes our sales:
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| Dollars in thousands | April 29, 2023 | April 30, 2022 | % | ||||||||||||||||||||||||||
| Product sales and other | $ | 1,406,655 | $ | 1,362,380 | 3.2% | ||||||||||||||||||||||||
| Rental income | 136,553 | 133,354 | 2.4% | ||||||||||||||||||||||||||
| Total Sales | $ | 1,543,208 | $ | 1,495,734 | 3.2% | ||||||||||||||||||||||||
Our total sales increased by $47.5 million, or 3.2%, to $1,543.2 million during the 52 weeks ended April 2020, upon29, 2023 from $1,495.7 million during the recommendation52 weeks ended April 30, 2022 which is primarily related to higher course material sales, primarily due to our BNC First Day programs and higher general merchandise sales as many schools approach a more traditional on campus learning experience. The components of management, the Compensation Committee suspended the Company’s 401(k) plan matchsales variances for the remainder of 2020. The amount of the Company’s matching contributions for each of our NEOs is set forth in footnotes to the “Summary Compensation Table” on page 5. We do not provide supplemental executive retirement benefits.
Limited Perquisites and Other Compensation. The Company’s NEOs52 week period are entitled to only the limited perquisites set forth in their employment agreements or letters and disclosedreflected in the footnotes to the “Summary Compensation Table” on page 5.
Severance and Change of Control Payments and Benefits. The Company has an employment agreement with Mr. Huseby and each of Messrs. Brover, Donohue, Malhotra and Miller have employment letter agreements that contain severance and change in control benefits. The agreements provide for certain severance payments and benefits upon termination of employment by the Company without cause or by the NEO for good reason (including upon termination within two years following a change of control). The triggering events that would result in the severance payments and benefits and the amount of those payments and benefits are intended to provide our NEOs with financial protection upon loss of employment and to support our executive retention goals and enable our NEOs to focus on the interests of the Company in the event of a potential change of control. Equity awards are subject to a “double-trigger” and vesting will only be accelerated if there is a termination of employment without” cause” or for “good reason” following a change of control. The Company does not pay any tax gross-ups in connection with the severance payments. The Compensation Committee believes that the terms of the employment agreements, including triggering events and amounts payable, are competitive with severance protection being offered by other companies with whom we compete for highly qualified executives. The compensation that could be received by each of our NEOs upon termination or change of control is set forth in the “Potential Payments Upon Termination or Change of Control Table” on page 11. The material terms of these agreements are described in the “Narrative to the Summary Compensation Table” and the “Grants of Plan-Based Awards Table-Employment Arrangements with the Named Executive Officers.”
Governance Policies
Executive Incentive Compensation Clawback Policy
The Board of Directors has adopted the Executive Incentive Compensation Clawback Policy (the “Clawback Policy”). The Clawback Policy allows the Compensation Committee to take action to recover incentive compensation from certain key employees, including executive officers, in the event that the Company is required to prepare an accounting restatement due to material noncompliance with financial reporting requirements. The Clawback Policy only applies to incentive-based compensation paid in excess of what would have been paid or granted under the circumstances reflected by such restatement, and applies irrespective of the responsibility of the key employee for the accounting restatement. The Clawback Policy applies to all Section 16 officers and covers all incentive-based compensation (including cash and equity) paid or granted after adoption of the policy.
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Prohibition on Hedging and Pledging Transactions
The Company’s Insider Trading Policy prohibits directors and executive officers from hedging their ownership of Company stock, including selling Company stock short, buying or selling puts or calls or other derivative instruments related to Company stock. Directors and executive officers are also prohibited from pledging Company stock, purchasing Company stock on margin or incurring any indebtedness secured by a margin or similar account in which Company stock is held, without prior approval of the Audit Committee.
Executive Stock Ownership and Retention Guidelines
The Compensation Committee has adopted executive stock ownership targets (“Stock Ownership Targets”) based on a multiple of annual salary as follows: Chief Executive Officer-five times; all other NEOs-two times; and all other Section 16 officers-one time. Officers are required to retain 50% of net after-tax shares earned from equity grants until the Stock Ownership Target is met (“Retention Guidelines”). Only vested and fully-owned shares owned by an officer directly or indirectly through the 401(k) plan, immediate family members or trusts or similar arrangements count toward the Stock Ownership Targets. The Compensation Committee reviews progress toward the Stock Ownership Targets and compliance with the Retention Guidelines annually.
| April 29, 2023 | |||||||||||||||||
| ||||||||||||||||||
| ||||||||||||||||||
| $ | |||||||||||||||||
| (46.4) | |||||||||||||||||
Comparable stores (a) | 25.7 | |||||||||||||||||
| Textbook rental deferral | ||||||||||||||||||
Compensation Policies and Practices as Related to Risk Management
With the assistance of its compensation consultant, the Compensation Committee conducted its risk assessment of the Company’s incentive compensation plans covering employees. The Compensation Committee evaluated the levels of risk-taking to determine whether they are appropriate in the context of the Company’s strategic objectives, the overall compensation arrangements, and the Company’s overall risk profile. The Compensation Committee concluded the Company has a balanced pay-for-performance executive compensation program that does not encourage excessive risk-taking and the Company does not maintain compensation policies and practices that are reasonably likely to have a material adverse effect on the Company.
Tax and Accounting Considerations
Section 162(m) of the Internal Revenue Code, as in effect prior to the adoption in December 2017 of The Tax Cuts and Jobs Act (the “TCJA”), includes a performance-based compensation exception to its limits on the deductibility of compensation in excess of $1 million earned by specified executive officers of publicly held companies. The TCJA eliminated the performance-based compensation exception, so that for Fiscal 2020 all compensation paid to specified executive officers in excess of $1 million will be nondeductible (except for any amounts that qualify as performance-based that have been grandfathered pursuant to the written binding contract transition rule under the TCJA).
Roles of the Compensation Committee, Management, and our Compensation Consultant in Determining the Compensation of our Named Executive Officers
21
Roles of the Compensation Committee and Management
The Compensation Committee is responsible for establishing, implementing and overseeing our compensation program, and reviews and approves our compensation philosophy and objectives. The Compensation Committee also annually reviews and approves annual base salary levels, annual incentive opportunity levels, long-term incentive opportunity levels, employment and severance agreements and any special or supplemental benefits for each of the NEOs and any other executive officers, Section 16 officers and employees of the Company earning a base salary of $400,000 or more.
The compensation of our Chairman and Chief Executive Officer is determined by the Compensation Committee in executive session. The Chairman and Chief Executive Officer reviews the performance of each of our other executive officers and makes compensation recommendations to the Compensation Committee. The Compensation Committee considers all key elements of compensation separately and also reviews the full compensation package of each executive officer.
Role of the Compensation Consultant
The Compensation Committee has retained Mercer, a wholly-owned subsidiary of Marsh & McLennan Companies, Inc., to assist with the committee’s responsibilities related to the Company’s executive compensation program and the director compensation program. Mercer’s engagement by the Compensation Committee includes reviewing and recommending the structure of our compensation program and advising on all significant aspects of executive compensation, including base salaries, annual incentives and long-term equity incentives for executives. At the request of the Compensation Committee, Mercer collects relevant market data to allow the Compensation Committee to compare components of our compensation program to those of our peers, provides information on executive compensation trends and implications and makes other recommendations to the Committee regarding our executive compensation program. Our management, Chief Executive Officer (on certain occasions), Senior Vice President, Human Resources, General Counsel and the chair of the Compensation Committee, meet with representatives of Mercer before Compensation Committee meetings.
In making its final decisions regarding the form and amount of compensation to be paid to the executives, the Compensation Committee considers the information gathered by and recommendations of Mercer. Mercer’s fees for executive and director compensation consulting to the Compensation Committee in Fiscal 2020 were approximately $229,319. MMC Securities LLC, a subsidiary of Marsh & McLennan Companies, Inc., provides advisory services to the Company’s Benefits Committee, which administers the Company’s 401(k) plan, and other human resource services for which the Company paid approximately $19,660. The Company also paid Marsh & McLennan Companies, Inc., the parent company of Mercer, for insurance brokerage services totaling approximately $585,641. The Compensation Committee has assessed the independence of Mercer taking into account the following factors identified by the SEC and NYSE as bearing upon independence: (i) Mercer’s provision of other services to the Company; (ii) the fees Mercer received for such services as a percentage of the revenues of Marsh & McLennan, Mercer’s parent; (iii) the policies and procedures of Mercer that are designed to prevent conflicts of interest; (iv) any business or personal relationship of the Mercer consultants with a member of the Compensation Committee; (v) any of our stock owned by the Mercer consultants; and (vi) any business or personal relationship of the Mercer consultants or Mercer with any of our executive officers. The Compensation Committee concluded that no conflict of interest exists with respect to its engagement of Mercer.
Compensation Committee Report
The Compensation Committee reviewed and discussed the foregoing Compensation Discussion and Analysis with management and, based on such review and discussions, the Compensation Committee as of that date recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Amendment No. 1 to Form 10-K.
Service revenue (b) | (3.8) | |||||||||||||
Other (c) | (2.6) | |||||||||||||
| Retail Sales subtotal: | $ | 52.1 | ||||||||||||
| Wholesale Sales | $ | (5.9) | ||||||||||||
Eliminations (d) | 1.3 | |||||||||||||
| Total sales variance: | 47.5 | |||||||||||||
40
(a) Effective in April 2021, as contemplated by the F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of our logo general merchandise sales to Lids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo general merchandise sales on a gross basis in the periods prior to the transition. For Retail Gross Comparable Store Sales details, see below.
(b) Service revenue includes brand partnerships, 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. Many of the store closings relate to closing less profitable stores, including satellite store locations.
| Fiscal 2023 | Fiscal 2022 | |||||||||||||||||||||||||||||||||||||
| Number of Stores: | Physical | Virtual | Total | Physical | Virtual | Total | ||||||||||||||||||||||||||||||||
| Beginning of period | 805 | 622 | 1,427 | 769 | 648 | 1,417 | ||||||||||||||||||||||||||||||||
| Opened | 36 | 30 | 66 | 57 | 35 | 92 | ||||||||||||||||||||||||||||||||
| Closed | 67 | 60 | 127 | 21 | 61 | 82 | ||||||||||||||||||||||||||||||||
| End of period | 774 | 592 | 1,366 | 805 | 622 | 1,427 | ||||||||||||||||||||||||||||||||
Generally, sales are impacted by revenue from net new/closed stores, increased campus traffic, and an increase in the number of on campus activities and events, such as graduations, athletic events, alumni events and prospective student campus tours, as schools approach a more traditional campus experience. We continued to experience higher sales related to our BNC First Day programs and higher general merchandise sales, especially for graduation products, logo products, and cafe and convenience products, as on campus traffic continues to grow compared to the prior year.Sales were negatively impacted by lower enrollments, primarily at community colleges and by international students, and the continuation of remote and hybrid class offerings.
Retail total sales increased by $52.1 million, or 3.6%, to $1,491.7 million during the 52 weeks ended April 29, 2023 from $1,439.7 million during the 52 weeks ended April 30, 2022. In addition, our sales and margins were positively impacted in Fiscal 2023 compared to Fiscal 2022 as a result of improved availability of used inventory which was constrained in 2022.
•Product sales and other increased by $48.9 million, or 3.7%, to $1,355.2 million during the 52 weeks ended April 29, 2023 from $1,306.3 million during the 52 weeks ended April 30, 2022. During the 52 weeks ended April 29, 2023, total course material product sales increased by $16.7 million, or 1.8%, to $927.9 million; total general merchandise product sales increased by $38.5 million, or 11.1%, to $385.5 million as students return to on campus activities, partially offset by a decrease in service and other revenue of $6.3 million, or 13.2%, to $41.8 million primarily due to lower shipping and handling income resulting from increased in-store order fulfillment.
•Revenue from our BNC First Day equitable and inclusive access programs increased by $112 million, or 48%, to $347 million during the 52 weeks ended April 29, 2023, as compared to $235 million during the 52 weeks ended April 30, 2022. Specifically, First Day Complete sales increased by $93 million, or 88%, to $198 million during the 52 weeks ended April 29, 2023, as compared to $105 million during the 52 weeks ended April 30, 2022. First Day sales increased by $19 million, or 15%, to $149 million during the 52 weeks ended April 29, 2023, as compared to $130 million during the 52 weeks ended April 30, 2022. As of April 29, 2023, 116 campus stores adopted our First Day Complete course materials delivery program for the 2023 Spring Term, representing approximately 580,000 in total undergraduate student enrollment (as reported by National Center for Education Statistics), compared to 76 campus stores representing approximately 380,000 in total undergraduate student enrollment in the 2022 Spring Term.
•Total course material rental income increased by $3.2 million, or 2.4%, to $136.6 million during the 52 weeks ended April 29, 2023 from $133.4 million during the 52 weeks ended April 30, 2022 primarily due to increased rental textbook activity in our First Day Complete program and improved availability of used textbook inventory.
41
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 for consistent year-over-year comparison.
Effective in April 2021, as contemplated by the F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of our logo general merchandise sales to Lids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo general merchandise sales on a gross basis in the periods prior to the transition.
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 equitable and inclusive access programs (as discussed above), partially offset by a shift to lower cost options and more affordable solutions, including digital offerings. The increase in general merchandise sales was primarily due to higher sales related to graduation products, logo products, and cafe and convenience products, as on campus traffic continues to grow compared to the prior year.
Retail Gross Comparable Store Sales variances for Retail by category for the 52 week period are as follows:
| Dollars in millions | 52 weeks ended | |||||||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | |||||||||||||||||||||||||
| Textbooks (Course Materials) | $ | 4.1 | 0.4 | % | $ | 21.2 | 2.3 | % | ||||||||||||||||||
| General Merchandise | 43.9 | 8.6 | % | 219.5 | 75.6 | % | ||||||||||||||||||||
| Total Retail Gross Comparable Store Sales | $ | 48.0 | 3.2 | % | $ | 240.7 | 19.6 | % | ||||||||||||||||||
Wholesale
Wholesale sales decreased by $5.9 million, or 5.2%, to $106.4 million during the 52 weeks ended April 29, 2023 from $112.2 million during the 52 weeks ended April 30, 2022. The decrease is primarily due to a decline in gross sales of $2.0 million from lower customer demand resulting from a shift in buying patterns from physical textbooks to digital products, and lower demand from other third-party clients, and higher returns and allowances of $3.9 million.
Cost of Sales and Gross Margin
Our cost of sales increased as a percentage of sales to 77.4% during the 52 weeks ended April 29, 2023 compared to 77.1% during the 52 weeks ended April 30, 2022. Our gross margin increased by $6.6 million, or 1.9%, to $349.4 million, or 22.6% of sales, during the 52 weeks ended April 29, 2023 from $342.8 million, or 22.9% of sales, during the 52 weeks ended April 30, 2022.
During the 52 weeks ended April 30, 2022, we recognized a merchandise inventory loss of $0.4 million in cost of goods sold in the Retail Segment. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories.
42
Retail
The following table summarizes the Retail cost of sales:
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | % of Related Sales | April 30, 2022 | % of Related Sales | |||||||||||||||||||||||||||||||||||||||||||
| Product and other cost of sales | $ | 1,086,095 | 80.1% | $ | 1,040,022 | 79.6% | |||||||||||||||||||||||||||||||||||||||||
| Rental cost of sales | 74,287 | 54.4% | 76,659 | 57.5% | |||||||||||||||||||||||||||||||||||||||||||
| Total Cost of Sales | $ | 1,160,382 | 77.8% | $ | 1,116,681 | 77.6% | |||||||||||||||||||||||||||||||||||||||||
The following table summarizes the Retail gross margin:
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | % of Related Sales | April 30, 2022 | % of Related Sales | |||||||||||||||||||||||||||||||||||||||||||
| Product and other gross margin | $ | 269,078 | 19.9% | $ | 266,288 | 20.4% | |||||||||||||||||||||||||||||||||||||||||
| Rental gross margin | 62,266 | 45.6% | 56,695 | 42.5% | |||||||||||||||||||||||||||||||||||||||||||
| Gross Margin | $ | 331,344 | 22.2% | $ | 322,983 | 22.4% | |||||||||||||||||||||||||||||||||||||||||
For the 52 weeks ended April 29, 2023, the Retail gross margin as a percentage of sales decreased as discussed below:
•Product and other gross margin decreased (50 basis points), driven primarily by lower margin rates (110 basis points) due to higher markdowns, higher inventory reserves, lower general merchandise margin rates, offset by lower shipping costs; higher contract costs as a percentage of sales related to our college and university contracts (40 basis points) resulting from contract renewals and new store contracts; partially offset by improved sales mix (95 basis points) primarily due to higher used textbook sales due to lower constraints on inventory availability, offset by lower margins due to a shift in buying patterns from physical textbooks to digital products, and higher general merchandise sales, including logo sales.
•Retail Rental gross margin as a percentage of sales increased driven primarily by higher rental margin rates primarily due to our First Day Complete program and favorable rental mix due to improved availability of used textbook inventory, partially offset by higher contract costs as a percentage of sales related to our college and university contracts resulting from contract renewals and new store contracts.
Wholesale
The cost of sales and gross margin for Wholesale were $88.1 million, or 82.8% of sales, and $18.3 million, or 17.2% of sales, respectively, during the 52 weeks ended April 29, 2023. The cost of sales and gross margin for Wholesale were $92.5 million, or 82.4% of sales, and $19.8 million, or 17.6% of sales, respectively, during the 52 weeks ended April 30, 2022. The gross margin decreased to 17.2% during the 52 weeks ended April 29, 2023 from 17.6% during the 52 weeks ended April 30, 2022. The decrease was primarily due to the unfavorable impact of higher markdowns of $2.3 million and returns and allowances of $0.5 million, partially offset by a favorable sales mix of $1.3 million due to improved availability of used textbook inventory.
Intercompany Eliminations
During the 52 weeks ended April 29, 2023 and 52 weeks ended April 30, 2022, sales eliminations were $54.9 million and $56.2 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 52 weeks ended April 29, 2023 and 52 weeks ended April 30, 2022, the cost of sales eliminations were $54.7 million and $56.2 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 52 weeks periods ended April 29, 2023 and 52 weeks ended April 30, 2022, the gross margin eliminations were $(0.2) million and $0.1 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.
43
Selling and Administrative Expenses
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | % of Sales | April 30, 2022 | % of Sales | |||||||||||||||||||||||||||||||||||||||||||
| Selling and Administrative Expenses | $ | 357,611 | 23.2% | $ | 353,968 | 23.7% | |||||||||||||||||||||||||||||||||||||||||
During the 52 weeks ended April 29, 2023, selling and administrative expenses increased by $3.6 million, or 1.0%, to $357.6 million from $354.0 million during the 52 weeks ended April 30, 2022. The variances by segment are discussed by segment below.
Retail
For Retail, selling and administrative expenses increased by $5.6 million, or 1.8%, to $320.7 million during the 52 weeks ended April 29, 2023 from $315.1 million during the 52 weeks ended April 30, 2022. This increase was primarily due to an increase in store payroll and operating costs at new/closed stores of $6.4 million, and a $5.4 million increase in corporate payroll, infrastructure and product development costs, partially offset by a $5.2 million decrease in incentive plan compensation expense and a $1.0 million decrease in store payroll and operating costs at comparable stores.
Wholesale
For Wholesale, selling and administrative expenses decreased by $1.0 million, or 6.0%, to $15.0 million during the 52 weeks ended April 29, 2023 from $16.0 million during the 52 weeks ended April 30, 2022. The decrease was primarily driven by lower compensation related expense, including incentive plan compensation expense.
Corporate Services
Corporate Services' selling and administrative expenses decreased by $1.0 million, or 4.4%, to $22.0 million during the 52 weeks ended April 29, 2023 from $23.0 million during the 52 weeks ended April 30, 2022. The decrease in costs was primarily due to lower incentive plan compensation costs of $1.8 million, partially offset by higher professional service costs of $0.8 million.
Depreciation and Amortization Expense
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | % of Sales | April 30, 2022 | % of Sales | |||||||||||||||||||||||||||||||||||||||||||
| Depreciation and Amortization Expense | $ | 42,163 | 2.7% | $ | 42,124 | 2.8% | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization expense remained flat at $42.1 million during both the 52 weeks ended April 29, 2023 and the 52 weeks ended April 30, 2022. Capital expenditures decreased by $8.5 million during the 52 weeks ended April 29, 2023 compared to the prior year period and depreciable assets and intangibles were lower due to the store impairment loss recognized during Fiscal 2023 and Fiscal 2022.
Impairment loss (non-cash)
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. For information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Note 6. Fair Value Measurements.
During the 52 weeks ended April 29, 2023, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $6.0 million (both pre-tax and after-tax), comprised of $0.7 million, $1.7 million, and $3.6 million of property and equipment, operating lease right-of-use assets, and amortizable intangibles, respectively, on the consolidated statement of operations.
During the 52 weeks ended April 30, 2022, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $6.4 million (both pre-tax and after-tax), comprised of $0.7 million, $1.8 million, $3.7 million and $0.2 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
44
Restructuring and other charges
During the 52 weeks ended April 29, 2023, we recognized restructuring and other charges totaling $10.1 million, comprised primarily of $4.4 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives, and $5.7 million, primarily for costs primarily associated with professional service costs for restructuring and process improvements.
During the 52 weeks ended April 30, 2022, we recognized restructuring and other charges totaling $1.0 million, comprised primarily of $1.3 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives and $1.8 million for costs associated with professional service costs for restructuring, process improvements, development and integration associated with the F/L Partnership, and shareholder activist activities, partially offset by $2.1 million in an actuarial gain related to a frozen retirement benefit plan (non-cash).
Operating Loss
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | % of Sales | April 30, 2022 | % of Sales | |||||||||||||||||||||||||||||||||||||||||||
| Operating Loss | $ | (66,446) | (4.3)% | $ | (60,615) | (4.1)% | |||||||||||||||||||||||||||||||||||||||||
Our operating loss was $(66.4) million during the 52 weeks ended April 29, 2023 compared to operating loss of $(60.6) million during the 52 weeks ended April 30, 2022. This operating loss increase was due to the matters discussed above.
For the 52 weeks ended April 29, 2023, excluding the $10.1 million of restructuring and other charges and the $6.0 million impairment loss (non-cash), all discussed above, operating loss was $(50.3) million (or (3.3)% of sales).
For the 52 weeks ended April 30, 2022, excluding the $0.4 million of merchandise inventory loss and write-off, $1.0 million of restructuring and other charges and the $6.4 million impairment loss (non-cash), all discussed above, operating loss was $(52.8) million (or (3.5)% of sales).
Interest Expense, Net
| 52 weeks ended | ||||||||||||||
| Dollars in thousands | April 29, 2023 | April 30, 2022 | ||||||||||||
| Interest Expense, Net | $ | 22,683 | $ | 10,096 | ||||||||||
Net interest expense increased by $12.6 million to $22.7 million during the 52 weeks ended April 29, 2023 from $10.1 million during the 52 weeks ended April 30, 2022 primarily due to higher borrowings and higher interest rates compared to the prior year.
Income Tax Expense (Benefit)
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | Effective Rate | April 30, 2022 | Effective Rate | |||||||||||||||||||||||||||||||||||||||||||
| Income Tax Expense (Benefit) | $ | 1,011 | (1.1)% | $ | (9,152) | 12.9% | |||||||||||||||||||||||||||||||||||||||||
We recorded an income tax expense of $1.0 million on a pre-tax loss of $(89.1) million during the 52 weeks ended April 29, 2023, which represented an effective income tax rate of (1.1)% and an income tax benefit of $(9.2) million on a pre-tax loss of $(70.7) million during the 52 weeks ended April 30, 2022, which represented an effective income tax rate of 12.9%.
The effective tax rate for the 52 weeks ended April 29, 2023 is significantly lower as compared to the prior year comparable period due to the valuation allowance benefit of changing the tax fiscal year in the prior year.
Impact of U.S. Tax Reform
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (The “CARES Act”) was enacted. We have analyzed the provisions, which provide for a technical correction to allow for full expensing of qualified leasehold improvements, modifications to charitable contribution and net operating loss limitations (“NOLs”), modifications to the deductibility of business interest expense, as well as Alternative Minimum Tax (“AMT”) credit acceleration. The most significant impact of the legislation for the Company was an income tax benefit of $7.2 million for the carryback of NOLs to higher tax rate years, recorded in Fiscal 2021. As of April 29, 2023, we reported a current income tax receivable of $10.0 million for NOL carrybacks in prepaid and other current assets on the consolidated balance sheet. We received a $7.8 million refund in Fiscal 2022, a $15.8 million refund in Fiscal 2023 and expect to receive the additional refunds of approximately $10.0 million.
45
Net Loss from Continuing Operations
| 52 weeks ended | |||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | April 30, 2022 | |||||||||||||||||||||
| Net Loss from Continuing Operations | $ | (90,140) | $ | (61,559) | |||||||||||||||||||
As a result of the factors discussed above, we reported a net loss from continuing operations of $(90.1) million during the 52 weeks ended April 29, 2023, compared with a net loss of $(61.6) million during the 52 weeks ended April 30, 2022. Adjusted Earnings (non-GAAP) - Continuing Operations is $(74.0) million during the 52 weeks ended April 29, 2023, compared with $(53.4) million during the 52 weeks ended April 30, 2022. See Adjusted Earnings (non-GAAP) discussion below.
Results of Operations - Continuing Operations
- 52 weeks ended April 30, 2022 compared with the 52 weeks ended May 1, 2021
52 weeks ended, April 30, 2022 (a) | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | Corporate Services | Eliminations (b) | Total | ||||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||||||||
| Product sales and other | $ | 1,306,310 | $ | 112,246 | $ | — | $ | (56,176) | $ | 1,362,380 | |||||||||||||||||||||||||
| Rental income | 133,354 | — | — | — | 133,354 | ||||||||||||||||||||||||||||||
| Total sales | 1,439,664 | 112,246 | — | (56,176) | 1,495,734 | ||||||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||||||||
| Product and other cost of sales | 1,040,022 | 92,464 | — | (56,243) | 1,076,243 | ||||||||||||||||||||||||||||||
| Rental cost of sales | 76,659 | — | — | — | 76,659 | ||||||||||||||||||||||||||||||
| Total cost of sales | 1,116,681 | 92,464 | — | (56,243) | 1,152,902 | ||||||||||||||||||||||||||||||
| Gross profit | 322,983 | 19,782 | — | 67 | 342,832 | ||||||||||||||||||||||||||||||
| Selling and administrative expenses | 315,124 | 16,000 | 23,002 | (158) | 353,968 | ||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 36,635 | 5,418 | 71 | — | 42,124 | ||||||||||||||||||||||||||||||
| Impairment loss (non-cash) | 6,411 | — | — | — | 6,411 | ||||||||||||||||||||||||||||||
| Restructuring and other charges | 2,118 | (2,131) | 957 | — | 944 | ||||||||||||||||||||||||||||||
| Operating (loss) income from continuing operations | $ | (37,305) | $ | 495 | $ | (24,030) | $ | 225 | $ | (60,615) | |||||||||||||||||||||||||
52 weeks ended, May 1, 2021 (a) | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | Corporate Services | Eliminations (b) | Total | ||||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||||||||
| Product sales and other | $ | 1,196,320 | $ | 165,825 | $ | — | $ | (89,779) | $ | 1,272,366 | |||||||||||||||||||||||||
| Rental income | 134,150 | — | — | — | 134,150 | ||||||||||||||||||||||||||||||
| Total sales | 1,330,470 | 165,825 | — | (89,779) | 1,406,516 | ||||||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||||||||
| Product and other cost of sales | 1,047,613 | 131,142 | — | (89,822) | 1,088,933 | ||||||||||||||||||||||||||||||
| Rental cost of sales | 87,240 | — | — | — | 87,240 | ||||||||||||||||||||||||||||||
| Total cost of sales | 1,134,853 | 131,142 | — | (89,822) | 1,176,173 | ||||||||||||||||||||||||||||||
| Gross profit | 195,617 | 34,683 | — | 43 | 230,343 | ||||||||||||||||||||||||||||||
| Selling and administrative expenses | 278,149 | 16,085 | 22,079 | (149) | 316,164 | ||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 39,634 | 5,461 | 109 | — | 45,204 | ||||||||||||||||||||||||||||||
| Impairment loss (non-cash) | 27,630 | — | — | — | 27,630 | ||||||||||||||||||||||||||||||
| Restructuring and other charges | 5,514 | (1,595) | 6,188 | — | 10,107 | ||||||||||||||||||||||||||||||
| Operating (loss) income from continuing operations | $ | (155,310) | $ | 14,732 | $ | (28,376) | $ | 192 | $ | (168,762) | |||||||||||||||||||||||||
(a) In Fiscal 2022 and Fiscal 2021, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows.
(b) For additional information related to the intercompany activities and eliminations, see Part II - Item 8. Financial Statements and Supplementary Data - Note 4. Segment Reporting.
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Sales
The following table summarizes our sales:
| 52 weeks ended | |||||||||||||||||||||||||||||
| Dollars in thousands | April 30, 2022 | May 1, 2021 | % | ||||||||||||||||||||||||||
| Product sales and other | $ | 1,362,380 | $ | 1,272,366 | 7.1% | ||||||||||||||||||||||||
| Rental income | 133,354 | 134,150 | (0.6)% | ||||||||||||||||||||||||||
| Total Sales | $ | 1,495,734 | $ | 1,406,516 | 6.3% | ||||||||||||||||||||||||
Our total sales increased by $89.2 million, or 6.3%, to $1,495.7 million during the 52 weeks ended April 30, 2022 from $1,406.5 million during the 52 weeks ended May 1, 2021. The sales increase is primarily related to re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. The increase is offset by the negative impact on sales primarily due to lower enrollments, primarily at community colleges and by international students, the continuation of remote and hybrid class offerings and lower logo and emblematic sales as they are reflected in sales on a net basis in our consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the periods prior to April 4, 2021. For additional information, see Retail Sales discussion below.
The components of the sales variances for the 52 week period are reflected in the table below.
| Sales variances | April 30, 2022 | |||||||||||||
| Dollars in millions | ||||||||||||||
| Retail Sales | ||||||||||||||
| New stores | $ | 67.2 | ||||||||||||
| Closed stores | (42.3) | |||||||||||||
Comparable stores (a) | 83.5 | |||||||||||||
| Textbook rental deferral | (1.8) | |||||||||||||
Service revenue (b) | (2.4) | |||||||||||||
Other (c) | 5.0 | |||||||||||||
| Retail Sales subtotal: | $ | 109.2 | ||||||||||||
| Wholesale Sales | $ | (53.6) | ||||||||||||
Eliminations (d) | $ | 33.6 | ||||||||||||
| Total sales variance: | $ | 89.2 | ||||||||||||
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(a) Effective in April 2021, as contemplated by the F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of our logo general merchandise sales to Lids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo general merchandise sales on a gross basis in the periods prior to the transition. For Retail Gross Comparable Store Sales details, see below.
(b) Service revenue includes brand partnerships, 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
Retail total sales increased by $109.2 million, or 8.2%, to $1,439.7 million during the 52 weeks ended April 30, 2022 from $1,330.5 million during the 52 weeks ended May 1, 2021. The following is a store count summary for physical stores and virtual stores. Many of the store closings relate to closing less profitable stores, including satellite store locations.
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DIRECTOR COMPENSATION
Annual Retainer
Each non-employee director receives
| Fiscal 2022 | Fiscal 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Physical | Virtual | Total | Physical | Virtual | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Beginning of period | 769 | 648 | 1,417 | 772 | 647 | 1,419 | ||||||||||||||||||||||||||||||||||||||||||||
| Opened | 57 | 35 | 92 | 40 | 58 | 98 | ||||||||||||||||||||||||||||||||||||||||||||
| Closed | 21 | 61 | 82 | 43 | 57 | 100 | ||||||||||||||||||||||||||||||||||||||||||||
| End of period | 805 | 622 | 1,427 | 769 | 648 | 1,417 | ||||||||||||||||||||||||||||||||||||||||||||
The comparability of Products and other sales, specifically logo and emblematic sales, is impacted by the recognition of logo and emblematic sales on a net basis in our consolidated financial statements during the 52 weeks ended April 30, 2022, as compared to on a gross basis prior to April 4, 2021. See the Retail Gross Comparable Store Sales discussion below.
Additionally, Product and other sales and Rental income are impacted by the growth of First Day Complete, comparable store sales, new store openings and store closings, as well as the impact from the COVID-19 pandemic. Sales were impacted by overall enrollment declines in higher education. Although most four year schools returned to a traditional on-campus environment for learning in the Fall 2021 semester, as well as hosted traditional on campus sporting activities, there is still uncertainty about the extent of the impact of the COVID-19 pandemic, including on enrollments at community colleges and by international students, and the continuation of remote and hybrid class offerings. While many college athletic conferences resumed their sport activities, other on campus events, such as parent's weekends or alumni events, continue to be either eliminated or severely restricted, which further impacted our general merchandise business. As we entered the Spring rush period in early January 2022, we continued to experience the ongoing effects of the COVID-19 pandemic with the surge of the Omicron variant further impacting students return to campus and on-campus activities. In early January 2022, while the majority of schools brought students back to campus, some schools chose to conduct classes virtually for the beginning of the semester, while other schools chose to delay their start dates (and some schools both delayed the start of the semester and started classes virtually), thus reducing and/or delaying sales.
Product and other sales for Retail increased by $110.0 million, or 9.2%, to $1,306.3 million during the 52 weeks ended April 30, 2022 from $1,196.3 million during the 52 weeks ended May 1, 2021. During the 52 weeks ended April 30, 2022, course material sales increased by $47.0 million or 5.4% to $911.2 million, and general merchandise sales increased by $72.3 million or 26.3% to $347.0 million, offset by a decrease in service and other revenue of $9.3 million or 16.2% to $48.1 million. Course material rental income for Retail decreased by $0.8 million, or 0.6%, to $133.4 million during the 52 weeks ended April 30, 2022 from $134.2 million during the 52 weeks ended May 1, 2021. The overall Retail sales increase is primarily related to re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. Course material sales were also impacted by lower enrollments, primarily at community colleges and by international students, and the continuation of remote and hybrid class offerings.
During the 52 weeks ended April 30, 2022, Retail Gross Comparable Store course material sales increased by 2.3%, as compared to a 15.2% decline a year ago, when the majority of our stores had temporarily closed due to the COVID-19 pandemic. See Retail Gross Comparable Store Sales discussion below. The increase in course material sales was reflective of the growth of BNC First Day equitable and inclusive access programs, digital and eTextbook revenue increases, due to a shift to lower cost options and more affordable solutions, including digital offerings. For the 2022 Spring term, First Day Complete was offered through 76 campus bookstores compared to 14 campus bookstores in the prior year, at schools with over 380,000 in total undergraduate enrollment, up from approximately 62,000 in total undergraduate enrollment in the 2021 Spring term. Revenue for both of our BNC First Day models increased to $235 million during Fiscal 2022, as compared to $123 million in the prior year period.
During the 52 weeks ended April 30, 2022, logo and emblematic sales are reflected in sales on a net basis in our consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis prior to April 4, 2021. See Retail Gross Comparable Store Sales discussion below. During the 52 weeks ended April 30, 2022, Retail Gross Comparable Store general merchandise sales increased by 75.6%, as compared to a 47.0% decline a year ago. Both results during both periods benefited greatly from the return to an annualon campus learning experience and the resumption of many activities and events. Sales for general merchandise, including on-campus cafe and convenience products, and trade merchandise have increased compared to the prior year, when sales were impacted by the temporary store closings due to the COVID-19 pandemic.
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
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Gross Comparable Store Sales, sales for logo general merchandise fulfilled by Lids, Fanatics and digital agency sales are included on a gross basis for consistent year-over-year comparison.
Effective in April 2021, as contemplated by the F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of our logo general merchandise sales to Lids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo general merchandise sales on a gross basis in the periods prior to the transition.
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.
Retail Gross Comparable Store Sales variances for Retail by category for the 52 week period are as follows:
| Dollars in millions | 52 weeks ended | |||||||||||||||||||||||||
| April 30, 2022 | May 1, 2021 | |||||||||||||||||||||||||
| Textbooks (Course Materials) | $ | 21.2 | 2.3 | % | $ | (158.4) | (15.2) | % | ||||||||||||||||||
| General Merchandise | 219.5 | 75.6 | % | (256.2) | (47.0) | % | ||||||||||||||||||||
| Total Retail Gross Comparable Store Sales | $ | 240.7 | 19.6 | % | $ | (414.6) | (26.1) | % | ||||||||||||||||||
Wholesale
Wholesale sales decreased by $53.6 million, or 32.3%, to $112.2 million during the 52 weeks ended April 30, 2022 from $165.8 million during the 52 weeks ended May 1, 2021. The decrease is primarily due to lower gross sales impacted by the COVID-19 pandemic, including supply constraints resulting from the lack of on campus textbook buyback opportunities during the prior fiscal year, a decrease in customer demand resulting from a shift in buying patterns from physical textbooks to digital products, and lower demand from other third-party clients, partially offset by lower returns and allowances. During the prior year period, the Wholesale operations assumed direct-to-student fulfillment of course material orders for the Retail Segment campus bookstores that were not fully operational due to COVID-19 campus store closures, whereas the sales shifted back to the physical bookstores in Fiscal 2022.
Cost of Sales and Gross Margin
Our cost of sales decreased as a percentage of sales to 77.1% during the 52 weeks ended April 30, 2022 compared to 83.6% during the 52 weeks ended May 1, 2021. Our gross margin increased by $112.5 million, or 48.8%, to $342.8 million, or 22.9% of sales, during the 52 weeks ended April 30, 2022 from $230.3 million, or 16.4% of sales, during the 52 weeks ended May 1, 2021.
During the 52 weeks ended April 30, 2022 and May 1, 2021, we recognized a merchandise inventory loss and write-off of $0.4 million and $15.0 million, respectively, in cost of goods sold in the Retail Segment discussed below. Excluding the merchandise inventory loss and write-off, cost of goods sold and gross margin was 77.1% and 22.9%, respectively, of sales during the 52 weeks ended April 30, 2022 compared to 82.6% and 17.4%, respectively, of sales during the 52 weeks ended May 1, 2021. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Organization and Note 2. Summary of Significant Accounting Policies - Merchandise Inventories.
Retail
The following table summarizes the Retail cost of sales:
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 30, 2022 | % of Related Sales | May 1, 2021 | % of Related Sales | |||||||||||||||||||||||||||||||||||||||||||
| Product and other cost of sales | $ | 1,040,022 | 79.6% | $ | 1,047,613 | 87.6% | |||||||||||||||||||||||||||||||||||||||||
| Rental cost of sales | 76,659 | 57.5% | 87,240 | 65.0% | |||||||||||||||||||||||||||||||||||||||||||
| Total Cost of Sales | $ | 1,116,681 | 77.6% | $ | 1,134,853 | 85.3% | |||||||||||||||||||||||||||||||||||||||||
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The following table summarizes the Retail gross margin:
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 30, 2022 | % of Related Sales | May 1, 2021 | % of Related Sales | |||||||||||||||||||||||||||||||||||||||||||
| Product and other gross margin | $ | 266,288 | 20.4% | $ | 148,707 | 12.4% | |||||||||||||||||||||||||||||||||||||||||
| Rental gross margin | 56,695 | 42.5% | 46,910 | 35.0% | |||||||||||||||||||||||||||||||||||||||||||
| Gross Margin | $ | 322,983 | 22.4% | $ | 195,617 | 14.7% | |||||||||||||||||||||||||||||||||||||||||
For the 52 weeks ended April 30, 2022, the Retail gross margin as a percentage of sales increased as discussed below:
•Product and other gross margin increased (800 basis points), driven primarily by a favorable sales mix (410 basis points) due to higher general merchandise sales and higher margin rates (445 basis points) due to lower inventory reserves and lower markdowns, partially offset by an inventory merchandise loss of $0.4 million related to the finalization of the sale of our logo and emblematic general merchandise inventory below cost to Lids which occurred in the fourth quarter in Fiscal 2021. The increase in margin was also partially offset by higher contract costs as a percentage of sales related to our college and university contracts (60 basis points) resulting from contract renewals and new store contracts.
•Rental gross margin increased (750 basis points), driven primarily by lower contract costs as a percentage of sales related to our college and university contracts (750 basis points) and a favorable rental mix (50 basis points), partially offset by lower rental margin rates (50 basis points).
Wholesale
The cost of sales and gross margin for Wholesale were $92.5 million, or 82.4% of sales, and $19.8 million, or 17.6% of sales, respectively, during the 52 weeks ended April 30, 2022. The cost of sales and gross margin for Wholesale were $131.1 million, or 79.1% of sales, and $34.7 million, or 20.9% of sales, respectively, during the 52 weeks ended May 1, 2021. The gross margin decreased to 17.6% during the 52 weeks ended April 30, 2022 from 20.9% during the 52 weeks ended May 1, 2021. The decrease was primarily due to the unfavorable impact of returns and allowances and higher markdowns, partially offset by a favorable sales mix.
Intercompany Eliminations
During the 52 weeks ended April 30, 2022 and 52 weeks ended May 1, 2021, sales eliminations were $56.2 million and $89.8 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 52 weeks ended April 30, 2022 and 52 weeks ended May 1, 2021, the cost of sales eliminations were $56.2 million and $89.8 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 both 52 weeks periods ended April 30, 2022 and 52 weeks ended May 1, 2021, the gross margin eliminations was $0.1 million. 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
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 30, 2022 | % of Sales | May 1, 2021 | % of Sales | |||||||||||||||||||||||||||||||||||||||||||
| Selling and Administrative Expenses | $ | 353,968 | 23.7% | $ | 316,164 | 22.5% | |||||||||||||||||||||||||||||||||||||||||
During the 52 weeks ended April 30, 2022, selling and administrative expenses increased by $37.8 million, or 12.0%, to $354.0 million from $316.2 million during the 52 weeks ended May 1, 2021. The variances by segment are discussed by segment below. The increase in selling and administrative expenses is primarily related to re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year.
Retail
For Retail, selling and administrative expenses increased by $37.0 million, or 13.3%, to $315.1 million during the 52 weeks ended April 30, 2022 from $278.1 million during the 52 weeks ended May 1, 2021. This increase was primarily due to a $34.5 million increase in stores payroll and operating expenses including comparable stores, virtual stores and new/closed
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stores payroll and operating expenses, and a $2.5 million increase in corporate payroll, infrastructure and product development costs. The payroll increase is primarily related to re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year.
Wholesale
For Wholesale, selling and administrative expenses decreased by $0.1 million, or 0.5%, to $16.0 million during the 52 weeks ended April 30, 2022 from $16.1 million during the 52 weeks ended May 1, 2021. Thedecrease in selling and administrative expenses was primarily driven by lower compensation expense and lower operating costs.
Corporate Services
Corporate Services' selling and administrative expenses increased by $0.9 million, or 4.2%, to $23.0 million during the 52 weeks ended April 30, 2022 from $22.1 million during the 52 weeks ended May 1, 2021. The increase was primarily due to higher professional services costs.
Depreciation and Amortization Expense
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 30, 2022 | % of Sales | May 1, 2021 | % of Sales | |||||||||||||||||||||||||||||||||||||||||||
| Depreciation and Amortization Expense | $ | 42,124 | 2.8% | $ | 45,204 | 3.2% | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization expense decreased by $3.1 million, or 6.8%, to $42.1 million during the 52 weeks ended April 30, 2022 from $45.2 million during the 52 weeks ended May 1, 2021. The decrease was primarily attributable to lower depreciable assets and intangibles due to the store impairment loss recognized during Fiscal 2022 and Fiscal 2021. See impairment loss discuss below.
Impairment loss (non-cash)
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. For information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Note 6. Fair Value Measurements.
During the 52 weeks ended April 30, 2022, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $6.4 million (both pre-tax and after-tax), comprised of $0.7 million, $1.8 million, $3.7 million and $0.2 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
During the 52 weeks ended May 1, 2021, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $27.6 million, $20.5 million after-tax, comprised of $5.1 million, $13.3 million, $6.3 million and $2.9 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
Restructuring and other charges
During the 52 weeks ended April 30, 2022, we recognized restructuring and other charges totaling $1.0 million, comprised primarily of $1.3 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives and $1.8 million for costs associated with professional service costs for restructuring, process improvements, development and integration associated with the F/L Partnership, shareholder activist activities, and liabilities for a facility closure, partially offset by a $2.1 million in an actuarial gain related to a frozen retirement benefit plan (non-cash).
During the 52 weeks ended May 1, 2021, we recognized restructuring and other charges totaling $10.1 million, comprised primarily of $6.0 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives, $5.7 million for professional service costs related to restructuring, process improvements, the financial advisor strategic review process, costs related to development and integration associated with F/L partnership agreements and shareholder activist activities, and liabilities for a facility closure, partially offset by a $1.6 million in an actuarial gain related to a frozen retirement benefit plan (non-cash).
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Operating Loss
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 30, 2022 | % of Sales | May 1, 2021 | % of Sales | |||||||||||||||||||||||||||||||||||||||||||
| Operating Loss | $ | (60,615) | (4.1)% | $ | (168,762) | (12.0)% | |||||||||||||||||||||||||||||||||||||||||
Our operating loss was $(60.6) million during the 52 weeks ended April 30, 2022 compared to operating loss of $(168.8) million during the 52 weeks ended May 1, 2021. This operating loss decrease was due to the matters discussed above.
For the 52 weeks ended April 30, 2022, excluding the $0.4 million of merchandise inventory loss and write-off, $1.0 million of restructuring and other charges and the $6.4 million impairment loss (non-cash), all discussed above, operating loss was $(52.8) million (or (3.5)% of sales).
For the 52 weeks ended May 1, 2021, excluding the $15.0 million of merchandise inventory loss and write-off, $10.1 million of restructuring and other charges and the $27.6 million impairment loss (non-cash), all discussed above, operating loss was $(116.1) million (or (8.3)% of sales).
Interest Expense, Net
| 52 weeks ended | ||||||||||||||
| Dollars in thousands | April 30, 2022 | May 1, 2021 | ||||||||||||
| Interest Expense, Net | $ | 10,096 | $ | 8,087 | ||||||||||
Net interest expense increased by $2.0 million to $10.1 million during the 52 weeks ended April 30, 2022 from $8.1 million during the 52 weeks ended May 1, 2021 primarily due to higher borrowings compared to the prior year.
Income Tax Benefit
| 52 weeks ended | 52 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | April 30, 2022 | Effective Rate | May 1, 2021 | Effective Rate | |||||||||||||||||||||||||||||||||||||||||||
| Income Tax Benefit | $ | (9,152) | 12.9% | $ | (43,280) | 24.5% | |||||||||||||||||||||||||||||||||||||||||
We recorded an income tax benefit of $(9.2) million on a pre-tax loss of $(70.7) million during the 52 weeks ended April 30, 2022, which represented an effective income tax rate of 12.9% and an income tax benefit of $(43.3) million on a pre-tax loss of $(176.8) million during the 52 weeks ended May 1, 2021, which represented an effective income tax rate of 24.5%.
The effective tax rate for the 52 weeks ended April 30, 2022 is significantly lower as compared to the prior year comparable period due to the change in pre-tax loss and the change in the assessment of the realization of deferred tax assets as compared to prior year loss carrybacks.
Impact of U.S. Tax Reform
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (The “CARES Act”) was enacted. We have analyzed the provisions, which provide for a technical correction to allow for full expensing of qualified leasehold improvements, modifications to charitable contribution and net operating loss limitations (“NOLs”), modifications to the deductibility of business interest expense, as well as Alternative Minimum Tax (“AMT”) credit acceleration. The most significant impact of the legislation for the Company was an income tax benefit of $7.2 million for the carryback of NOLs to higher tax rate years, recorded in Fiscal 2021. As of April 30, 2022, we reported a current income tax receivable for NOL carrybacks of $30.5 million in prepaid and other current assets on the consolidated balance sheet. We received a $7.8 million refund in the second quarter of Fiscal 2022 and expect to receive the additional refunds of approximately $22.7 million.
Net Loss from Continuing Operations
| 52 weeks ended | |||||||||||||||||||||||
| Dollars in thousands | April 30, 2022 | May 1, 2021 | |||||||||||||||||||||
| Net Loss from Continuing Operations | $ | (61,559) | $ | (133,569) | |||||||||||||||||||
As a result of the factors discussed above, we reported a net loss from continuing operations of $(61.6) million during the 52 weeks ended April 30, 2022, compared with a net loss from continuing operations of $(133.6) million during the 52 weeks ended May 1, 2021. Adjusted Earnings (non-GAAP) is $(53.4) million during the 52 weeks ended April 30, 2022, compared with $(93.9) million during the 52 weeks ended May 1, 2021. See Adjusted Earnings (non-GAAP) discussion below.
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Use of Non-GAAP Measures - Adjusted Earnings, Adjusted EBITDA, Adjusted EBITDA by Segment, and Free Cash Flow
To supplement our results prepared in accordance with generally accepted accounting principles (“GAAP”), we use the measure of Adjusted Earnings, Adjusted EBITDA, Adjusted EBITDA by Segment, and Free Cash Flow, which are non-GAAP financial measures under Securities and Exchange Commission (the “SEC”) regulations. We define Adjusted Earnings as net income from continuing operations adjusted for certain reconciling items that are subtracted from or added to net income (loss) from continuing operations. We define Adjusted EBITDA as net income (loss) from continuing operations plus (1) depreciation and amortization; (2) interest expense and (3) income taxes, (4) as adjusted for items that are subtracted from or added to net income (loss) from continuing operations. We define Free Cash Flow as Cash Flows from Operating Activities less capital expenditures, cash interest and cash taxes.
To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this Form 10-K, the reconciliation of Adjusted Earnings to net income (loss) from continuing operations, the reconciliation of consolidated Adjusted EBITDA to consolidated net income (loss) from continuing operations, and the reconciliation of Adjusted EBITDA by Segment to net income (loss) from continuing operations by segment, the most directly comparable financial measure presented in accordance with GAAP, set forth in the tables below. All of the items included in the reconciliations below are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance.
These non-GAAP financial measures are not intended as substitutes for and should not be considered superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of these non-GAAP financial measures may be different from similarly named measures used by other companies, limiting their usefulness for comparison purposes.
We review these non-GAAP financial measures as internal measures to evaluate our performance at a consolidated level and at a segment level and manage our operations. We believe that these measures are useful performance measures which are used by us to facilitate a comparison of our on-going operating performance on a consistent basis from period-to-period. We believe that these non-GAAP financial measures provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone, as they exclude certain items that management believes do not reflect the ordinary performance of our operations in a particular period. Our Board of Directors retainerand management also use Adjusted EBITDA and Adjusted EBITDA by Segment, at a consolidated and at a segment level, as one of the primary methods for planning and forecasting expected performance, for evaluating on a quarterly and annual basis actual results against such expectations, and as a measure for performance incentive plans. Management also uses Adjusted EBITDA by Segment to determine segment capital allocations. We believe that the inclusion of Adjusted Earnings, Adjusted EBITDA, and Adjusted EBITDA by Segment results provides investors useful and important information regarding our operating results, in a manner that is consistent with management's evaluation of business performance. We believe that Free Cash Flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements and assists investors in their understanding of our operating profitability and liquidity as we manage the business to maximize margin and cash flow.
Consolidated Adjusted Earnings (non-GAAP) - Continuing Operations
| 52 weeks ended | |||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | April 30, 2022 (a) | May 1, 2021 (a) | ||||||||||||||||||||||||||
Net loss from continuing operations (b) | $ | (90,140) | $ | (61,559) | $ | (133,569) | |||||||||||||||||||||||
Reconciling items, after-tax (below) | 16,137 | 8,175 | 39,679 | ||||||||||||||||||||||||||
| Adjusted Earnings (non-GAAP) | $ | (74,003) | $ | (53,384) | $ | (93,890) | |||||||||||||||||||||||
| Reconciling items, pre-tax | |||||||||||||||||||||||||||||
Impairment loss (non-cash) (c) | $ | 6,008 | $ | 6,411 | $ | 27,630 | |||||||||||||||||||||||
Merchandise inventory loss and write-off (c) | — | 434 | 14,960 | ||||||||||||||||||||||||||
Content amortization (non-cash) (d) | 26 | 386 | 745 | ||||||||||||||||||||||||||
Restructuring and other charges (c) | 10,103 | 944 | 10,107 | ||||||||||||||||||||||||||
| Reconciling items, pre-tax | 16,137 | 8,175 | 53,442 | ||||||||||||||||||||||||||
Less: Pro forma income tax impact (e) | — | — | 13,763 | ||||||||||||||||||||||||||
| Reconciling items, after-tax | $ | 16,137 | $ | 8,175 | $ | 39,679 | |||||||||||||||||||||||
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Consolidated Adjusted EBITDA (non-GAAP) - Continuing Operations
| 52 weeks ended | ||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | April 30, 2022 (a) | May 1, 2021 (a) | |||||||||||||||||
Net loss from continuing operations (b) | $ | (90,140) | $ | (61,559) | $ | (133,569) | ||||||||||||||
| Add: | ||||||||||||||||||||
| Depreciation and amortization expense | 42,163 | 42,124 | 45,204 | |||||||||||||||||
| Interest expense, net | 22,683 | 10,096 | 8,087 | |||||||||||||||||
| Income tax expense (benefit) | 1,011 | (9,152) | (43,280) | |||||||||||||||||
Impairment loss (non-cash) (c) | 6,008 | 6,411 | 27,630 | |||||||||||||||||
Merchandise inventory loss and write-off (c) | — | 434 | 14,960 | |||||||||||||||||
Content amortization (non-cash) (d) | 26 | 386 | 745 | |||||||||||||||||
Restructuring and other charges (c) | 10,103 | 944 | 10,107 | |||||||||||||||||
| Adjusted EBITDA (Non-GAAP) - Continuing Operations | $ | (8,146) | $ | (10,316) | $ | (70,116) | ||||||||||||||
| Adjusted EBITDA (Non-GAAP) - Discontinued Operations | $ | 654 | $ | 5,524 | $ | 4,491 | ||||||||||||||
| Adjusted EBITDA (Non-GAAP) - Total | $ | (7,492) | $ | (4,792) | $ | (65,625) | ||||||||||||||
(a) In Fiscal 2022 and 2021, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows.
(b) During the fourth quarter of fiscal 2023, assets related to our Digital Student Solutions ("DSS") Segment met the criteria for classification as Assets Held for Sale and Discontinued Operations. Net Loss from Continuing Operations excludes the results of operations related to the DSS Segment for all years reported above.
(c) See Management Discussion and Analysis - Results of Operations discussion above.
(d) Earnings are adjusted for amortization expense (non-cash) related to content development costs which are included in cost of goods sold.
(e) Represents the income tax effects of the non-GAAP items.
The following is Adjusted EBITDA - Continuing Operations by Segment for Fiscal 2023, Fiscal 2022, and Fiscal 2021:
| Adjusted EBITDA - by Segment | 52 weeks ended April 29, 2023 | |||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | Corporate Services(b) | Eliminations | Total | |||||||||||||||||||||||||||||||||
Net loss from continuing operations (a) | $ | (35,095) | $ | (3,050) | $ | (51,970) | $ | (25) | $ | (90,140) | ||||||||||||||||||||||||||||
| Add: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 36,737 | 5,373 | 53 | — | 42,163 | |||||||||||||||||||||||||||||||||
| Interest expense, net | — | — | 22,683 | — | 22,683 | |||||||||||||||||||||||||||||||||
| Income tax expense | — | — | 1,011 | — | 1,011 | |||||||||||||||||||||||||||||||||
Impairment loss (non-cash) (c) | 6,008 | — | — | — | 6,008 | |||||||||||||||||||||||||||||||||
Content amortization (non-cash) (d) | 26 | — | — | — | 26 | |||||||||||||||||||||||||||||||||
Restructuring and other charges (c) | 2,964 | 916 | 6,223 | — | 10,103 | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 10,640 | $ | 3,239 | $ | (22,000) | $ | (25) | $ | (8,146) | ||||||||||||||||||||||||||||
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| Adjusted EBITDA - by Segment | 52 weeks ended April 30, 2022 (e) | |||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | Corporate Services(b) | Eliminations | Total | |||||||||||||||||||||||||||||||||
Net (loss) income from continuing operations (a) | $ | (37,305) | $ | 495 | $ | (24,974) | $ | 225 | $ | (61,559) | ||||||||||||||||||||||||||||
| Add: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 36,635 | 5,418 | 71 | — | 42,124 | |||||||||||||||||||||||||||||||||
| Interest expense, net | — | — | 10,096 | — | 10,096 | |||||||||||||||||||||||||||||||||
| Income tax benefit | — | — | (9,152) | — | (9,152) | |||||||||||||||||||||||||||||||||
Impairment loss (non-cash) (c) | 6,411 | — | — | — | 6,411 | |||||||||||||||||||||||||||||||||
Merchandise inventory loss and write-off (c) | 434 | — | — | — | 434 | |||||||||||||||||||||||||||||||||
Content amortization (non-cash) (d) | 386 | — | — | — | 386 | |||||||||||||||||||||||||||||||||
Restructuring and other charges (c) | 2,118 | (2,131) | 957 | — | 944 | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 8,679 | $ | 3,782 | $ | (23,002) | $ | 225 | $ | (10,316) | ||||||||||||||||||||||||||||
| Adjusted EBITDA - by Segment | 52 weeks ended May 1, 2021 (e) | |||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Retail | Wholesale | Corporate Services(b) | Eliminations | Total | |||||||||||||||||||||||||||||||||
Net (loss) income from continuing operations (a) | $ | (155,310) | $ | 14,732 | $ | 6,817 | $ | 192 | $ | (133,569) | ||||||||||||||||||||||||||||
| Add: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | 39,634 | 5,461 | 109 | — | 45,204 | |||||||||||||||||||||||||||||||||
| Interest expense, net | — | — | 8,087 | — | 8,087 | |||||||||||||||||||||||||||||||||
| Income tax benefit | — | — | (43,280) | — | (43,280) | |||||||||||||||||||||||||||||||||
Impairment loss (non-cash) (c) | 27,630 | — | — | — | 27,630 | |||||||||||||||||||||||||||||||||
Merchandise inventory loss and write-off (c) | 14,960 | — | — | — | 14,960 | |||||||||||||||||||||||||||||||||
Content amortization (non-cash) (d) | 745 | — | — | — | 745 | |||||||||||||||||||||||||||||||||
Restructuring and other charges (c) | 5,514 | (1,595) | 6,188 | — | 10,107 | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | (66,827) | $ | 18,598 | $ | (22,079) | $ | 192 | $ | (70,116) | ||||||||||||||||||||||||||||
(a) During the fourth quarter of Fiscal 2023, assets related to our Digital Student Solutions ("DSS") Segment met the criteria for classification as Assets Held for Sale and Discontinued Operations. Net Loss from Continuing Operations excludes the results of operations related to the DSS Segment for all years reported above.
(b) Interest expense is reflected in Corporate Services as it is primarily related to our Credit Agreement which funds our operating and financing needs across the organization. Income taxes are reflected in Corporate Services as we record our income tax provision on a consolidated basis.
(c) See Management Discussion and Analysis - Results of Operations discussion above.
(d) Earnings are adjusted for amortization expense (non-cash) related to content development costs which are included in cost of goods sold.
(e) In Fiscal 2022 and 2021, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows.
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| Adjusted EBITDA (non-GAAP) - Discontinued Operations | 52 weeks ended | |||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||
| Loss from discontinued operations | $ | (11,722) | $ | (7,298) | $ | (6,241) | ||||||||||||||
| Add: | ||||||||||||||||||||
| Depreciation and amortization expense | 3,155 | 7,257 | 7,763 | |||||||||||||||||
| Income tax expense (benefit) | 398 | 497 | (1,891) | |||||||||||||||||
| Content amortization (non-cash) | 6,594 | 5,068 | 4,289 | |||||||||||||||||
| Restructuring and other charges | 1,848 | — | 571 | |||||||||||||||||
| Transaction costs | 381 | — | — | |||||||||||||||||
| Adjusted EBITDA (Non-GAAP) - Total | $ | 654 | $ | 5,524 | $ | 4,491 | ||||||||||||||
Free Cash Flow (non-GAAP) - Continuing Operations
| 52 weeks ended | ||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | April 30, 2022 | May 1, 2021 | |||||||||||||||||
Net cash flows provided by (used in) operating activities from continuing operations (a) | $ | 90,513 | $ | (16,195) | $ | 27,049 | ||||||||||||||
| Less: | ||||||||||||||||||||
Capital expenditures (b) | 25,092 | 33,607 | 27,562 | |||||||||||||||||
| Cash interest | 19,024 | 8,166 | 6,778 | |||||||||||||||||
| Cash taxes (refund) paid | (16,005) | (8,088) | 5,823 | |||||||||||||||||
| Free Cash Flow (non-GAAP) | $ | 62,402 | $ | (49,880) | $ | (13,114) | ||||||||||||||
(a) The tightening of our available credit commitments, including the elimination and repayment of our seasonal borrowing facility (FILO Facility), has had a significant impact on our liquidity during the year ended April 29, 2023, including our ability to make timely vendor payments and school commission payments resulting in a positive cash flow from operations offset by a use of cash for financing activities.
(b) Purchases of property and equipment are also referred to as capital expenditures. Our investing activities consist principally of capital expenditures for contractual capital investments associated with renewing existing contracts, new store construction, and enhancements to internal systems and our website. The following table provides the components of total purchases of property and equipment:
Capital Expenditures - Continuing Operations
| 52 weeks ended | ||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | April 30, 2022 | May 1, 2021 | |||||||||||||||||
| Physical store capital expenditures | $ | 13,068 | $ | 16,206 | $ | 10,383 | ||||||||||||||
| Product and system development | 10,030 | 14,867 | 10,826 | |||||||||||||||||
| Other | 1,994 | 2,534 | 6,353 | |||||||||||||||||
| Total Capital Expenditures | $ | 25,092 | $ | 33,607 | $ | 27,562 | ||||||||||||||
Liquidity and Capital Resources
The accompanying consolidated financial statements are prepared in accordance with U.S. GAAP applicable to a going concern. This presentation contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described below.
Pursuant to ASC 205-40, Presentation of Financial Statements — Going Concern (“ASC 205-40”), management must evaluate whether there are conditions and events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that these Consolidated Financial Statements are issued. In accordance with ASC 205-40, management’s analysis can only include the potential mitigating impact of management’s plans that have not been fully implemented as of the issuance date of these consolidated financial statements if (a) it is probable that
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management’s plans will be effectively implemented on a timely basis, and (b) it is probable that the plans, when implemented, will alleviate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.
Evaluation in conjunction with the issuance of the April 29, 2023 Consolidated Financial Statements
Our primary sources of cash are net cash flows from operating activities, funds available under our Credit Agreement, Term Loan Agreement, and short-term vendor financing. Our liquidity is highly dependent on the seasonal nature of our business, particularly with respect to course material sales, as sales are generally highest in the second and third fiscal quarters, when college students generally purchase textbooks for the upcoming Fall and Spring semesters, respectively. As of April 29, 2023, we had $30.9 million of cash on hand, including $16.7 million of restricted cash related to segregated funds for commission due to Fanatics for logo merchandise sales as per the merchandising partnership agreement.
We incurred a Net Loss from Continuing Operations of $(90.1) million, $(61.6) million, and $(133.6) million, for the years ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively, and Cash Flow Provided By (Used In) Operating Activities from Continuing Operations of $90.5 million, $(16.2) million, and $27.0 million, respectively. The tightening of our available credit commitments, including the elimination and repayment of our seasonal borrowing facility (FILO Facility) of $40.0 million, has had a significant impact on our liquidity during the year ended April 29, 2023, including our ability to make timely vendor payments and school commission payments resulting in a positive cash flow from operations offset by a use of cash for financing activities.
Our business was significantly negatively impacted by the COVID-19 pandemic during the years ended April 30, 2022 and May 1, 2021, as many schools adjusted their learning models and on-campus activities. Although most academic institutions have since reopened after the COVID-19 pandemic, the lingering impacts of the pandemic have resulted in changes in customer behaviors, lower enrollments, and an evolving educational landscape which continued to impact our financial results during the year ended April 29, 2023. Some institutions are still providing alternatives to traditional in-person instruction, including online and hybrid learning options and significantly reduced classroom sizes. The impact of COVID-19 store closings, as well as lower earnings during the year ended April 29, 2023, resulted in the loss of cash flows and increased borrowings that we would not otherwise have expected to incur.
Our losses and projected cash needs, combined with our current liquidity level, initially raised substantial doubt about our ability to continue as a going concern. As discussed below, Management’s plan to improve the Company’s liquidity and successfully alleviate substantial doubt includes (1) raising additional liquidity and (2) taking additional operational restructuring actions.
Debt amendments
On July 28, 2023, we amended our existing Credit Agreement to (i) extend the maturity date of the Credit Agreement to December 28, 2024, (ii) reduce advance rates with respect to the borrowing base by 1000 basis points on September 2, 2024 (in lieu of the reductions previously contemplated for September 2023), (iii) subject to the conditions set forth in such amendment, add a CARES Act tax refund claim to the borrowing base, from April 1, 2024 through July 31, 2024, (iv) amend the financial maintenance covenant to require Availability (as defined in the Credit Agreement) at all times greater than the greater of (x) 10% of the Aggregate Loan Cap (as defined in the Credit Agreement) and (y) (A) $32.5 million minus, subject to the conditions set forth in such amendment, (B) (a) $7.5 million for the period of April 1, 2024 through and including April 30, 2024, (b) $2.5 million for the period of May 1, 2024 through and including May 31, 2024 and (c) $0 at all other times, (v) add a minimum Consolidated EBITDA (as defined in the Credit Agreement) financial maintenance covenant, and (vi) amend certain negative and affirmative covenants and add certain additional covenants, all as more particularly set forth in such amendment. The amendment also requires that we appoint a Chief Restructuring Officer and that, by August 11, 2023, we (i) appoint two independent members to the board of directors of the Company from prospective candidates that have been previously disclosed to the Administrative Agent and the Lenders and (ii) appoint a committee of the board of directors of the Company to consist of three board members (two of whom will be the new independent directors). The committee’s responsibilities will include, among other things, to explore, consider, solicit expressions of interest or proposals for, respond to any communications, inquiries or proposals regarding, and advise as to all strategic alternatives to effect a “Specified Liquidity Transaction” (as defined in the Credit Agreement). There can be no guarantee or assurances that any such transaction or transactions be consummated. We must pay (i) a fee of $65,000,0.50% of the outstanding principal amount of the commitments under the Credit Agreement March 2023 amendment (as defined in the Credit Agreement) on the closing date (in lieu of the deferred fee previously contemplated in connection with the March 2023 amendment (as defined in the Credit Agreement)) and (ii) a fee of 1.00% of the outstanding principal amount of the commitments under the Credit Agreement as of the closing date on the earlier to occur of September 2, 2024 and an Event of Default (as defined in the Credit Agreement).
On July 28, 2023, we amended our Term Loan to (i) extend the maturity date of the Term Loan Agreement to April 7, 2025, (ii) allow for interest to be paid in quarterly installments. The Lead Directorkind until September 2, 2024, (iii) amend the 1.50% anniversary fee to recur on June 7 of each year that the Term Loan Agreement remains outstanding, with 2024 fee deferred to the earlier of September 2, 2024 and
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the Termination Date (as defined in the Term Loan Agreement) and (iv) amend certain negative and affirmative covenants and add certain additional covenants. We must pay a fee of $0.05 million to the lenders under the Term Loan Agreement on the earlier of September 2, 2024 and the Termination Date (as defined in the Term Loan Agreement).
Operational restructuring plans
We have implemented a significant cost reduction program designed to streamline our operations, maximize productivity and drive profitability. We have taken steps to significantly reduce our workforce during non-rush seasonal sales periods, eliminated duplicate administrative headcounts at all levels, implemented improved system development processes to reduce maintenance costs. reduced capital expenditures, and evaluated operating contractual obligations for cost savings. We have achieved meaningful cost savings from this program of approximately $17 million during the year ended April 29, 2023. These initiatives are expected to provide annualized savings of $30 million to $35 million in Fiscal 2024. Management's plans over the next twelve months include the further reduction of gross capital expenditures and other cost saving measures of approximately $25 million. Management believes that these plans are within its control and probable of being implemented on a timely basis.
Management believes that the expected impact on our liquidity and cash flows resulting from the Debt amendments and the operational initiatives outlined above are sufficient to enable the Company to meet its obligations for at least twelve months from the issuance date of these consolidated financial statements and alleviate the conditions that initially raised substantial doubt about the Company's ability to continue as a going concern.
See Part I - Risk Factors - We are dependent upon access to the capital markets, bank credit facilities, and short-term vendor financing for liquidity needs.
Sources and Uses of Cash Flow - Continuing Operations
| Dollars in thousands | Fiscal 2023 | Fiscal 2022 | Fiscal 2021 | |||||||||||||||||
| Net cash flows provided by (used in) operating activities from continuing operations | $ | 90,513 | $ | (16,195) | $ | 27,049 | ||||||||||||||
| Net cash flows used in investing activities from continuing operations | (24,501) | (32,735) | (27,227) | |||||||||||||||||
| Net cash flows (used in) provided by financing activities from continuing operations | (49,675) | 45,721 | 11,799 | |||||||||||||||||
| Net change in cash, cash equivalents, and restricted cash from continuing operations | $ | 16,337 | $ | (3,209) | $ | 11,621 | ||||||||||||||
As of April 29, 2023, April 30, 2022 and May 1, 2021, we had cash of $14.2 million, $8.8 million and $7.4 million, respectively. As of April 29, 2023, April 30, 2022, and May1, 2021, we had restricted cash of $16.7 million, $11.5 million, and $8.8 million, respectively, comprised of $15.8 million, $10.6 million, and $7.9 million, respectively, in prepaid and other current assets in the consolidated balance sheet related to segregated funds for commission due to Lids for logo merchandise sales as per the F/L Partnership's merchandising agreement and $0.9 million as of the Boardend of Directors receiveseach period in other noncurrent assets in the consolidated balance sheet related to amounts held in trust for future distributions related to employee benefit plans.
Cash Flow from Operating Activities from Continuing Operations
Our business is highly seasonal. For our retail operations, cash flows from operating activities are typically a source of cash in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials for the upcoming semesters based on the typical academic semester. Given the growth of our BNC First Day programs, the timing of cash collection from our school partners may shift to periods subsequent to when the revenue is recognized. When a school adopts our BNC First Day equitable and inclusive access offerings, cash collection from the school generally occurs after the student drop/add dates, which is later in the working capital cycle, particularly in our third quarter given the timing of the Spring Term and our quarterly reporting period, as compared to direct-to-student point-of-sale transactions where cash is generally collected during the point-of-sale transaction or within a few days from the credit card processor. As a higher percentage of our sales shift to BNC First Day equitable and inclusive access offerings, we are focused on efforts to better align the timing of our cash outflows to course material vendors with cash inflows collected from schools, including modifying payment terms in existing and future school contracts. For our wholesale operations, cash flows from operating activities are typically a source of cash in the second and third fiscal quarters, as payments are received from the summer and winter selling season when our wholesale business sell textbooks and other course materials for retail distribution. For both retail and wholesale, cash flows from operating activities are typically a use of cash in the fourth fiscal quarter, when sales volumes are materially lower than the other quarters. Our quarterly cash flows also may fluctuate depending on the timing of the start of the various school’s semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods.
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Cash flows provided by operating activities from continuing operations during Fiscal 2023 were $90.5 million compared to cash flows used in operating activities from continuing operations of $(16.2) million during Fiscal 2022. This increase in cash flows provided by operating activities from continuing operations of $106.7 million was primarily due to improved accounts receivables collections primarily related to our increased adoption of our BNC First Day equitable and inclusive access sales; timing of payables ($82.3 million) primarily due to delayed payments to vendors for inventory purchases and expenses and lower right-of-use payments, all of which were delayed resulting from lower borrowing base availability; and higher tax refunds of $7.2 million. Cash flows provided by operating activities from continuing operations were offset by lower earnings and higher interest expense paid of $10.9 million.
Cash flows used in operating activities from continuing operations during Fiscal 2022 were $(16.2) million compared to cash flows provided by operating activities from continuing operations of $27.0 million during Fiscal 2021. This decrease in cash provided by operating activities of $43.2 million was primarily due to $41.8 million of proceeds received in Fiscal 2021 from the sale of logo merchandise inventory to Lids pursuant to the F/L Partnership agreements and changes in working capital, including higher accounts receivables outstanding and higher inventory purchases, partially offset by improved earnings in Fiscal 2022 compared to Fiscal 2021 and lower tax payments of $14.0 million. Our operations were highly impacted by the COVID-19 pandemic related campus store closures in Fiscal 2021, resulting in lower operating costs and lower inventory purchases in Fiscal 2021.
Cash Flow from Investing Activities from Continuing Operations
Cash flows used in investing activities from continuing operations during Fiscal 2023 were $(24.5) million compared to $(32.7) million during Fiscal 2022. The decrease in cash used in investing activities is primarily due to lower capital expenditures and contractual capital investments, enhancements to internal systems and websites, and new store construction. Capital expenditures totaled $(25.1) million and $(33.6) million during Fiscal 2023 and Fiscal 2022, respectively.
Cash flows used in investing activities from continuing operations during Fiscal 2022 were $(32.7) million compared to $(27.2) million during Fiscal 2021. The increase in cash used in investing activities is primarily due to higher capital expenditures of $(33.6) million during Fiscal 2022 compared to $(27.6) million during Fiscal 2021.
Cash Flow from Financing Activities from Continuing Operations
Cash flows used in financing activities from continuing operations during Fiscal 2023 were $(49.7) million compared to cash flows provided by financing activities from continuing operations of $45.7 million during Fiscal 2022. The net change is primarily due to higher debt repayments and the payment of deferred financing costs of $7.3 million in Fiscal 2023. Our net debt repayments increased primarily due to a decrease in our eligible borrowing base due to lower inventory and receivables.
Cash flows provided by financing activities from continuing operations during Fiscal 2022 were $45.7 million compared to $11.8 million during Fiscal 2021. The net change is primarily due to higher net borrowings, offset by proceeds from the sale of treasury shares of $10.9 million during Fiscal 2021.
Financing Arrangements
| As of | ||||||||||||||
| Dollars in thousands | April 29, 2023 | April 30, 2022 | ||||||||||||
| Credit Facility | $ | 154,154 | $ | 185,700 | ||||||||||
| FILO Facility | — | 40,000 | ||||||||||||
| Term Loan | 30,000 | — | ||||||||||||
| sub-total | 184,154 | 225,700 | ||||||||||||
| Less: Deferred financing costs | (2,003) | — | ||||||||||||
| Total debt | $ | 182,151 | $ | 225,700 | ||||||||||
| Balance Sheet classification: | ||||||||||||||
| Short-term borrowings | $ | — | $ | 40,000 | ||||||||||
| Long-term borrowings | 182,151 | 185,700 | ||||||||||||
| Total debt | $ | 182,151 | $ | 225,700 | ||||||||||
Credit Facility
We have a credit agreement (the “Credit Agreement”), amended from time to time, including on March 31, 2021 and March 1, 2019, under which the lenders committed to provide us with a 5-year asset-backed revolving credit facility in an aggregate committed principal amount of $400 million (the “Credit Facility”) effective from the March 1, 2019 amendment. We had the option to request an increase in commitments under the Credit Facility of up to $100 million, subject to certain
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restrictions. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. The agreement included an incremental first in, last out seasonal loan facility (the “FILO Facility”) for a $100 million maintaining the maximum availability under the Credit Agreement at $500 million. As of July 31, 2022, the FILO Facility was repaid according to its terms and future commitments under the FILO Facility were reduced to $0.
On March 8, 2023, we amended our existing Credit Agreement to (i) extend the maturity date of the Credit Agreement by six months to August 29, 2024, (ii) reduce the commitments under the Credit Agreement by $20 million to $380 million, (iii) increase the applicable margin with respect to the interest rate under the Credit Agreement to 3.375% per annum, in the case of interest accruing based on a Secured Overnight Financing Rate ("SOFR"), and 2.375%, in the case of interest accruing based on an alternative base rate, in each case, without regard to a pricing grid, (iv) reduce advance rates with respect to the borrowing base (x) by 500 basis points upon the achievement of certain liquidity events, which may include a sale of equity interests or of assets (a “Specified Event”), or, if such a Specified Event shall not have occurred, on May 31, 2023 (see discussion below) and (y) by an additional $25,000 annual retainer. Audit Committee members receive500 basis points on September 29, 2023, (v) amend certain negative covenants and add certain additional covenants, (vi) amend the financial maintenance covenant to require Availability (as defined in the Credit Agreement) to be at all times greater than the greater of 10% of the Aggregate Loan Cap (as defined in the Credit Agreement) and $32.5 million and (vii) require repayment of the loans under the Credit Agreement upon a Specified Event. For additional information related to the Credit Agreement amendment, see the Company’s Report on Form 8-K dated March 8, 2023 and filed with the SEC on March 9, 2023.
As noted above, the amendment requires the achievement of a Specified Event by no later than May 31, 2023 (as such date may be extended pursuant to the terms for the Credit Agreement). See Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies for information related to the sale of our DSS segment on May 31, 2023.
We paid a fee of 0.25% of the outstanding principal amount of the commitments under the Credit Agreement on the amendment closing date, and we will pay an additional $15,000 annual retainer,fee of 1.00% of the outstanding principal amount of the commitments under the Credit Agreement on September 29, 2023.
On May 24, 2023, subsequent to quarter end, we further amended the Credit Agreement to (i) increase the applicable margin with respect to the interest rate under the Credit Agreement to 3.75% per annum, in the case of interest accruing based on SOFR, and 2.75%, in the case of interest accruing based on an alternative base rate, in each case, without regard to a pricing grid, (ii) defer the reduction of advance rates used to calculate our borrowing capacity by an amount equal to 500 basis points previously required on May 31, 2023 to September 1, 2023, (iii) require cash flow reporting and variance testing commencing June 3, 2023 and (iv) defer partial prepayment of the Term Loan from the DSS segment sale proceeds to September 1, 2023. For additional information related to the Credit Agreement amendment, see the Company’s Report on Form 8-K dated May 24, 2023 and filed with the SEC on May 31, 2023.
On July 28, 2023, we amended our existing Credit Agreement to (i) extend the maturity date of the Credit Agreement to December 28, 2024, (ii) reduce advance rates with respect to the borrowing base by 1000 basis points on September 2, 2024 (in lieu of the reductions previously contemplated for September 2023), (iii) subject to the conditions set forth in such amendment, add a CARES Act tax refund claim to the borrowing base, from April 1, 2024 through July 31, 2024, (iv) amend the financial maintenance covenant to require Availability (as defined in the Credit Agreement) at all times greater than the greater of (x) 10% of the Aggregate Loan Cap (as defined in the Credit Agreement) and (y) (A) $32.5 million minus, subject to the conditions set forth in such amendment, (B) (a) $7.5 million for the period of April 1, 2024 through and including April 30, 2024, (b) $2.5 million for the period of May 1, 2024 through and including May 31, 2024 and (c) $0 at all other times, (v) add a minimum Consolidated EBITDA (as defined in the Credit Agreement) financial maintenance covenant, and (vi) amend certain negative and affirmative covenants and add certain additional covenants, all as more particularly set forth in such amendment. The amendment also requires that we appoint a Chief Restructuring Officer and that, by August 11, 2023, we (i) appoint two independent members to the board of directors of the Company from prospective candidates that have been previously disclosed to the Administrative Agent and the ChairLenders and (ii) appoint a committee of the Audit Committee receivesboard of directors of the Company to consist of three board members (two of whom will be the new independent directors). The committee’s responsibilities will include, among other things, to explore, consider, solicit expressions of interest or proposals for, respond to any communications, inquiries or proposals regarding, and advise as to all strategic alternatives to effect a “Specified Liquidity Transaction” (as defined in the Credit Agreement). There can be no guarantee or assurances that any such transaction or transactions be consummated. We must pay (i) a fee of 0.50% of the outstanding principal amount of the commitments under the Credit Agreement March 2023 amendment (as defined in the Credit Agreement) on the closing date (in lieu of the deferred fee previously contemplated in connection with the March 2023 amendment (as defined in the Credit Agreement)) and (ii) a fee of 1.00% of the outstanding principal amount of the commitments under the Credit Agreement as of the closing date on the earlier to occur of September 2, 2024 and an Event of Default (as defined in the Credit Agreement).
As of April 29, 2023, and through the date of this filing, we were in compliance with all debt covenants under the Credit Agreement.
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The Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the Credit Facility. This is considered an all asset lien (inclusive of proceeds from tax refunds payable to the Company and a pledge of equity from subsidiaries, exclusive of real estate).
During the 52 weeks ended April 29, 2023, we borrowed $590.3 million and repaid $631.8 million under the Credit Agreement, with $154.2 million of outstanding borrowings as of April 29, 2023, comprised entirely of borrowings under the Credit Facility and $0 under the FILO Facility, which was repaid on August 1, 2022. During the 52 weeks ended April 30, 2022, we borrowed $632.2 million and repaid $584.1 million under the Credit Agreement, with $225.7 million of outstanding borrowings as of April 30, 2022, comprised of outstanding borrowings of $185.7 million and $40.0 million under the Credit Facility and FILO Facility, respectively. During the 52 weeks ended May 1, 2021, we borrowed $722.6 million and repaid $719.7 million under the Credit Agreement, with $177.6 million of outstanding borrowings as of May 1, 2021, comprised of outstanding borrowings of $127.6 million and $50.0 million under the Credit Facility and FILO Facility, respectively. As of both April 29, 2023 and April 30, 2022, we have issued $2.1 million and $4.8 million, respectively, in letters of credit under the Credit Facility.
During the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, we incurred debt issuance costs totaling $4.1 million, $0.3 million and $1.1 million, respectively, related to the Credit Facility. The debt issuance costs have been deferred and are presented as prepaid and other current assets and other noncurrent assets in the consolidated balance sheets, and subsequently amortized ratably over the term of the credit agreement.
Term Loan
On June 7, 2022, we entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) with TopLids LendCo, LLC and Vital Fundco, LLC and we entered into an amendment to our existing Credit Agreement, which permitted us to incur the Term Loan Facility (as defined below). For additional information, see the Company’s Report on Form 8-K dated June 7, 2022 and filed with the SEC on June 10, 2022.
The Term Loan Credit Agreement provides for term loans in an amount equal to $30,000 annual retainer. Compensation Committee members receive an additional $10,000 annual retainer,(the “Term Loan Facility” and, the Chairloans thereunder, the “Term Loans”) and matures on June 7, 2024. The proceeds of the Compensation Committee receives anTerm Loans are being used to finance working capital, and to pay fees and expenses related to the Term Loan Facility. During the 52 weeks ended April 29, 2023, we borrowed $30.0 million and repaid $0 under the Term Loan Credit Agreement, with $30.0 million of outstanding borrowings as of April 29, 2023.
On March 8, 2023, we amended the Term Loan Credit Agreement to (i) extend the maturity date of the Term Loan Credit Agreement by six months to December 7, 2024, (ii) permit the application of certain proceeds to the repayment of the loans under Credit Agreement and (iii) amend certain negative covenants and add certain additional $20,000 annual retainer. Corporate Governancecovenants to conform to the Credit Agreement.In addition, the amendment requires the achievement of a Specified Event (as described above) by no later than May 31, 2023 (as such date may be extended under the Credit Agreement, but no later than August 31, 2023 without consent from lenders under the Term Loan Credit Agreement). We paid a fee of $0.05 million on the amendment closing date to the lenders under the Term Loan Credit Agreement. For additional information related to the Term Loan Agreement amendment, see the Company’s Report on Form 8-K dated March 8, 2023 and Nominating Committee members receive an additional $10,000 annual retainer,filed with the SEC on March 9, 2023.
On July 28, 2023, we amended our Term Loan to (i) extend the maturity date of the Term Loan Agreement to April 7, 2025, (ii) allow for interest to be paid in kind until September 2, 2024, (iii) amend the 1.50% anniversary fee to recur on June 7 of each year that the Term Loan Agreement remains outstanding, with 2024 fee deferred to the earlier of September 2, 2024 and the ChairTermination Date (as defined in the Term Loan Agreement) and (iv) amend certain negative and affirmative covenants and add certain additional covenants. We must pay a fee of $0.05 million to the lenders under the Term Loan Agreement on the earlier of September 2, 2024 and the Termination Date (as defined in the Term Loan Agreement).
During the 52 weeks ended April 29, 2023, we incurred debt issuance costs totaling $3.2 million related to the Term Loan. The debt issuance costs have been deferred and are presented as a reduction to the long-term borrowing in the consolidated balance sheets, and subsequently amortized ratably over the term of the Corporate Governance and Nominating Committee receives an additional $17,500 annual retainer. All retainer fees areTerm Loan Facility.
The Term Loans accrue interest at a rate equal to 11.25%, payable quarterly. We have the right, through December 31, 2022, to pay all or a portion of the interest on the Term Loans in kind. To date, all interest on the term loan has been paid quarterly in cash. Directors whoThe Term Loans do not amortize prior to maturity. Solely to the extent that any Term Loans remain outstanding on June 7, 2023, we paid a fee of 1.5% of the outstanding principal amount of the Term Loans on such date.
The Term Loan Credit Agreement does not contain a financial covenant, but otherwise contains representations and warranties, covenants and events of default that are substantially the same as those in the Credit Agreement, including restrictions on the ability of the Company and its subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and make dividends and distributions. The Term Loan Facility is secured by second-priority liens on all assets securing the obligations under the Credit
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Agreement, which is all of the assets of the Company and the Guarantors, subject to customary exclusions and limitations set forth in the Term Loan Credit Agreement and the other loan documents executed in connection therewith.
The Credit Agreement amendment permitted us to incur the Term Loan Facility and also provides that, upon repayment of the Term Loan Credit Agreement (and, if applicable, any replacement credit facility thereof), we may incur second lien secured debt in an aggregate principal amount not to exceed $75.0 million.
Income Tax Implications on Liquidity
For the fiscal year ended April 30, 2022, we filed an application to change our employees will nottax year from January to April under the automatic consent provisions. As a result of the tax year-end change, there is no longer a long-term tax payable associated with the LIFO reserve in other long-term liabilities.
We have filed our federal income tax returns for the tax year ended January 2021, as well claims for refunds for cash taxes paid in prior years. We received refunds of $7.8 million in Fiscal 2022 and $15.8 million in Fiscal 2023. We expect to receive additional compensation for serving onrefunds of approximately $10.0 million.
Share Repurchases
On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $50 million, in the aggregate, of our outstanding common stock. The stock repurchase program is carried out at the direction of management (which may include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or its committees. All directors are also reimbursedmodified at any time. Any repurchased shares will be held as treasury stock and will be available for travel, lodginggeneral corporate purposes. During Fiscal 2022, Fiscal 2021, and related expenses incurred in attending Board of Directors meetings. The Company hasFiscal 2020, we did not increased the compensation paid to directors since the Spin-Off in 2015.
Equity Compensation
Each non-employee director is eligible for equity award grantspurchase shares under the Company’s Equity Incentive Plan. In Fiscal 2020, these awards were in the formstock repurchase program. As of restricted stock units with a grant date value of $120,000 for each non-employee director. Such awards are granted the day following the Annual Meeting at which each individual director is elected by a majority of stockholders voting and vest after one year. Directors have the option to defer receipt of such awardsApril 29, 2023, approximately $26.7 million remains available under the Company’s director’s deferral plan.
Director Stock Ownershipstock repurchase program.
During Fiscal 2023, Fiscal 2022, and Retention Guidelines
In 2016, the BoardFiscal 2021, we also repurchased 347,808 shares, 239,751 shares, and 414,174 shares, respectively, of Directors adopted Director Stock Ownership and Retention Guidelines, which require each non-employee director to maintain a minimum stock ownership amount equal to four times the annual cash retainer of $65,000, which currently equals $260,000. Directors have a three-year period following their appointment or election to the Board to achieve the minimum ownership level. Shares beneficially owned by a director and vested shares or units are deemed to be owned for purposes of the ownership guidelines. A director is deemed to have complied with these guidelines once they hold a number of shares sufficient to satisfy the minimum ownership level, regardless of subsequent fluctuations in the market price of the Company’s common stock. Directors are required to retain 100% of net-after-tax shares earned from the annual equity grants until the then-current minimum ownership level is met and may not sell or otherwise transferour common stock unless he or she has satisfied the then-current minimum ownership level. All of the Company’s directors are in compliance with the current Director Stock Ownership and Retention Guidelines, other than Mr. Robinson, who recently joined the Board.
Director Compensation Table
Name | Paid in Cash | Number of Restricted Stock Units (Number of Shares) | Value | Total Compensation | ||||||||||||
Emily C. Chiu | $ | 68,833 | 38,096 | $ | 120,002 | $ | 188,835 | |||||||||
Daniel A. DeMatteo | $ | 90,000 | 38,096 | $ | 120,002 | $ | 210,002 | |||||||||
David G. Golden | $ | 100,000 | 38,096 | $ | 120,002 | $ | 220,002 | |||||||||
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John R. Ryan | $ | 117,500 | 38,096 | $ | 120,002 | $ | 237,502 | |||||||||
Jerry Sue Thornton | $ | 85,000 | 38,096 | $ | 120,002 | $ | 205,002 | |||||||||
David A. Wilson | $ | 105,000 | 38,096 | $ | 120,002 | $ | 225,002 | |||||||||
Lowell W. Robinson | $ | 56,667 | 0 | $ | 0 | $ | 56,667 |
Mr. Robinson was elected to the board on July 20, 2020 and appointed to the Audit Committee effective immediately, and the Compensation Committee agreed to pay Mr. Robinson in advance for his pro rata July 2020 and August 2020 through October 2020 quarterly payments for an aggregate of $56,667, including an upfront cash payment of $30,000 due to the Company’s inability to grant equity during the pendency of the Company’s strategic review process and as compensation for his efforts associated with such process following his election to the Board. In connection with his service on the Board, Mr. Robinson is entitled to receive the compensation and equity awards applicable to all of the Company’s non-employee directors. Accordingly, Mr. Robinson is entitled to an annual retainer fee of $65,000, payable in quarterly installments, and equity awards with a target value of $120,000 per year. Mr. Robinson is also eligible to receive incremental annual retainer feesemployee tax withholding obligations for service on one or more of the Board’s committees. The Company entered into a standard form of indemnification agreement with Mr. Robinson.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee has ever been an employee of the Company, and none of them had a relationship requiring disclosure in Part III, Item 11 under Item 404 of SEC Regulation S-K. None of the Company’s executive officers serve, or in Fiscal 2020 served, as a member of the Board of Directors or compensation committee of any entity that has one or more of its executive officers serving as a member of the Company’s Board of Directors or the Company’s Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
vested stock awards.
Contractual Obligations
The following table sets forth our contractual obligations (in millions):
| Payments Due by Period | ||||||||||||||||||||||||||||||||
| Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||||||||||||||||
Credit Facility (a) | $ | 154.2 | $ | — | $ | 154.2 | $ | — | $ | — | ||||||||||||||||||||||
Term Loans (a) | 30.0 | — | 30.0 | — | — | |||||||||||||||||||||||||||
Lease obligations (excluding imputed interest) (b) | 321.0 | 111.9 | 94.9 | 55.0 | 59.2 | |||||||||||||||||||||||||||
Purchase obligations (c) | 17.1 | 12.3 | 4.3 | 0.5 | — | |||||||||||||||||||||||||||
Other long-term liabilities reflected on the balance sheet under GAAP (d) | — | — | — | — | — | |||||||||||||||||||||||||||
| Total | $ | 522.3 | $ | 124.2 | $ | 283.4 | $ | 55.5 | $ | 59.2 | ||||||||||||||||||||||
(a)As of April 29, 2023, we had a total of $184.2 million of outstanding borrowings under the Credit Facility and Term Loan. See Financing Arrangements discussion above.
(b)Our contracts for physical bookstores with colleges and universities are typically five years with renewal options, but can range from one to 15 years, and are typically cancelable by either party without penalty with 90 to 120 days' notice. Annual projections are based on current minimum guarantee amounts. In approximately 50% of our contracts with colleges and universities that include minimum guarantees, the minimum guaranteed amounts adjust annually to equal less than the prior year's commission earned. Excludes obligations under store leases for property insurance and real estate taxes, which totaled approximately 2.6% of the minimum rent payments under those leases.
(c)Includes information regardingtechnology contracts.
(d)Other long-term liabilities excludes expected payments related to employee benefit plans. See Part II -Item 8. Financial Statements and Supplementary Data — Note 11. Employee Benefit Plans.
Certain Relationships and Related Party Transactions
See Part II - Item 8. Financial Statements and Supplementary Data — Note 10. Related Party Transactions.
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Critical Accounting Policies and Estimates
The accompanying consolidated financial statements are prepared in accordance with U.S. GAAP applicable to a going concern. This presentation contemplates the beneficial ownershiprealization of sharesassets and the satisfaction of Common Stock,liabilities in the normal course of business and does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described below. Pursuant to ASC 205-40, Presentation of Financial Statements — Going Concern (“ASC 205-40”), management must evaluate whether there are conditions and events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that these consolidated financial statements are issued. In accordance with ASC 205-40, management’s analysis can only include the potential mitigating impact of management’s plans that have not been fully implemented as of August 25, 2020, unless otherwise indicated,the issuance date of these consolidated financial statements if (a) it is probable that management’s plans will be effectively implemented on a timely basis, and (b) it is probable that the plans, when implemented, will alleviate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.
In preparing our consolidated financial statements in accordance with GAAP, we are required to use judgment in making estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. In preparing these financial statements, management has made its best estimates and judgments with respect to certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Revenue Recognition and Deferred Revenue
Product sales and rentals
The majority of our revenue is derived from the sale of products through our bookstore locations, including virtual bookstores, and our bookstore affiliated e-commerce websites, and contains a single performance obligation. Revenue from sales of our products is recognized at the point in time when control of the products is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for the products. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 3. Revenue.
Retail product revenue is recognized when the customer takes physical possession of our products, which occurs either at the point of sale for products purchased at physical locations or upon receipt of our products by each person knownour customers for products ordered through our websites and virtual bookstores. Wholesale product revenue is recognized upon shipment of physical textbooksat which point title passes and risk of loss is transferred to the customer. Additional revenue is recognized for shipping charges billed to customers and shipping costs are accounted for as fulfillment costs within cost of goods sold.
Revenue from the sale of digital textbooks, which contains a single performance obligation, is recognized at the point of sale as product revenue in our consolidated financial statements. A software feature is embedded within the content of our digital textbooks, such that upon expiration of the term the customer is no longer able to access the content. While the sale of the digital textbook allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer, our performance obligation is complete.
Revenue from the rental of physical textbooks, which contains a single performance obligation, is deferred and recognized over the rental period based on the passage of time commencing at the point of sale, when control of the product transfers to the customer. Rental periods are typically for a single semester and are always less than one year in duration. We offer a buyout option to allow the purchase of a rented physical textbook at the end of the rental period if the customer desires to do so. We record the buyout purchase when the customer exercises and pays the buyout option price which is determined at the time of the buyout. In these instances, we accelerate any remaining deferred rental revenue at the point of sale.
Revenue for our BNC First Day offerings are recognized consistent with our policies outlined above for product, digital and rental sales, net of an anticipated opt-out or return provision. Given the growth of BNC First Day programs, the timing of cash collection from our school partners may shift to periods subsequent to when the revenue is recognized. When a school adopts our BNC First Day equitable and inclusive access offerings, cash collection from the school generally occurs after the student drop/add dates, which is later in the working capital cycle, particularly in our third quarter given the timing of the Spring Term and our quarterly reporting period, as compared to direct-to-student point-of-sale transactions where cash is generally collected during the point-of-sale transaction or within a few days from the credit card processor.
We estimate returns based on an analysis of historical experience. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded.
For sales and rentals involving third-party products, we evaluate whether we are acting as a principal or an agent. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. There are significant judgments involved in determining whether we control the specified goods or services prior to transferring them to the customer including whether we have the ability to direct the use of the good or service and obtain
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substantially all of the remaining benefits from the good or service. For those transactions where we are the principal, we record revenue on a gross basis, and for those transactions where we are an agent to a third-party, we record revenue on a net basis.
Effective in April 2021, as contemplated by the F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of our logo general merchandise sales to Lids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo general merchandise sales on a gross basis in the periods prior to the transition.
We do not have gift card or customer loyalty programs. We do not treat any promotional offers as expenses. Sales tax collected from our customers is excluded from reported revenues. Our payment terms are generally 30 days and do not extend beyond one year.
Service and other revenue
Service and other revenue is primarily derived from partnership marketing services which includes promotional activities and advertisements within our physical bookstores and web properties performed on behalf of third-party customers, shipping and handling, and revenue from other programs.
Partnership marketing agreements often include multiple performance obligations which are individually negotiated with our customers. For these arrangements that contain distinct performance obligations, we allocate the transaction price based on the relative standalone selling price method by comparing the standalone selling price (“SSP”) of each distinct performance obligation to the total value of the contract. The revenue is recognized as each performance obligation is satisfied, typically at a point in time for partnership marketing service and overtime for advertising efforts as measured based upon the passage of time for contracts that are based on a stated period of time or the number of impressions delivered for contracts with a fixed number of impressions.
Merchandise Inventories
Merchandise inventories, which consist of finished goods, are stated at the lower of cost or market. Market value of our inventory, which is all purchased finished goods, is determined based on its estimated net realizable value, which is generally the selling price less normally predictable costs of disposal and transportation.
Cost is determined primarily by the retail inventory method for our Retail Segment. Our textbook and trade book inventories, for Retail and Wholesale Segments, are valued using the LIFO method and the related reserve was not material to the recorded amount of our inventories. There were no LIFO adjustments in Fiscal 2023, Fiscal 2022, and Fiscal 2021.
Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory. Reserve calculations are sensitive to certain significant assumptions, including markdowns, sales below cost, inventory aging and expected demand. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate the non-returnable inventory reserve. However, if assumptions based on our history of liquidating non-returnable inventory are incorrect, we may be exposed to losses or gains that could be material. A 10% change in actual non-returnable inventory would have affected pre-tax earnings by approximately $6.0 million in Fiscal 2023.
For our physical bookstores, we also estimate and accrue shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate shortage rates. However, if our estimates regarding shortage rates are incorrect, we may be exposed to losses or gains that could be material. A 10 basis point change in actual shortage rates would have affected pre-tax earnings by approximately $0.3 million in Fiscal 2023.
Textbook Rental Inventories
Physical textbooks out on rent are categorized as textbook rental inventories. At the time a rental transaction is consummated, the book is removed from merchandise inventories and moved to textbook rental inventories at cost. The cost of the book is amortized down to its estimated residual value over the rental period. The related amortization expense is included in cost of goods sold. At the end of the rental period, upon return, the book is removed from textbook rental inventories and recorded in merchandise inventories at its amortized cost. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate rental cost of goods sold. However, if our estimates regarding residual value are incorrect, we may be exposed to losses or gains that could be material. A 10% change in rental cost of goods sold would have affected pre-tax earnings by approximately $3.3 million in Fiscal 2023.
Long-Term Incentive Compensation
The assumptions used in calculating the fair value of long-term incentive compensation payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. See Part II - Item 8. Financial Statements and Supplementary Data — Note 12. Long-Term Incentive Compensation Expense.
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We are required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from their estimate, our long-term incentive compensation expense could be significantly different from what we recorded in the current period. For stock options granted with an "at market" exercise price, we determined the grant fair value using the Black-Scholes model and for stock options granted with "a premium" exercise price, we determined the grant date fair value using the Monte Carlo simulation model. The fair value models for stock options use assumptions that include the risk-free interest rate, expected volatility, expected dividend yield and expected term of the options.
Phantom shares will be settled in cash based on the fair market value of a share of common stock at each vesting date in an amount not to exceed a specific price per share. The fair value of the phantom shares was determined using the closing stock price on the date of the award less the fair value of the call option which was estimated using the Black-Scholes model. The fair value of the liability for the cash-settled phantom share unit awards is remeasured at the end of each reporting period through settlement to reflect current risk-free rate and volatility assumptions.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to determine long-term incentive compensation expense. If actual results are not consistent with the assumptions used, the long-term incentive compensation expense reported in our financial statements may not be representative of the actual economic cost of the long-term incentive compensation. A 10% change in our long-term incentive compensation expense would have affected pre-tax earnings by approximately $0.5 million in Fiscal 2023.
Evaluation of Other Long-Lived Assets Impairment
As of April 29, 2023, our other long-lived assets include property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets of $68.2 million, $247.0 million, $110.6 million, and $17.9 million, respectively, on our consolidated balance sheet.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and consider market participants in accordance with Accounting Standards Codification (“ASC”) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate the long-lived assets of the reporting units for impairment at the lowest asset group level for which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, we first compared the carrying amount of the asset group to the estimated future undiscounted cash flows. The impairment loss calculation compares the carrying amount of the assets to the fair value based on estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value.
Our business has been significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Although most academic institutions have since reopened, some are providing alternatives to traditional in-person instruction, including online and hybrid learning options and significantly reduced classroom sizes. Enrollment trends have been negatively impacted overall by COVID-19 concerns at physical campuses. While many athletic conferences resumed their sport activities, other events, such as parent and alumni weekends and prospective student campus tour activities, some may still be curtailed or offer a virtual option. These combined events continue to impact the Company’s course materials and general merchandise business.
During the third quarter of Fiscal 2023, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $6.0 million (both pre-tax and after-tax), comprised of $0.7 million, $1.7 million, and $3.6 million of property and equipment, operating lease right-of-use assets, and amortizable intangibles, respectively, on the consolidated statement of operations.
During the third quarter of Fiscal 2022, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $6.4 million (both pre-tax and after-tax), comprised of $0.7 million, $1.8 million, $3.7 million and $0.2 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
During the third quarter of Fiscal 2021, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $27.6 million, $20.5 million after-tax, comprised of $5.1 million, $13.3 million, $6.3 million and $2.9 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations
The fair value of the impaired long-lived assets were determined using an income approach (Level 3 input), using the Company’s best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 6. Fair Value Measurements.
65
The impairment analysis process requires significant estimation to determine recoverability of each asset group and to determine the fair value of asset groups that were not recoverable, as well as the fair values of certain operating right-of-use assets included within the asset groups that were not recoverable. The significant assumptions used included annual revenue growth rates, gross margin rates and the estimated relationship of selling and administrative costs to revenue used to estimate the projected cash-flow directly related to the future operation of the stores as well as the weighted average cost of capital used to calculate the fair value. Significant assumptions used to determine the fair values of certain operating right-of-use assets included the current market rent and discount rate. These assumptions are subjective in nature and are affected by expectations about future market or economic conditions (including the effects of the global pandemic).
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate long-lived asset impairment losses. However, if actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. A 10% decrease in our estimated discounted cash flows would not have materially affected the results of our operations in Fiscal 2023.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. FASB guidance on accounting for income taxes requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience and expectations of future taxable income by taxing jurisdiction, the carryforward periods available to us for tax reporting purposes and other relevant factors. The actual realization of deferred tax assets may differ significantly from the amounts we have recorded.
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if available evidence indicates it is more likely than not that the tax position will be fully sustained upon review by taxing authorities, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount with a greater than 50 percent likelihood of being realized upon ultimate settlement. For tax positions that are 50 percent or less likely of being sustained upon audit, we do not recognize any portion of that benefit in the financial statements. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Our actual results could differ materially from our current estimates.
66
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We generally limit our interest rate risk by investing certain of our excess cash balances in short-term, highly-liquid instruments with an original maturity of one year or less. During Fiscal 2023, we did not have any invested cash balances. We do not expect any material losses from our invested cash balances and we believe that our interest rate exposure is modest. As of April 29, 2023, our cash and cash equivalents totaled approximately $14.2 million.
We may from time to time borrow money under the Credit Facility at various interest rate options based on Secured Overnight Financing Rate ("SOFR") depending upon certain financial tests. Accordingly, we may be exposed to interest rate risk on borrowings outstanding under the Credit Facility. We had $154.2 million of borrowings outstanding under Credit Facility as of April 29, 2023. A 25 basis point increase in interest rates or 25 basis point decrease in interest rates would affect interest expense by approximately less than $0.1 million in Fiscal 2023.
We recognize lease assets and lease liabilities on the consolidated balance sheet for all operating lease arrangements based on the present value of future lease payments. We used our incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable. We utilized an estimated collateralized incremental borrowing rate as of the effective date or the commencement date of the lease, whichever is later. A 25 basis point increase in the rate or 25 basis point decrease in the rate would not have materially affected the present value of future lease payments.
Foreign Currency Risk
We do not have any material foreign currency exposure as nearly all of our business is transacted in United States currency.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| FINANCIAL STATEMENT INDEX | |||||||||||
| Page No. | |||||||||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Barnes & Noble Education, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Barnes & Noble Education, Inc. and subsidiaries (the Company) as of April 29, 2023 and April 30, 2022, the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended April 29, 2023 and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company to own beneficially more than five percentat April 29, 2023 and April 30, 2022, and the results of its operations and its cash flows for each of the three years in the period ended April 29, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of April 29, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated July 31, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s outstanding Common Stock, by each director, by each executive officer named in the Summary Compensation Table and by all directors and executive officers of the Company as a group. Except as otherwise noted,management. Our responsibility is to express an opinion on the Company’s knowledge, each person named infinancial statements based on our audits. We are a public accounting firm registered with the table has sole votingPCAOB and investment powerare required to be independent with respect to all sharesthe Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of Common Stock shownthe Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as beneficially ownedwell as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee of the Company’s board of directors and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by him, hercommunicating the critical audit matters below, providing separate opinions on the critical audit matters or it.
Name of Beneficial Owner | Shares Beneficially Owned (1) | Percent of Class (1) | ||||||
Five Percent Stockholders | ||||||||
Outerbridge Capital Management, LLC (2) | 6,499,621 | 13.36 | % | |||||
Leonard Riggio (3) | 4,875,361 | 10.02 | % | |||||
Dimensional Fund Advisors LP (4) | 3,950,291 | 8.12 | % | |||||
BlackRock, Inc. (5) | 3,906,241 | 8.03 | % | |||||
Daniel R. Tisch (6) | 3,271,212 | 6.72 | % | |||||
James V. Barnes and Terry J. Barnes (7) | 3,091,884 | 6.36 | % | |||||
Directors and Named Executive Officers (8) | ||||||||
Michael P. Huseby (9) (10) | 649,690 | 1.32 | % | |||||
Kanuj Malhotra (9) (10) | 201,383 | * | ||||||
Barry Brover (9) (10) (14) | 145,927 | * | ||||||
David G. Golden | 127,729 | * | ||||||
Thomas D. Donohue (9) (10) | 102,474 | * | ||||||
Michael C. Miller (9) (10) | 64,593 | * | ||||||
24
| Non-Returnable Inventory Reserve | ||||||||||||||
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| As described in Note 2 to the consolidated financial statements, the Company reserves for non-returnable inventory based on its history of liquidating non-returnable inventory. | ||||||||||||||
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| Auditing management’s estimate of the reserves for non-returnable inventory involved especially subjective auditor judgment as such estimates are based on various factors that are affected by current and future market and economic conditions. In particular, the reserve calculations are sensitive to certain significant assumptions, including markdowns, sales below cost, inventory aging and expected demand. | ||||||||||||||
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| We obtained an understanding, evaluated the design, and | ||||||||||||||
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| Long-Lived Asset Impairment | ||||||||
| Description of the Matter | As described in Note 2 to the consolidated financial statements, the Company tests its long-lived assets for impairment if an event occurs or circumstances change that would indicate the carrying amount may not be | |||||||
| Auditing the Company's impairment of store long-lived assets was complex and highly judgmental due to the significant estimation required to determine recoverability of each asset group and | ||||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the store long-lived assets impairment process, including controls over the determination of the undiscounted projected cash flows of the stores with indicators of impairment, the fair values of the stores with carrying values that were not | |||||||
| Our testing of the Company's impairment analysis included, among other procedures, evaluating the significant assumptions described above and the operating data used to | ||||||||
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/s/ Ernst & Young LLP
We have served as the Company's auditor since 2015.
Iselin, New Jersey
July 31, 2023
70
Index to Form 10-KITEM 13. CERTAIN RELATIONSHIPSIndex to FS
BARNES & NOBLE EDUCATION, INC. AND RELATED TRANSACTIONSSUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
| 52 weeks ended | |||||||||||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | |||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Product sales and other | $ | 1,406,655 | $ | 1,362,380 | $ | 1,272,366 | |||||||||||||||||||||||
| Rental income | 136,553 | 133,354 | 134,150 | ||||||||||||||||||||||||||
| Total sales | 1,543,208 | 1,495,734 | 1,406,516 | ||||||||||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization expense): | |||||||||||||||||||||||||||||
| Product and other cost of sales | 1,119,482 | 1,076,243 | 1,088,933 | ||||||||||||||||||||||||||
| Rental cost of sales | 74,287 | 76,659 | 87,240 | ||||||||||||||||||||||||||
| Total cost of sales | 1,193,769 | 1,152,902 | 1,176,173 | ||||||||||||||||||||||||||
| Gross profit | 349,439 | 342,832 | 230,343 | ||||||||||||||||||||||||||
| Selling and administrative expenses | 357,611 | 353,968 | 316,164 | ||||||||||||||||||||||||||
| Depreciation and amortization expense | 42,163 | 42,124 | 45,204 | ||||||||||||||||||||||||||
| Impairment loss (non-cash) | 6,008 | 6,411 | 27,630 | ||||||||||||||||||||||||||
| Restructuring and other charges | 10,103 | 944 | 10,107 | ||||||||||||||||||||||||||
| Operating loss | (66,446) | (60,615) | (168,762) | ||||||||||||||||||||||||||
| Interest expense, net | 22,683 | 10,096 | 8,087 | ||||||||||||||||||||||||||
| Loss from continuing operations before income taxes | (89,129) | (70,711) | (176,849) | ||||||||||||||||||||||||||
| Income tax expense (benefit) | 1,011 | (9,152) | (43,280) | ||||||||||||||||||||||||||
| Loss from continuing operations, net of tax | (90,140) | (61,559) | (133,569) | ||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax of $398, 497, and $(1,891), respectively | (11,722) | (7,298) | (6,241) | ||||||||||||||||||||||||||
| Net loss | $ | (101,862) | $ | (68,857) | $ | (139,810) | |||||||||||||||||||||||
| Loss per share of Common Stock | |||||||||||||||||||||||||||||
| Basic and Diluted | |||||||||||||||||||||||||||||
| Continuing operations | $ | (1.72) | $ | (1.19) | $ | (2.69) | |||||||||||||||||||||||
| Discontinued operations | $ | (0.22) | $ | (0.14) | $ | (0.12) | |||||||||||||||||||||||
| Total Basic and Diluted Earnings per share | $ | (1.94) | $ | (1.33) | $ | (2.81) | |||||||||||||||||||||||
| Weighted average shares of common stock outstanding - Basic and Diluted | 52,454 | 51,797 | 49,669 | ||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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BARNES & NOBLE EDUCATION, INC. AND DIRECTOR INDEPENDENCE
25
Consolidated Balance Sheets
(In thousands, except per share data)
| As of | ||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | |||||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 14,219 | $ | 8,795 | ||||||||||||||||
| Receivables, net | 92,512 | 136,001 | ||||||||||||||||||
| Merchandise inventories, net | 322,979 | 293,854 | ||||||||||||||||||
| Textbook rental inventories | 30,349 | 29,612 | ||||||||||||||||||
| Prepaid expenses and other current assets | 49,512 | 59,899 | ||||||||||||||||||
| Assets held for sale, current | 27,430 | 3,544 | ||||||||||||||||||
| Total current assets | 537,001 | 531,705 | ||||||||||||||||||
| Property and equipment, net | 68,153 | 73,584 | ||||||||||||||||||
| Operating lease right-of-use assets | 246,972 | 286,584 | ||||||||||||||||||
| Intangible assets, net | 110,632 | 126,993 | ||||||||||||||||||
| Deferred tax assets, net | 132 | — | ||||||||||||||||||
| Other noncurrent assets | 17,889 | 24,547 | ||||||||||||||||||
| Assets held for sale, noncurrent | — | 28,140 | ||||||||||||||||||
| Total assets | $ | 980,779 | $ | 1,071,553 | ||||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | 267,923 | $ | 182,617 | ||||||||||||||||
| Accrued liabilities | 85,759 | 88,540 | ||||||||||||||||||
| Current operating lease liabilities | 99,980 | 97,143 | ||||||||||||||||||
| Short-term borrowings | — | 40,000 | ||||||||||||||||||
| Liabilities held for sale | 8,423 | 7,102 | ||||||||||||||||||
| Total current liabilities | 462,085 | 415,402 | ||||||||||||||||||
| Long-term deferred taxes, net | 1,970 | 1,430 | ||||||||||||||||||
| Long-term operating lease liabilities | 184,754 | 219,594 | ||||||||||||||||||
| Other long-term liabilities | 19,068 | 21,053 | ||||||||||||||||||
| Long-term borrowings | 182,151 | 185,700 | ||||||||||||||||||
| Total liabilities | 850,028 | 843,179 | ||||||||||||||||||
| Commitments and contingencies | — | — | ||||||||||||||||||
| Stockholders' equity: | ||||||||||||||||||||
| Preferred stock, $0.01 par value; authorized, 5,000 shares; 0 shares issued and 0 shares outstanding | — | — | ||||||||||||||||||
| Common stock, $0.01 par value; authorized, 200,000 shares; issued, 55,140 and 54,234 shares, respectively; outstanding, 52,604 and 52,046 shares, respectively | 551 | 542 | ||||||||||||||||||
| Additional paid-in capital | 745,932 | 740,838 | ||||||||||||||||||
| Accumulated deficit | (593,356) | (491,494) | ||||||||||||||||||
| Treasury stock, at cost | (22,376) | (21,512) | ||||||||||||||||||
| Total stockholders' equity | 130,751 | 228,374 | ||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 980,779 | $ | 1,071,553 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
72
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (In thousands)
| 52 weeks ended | ||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Net loss | $ | (101,862) | $ | (68,857) | $ | (139,810) | ||||||||||||||
| Less: Loss from discontinued operations, net of tax | (11,722) | (7,298) | (6,241) | |||||||||||||||||
| Loss from continuing operations, net of tax | (90,140) | (61,559) | (133,569) | |||||||||||||||||
| Adjustments to reconcile net loss from continuing operations to net cash flows from operating activities from continuing operations: | ||||||||||||||||||||
| Depreciation and amortization expense | 42,163 | 42,124 | 45,204 | |||||||||||||||||
| Impairment loss (non-cash) | 6,008 | 6,411 | 27,630 | |||||||||||||||||
| Merchandise inventory loss and write-off | — | 434 | 14,960 | |||||||||||||||||
| Content amortization expense | 26 | 386 | 745 | |||||||||||||||||
| Amortization of deferred financing costs | 3,129 | 1,472 | 1,112 | |||||||||||||||||
| Deferred taxes | 409 | (17,838) | (7,772) | |||||||||||||||||
| Stock-based compensation expense | 4,715 | 5,726 | 4,678 | |||||||||||||||||
| Changes in operating lease right-of-use assets and liabilities | 5,912 | (8,475) | (4,367) | |||||||||||||||||
| Changes in other long-term assets and liabilities and other, net | 2,711 | (3,291) | 9,454 | |||||||||||||||||
| Changes in other operating assets and liabilities, net: | ||||||||||||||||||||
| Receivables, net | 43,489 | (15,532) | (30,244) | |||||||||||||||||
| Merchandise inventories | (29,125) | (13,176) | 132,867 | |||||||||||||||||
| Textbook rental inventories | (737) | (920) | 12,018 | |||||||||||||||||
| Prepaid expenses and other current assets | 19,610 | 2,100 | (35,256) | |||||||||||||||||
| Accounts payable and accrued liabilities | 82,343 | 45,943 | (10,411) | |||||||||||||||||
| Changes in other operating assets and liabilities, net | 115,580 | 18,415 | 68,974 | |||||||||||||||||
| Net cash flows provided by (used in) operating activities from continuing operations | 90,513 | (16,195) | 27,049 | |||||||||||||||||
| Net cash flows provided by operating activities from discontinued operations | 1,157 | 17,356 | 5,847 | |||||||||||||||||
| Net cash flows provided by operating activities | $ | 91,670 | $ | 1,161 | $ | 32,896 | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of property and equipment | $ | (25,092) | $ | (33,607) | $ | (27,562) | ||||||||||||||
| Changes in other noncurrent assets and other | 591 | 872 | 335 | |||||||||||||||||
| Net cash flows used in investing activities from continuing operations | (24,501) | (32,735) | (27,227) | |||||||||||||||||
| Net cash flows used in investing activities from discontinued operations | (6,542) | (9,926) | (9,661) | |||||||||||||||||
| Net cash flows used in investing activities | $ | (31,043) | $ | (42,661) | $ | (36,888) | ||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Proceeds from borrowings | $ | 590,303 | $ | 632,220 | $ | 722,600 | ||||||||||||||
| Repayments of borrowings | (631,849) | (584,120) | (719,700) | |||||||||||||||||
| Payment of deferred financing costs | (7,265) | (265) | (1,076) | |||||||||||||||||
| Sale of treasury shares | — | — | 10,869 | |||||||||||||||||
| Purchase of treasury shares | (864) | (2,370) | (894) | |||||||||||||||||
| Proceeds from the exercise of stock options, net | — | 256 | — | |||||||||||||||||
| Net cash flows (used in) provided by financing activities from continuing operations | (49,675) | 45,721 | 11,799 | |||||||||||||||||
| Net cash flows provided by financing activities from discontinued operations | — | — | — | |||||||||||||||||
| Net cash flows (used in) provided by financing activities | $ | (49,675) | $ | 45,721 | $ | 11,799 | ||||||||||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 10,952 | $ | 4,221 | $ | 7,807 | ||||||||||||||
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| Cash, cash equivalents, and restricted cash at beginning of period | 21,036 | 16,815 | 9,008 | |||||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | 31,988 | 21,036 | 16,815 | |||||||||||||||||
| Less: Cash and cash equivalents of discontinued operations at end of period | (1,057) | (696) | (645) | |||||||||||||||||
| Cash, cash equivalents, and restricted cash of continuing operations at end of period | $ | 30,931 | $ | 20,340 | $ | 16,170 | ||||||||||||||
| Supplemental cash flow information: | ||||||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||||||
| Interest paid | $ | 19,024 | $ | 8,166 | $ | 6,778 | ||||||||||||||
| Income taxes paid (net of refunds) | $ | (15,216) | $ | (8,007) | $ | 6,008 | ||||||||||||||
See accompanying notes to consolidated financial statements.
74
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Equity
(In thousands)
| Additional | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||
| Balance at May 2, 2020 | 52,140 | $ | 521 | $ | 732,958 | $ | (282,827) | 3,842 | $ | (32,901) | $ | 417,751 | ||||||||||||||||||||||||||
| Stock-based compensation expense | 5,095 | 5,095 | ||||||||||||||||||||||||||||||||||||
| Vested equity awards | 1,187 | 12 | (12) | — | ||||||||||||||||||||||||||||||||||
| Sale of treasury shares | (3,784) | (2,308) | 14,653 | 10,869 | ||||||||||||||||||||||||||||||||||
| Shares repurchased for tax withholdings for vested stock awards | 414 | (894) | (894) | |||||||||||||||||||||||||||||||||||
| Net loss | (139,810) | (139,810) | ||||||||||||||||||||||||||||||||||||
| Balance at May 1, 2021 | 53,327 | $ | 533 | $ | 734,257 | $ | (422,637) | 1,948 | $ | (19,142) | $ | 293,011 | ||||||||||||||||||||||||||
| Stock-based compensation expense | 6,333 | 6,333 | ||||||||||||||||||||||||||||||||||||
| Vested equity awards | 829 | 8 | (8) | — | ||||||||||||||||||||||||||||||||||
| Shares repurchased for tax withholdings for vested stock awards | 240 | (2,370) | (2,370) | |||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | 78 | 1 | 256 | 257 | ||||||||||||||||||||||||||||||||||
| Net loss | (68,857) | (68,857) | ||||||||||||||||||||||||||||||||||||
| Balance at April 30, 2022 | 54,234 | $ | 542 | $ | 740,838 | $ | (491,494) | 2,188 | $ | (21,512) | $ | 228,374 | ||||||||||||||||||||||||||
| Stock-based compensation expense | 5,103 | 5,103 | ||||||||||||||||||||||||||||||||||||
| Vested equity awards | 906 | 9 | (9) | — | ||||||||||||||||||||||||||||||||||
| Shares repurchased for tax withholdings for vested stock awards | 348 | (864) | (864) | |||||||||||||||||||||||||||||||||||
| Net loss | (101,862) | (101,862) | ||||||||||||||||||||||||||||||||||||
| Balance at April 29, 2023 | 55,140 | $ | 551 | $ | 745,932 | $ | (593,356) | 2,536 | $ | (22,376) | $ | 130,751 | ||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of dollars, except share and Procedures Governing Related Person Transactions
Our Audit Committeeper share data)
Unless the context otherwise indicates, references in these Notes to the accompanying consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc., or “BNED”, a Delaware corporation. References to “Barnes & Noble College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our virtual bookstore and wholesale textbook distribution business operated through our subsidiary MBS Textbook Exchange, LLC.
Note 1. Organization
Description of Business
Barnes & Noble Education, Inc. (“BNED”) is one of the Boardlargest contract operators of Directorsphysical and virtual bookstores for college and university campuses and K-12 institutions across the United States. We are also one of Directors utilizes proceduresthe largest textbook wholesalers, inventory management hardware and software providers, and a leading provider of digital education solutions. We operate 1,366 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content, tools and general merchandise within a dynamic omnichannel retail environment.
The strengths of our business include our ability to compete by developing new products and solutions to meet market needs, our large operating footprint with direct access to students and faculty, our well-established, deep relationships with academic partners and stable, long-term contracts and our well-recognized brands. We provide product and service offerings designed to address the most pressing issues in evaluatinghigher education, including equitable access, enhanced convenience and improved affordability through innovative course material delivery models designed to drive improved student experiences and outcomes. We offer our BNC First Day® equitable and inclusive access programs, consisting of First DayComplete and First Day, which provide faculty requested course materials on or before the termsfirst day of class at a discounted rate, as compared to the total retail price for the same course materials if purchased separately. The BNC First Day discounted price is offered as a course fee or included in tuition. During Fiscal 2023, BNC First Day total revenue increased 48% from the prior year period.
We expect to continue to introduce scalable and provisionsadvanced solutions focused largely on the student and customer experience, expand our e-commerce capabilities and accelerate such capabilities through our merchandising partnership with Fanatics Retail Group Fulfillment, LLC, Inc. (“Fanatics”) and Fanatics Lids College, Inc. D/B/A "Lids" (“Lids”) (collectively referred to herein as the “F/L Partnership”), win new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect gross general merchandise sales to continue to increase over the long term, as our product assortments continue to emphasize and reflect changing consumer trends, and we evolve our presentation concepts and merchandising of proposedproducts in stores and online, which we expect to be further enhanced and accelerated through the F/L Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our logo general merchandise business.
The Barnes & Noble brand (licensed from our former parent) along with our subsidiary brands, BNC and MBS, are synonymous with innovation in bookselling and campus retailing, and are widely recognized and respected brands in the United States. Our large college footprint, reputation, and credibility in the marketplace not only support our marketing efforts to universities, students, and faculty, but are also important to our relationship with leading publishers who rely on us as one of their primary distribution channels.
During the fourth quarter of Fiscal 2023, assets related partyto our DSS Segment met the criteria for classification as Assets Held for Sale and Discontinued Operations and is no longer a reportable segment. On May 31, 2023, subsequent to the end of Fiscal 2023, we completed the sale of these assets related to our DSS Segment for cash proceeds of $20,000, net of certain transaction fees, severance costs, escrow, and other considerations. During the first quarter of Fiscal 2024, we expect to record a Gain on Sale of Business in the range of $2,500 to $4,500. Net cash proceeds from the sale was used for debt repayment and provided additional funds for working capital needs under our Credit Facility.
We have two reportable segments: Retail and Wholesale. For additional information related to our strategies, operations and segments, see Part I - Item 1. Business and Part II - Item 8. Financial Statements and Supplementary Data - Note 4. Segment Reporting.
BNC First Day Equitable and Inclusive Access Programs
We provide product and service offerings designed to address the most pressing issues in higher education, including equitable access, enhanced convenience and improved affordability through innovative course material delivery models designed to drive improved student experiences and outcomes. We offer our BNC First Day® equitable and inclusive access programs, consisting of First DayComplete and First Day, which provide faculty requested course materials on or before the
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
first day of class at a discounted rate, as compared to the total retail price for the same course materials if purchased separately. The BNC First Day discounted price is offered as a course fee or included in tuition.
•First Day Complete is adopted by an institution and includes all undergraduate classes (and on occasion graduate classes), providing students both physical and digital materials. The First Day Complete model drives substantially greater unit sales and sell-through for the bookstore.
•First Day is adopted by a faculty member for a single course, and students receive primarily digital course materials through their school's learning management system ("LMS").
Offering course materials through our equitable and inclusive access First Day Complete and First Day models is a key, and increasingly important strategic initiative of ours to meet the market demands of substantially reduced pricing to students, as well as the opportunity to improve student outcomes, while, at the same time, increasing our market share, revenue and relative gross profits of course material sales given the higher volumes of units sold in such models as compared to historical sales models that rely on individual student marketing and sales. These programs have allowed us to reverse historical long-term trends in course materials revenue declines, which have been observed at those schools where such programs have been adopted. We are moving quickly and decisively to accelerate our First Day Complete strategy. We plan to move many institutions to First Day Complete in Fiscal 2024 and the majority of our schools by Fiscal 2025, with continued relative adoption of this model thereafter.
For the 2023 Spring Term, 116 campus stores adopted our First Day Complete course materials delivery program, representing approximately 580,000 in total undergraduate student enrollment (as reported by National Center for Education Statistics), compared to 76 campus stores representing approximately 380,000 in total undergraduate student enrollment for the 2022 Spring Term. During the 52 weeks ended April 29, 2023, First Day Complete sales increased by 88% as compared to the prior year period.
Partnership with Fanatics and Lids
In December 2020, we entered into the F/L Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our general merchandise business. Fanatics’ cutting-edge e-commerce and technology expertise offers our campus stores expanded product selection, a world-class online and mobile experience, and a progressive direct-to-consumer platform. Coupled with Lids, the leading standalone brick and mortar retailer focused exclusively on licensed fan and alumni products, our campus stores have improved access to trend and sales performance data on licensees, product styles, and design treatments.
We maintain our relationships with campus partners and remain responsible for staffing and managing the day-to-day operations of our campus bookstores. We also work closely with our campus partners to ensure that each campus store maintains unique aspects of in-store merchandising, including localized product assortments and specific styles and designs that reflect each campus’s brand. We leverage Fanatics’ e-commerce technology and expertise for the operational management of the emblematic merchandise and gift sections of our campus store websites. Lids manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores, and Lids owns the inventory it manages, relieving us of the obligation to finance inventory purchases from working capital.
COVID-19 Pandemic Business Impact
Our business was significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. The impact of COVID-19 store closings during Fiscal 2021 to Fiscal 2022 resulted in the loss of cash flow and increased borrowings that we would not otherwise have expected to incur. However, on campus traffic continues to grow from increased campus events and activities, as compared to the last two years. We cannot accurately predict the lingering impact of the COVID-19 pandemic on enrollments, primarily at community colleges and international student enrollment, campus activities, university budgets, athletics, the continuation of remote and hybrid class offerings, and other areas that directly affect our business operations. Refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The results of operations reflected in our consolidated financial statements are presented on a consolidated basis. All material intercompany accounts and transactions have been eliminated in consolidation. Our 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”). Net income (loss) is equal to comprehensive income (loss) on our consolidated statement of operations. In the opinion of the Company’s management, the accompanying consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position and the results of its operations and cash flows for the periods reported.
Our fiscal year is comprised of 52 or agreements53 weeks, ending on the Saturday closest to the last day of April. The fiscal year periods for each of the last three fiscal years consisted of the 52 weeks ended April 29, 2023 (“Fiscal 2023”), 52 weeks ended April 30, 2022 (“Fiscal 2022”), and 52 weeks ended May 1, 2021 (“Fiscal 2021”).
Liquidity and Going Concern
The accompanying consolidated financial statements are prepared in accordance with U.S. GAAP applicable to a going concern. This presentation contemplates the fiduciary dutiesrealization of assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described below.
Pursuant to ASC 205-40, Presentation of Financial Statements — Going Concern (“ASC 205-40”), management must evaluate whether there are conditions and events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that these Consolidated Financial Statements are issued. In accordance with ASC 205-40, management’s analysis can only include the potential mitigating impact of management’s plans that have not been fully implemented as of the issuance date of these consolidated financial statements if (a) it is probable that management’s plans will be effectively implemented on a timely basis, and (b) it is probable that the plans, when implemented, will alleviate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.
Evaluation in conjunction with the issuance of the April 29, 2023 Consolidated Financial Statements
Our primary sources of cash are net cash flows from operating activities, funds available under our Credit Agreement, Term Loan Agreement, and short-term vendor financing. Our liquidity is highly dependent on the seasonal nature of our business, particularly with respect to course material sales, as sales are generally highest in the second and third fiscal quarters, when college students generally purchase textbooks for the upcoming Fall and Spring semesters, respectively. As of April 29, 2023, we had $30,931 of cash on hand, including $16,712 of restricted cash related to segregated funds for commission due to Fanatics for logo merchandise sales as per the merchandising partnership agreement.
We incurred a Net Loss from Continuing Operations of $(90,140), $(61,559), and $(133,569), for the years ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively, and Cash Flow Provided By (Used In) Operating Activities from Continuing Operations of $90,513, $(16,195), and $27,049, respectively. The tightening of our available credit commitments, including the elimination and repayment of our seasonal borrowing facility (FILO Facility) of $40,000, has had a significant impact on our liquidity during the year ended April 29, 2023, including our ability to make timely vendor payments and school commission payments resulting in a positive cash flow from operations offset by a use of cash for financing activities.
Our business was significantly negatively impacted by the COVID-19 pandemic during the years ended April 30, 2022 and May 1, 2021, as many schools adjusted their learning models and on-campus activities. Although most academic institutions have since reopened after the COVID-19 pandemic, the lingering impacts of the pandemic have resulted in changes in customer behaviors, lower enrollments, and an evolving educational landscape which continued to impact our financial results during the year ended April 29, 2023. Some institutions are still providing alternatives to traditional in-person instruction, including online and hybrid learning options and significantly reduced classroom sizes. The impact of COVID-19 store closings, as well as lower earnings during the year ended April 29, 2023, resulted in the loss of cash flows and increased borrowings that we would not otherwise have expected to incur.
Our losses and projected cash needs, combined with our current liquidity level, initially raised substantial doubt about our ability to continue as a going concern. As discussed below, Management’s plan to improve the Company’s liquidity and
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
successfully alleviate substantial doubt includes (1) raising additional liquidity and (2) taking additional operational restructuring actions.
Debt amendments
On July 28, 2023, we amended our existing Credit Agreement to (i) extend the maturity date of the Credit Agreement to December 28, 2024, (ii) reduce advance rates with respect to the borrowing base by 1000 basis points on September 2, 2024 (in lieu of the reductions previously contemplated for September 2023), (iii) subject to the conditions set forth in such amendment, add a CARES Act tax refund claim to the borrowing base, from April 1, 2024 through July 31, 2024, (iv) amend the financial maintenance covenant to require Availability (as defined in the Credit Agreement) at all times greater than the greater of (x) 10% of the Aggregate Loan Cap (as defined in the Credit Agreement) and (y) (A) $32,500 minus, subject to the conditions set forth in such amendment, (B) (a) $7,500 for the period of April 1, 2024 through and including April 30, 2024, (b) $2,500 for the period of May 1, 2024 through and including May 31, 2024 and (c) $0 at all other times, (v) add a minimum Consolidated EBITDA (as defined in the Credit Agreement) financial maintenance covenant, and (vi) amend certain negative and affirmative covenants and add certain additional covenants, all as more particularly set forth in such amendment. The amendment also requires that we appoint a Chief Restructuring Officer and that, by August 11, 2023, we (i) appoint two independent members to the board of directors of the Company from prospective candidates that have been previously disclosed to the Administrative Agent and the Lenders and (ii) appoint a committee of the board of directors of the Company to consist of three board members (two of whom will be the new independent directors). The committee’s responsibilities will include, among other things, to explore, consider, solicit expressions of interest or proposals for, respond to any communications, inquiries or proposals regarding, and advise as to all strategic alternatives to effect a “Specified Liquidity Transaction” (as defined in the Credit Agreement). There can be no guarantee or assurances that any such transaction or transactions be consummated. We must pay (i) a fee of 0.50% of the outstanding principal amount of the commitments under Delaware law. the Credit Agreement March 2023 amendment (as defined in the Credit Agreement) on the closing date (in lieu of the deferred fee previously contemplated in connection with the March 2023 amendment (as defined in the Credit Agreement)) and (ii) a fee of 1.00% of the outstanding principal amount of the commitments under the Credit Agreement as of the closing date on the earlier to occur of September 2, 2024 and an Event of Default (as defined in the Credit Agreement).
On July 28, 2023, we amended our Term Loan to (i) extend the maturity date of the Term Loan Agreement to April 7, 2025, (ii) allow for interest to be paid in kind until September 2, 2024, (iii) amend the 1.50% anniversary fee to recur on June 7 of each year that the Term Loan Agreement remains outstanding, with 2024 fee deferred to the earlier of September 2, 2024 and the Termination Date (as defined in the Term Loan Agreement) and (iv) amend certain negative covenants and affirmative and add certain additional covenants. We must pay a fee of $50,000 to the lenders under the Term Loan Agreement on the earlier of September 2, 2024 and the Termination Date (as defined in the Term Loan Agreement).
See Part II - Item 8. Financial Statements and Supplementary Data - Note 7. Debt and Note 17. Subsequent Events.
Operational restructuring plans
We have implemented a significant cost reduction program designed to streamline our operations, maximize productivity and drive profitability. We have taken steps to significantly reduce our workforce during non-rush seasonal sales periods, eliminated duplicate administrative headcounts at all levels, implemented improved system development processes to reduce maintenance costs. reduced capital expenditures, and evaluated operating contractual obligations for cost savings. We have achieved meaningful cost savings from this program of approximately $17,000 during the year ended April 29, 2023. These initiatives are expected to provide annualized savings of $30,000 to $35,000 in Fiscal 2024. Management's plans over the next twelve months include the further reduction of gross capital expenditures and other cost saving measures of approximately $25,000. Management believes that these plans are within its control and probable of being implemented on a timely basis.
Management believes that the expected impact on our liquidity and cash flows resulting from the Debt amendments and the operational initiatives outlined above are sufficient to enable the Company to meet its obligations for at least twelve months from the issuance date of these consolidated financial statements and alleviate the conditions that initially raised substantial doubt about the Company's ability to continue as a going concern.
See Part I - Risk Factors - We are dependent upon access to the capital markets, bank credit facilities, and short-term vendor financing for liquidity needs.
Seasonality
Our business is highly seasonal. Our quarterly results also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
results across periods. Our retail business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters. Sales attributable to our wholesale business are generally highest in our first, second and third quarter, as it sells textbooks and other course materials for retail distribution. See Revenue Recognition and Deferred Revenue discussion below.
Use of Estimates
In preparing financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Discontinued Operations
During the fourth quarter of Fiscal 2023, assets related partyto our Digital Student Solutions ("DSS") Segment met the criteria for classification as Assets Held for Sale and Discontinued Operations and is no longer a reportable segment. Certain assets and liabilities associated with the DSS Segment are presented in our consolidated balance sheets as "Assets Held for Sale" and "Liabilities Held for Sale". The results of operations related to the DSS Segment are included in the 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 consolidated statements of cash flows. All corresponding prior year periods presented in our financial statements and related information in the accompanying notes have been reclassified to reflect the Asset Held for Sale and Discontinued Operations presentation.
On May 31, 2023, subsequent to the end of Fiscal 2023, we completed the sale of these assets related to our DSS Segment for cash proceeds of $20,000, net of certain transaction procedures contemplate Audit Committeefees, severance costs, escrow, and other considerations. During the first quarter of Fiscal 2024, we expect to record a Gain on Sale of Business in the range of $2,500 to $4,500. Net cash proceeds from the sale was used for debt repayment and provided additional funds for working capital needs under our Credit Facility.
The following table summarizes the operating results of the discontinued operations for the periods indicated:
| 52 weeks ended | |||||||||||||||||||||||||||||
| Dollars in thousands | April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||||||||||
| Total sales | $ | 35,353 | $ | 35,666 | $ | 27,374 | |||||||||||||||||||||||
Cost of sales (a) | 7,156 | 5,738 | 5,056 | ||||||||||||||||||||||||||
Gross profit (a) | 28,197 | 29,928 | 22,318 | ||||||||||||||||||||||||||
| Selling and administrative expenses | 34,137 | 29,472 | 22,116 | ||||||||||||||||||||||||||
| Depreciation and amortization | 3,155 | 7,257 | 7,763 | ||||||||||||||||||||||||||
| Restructuring costs | 1,848 | — | 571 | ||||||||||||||||||||||||||
| Transaction costs | 381 | — | — | ||||||||||||||||||||||||||
| Operating loss | (11,324) | (6,801) | (8,132) | ||||||||||||||||||||||||||
| Income tax expense | 398 | 497 | (1,891) | ||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax | $ | (11,722) | $ | (7,298) | $ | (6,241) | |||||||||||||||||||||||
(a) Cost of sales and Gross margin for the DSS Segment includes amortization expense (non-cash) related to content development costs of $6,594, $5,068, and $4,289 for the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
The following table summarizes the assets and liabilities of the Assets Held for Sale included in the consolidated balance sheets for the periods indicated:
| As of | ||||||||||||||
| April 29, 2023 | April 30, 2022 | |||||||||||||
| Cash and cash equivalents | $ | 1,057 | $ | 696 | ||||||||||
| Receivables, net | 480 | 1,038 | ||||||||||||
| Prepaid expenses and other current assets | 901 | 1,810 | ||||||||||||
| Property and equipment, net | 19,523 | 20,488 | ||||||||||||
| Intangible assets, net | 402 | 2,631 | ||||||||||||
| Goodwill | 4,700 | 4,700 | ||||||||||||
| Deferred tax assets, net | 130 | — | ||||||||||||
| Other noncurrent assets | 237 | 321 | ||||||||||||
| Assets held for sale | $ | 27,430 | $ | 31,684 | ||||||||||
| Accounts payable | $ | 211 | $ | 173 | ||||||||||
| Accrued liabilities | 8,212 | 6,847 | ||||||||||||
| Other long-term liabilities | — | 82 | ||||||||||||
| Liabilities held for sale | $ | 8,423 | $ | 7,102 | ||||||||||
Cash and Cash Equivalents
We consider all short-term, highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
As of April 29, 2023, we had restricted cash of $16,712, comprised of $15,790 in prepaid and other current assets in the consolidated balance sheet related to segregated funds for commission due to Lids for logo merchandise sales as per the Lids Partnership's merchandising agreement and $922 in other noncurrent assets in the consolidated balance sheet related to amounts held in trust for future distributions related to employee benefit plans.
As of April 30, 2022, we had restricted cash of $11,545, comprised of $10,649 in prepaid and other current assets in the consolidated balance sheet related to segregated funds for commission due to Lids for logo merchandise sales as per the Lids Partnership's merchandising agreement and $897 in other noncurrent assets in the consolidated balance sheet related to amounts held in trust for future distributions related to employee benefit plans.
Accounts Receivable
Receivables represent customer, private and public institutional and government billings (colleges, universities and other financial aid providers), credit/debit card receivables, advances for book buybacks, advertising and other receivables due within one year. Components of accounts receivables are as follows:
| As of | ||||||||||||||
| April 29, 2023 | April 30, 2022 | |||||||||||||
| Trade accounts | $ | 71,990 | $ | 102,358 | ||||||||||
| Advances for book buybacks | 2,344 | 2,292 | ||||||||||||
| Credit/debit card receivables | 4,733 | 5,129 | ||||||||||||
| Other receivables | 13,445 | 26,222 | ||||||||||||
| Total receivables, net | $ | 92,512 | $ | 136,001 | ||||||||||
Accounts receivable are presented on our consolidated balance sheets net of allowances. An allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable and assessments of collectability based on
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
historical trends, the financial condition of our customers and an evaluation of economic conditions. We write-off uncollectible trade receivables once collection efforts have been exhausted and record bad debt expenses related to textbook rentals that are not returned and we are unable to successfully charge the customer. Allowance for doubtful accounts were $1,156, and $2,243 as of April 29, 2023 and April 30, 2022, respectively.
Merchandise Inventories
Merchandise inventories, which consist of finished goods, are stated at the lower of cost or market. Market value of our inventory, which is all purchased finished goods, is determined based on its estimated net realizable value, which is generally the selling price less normally predictable costs of disposal and transportation. Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory, which includes certain significant assumptions, including markdowns, sales below cost, inventory aging and expected demand.
Cost is determined primarily by the retail inventory method for our Retail segment. Our textbook and trade book inventories, for Retail and Wholesale, are valued using the LIFO method and the related reserve was not material to the recorded amount of our inventories. There were no LIFO adjustments in Fiscal 2023, Fiscal 2022 and Fiscal 2021.
For our physical bookstores, we also estimate and accrue shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.
The Retail Segment fulfillment order is directed first to our wholesale business before other sources of inventory are utilized. The products that we sell originate from a wide variety of domestic and international vendors. After internal sourcing, the bookstore purchases textbooks from outside suppliers and publishers. The Retail Segment's four largest suppliers, excluding the supply sourced from our Wholesale Segment, accounted for approximately 25% of our merchandise purchased during the 52 weeks ended April 29, 2023. For our Wholesale Segment, the four largest suppliers, excluding textbooks purchased from students at our Retail Segment's bookstores, accounted for approximately 25% of merchandise purchases during the 52 weeks ended April 29, 2023.
As contemplated by the F/L Partnership merchandising partnership agreement, we sold our logo and emblematic general merchandise inventory to Lids and received proceeds of $41,773, and recognized a merchandise inventory loss on the sale of $10,262 in cost of goods sold in the consolidated statement of operations during the 52 weeks ended May 1, 2021 for the Retail Segment. The final inventory sale price was determined during the first quarter of Fiscal 2022, at which time, we received additional proceeds of $1,906, and recognized a merchandise inventory loss on the sale of $434 in cost of goods sold in the consolidated statement of operations for the Retail Segment. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Organization.
Additionally, during the 52 weeks ended May 1, 2021, we also recognized a merchandise inventory write-off of $4,698 in cost of goods sold in the statement of operations for the Retail Segment related to our initiative to exit certain product offerings and streamline/rationalize our overall non-logo general merchandise product assortment resulting from the centralization of our merchandising decision-making during the year.
Textbook Rental Inventories
Physical textbooks out on rent are categorized as textbook rental inventories. At the time a rental transaction is consummated, the book is removed from merchandise inventories and moved to textbook rental inventories at cost. The cost of the book is amortized down to its estimated residual value over the rental period. The related amortization expense is included in cost of goods sold. At the end of the rental period, upon return, the book is removed from textbook rental inventories and recorded in merchandise inventories at its amortized cost.
Cloud Computing Arrangements
Implementation costs incurred in a cloud computing arrangement (or hosting arrangement) that is a service contract are amortized to hosting expense over the term of the arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. Implementation costs are included in prepaid expenses and other assets in the consolidated balance sheets and amortized to selling and administrative expense in the consolidated statement of operations. Implementation costs incurred in cloud computing arrangements reflected in prepaid and other assets in the consolidated balance sheets were $9,359 and $13,294 as of April 29, 2023 and April 30, 2022, respectively. We had $6,460, $3,179, and $283 of amortization of implementation costs in selling and administrative expense in the consolidated statement of operations, for the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over estimated useful lives. Maintenance and repairs are expensed as incurred, however major maintenance and remodeling costs are capitalized if they extend the useful life of the asset. We had $29,401, $30,132, and $33,198, of depreciation expense in the consolidated statement of operations for the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively.
Content development costs are primarily related to development of courseware. Content amortization is computed using the straight-line method over estimated useful lives. Amortization of content development costs is recorded to cost of goods sold. We had $26, $386, and $745, of content amortization expense in the consolidated statement of operations for the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively.
Components of property and equipment are as follows:
| As of | ||||||||||||||||||||||||||
| Useful Life | April 29, 2023 | April 30, 2022 | ||||||||||||||||||||||||
| Property and equipment: | ||||||||||||||||||||||||||
| Leasehold improvements | (a) | $ | 120,687 | $ | 125,324 | |||||||||||||||||||||
| Machinery, equipment and display fixtures | 3 - 5 | 253,763 | 252,037 | |||||||||||||||||||||||
| Computer hardware and capitalized software costs | (b) | 163,098 | 157,908 | |||||||||||||||||||||||
| Office furniture and other | 2 - 7 | 66,201 | 64,137 | |||||||||||||||||||||||
Content development costs (c) | 3 - 5 | 2,519 | 2,519 | |||||||||||||||||||||||
| Construction in progress | 4,644 | 3,710 | ||||||||||||||||||||||||
| Total property and equipment | 610,912 | 605,635 | ||||||||||||||||||||||||
| Less accumulated depreciation and amortization | 542,759 | 532,051 | ||||||||||||||||||||||||
| Total property and equipment, net | $ | 68,153 | $ | 73,584 | ||||||||||||||||||||||
(a) Leasehold improvements are capitalized and depreciated over the shorter of the lease term or the useful life of the improvements, ranging from 1 - 15 years.
(b) System costs are capitalized and amortized over their estimated useful lives, from the date the systems become operational. Purchased software is generally amortized over a period of between 2 - 5 years.
(c) Content development costs are fully depreciated and are generally depreciated over 3 - 5 years.
Intangible Assets
Amortizable intangible assets as of April 29, 2023 and April 30, 2022 are as follows:
| As of April 29, 2023 | ||||||||||||||||||||||||||
| Amortizable intangible assets | Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Total | ||||||||||||||||||||||
| Customer relationships | 7 - 11 | $ | 239,955 | $ | (130,667) | $ | 109,288 | |||||||||||||||||||
| Technology | 3 | 1,500 | (1,500) | — | ||||||||||||||||||||||
Other (a) | 1 - 4 | 4,162 | (2,818) | 1,344 | ||||||||||||||||||||||
| $ | 245,617 | $ | (134,985) | $ | 110,632 | |||||||||||||||||||||
| As of April 30, 2022 | ||||||||||||||||||||||||||
| Amortizable intangible assets | Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Total | ||||||||||||||||||||||
| Customer relationships | 8 - 12 | $ | 251,728 | $ | (126,429) | $ | 125,299 | |||||||||||||||||||
| Technology | 3 | 1,500 | (1,500) | — | ||||||||||||||||||||||
Other (a) | 1 - 5 | 4,162 | (2,468) | 1,694 | ||||||||||||||||||||||
| $ | 257,390 | $ | (130,397) | $ | 126,993 | |||||||||||||||||||||
(a) Other consists of recognized intangibles for non-compete agreements, trade names, and favorable leasehold interests.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
All amortizable intangible assets are being amortized over their useful life on a straight-line basis.
| Aggregate Amortization Expense: | |||||
| For the 52 weeks ended April 29, 2023 | $ | 12,761 | |||
| For the 52 weeks ended April 30, 2022 | $ | 11,992 | |||
| For the 52 weeks ended May 1, 2021 | $ | 12,006 | |||
| Estimated Amortization Expense: (Fiscal Year) | |||||
| 2024 | $ | 10,344 | |||
| 2025 | $ | 10,344 | |||
| 2026 | $ | 10,344 | |||
| 2027 | $ | 10,286 | |||
| 2028 | $ | 9,994 | |||
| After 2028 | $ | 59,320 | |||
For additional information about intangible assets, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.
Leases
We recognize lease assets and lease liabilities on the consolidated balance sheet for all operating lease arrangements based on the present value of future lease payments as required by FASB Accounting Standards Codification (“ASC”) 842, Leases (Topic 842). We do not recognize lease assets or lease liabilities for short-term leases (i.e., those with a term of twelve months or less). We recognize lease expense on a straight-line basis over the lease term for contracts with fixed lease payments, including those with fixed annual minimums, or over a rolling twelve-month period for leases where the annual guarantee resets at the start of each contract year, in order to best reflect the pattern of usage of the underlying leased asset. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 8. Leases.
Impairment of Long-Lived Assets
As of April 29, 2023, our other long-lived assets include property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets of $68,153, $246,972, $110,632, and $17,889, respectively, on our consolidated balance sheet. As of April 30, 2022, our other long-lived assets include property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets of $73,584, $286,584, $126,993, and $24,547, respectively, on our consolidated balance sheet.
These amortizable intangible assets relate primarily to our customer and bookstore relationships with our colleges and university clients, and technology acquired. For additional information related to amortizable intangibles, see Intangible Assets above.
We review and approval of all new agreements, transactionsour long-lived assets for impairment whenever events or courses of dealing with related parties,changes in circumstances, including any modifications, waiversbut not limited to contractual changes, renewals or amendments are made to existing related party transactions. We conduct tests to ensureagreements with our college, university, or K-12 schools, indicate that the termscarrying amount of related party transactionsan asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate the long-lived assets of the reporting units for impairment at the lowest asset group level for which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, we first compared the carrying amount of the asset group to the estimated future undiscounted cash flows. The impairment loss calculation compares the carrying amount of the assets to the fair value based on estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value.
Our business has been significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Although most academic institutions have since reopened, some are at least as favorableproviding alternatives to us as couldtraditional in-person instruction, including online and hybrid learning options and significantly reduced classroom sizes. Enrollment trends have been obtainednegatively impacted overall by COVID-19 concerns at physical campuses. While many athletic conferences resumed their sport activities, other events, such as parent and alumni weekends and prospective student campus tour activities, some may still be curtailed or offer a virtual option. These combined events continue to impact the Company’s course materials and general merchandise business.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
During the third quarter of Fiscal 2023, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $6,008 (both pre-tax and after-tax), comprised of $708, $1,697, $3,599 and $4 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
During the third quarter of Fiscal 2022, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $6,411 (both pre-tax and after-tax), comprised of $739, $1,793, $3,668 and $211 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
During the third quarter of Fiscal 2021, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $27,630, $20,506 after-tax, comprised of $5,085, $13,328, $6,278 and $2,939 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
The fair value of the impaired long-lived assets were determined using an income approach (Level 3 input), using the Company’s best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations. The significant assumptions used in the income approach included annual revenue growth rates, gross margin rates and the estimated relationship of selling and administrative costs to revenue used to estimate the projected cash-flow directly related to the future operation of the stores as well as the weighted average cost of capital used to calculate the fair value. Significant assumptions used to determine the fair values of certain operating right-of-use assets included the current market rent and discount rate. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 6. Fair Value Measurements.
Revenue Recognition and Deferred Revenue
Product sales and rentals
The majority of our revenue is derived from unrelated partiesthe sale of products through our bookstore locations, including virtual bookstores, and our bookstore affiliated e-commerce websites, and contains a single performance obligation. Revenue from sales of our products is recognized at the point in time when control of the products is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for the products. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 3. Revenue.
Retail product revenue is recognized when the customer takes physical possession of our products, which occurs either at the point of sale for products purchased at physical locations or upon receipt of our products by our customers for products ordered through our websites and virtual bookstores. Wholesale product revenue is recognized upon shipment of physical textbooksat which point title passes and risk of loss is transferred to the customer. Additional revenue is recognized for shipping charges billed to customers and shipping costs are accounted for as fulfillment costs within cost of goods sold.
Revenue from the sale of digital textbooks, which contains a single performance obligation, is recognized at the point of sale as product revenue in our consolidated financial statements. A software feature is embedded within the content of our digital textbooks, such that upon expiration of the term the customer is no longer able to access the content. While the sale of the digital textbook allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer, our performance obligation is complete.
Revenue from the rental of physical textbooks is deferred and recognized over the rental period based on the passage of time commencing at the point of sale, when control of the product transfers to the customer and is recognized as rental income in our consolidated financial statements. Rental periods are typically for a single semester and are always less than one year in duration. We offer a buyout option to allow the purchase of a rented physical textbook at the end of the rental period if the customer desires to do so. We record the buyout purchase when the customer exercises and pays the buyout option price which is determined at the time of the transaction.buyout. In these instances, we accelerate any remaining deferred rental revenue at the point of sale.
Revenue for our BNC First Day offerings are recognized consistent with our policies outlined above for product, digital and rental sales, net of an anticipated opt-out or return provision. Given the growth of BNC First Day programs, the timing of cash collection from our school partners may shift to periods subsequent to when the revenue is recognized. When a school adopts our BNC First Day equitable and inclusive access offerings, cash collection from the school generally occurs after the student drop/add dates, which is later in the working capital cycle, particularly in our third quarter given the timing of the Spring Term and our quarterly reporting period, as compared to direct-to-student point-of-sale transactions where cash is generally collected during the point-of-sale transaction or within a few days from the credit card processor.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
We estimate returns based on an analysis of historical experience. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded.
For sales and rentals involving third-party products, we evaluate whether we are acting as a principal or an agent. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. There are significant judgments involved in determining whether we control the specified goods or services prior to transferring them to the customer including whether we have the ability to direct the use of the good or service and obtain substantially all of the remaining benefits from the good or service. For those transactions where we are the principal, we record revenue on a gross basis, and for those transactions where we are an agent to a third-party, we record revenue on a net basis.
Effective in April 2021, as contemplated by the F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of our logo general merchandise sales to Lids and Fanatics. The Audit Committee considers,transition to Lids for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo general merchandise sales on a gross basis in the periods prior to the transition.
We do not have gift card or customer loyalty programs. We do not treat any promotional offers as expenses. Sales tax collected from our customers is excluded from reported revenues. Our payment terms are generally 30 days and do not extend beyond one year.
Service and other revenue
Service and other revenue is primarily derived from partnership marketing services which includes promotional activities and advertisements within our physical bookstores and web properties performed on behalf of third-party customers, shipping and handling, and revenue from other programs.
Partnership marketing agreements often include multiple performance obligations which are individually negotiated with our customers. For these arrangements that contain distinct performance obligations, we allocate the transaction price based on the relative standalone selling price method by comparing the standalone selling price (“SSP”) of each distinct performance obligation to the total value of the contract. The revenue is recognized as each performance obligation is satisfied, typically at a minimum,point in time for partnership marketing service and overtime for advertising efforts as measured based upon the naturepassage of time for contracts that are based on a stated period of time or the number of impressions delivered for contracts with a fixed number of impressions.
Cost of Sales
Our cost of sales primarily includes costs such as merchandise costs, textbook rental amortization, content development cost 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.
Selling and Administrative 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, 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 any specific reporting segment and are recorded in Corporate Services.
Long-Term Incentive Compensation
We have granted awards in accordance with the Barnes & Noble Education Inc. Equity Incentive Plan (the “Equity Incentive Plan”). Types of equity awards that can be granted under the Equity Incentive Plan include options, restricted stock, restricted stock units, performance shares, performance share units, and phantom share units. See Part II - Item 8. Financial Statements and Supplementary Data - Note 12. Long-Term Incentive Compensation Expense for additional information regarding expense recognition for each type of award.
Advertising Costs
The costs of advertising are expensed as incurred during the year pursuant to ASC No. 720-35, Advertising Costs. Advertising costs charged to selling and administrative expenses were $9,139, $9,932, and $10,895 in the consolidated statement of operations for the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Income Taxes
The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. We regularly review deferred tax assets for recoverability and establish a valuation allowance, if determined to be necessary. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 13. Income Taxes.
For the fiscal year ended April 30, 2022, the Company filed an application to change its tax year from January to April under the automatic consent provisions. As a result of the relationship between ustax year-end change, there is no longer a long-term tax payable associated with the LIFO reserve in other long-term liabilities.
Note 3. Revenue
Revenue from sales of our products and services is recognized either at the point in time when control of the products is transferred to our customers or over time as services are provided in an amount that reflects the consideration we expect to be entitled to in exchange for the products or services.
See Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Pronouncements for additional information related to our revenue recognition policies and Part II - Item 8. Financial Statements and Supplementary Data - Note 4. Segment Reporting for a description of each segments product and service offerings.
Disaggregation of Revenue
The following table disaggregates the revenue associated with our major product and service offerings.
| 52 weeks ended | ||||||||||||||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||||||||||||||
| Retail | ||||||||||||||||||||||||||||||||
| Course Materials Product Sales | $ | 927,915 | $ | 911,182 | $ | 864,195 | ||||||||||||||||||||||||||
General Merchandise Product Sales (a) | 385,499 | 346,999 | 274,704 | |||||||||||||||||||||||||||||
Service and Other Revenue (b) | 41,759 | 48,129 | 57,421 | |||||||||||||||||||||||||||||
| Retail Product and Other Sales sub-total | 1,355,173 | 1,306,310 | 1,196,320 | |||||||||||||||||||||||||||||
| Course Materials Rental Income | 136,553 | 133,354 | 134,150 | |||||||||||||||||||||||||||||
| Retail Total Sales | $ | 1,491,726 | $ | 1,439,664 | $ | 1,330,470 | ||||||||||||||||||||||||||
| Wholesale Sales | $ | 106,366 | $ | 112,246 | $ | 165,825 | ||||||||||||||||||||||||||
Eliminations (c) | $ | (54,884) | $ | (56,176) | $ | (89,779) | ||||||||||||||||||||||||||
| Total Sales | $ | 1,543,208 | $ | 1,495,734 | $ | 1,406,516 | ||||||||||||||||||||||||||
(a)Effective in April 2021, as contemplated by the F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of our logo general merchandise sales to Lids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the related party,e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the historylogo general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo general merchandise sales on a gross basis in the periods prior to the transition.
(b)Service and other revenue primarily relates to brand partnerships and other service revenues.
(c)The sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale.
Contract Assets and Contract Liabilities
Contract assets represent the sale of goods or services to a customer before we have the right to obtain consideration from the customer. Contract assets consist of unbilled amounts at the reporting date and are transferred to accounts receivable when the rights become unconditional. Contract assets (unbilled receivables) were $0 as of both April 29, 2023 and April 30, 2022 on our consolidated balance sheets.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Contract liabilities represent an obligation to transfer goods or services to a customer for which we have received consideration and consists of our deferred revenue liability (deferred revenue). Deferred revenue consists of the transaction (in the case of modifications, waivers or amendments),following:
•advanced payments from customers related to textbook rental performance obligations, which are recognized ratably over the terms of the proposedrelated rental period;
•unsatisfied performance obligations associated with partnership marketing services, which are recognized when the contracted services are provided to our partnership marketing customers; and
•unsatisfied performance obligations associated with the premium paid for the sale of treasury shares, which are expected to be recognized over the term of the merchandising contracts for Fanatics and Lids. respectively as discussed in Part II - Item 8. Financial Statements and Supplementary Data - Note 5. Equity and Earnings Per Share - Sale of Treasury Shares.
The following table presents changes in deferred revenue associated with our contract liabilities:
| 52 weeks ended | ||||||||||||||
| April 29, 2023 | April 30, 2022 | |||||||||||||
| Deferred revenue at the beginning of period | $ | 16,475 | $ | 15,709 | ||||||||||
| Additions to deferred revenue during the period | 184,163 | 130,137 | ||||||||||||
| Reductions to deferred revenue for revenue recognized during the period | (185,282) | (129,371) | ||||||||||||
| Deferred revenue balance at the end of period: | $ | 15,356 | $ | 16,475 | ||||||||||
| Balance Sheet classification: | ||||||||||||||
| Accrued liabilities | $ | 11,218 | $ | 11,781 | ||||||||||
| Other long-term liabilities | 4,138 | 4,694 | ||||||||||||
| Deferred revenue balance at the end of period: | $ | 15,356 | $ | 16,475 | ||||||||||
As of April 29, 2023, we expect to recognize $11,218 of the deferred revenue balance within the next 12 months.
Note 4. Segment Reporting
During the fourth quarter of Fiscal 2023, assets related to our DSS Segment met the criteria for classification as Assets Held for Sale and Discontinued Operations and is no longer a reportable segment. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.
We have two reportable segments: Retail and Wholesale. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, are not allocated to any specific reporting segment and continue to be presented as “Corporate Services”.
We identify our segments in accordance with the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance. The following summarizes the three segments. For additional information about this segments operations, see Part I - Item 1. Business.
Retail Segment
The Retail Segment operates 1,366 college, university, and K-12 school bookstores, comprised of 774 physical bookstores and 592 virtual bookstores. Our bookstores typically operate under agreements with the college, university, or K-12 schools to be the official bookstore and the exclusive seller of course materials and supplies, including physical and digital products. The majority of the physical campus bookstores have school-branded e-commerce websites which we operate independently or along with our merchant partners, and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. The Retail Segment offers our BNC First Day® equitable and inclusive access programs, consisting of First DayComplete and First Day, which provide faculty requested course materials on or before the first day of class at a discounted rate, as compared to the total retail price for the same course materials if purchased separately. The BNC First Day discounted price is offered as a course fee or included in tuition. Additionally, the Retail Segment offers a suite of digital content and services to colleges and universities, including a variety of open educational resource-based courseware.
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Wholesale Segment
The Wholesale Segment is comprised of our wholesale textbook business and is one of the largest textbook wholesalers in the country. The Wholesale Segment centrally sources, sells, and distributes new and used textbooks to approximately 3,000 physical bookstores (including our Retail Segment's 774 physical bookstores) and sources and distributes new and used textbooks to our 592 virtual bookstores. Additionally, the Wholesale Segment sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 340 college bookstores.
Corporate Services
Corporate Services represents unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources.
Intercompany Eliminations
The eliminations are primarily related to the following intercompany activities:
•The sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale, and
•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.
Our international operations are not material and the majority of the revenue and total assets are within the United States.
| As of | ||||||||||||||
| April 29, 2023 | April 30, 2022 | |||||||||||||
| Total Assets | ||||||||||||||
| Retail | $ | 785,900 | $ | 875,569 | ||||||||||
| Wholesale | 160,868 | 159,125 | ||||||||||||
| Corporate Services | 6,581 | 5,175 | ||||||||||||
| Sub-Total | 953,349 | 1,039,869 | ||||||||||||
| Assets Held for Sale | 27,430 | 31,684 | ||||||||||||
| Total Assets | $ | 980,779 | $ | 1,071,553 | ||||||||||
| 52 weeks ended | |||||||||||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | |||||||||||||||||||||||||||
| Capital Expenditures from Continuing Operations | |||||||||||||||||||||||||||||
| Retail | $ | 23,098 | $ | 31,073 | $ | 21,208 | |||||||||||||||||||||||
| Wholesale | 1,959 | 2,472 | 5,905 | ||||||||||||||||||||||||||
| Corporate Services | 35 | 62 | 449 | ||||||||||||||||||||||||||
| Total Capital Expenditures | $ | 25,092 | $ | 33,607 | $ | 27,562 | |||||||||||||||||||||||
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Summarized financial information for our reportable segments is reported below:
| 52 weeks ended | |||||||||||||||||||||||||||||
| April 29, 2023 | April 30, 2022 (a) | May 1, 2021 (a) | |||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Retail | $ | 1,491,726 | $ | 1,439,664 | $ | 1,330,470 | |||||||||||||||||||||||
| Wholesale | 106,366 | 112,246 | 165,825 | ||||||||||||||||||||||||||
| Eliminations | (54,884) | (56,176) | (89,779) | ||||||||||||||||||||||||||
| Total Sales | $ | 1,543,208 | $ | 1,495,734 | $ | 1,406,516 | |||||||||||||||||||||||
| Gross Profit | |||||||||||||||||||||||||||||
Retail (b) | $ | 331,344 | $ | 322,983 | $ | 195,617 | |||||||||||||||||||||||
| Wholesale | 18,275 | 19,782 | 34,683 | ||||||||||||||||||||||||||
| Eliminations | (180) | 67 | 43 | ||||||||||||||||||||||||||
| Total Gross Profit | $ | 349,439 | $ | 342,832 | $ | 230,343 | |||||||||||||||||||||||
| Selling and Administrative Expenses | |||||||||||||||||||||||||||||
| Retail | $ | 320,730 | $ | 315,124 | $ | 278,149 | |||||||||||||||||||||||
| Wholesale | 15,036 | 16,000 | 16,085 | ||||||||||||||||||||||||||
| Corporate Services | 22,000 | 23,002 | 22,079 | ||||||||||||||||||||||||||
| Eliminations | (155) | (158) | (149) | ||||||||||||||||||||||||||
| Total Selling and Administrative Expenses | $ | 357,611 | $ | 353,968 | $ | 316,164 | |||||||||||||||||||||||
| Depreciation and Amortization | |||||||||||||||||||||||||||||
| Retail | $ | 36,737 | $ | 36,635 | $ | 39,634 | |||||||||||||||||||||||
| Wholesale | 5,373 | 5,418 | 5,461 | ||||||||||||||||||||||||||
| Corporate Services | 53 | 71 | 109 | ||||||||||||||||||||||||||
| Total Depreciation and Amortization | $ | 42,163 | $ | 42,124 | $ | 45,204 | |||||||||||||||||||||||
Impairment loss (non-cash) - Retail (c) | $ | 6,008 | $ | 6,411 | $ | 27,630 | |||||||||||||||||||||||
Restructuring and Other Charges (c) | |||||||||||||||||||||||||||||
| Retail | $ | 2,964 | $ | 2,118 | $ | 5,514 | |||||||||||||||||||||||
| Wholesale | 916 | (2,131) | (1,595) | ||||||||||||||||||||||||||
| Corporate Services | 6,223 | 957 | 6,188 | ||||||||||||||||||||||||||
| Total Restructuring and Other Charges | $ | 10,103 | $ | 944 | $ | 10,107 | |||||||||||||||||||||||
| Operating Loss | |||||||||||||||||||||||||||||
| Retail | $ | (35,095) | $ | (37,305) | $ | (155,310) | |||||||||||||||||||||||
Wholesale | (3,050) | 495 | 14,732 | ||||||||||||||||||||||||||
| Corporate Services | (28,276) | (24,030) | (28,376) | ||||||||||||||||||||||||||
| Eliminations | (25) | 225 | 192 | ||||||||||||||||||||||||||
| Total Operating Loss | $ | (66,446) | $ | (60,615) | $ | (168,762) | |||||||||||||||||||||||
| The following is a reconciliation of segment Operating Loss from Continuing Operations to consolidated Loss from Continuing Operations Before Income Taxes | |||||||||||||||||||||||||||||
| Total Operating Loss | $ | (66,446) | $ | (60,615) | $ | (168,762) | |||||||||||||||||||||||
| Interest Expense, net | (22,683) | (10,096) | (8,087) | ||||||||||||||||||||||||||
| Total Loss from Continuing Operations Before Income Taxes | $ | (89,129) | $ | (70,711) | $ | (176,849) | |||||||||||||||||||||||
90
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
(a)In Fiscal 2022 and Fiscal 2021, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows.
(b)In Fiscal 2022 and 2021, gross margin includes a merchandise inventory loss and write-off of $434 and $14,960, respectively, in the Retail Segment. See Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories.
(c)See Part II - Item 8. Financial Statements and Supplementary Data - Note 9. Supplementary Information.
Note 5. Equity and Earnings Per Share
Equity
Our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. As of April 29, 2023, 55,140,186 shares and 52,604,274 shares of our common stock were issued and outstanding, respectively, and 0 shares of our preferred stock were both issued and outstanding. Our common stock trades on the NYSE under the symbol “BNED”.
The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Holders of shares of our common stock do not have cumulative voting rights in the election of directors. The holders of our common stock will be entitled to share ratably in our assets legally available for distribution to our stockholders, subject to the prior distribution rights of preferred stock, if any, then outstanding. The holders of our common stock do not have preemptive rights or preferential rights to subscribe for shares of our capital stock.
Repurchase of Shares
On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $50,000, in the aggregate, of our outstanding common stock. The stock repurchase program is carried out at the direction of management (which may include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. During the Fiscal 2023, Fiscal 2022 and Fiscal 2021, we did not purchase shares under the stock repurchase program. As of April 29, 2023, approximately $26,669 remains available under the stock repurchase program.
During the Fiscal 2023, Fiscal 2022 and Fiscal 2021, we also repurchased 347,808, 239,751 shares, and 414,174 shares of our common stock in connection with employee tax withholding obligations for vested stock awards, respectively.
Sale of Treasury Shares
In December 2020 (Fiscal 2021), we entered into a new merchandising partnership with Fanatics and Lids which included a strategic equity investment in the Company. Fanatics, Inc. and Lids Holdings, Inc. jointly purchased an aggregate 2,307,692 of our common shares (issued from treasury shares) for $15,000, representing a share price of $6.50 per share. The premium price paid above the fair market value of our common stock at closing was approximately $4,131 and was recorded as a contract liability which is recognized over the term of the merchandising contracts for Fanatics and Lids ($211 and $211, respectively, in accrued liabilities, and $3,498 and $3,709, respectively, as of April 29, 2023 and April 30, 2022, in other long-term liabilities our consolidated balance sheet) which is expected to be recognized over the term of the merchandising contracts for Fanatics and Lids, as discussed in Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Organization - Partnership with Fanatics and Lids.
Dividends
We paid no other dividends to common stockholders during Fiscal 2023, Fiscal 2022 and Fiscal 2021. We do not intend to pay dividends on our common stock in the foreseeable future and dividend payments are not permitted under current or future financing arrangements. See Part II - Item 8. Financial Statements and Supplementary Data - Note 7 - Debt and Note 17. Subsequent Event for details.
Earnings Per Share
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
unvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. During the Fiscal 2023, Fiscal 2022 and Fiscal 2021, average shares of 4,740,436, 3,995,990, and 3,387,185, respectively, were excluded from the diluted earnings per share calculation using the two-class method as their inclusion would have been antidilutive.
The following is a reconciliation of the basic and diluted earnings per share calculation:
| 52 weeks ended | |||||||||||||||||||||||||||||
| (shares in thousands) | April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||||||||||
| Numerator for basic and diluted earnings per share: | |||||||||||||||||||||||||||||
| Loss from continuing operations, net of tax | $ | (90,140) | $ | (61,559) | $ | (133,569) | |||||||||||||||||||||||
| Loss from discontinued operations, net of tax | (11,722) | (7,298) | (6,241) | ||||||||||||||||||||||||||
| Net loss available to common shareholders | $ | (101,862) | $ | (68,857) | $ | (139,810) | |||||||||||||||||||||||
| Denominator for basic and diluted earnings per share: | |||||||||||||||||||||||||||||
| Basic and diluted weighted average shares of Common Stock | 52,454 | 51,797 | 49,669 | ||||||||||||||||||||||||||
| Loss per share of Common Stock: | |||||||||||||||||||||||||||||
| Basic and Diluted | |||||||||||||||||||||||||||||
| Continuing operations | $ | (1.72) | $ | (1.19) | $ | (2.69) | |||||||||||||||||||||||
| Discontinued operations | (0.22) | (0.14) | (0.12) | ||||||||||||||||||||||||||
| Basic and diluted loss per share of Common Stock | $ | (1.94) | $ | (1.33) | $ | (2.81) | |||||||||||||||||||||||
Note 6. Fair Values Measurements
In accordance with ASC No. 820, Fair Value Measurements and Disclosures, the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1—Observable inputs that reflect quoted prices in active markets
Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3—Unobservable inputs in which little or no market data exists, therefore requiring us to develop our rationaleown assumptions
Our financial instruments include cash and cash equivalents, receivables, accrued liabilities and accounts payable. The fair values of cash and cash equivalents, receivables, accrued liabilities and accounts payable approximates their carrying values because of the short-term nature of these instruments, which are all considered Level 1. The fair value of short-term and long-term debt approximates its carrying value.
Non-Financial Assets and Liabilities
Our non-financial assets include property and equipment, operating lease right-of-use assets, and intangible assets. Such assets are reported at their carrying values and are not subject to recurring fair value measurements. We review our long-lived assets for entering intoimpairment whenever events or changes in circumstances indicate that the transactioncarrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets.
During the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment, and we recognized an impairment loss (non-cash) of $6,008, $6,411, and $27,630 ($20,506 after-tax), respectively, on the consolidated statement of operations. The fair value of the impaired long-lived assets were determined using an income approach (Level 3 input), using our best estimates of the amount and timing of future
92
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
discounted cash flows, based on historical experience, market conditions, current trends and performance expectations. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.
The following table shows the fair values of our non-financial assets and liabilities that were required to be remeasured at fair value on a non-recurring basis for each respective period and the total impairments recorded as a result of the remeasurement process:
| 52 weeks ended April 29, 2023 | 52 weeks ended April 30, 2022 | 52 weeks ended May 1, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Carrying Value Prior to Impairment | Fair Value | Impairment Loss (non-cash) | Carrying Value Prior to Impairment | Fair Value | Impairment Loss (non-cash) | Carrying Value Prior to Impairment | Fair Value | Impairment Loss (non-cash) | |||||||||||||||||||||||||||||||||||||||||||||
| Property and equipment, net | $ | 708 | $ | — | $ | 708 | $ | 742 | $ | 3 | $ | 739 | $ | 5,505 | $ | 420 | $ | 5,085 | |||||||||||||||||||||||||||||||||||
| Operating lease right-of-use assets | 3,002 | 1,305 | 1,697 | 3,299 | 1,506 | 1,793 | 26,427 | 13,099 | 13,328 | ||||||||||||||||||||||||||||||||||||||||||||
| Intangible assets, net | 3,599 | — | 3,599 | 3,745 | 77 | 3,668 | 7,723 | 1,445 | 6,278 | ||||||||||||||||||||||||||||||||||||||||||||
| Other noncurrent assets | 4 | — | 4 | 211 | — | 211 | 3,539 | 600 | 2,939 | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 7,313 | $ | 1,305 | $ | 6,008 | $ | 7,997 | $ | 1,586 | $ | 6,411 | $ | 43,194 | $ | 15,564 | $ | 27,630 | |||||||||||||||||||||||||||||||||||
We granted phantom share units as long-term incentive awards which are settled in cash based on the fair market value of a share of common stock of the Company at each vesting date. The fair value of the liability for the cash-settled phantom share unit awards will be remeasured at the end of each reporting period through settlement to reflect current risk-free rate and volatility assumptions. As of April 29, 2023, we recorded a liability of $777 (Level 2 input) which is reflected in accrued liabilities ($734) and other long-term liabilities ($42) on the consolidated balance sheet. As of April 30, 2022, we recorded a liability of $2,774 (Level 2 input) which is reflected in accrued liabilities ($1,726) and other long-term liabilities ($1,048) on the consolidated balance sheet. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 12. Long-Term Incentive Compensation Expense.
Note 7. Debt
| As of | ||||||||||||||
| April 29, 2023 | April 30, 2022 | |||||||||||||
| Credit Facility | $ | 154,154 | $ | 185,700 | ||||||||||
| FILO Facility | — | 40,000 | ||||||||||||
| Term Loan | 30,000 | — | ||||||||||||
| sub-total | 184,154 | 225,700 | ||||||||||||
| Less: Deferred financing costs | (2,003) | — | ||||||||||||
| Total debt | $ | 182,151 | $ | 225,700 | ||||||||||
| Balance Sheet classification: | ||||||||||||||
| Short-term borrowings | $ | — | $ | 40,000 | ||||||||||
| Long-term borrowings | 182,151 | 185,700 | ||||||||||||
| Total debt | $ | 182,151 | $ | 225,700 | ||||||||||
Credit Facility
We have a credit agreement (the “Credit Agreement”), amended from time to time including on March 31, 2021 and March 1, 2019, under which the lenders committed to provide us with a 5 year asset-backed revolving credit facility in an aggregate committed principal amount of $400,000 (the “Credit Facility”) effective from the March 1, 2019 amendment. We have the option to request an increase in commitments under the Credit Facility of up to $100,000, subject to certain restrictions. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. The
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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
agreement included an incremental first in, last out seasonal loan facility (the “FILO Facility”) for a $100,000 maintaining the maximum availability under the Credit Agreement at $500,000. As of July 31, 2022, the FILO Facility was repaid according to its terms and future commitments under the FILO Facility were reduced to $0.
On March 8, 2023, we amended our existing Credit Agreement to (i) extend the maturity date of the Credit Agreement by six months to August 29, 2024, (ii) reduce the commitments under the Credit Agreement by $20,000 to $380,000, (iii) increase the applicable margin with respect to the interest rate under the Credit Agreement to 3.375% per annum, in the case of interest accruing based on a Secured Overnight Financing Rate, and 2.375%, in the case of interest accruing based on an alternative base rate, in each case, without regard to a pricing grid, (iv) reduce advance rates with respect to the borrowing base (x) by 500 basis points upon the achievement of certain liquidity events, which may include a sale of equity interests or of assets (a “Specified Event”), or, if such a Specified Event shall not have occurred, on May 31, 2023 (see discussion below) and (y) by an additional 500 basis points on September 29, 2023, (v) amend certain negative covenants and add certain additional covenants, (vi) amend the financial maintenance covenant to require Availability (as defined in the Credit Agreement) to be at all times greater than the greater of 10% of the Aggregate Loan Cap (as defined in the Credit Agreement) and $32,500 and (vii) require repayment of the loans under the Credit Agreement upon a Specified Event. For additional information related to the Credit Agreement amendment, see the Company’s Report on Form 8-K dated March 8, 2023 and filed with the SEC on March 9, 2023.
As noted above, the amendment requires the achievement of a Special Event by no later than May 31, 2023 (as such date may be extended pursuant to the terms of comparable transactionsthe Credit Agreement). See Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies for information related to the sale of our DSS segment on May 31, 2023.
We paid a fee of 0.25% of the outstanding principal amount of the commitments under the Credit Agreement on the amendment closing date and we will pay an additional fee of 1.00% of the outstanding principal amount of the commitments under the Credit Agreement on September 29, 2023.
On May 24, 2023 and July 28, 2023, subsequent to quarter end, we amended the Credit Agreement to extend the maturity date, as well as other changes as described in Part II - Item 8. Financial Statements and Supplementary Data - Note 17. Subsequent Events.
As of April 29, 2023, and through the date of this filing, we were in compliance with unrelated third parties. In addition, managementall debt covenants under the Credit Agreement.
The Credit Facility is secured by substantially all of the inventory, accounts receivable and internal audit annually analyzerelated assets of the borrowers under the Credit Facility. This is considered an all asset lien (inclusive of proceeds from tax refunds payable to the Company and a pledge of equity from subsidiaries, exclusive of real estate).
During the 52 weeks ended April 29, 2023, we borrowed $590,303 and repaid $631,849 under the Credit Agreement, and had outstanding borrowings of $154,154 as of April 29, 2023, comprised entirely of borrowing under the Credit Facility and $0 under the FILO Facility, which was repaid on August 1, 2022. During the 52 weeks ended April 30, 2022, we borrowed $632,220 and repaid $584,120 under the Credit Agreement, and had outstanding borrowings of $185,700 and $40,000 under the Credit Facility and FILO Facility, respectively, as of April 30, 2022. During the 53 weeks ended May 1, 2021, we borrowed $722,600 and repaid $719,700 under the Credit Agreement, and had outstanding borrowings of $127,600 and $50,000 under the Credit Facility and FILO Facility, respectively, as of May 1, 2021. As of April 29, 2023 and April 30, 2022, we issued $2,059 and $4,759, respectively, in letters of credit under the Credit Facility.
During the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021 we incurred debt issuance costs totaling $4,081, $265, and $1,076, respectively. The debt issuance costs have been deferred and are presented as prepaid and other current assets and other noncurrent assets in the consolidated balance sheets, and subsequently amortized ratably over the term of the credit agreement.
Term Loan
On June 7, 2022, we entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) with TopLids LendCo, LLC and Vital Fundco, LLC and we entered into an amendment to our existing related party agreementsCredit Agreement, which permitted us to incur the Term Loan Facility (as defined below). For additional information, see the Company’s Report on Form 8-K dated June 7, 2022 and transactions and review themfiled with the Audit Committee.
SEC on June 10, 2022.
94
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
The Term Loan Credit Agreement provides for term loans in an amount equal to $30,000 (the “Term Loan Facility” and, the loans thereunder, the “Term Loans”) and matures on June 7, 2024. The proceeds of the Term Loans are being used to finance working capital, and to pay fees and expenses related to the Term Loan Facility. During the 52 weeks ended April 29, 2023, we borrowed $30,000 and repaid $0 under the Term Loan Credit Agreement, with $30,000 of outstanding borrowings as of April 29, 2023.
On May 24, 2023 and July 28, 2023, subsequent to quarter end, we amended the Term Loan Agreement to extend the maturity date, as well as other changes as described in Part II - Item 8. Financial Statements and Supplementary Data - Note 17. Subsequent Events.
During the 52 weeks ended April 29, 2023, we incurred debt issuance costs totaling $3,184 related to the Term Loan Credit Agreement. The debt issuance costs have been deferred and are presented as a reduction to the long-term borrowings in the consolidated balance sheets, and subsequently amortized ratably over the term of the Term Loan Facility.
The Term Loans accrue interest at a rate equal to 11.25%, payable quarterly. We have the right, through December 31, 2022, to pay all or a portion of the interest on the Term Loans in kind. To date, all interest on the term loan has been paid in cash. The Term Loans do not amortize prior to maturity. Solely to the extent that any Term Loans remain outstanding on June 7, 2023, we paid a fee of 1.5% of the outstanding principal amount of the Term Loans on such date.
The Term Loan Credit Agreement does not contain a financial covenant, but otherwise contains representations and warranties, covenants and events of default that are substantially the same as those in the Credit Agreement, including restrictions on the ability of the Company and its subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and make dividends and distributions. The Term Loan Facility is secured by second-priority liens on all assets securing the obligations under the Credit Agreement, which is all of the assets of the Company and the Guarantors, subject to customary exclusions and limitations set forth in the Term Loan Credit Agreement and the other loan documents executed in connection therewith.
The Credit Agreement amendment permitted us to incur the Term Loan Facility and also provides that, upon repayment of the Term Loan Credit Agreement (and, if applicable, any replacement credit facility thereof), we may incur second lien secured debt in an aggregate principal amount not to exceed $75,000.
Note 8. Leases
We recognize lease assets and lease liabilities on the consolidated balance sheets for substantially all lease arrangements based on the present value of future lease payments as required by ASC 842, Leases (Topic 842). Our portfolio of leases consists of operating leases comprised of operations agreements which grant us the right to operate on-campus bookstores at colleges and universities; real estate leases for office and warehouse operations; and vehicle leases. We do not have finance leases or short-term leases (i.e., those with a term of twelve months or less).
We recognize a right of use (“ROU”) asset and lease liability in our consolidated balance sheets for leases with a term greater than twelve months. Options to extend or terminate a lease are included in the determination of the ROU asset and lease liability when it is reasonably certain that such options will be exercised. Our lease terms generally range from one year to fifteen years and a number of agreements contain minimum annual guarantees, many of which are adjusted at the start of each contract year based on the actual sales activity of the leased premises for the most recently completed contract year.
Payment terms are based on the fixed rates explicit in the lease, including minimum annual guarantees, and/or variable rates based on: i) a percentage of revenues or sales arising at the relevant premises (“variable commissions”), and/or ii) operating expenses, such as common area charges, real estate taxes and insurance. For contracts with fixed lease payments, including those with minimum annual guarantees, we recognize lease expense on a straight-line basis over the lease term or over the contract year in order to best reflect the pattern of usage of the underlying leased asset and our minimum obligations arising from these types of leases. Our lease agreements do not contain any material residual value guarantees, material restrictions or covenants.
We used our incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable. We utilized an estimated collateralized incremental borrowing rate as of the effective date or the commencement date of the lease, whichever is later.
95
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
The following table summarizes lease expense:
| 52 weeks ended | ||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||
| Variable lease expense | $ | 69,570 | $ | 77,956 | $ | 69,511 | ||||||||||||||
| Operating lease expense | 135,037 | 114,815 | 108,282 | |||||||||||||||||
| Net lease expense | $ | 204,607 | $ | 192,771 | $ | 177,793 | ||||||||||||||
The increase in lease expense is primarily due to higher sales for contracts based on a percentage of revenue and the impact of the timing due to contract renewals, and the increase in minimum contractual guarantees which were temporarily eliminated in the prior years due to limited on campus store traffic resulting from the COVID-19 pandemic.
The following table summarizes our minimum fixed lease obligations, excluding variable commissions, as of April 29, 2023:
| As of | ||||||||
| April 29, 2023 | ||||||||
| Fiscal 2024 | $ | 111,864 | ||||||
| Fiscal 2025 | 55,801 | |||||||
| Fiscal 2026 | 39,052 | |||||||
| Fiscal 2027 | 30,724 | |||||||
| Fiscal 2028 | 24,276 | |||||||
| Thereafter | 59,252 | |||||||
| Total lease payments | 320,969 | |||||||
| Less: imputed interest | (36,235) | |||||||
| Operating lease liabilities at period end | $ | 284,734 | ||||||
Future lease payment obligations related to leases that were entered into, but did not commence as of April 29, 2023, were not material.
The following summarizes additional information related to our operating leases:
| As of | ||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||
| Weighted average remaining lease term (in years) | 5.3 years | 6.2 years | 5.5 years | |||||||||||||||||
| Weighted average discount rate | 4.7 | % | 4.7 | % | 4.9 | % | ||||||||||||||
| Supplemental cash flow information: | ||||||||||||||||||||
| Cash payments for lease liabilities within operating activities | $ | 127,582 | $ | 123,037 | $ | 111,167 | ||||||||||||||
| ROU assets obtained in exchange for lease liabilities from initial recognition | $ | 97,926 | $ | 160,510 | $ | 123,556 | ||||||||||||||
Note 9. Supplementary Information
Impairment Loss (non-cash)
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. For information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.
During the 52 weeks ended April 29, 2023, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $6,008 (both pre-tax and after-tax), comprised of $708, $1,697, $3,599 and $4 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
96
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
During the 52 weeks ended April 30, 2022, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $6,411 (both pre-tax and after-tax), comprised of $739, $1,793, $3,668 and $211 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
During the 52 weeks ended May 1, 2021, we recognized an impairment loss (non-cash) of $27,630, $20,506 after-tax, in the Retail segment comprised of $5,085, $13,328, $6,278 and $2,939 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations.
Restructuring and Other Charges
During the 52 weeks ended April 29, 2023, we recognized restructuring and other charges totaling $10,103, comprised primarily of $4,359 for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives, ($1,712 is included in accrued liabilities in the consolidated balance sheet as of April 29, 2023), and $5,744 for costs primarily associated with professional service costs for restructuring and process improvements.
During the 52 weeks ended April 30, 2022, we recognized restructuring and other charges totaling $944, comprised primarily of $1,250 for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($71 is included in accrued liabilities in the consolidated balance sheet as of April 30, 2022) and $1,825 for costs associated with professional service costs for restructuring, process improvements, development and integration associated with the F/L Partnership, shareholder activist activities, and liabilities for a facility closure, partially offset by a $2,131 in an actuarial gain related to a frozen retirement benefit plan (non-cash).
During the 52 weeks ended May 1, 2021, we recognized restructuring and other charges totaling $10,107, comprised primarily of $6,035 for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives, $5,213 for professional service costs related to restructuring, process improvements, the financial advisor strategic review process, costs related to development and integration associated with the F/L Partnership and shareholder activist activities, and $454 related to liabilities for a facility closure, partially offset by a $1,595 in an actuarial gain related to a frozen retirement benefit plan (non-cash).
Note 10. Related Party Transactions
We believe that the transactions and agreements discussed below between us and related third parties are at least as favorable to us as could have been obtained from unrelated parties at the time they were entered into.
MBS Lease.
MBS Textbook Exchange, LLC (“MBS”), which
Prior to the acquisition of MBS on February 27, 2017, MBS was majority ownedconsidered a related-party as it was majority-owned by Leonard Riggio, (“Mr. Riggio”),who is a principal owner holding substantial shares of our common stock, was acquired in February 2017, and is now a wholly-owned subsidiaryother members of the Company. Riggio family. Subsequent to the acquisition, the consolidated financial statements include the accounts of MBS and all material intercompany accounts and transactions have been eliminated in consolidation.
MBS leases its main warehouse and distribution facility located in Columbia, Missouri from MBS Realty Partners L.P., which is majority-owned by Mr.Leonard Riggio, with the remaining ownership by other sellers of MBS. The lease was originally entered into in 1991 and included a renewal option thatwhich extended the lease term through September 1, 2023. Based upon a valuation performed as of the acquisition date,Effective January 1, 2023, MBS amended the lease was determinedagreement to be favorable from a lessee perspective with below market rent. Rentallower the rent and extend the term to December 31, 2024. Rent payments to MBS Realty Partners L.P. were approximately $1.4 million$1,150, $1,380 and $1,380 during the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively.
Note 11. Employee Benefit Plans
We sponsor defined contribution plans for the benefit of substantially all of the employees of BNC and DSS. MBS maintains a profit sharing plan covering substantially all full-time employees of MBS. For all plans, we are responsible to fund the employer contributions directly, if any. Total employee benefit expense for these plans was $4,391, $3,200, and $0, during the 52 weeks ended April 29, 2023, April 30, 2022, and May 1, 2021, respectively.
Effective April 2020, due to the significant impact as a result of COVID-19 related campus store closures, we temporarily suspended employer matching contributions into our 401(k) plans. The matching contributions were reinstated effective July 25, 2021.
97
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Note 12. Long-Term Incentive Compensation Expense
We have reserved 13,409,345 shares of our common stock for future grants in bothaccordance with the Barnes & Noble Education Inc. Equity Incentive Plan. Types of equity awards that can be granted under the Equity Incentive Plan include options, restricted stock (“RS”), restricted stock units (“RSU”), performance shares (“PS”), performance share units (“PSU”), and stock options.
We recognize compensation expense for restricted stock awards and performance share awards ratably over the requisite service period of the award, which is generally three years. We recognize compensation expense for these awards based on the number of awards expected to vest, which includes an estimated average forfeiture rate. We calculate the fair value of these awards based on the closing stock price on the date the award was granted. For those awards with market conditions, we have determined the grant date fair value using the Monte Carlo simulation model and compensation expense is recognized ratably over the requisite service period regardless of whether the market condition is satisfied.
Restricted Stock Awards
A RS award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of unvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon (although payment may be deferred until the shares have vested) and are considered to be currently issued and outstanding. Restricted stock awards will have a minimum vesting period of one year.
A RSU is a grant valued in terms of our common stock, but no stock is issued at the time of grant. Each restricted stock unit may be redeemed for one share of our common stock once vested. Restricted stock units are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the units except in very limited circumstances and with the consent of the compensation committee. Shares associated with unvested restricted stock units have no voting rights but are entitled to receive dividends and other distributions thereon (although payment may be deferred until the units have vested). Restricted stock units generally vest over a period of three years, but will have a minimum vesting period of one year.
Performance Share Awards
PS awards and PSU awards were granted to employees. Each PS and PSU may be redeemed for one share of our common stock once vested and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the PS or PSU awards except in very limited circumstances and with the consent of the compensation committee. Shares of unvested PSU awards have no voting rights but are entitled to receive dividends and other distributions thereon (although payment may be deferred until the shares or units, as the case may be, have vested). The PS and PSU awards will only vest based upon the achievement of pre-established performance goals related to Adjusted EBITDA, segment revenue, new business, and/or total shareholder return performance achieved over a period of time. The PS and PSU awards will vest based on company performance and/or market conditions during the subsequent two year period with one additional year of time-based vesting. The number of PS and PSU awards that will vest range from 0%-150% of the target award based on actual performance.
Phantom Shares
During Fiscal 20202022, we granted 183,348 phantom share units granted to employees. Each phantom share represents the economic equivalent to one share of the Company's common stock and will be settled in cash based on the fair market value of a share of common stock at each vesting date in an amount not to exceed $32.40 per share. The phantom shares vest and will be settled in three equal installments commencing one year after the date of grant. The fair value of the phantom shares was determined using the closing stock price on the date of the award less the fair value of the call option which was estimated using the Black-Scholes model. The average fair value on the date of grant was $8.50 per phantom share using risk-free rates ranging from 0.08%-0.53% for the three tranches and annual volatility ranging from 78%-92% for the three tranches. The fair value of the liability for the cash-settled phantom share unit awards will be remeasured at the end of each reporting period through settlement to reflect current risk-free rate and volatility assumptions.
As of April 29, 2023, we recorded a liability of $777 (Level 2 input) related to phantom share units grants of which $734 and $42 is reflected in accrued liabilities and other long-term liabilities, respectively, on the consolidated balance sheet. As of April 30, 2022, we recorded a liability of $2,774 (Level 2 input) related to phantom share units grants of which $1,726 and
98
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
$1,048 is reflected in accrued liabilities and other long-term liabilities, respectively, on the consolidated balance sheet, respectively.
Stock Options
For stock options granted with an "at market" exercise price, we determined the grant fair value using the Black-Scholes model and for stock options granted with "a premium" exercise price, we determined the grant date fair value using the Monte Carlo simulation model. The fair value models for stock options use assumptions that include the risk-free interest rate, expected volatility, expected dividend yield and expected term of the options.
During Fiscal 2023, we granted 322,495 stock options with an exercise price of $2.36 per stock option, which was the fair market value on the date of grant (Stock Option Grant #1) and 348,723 stock options with an exercise price of $4.86 per stock option (Stock Option Grant #2) granted to employees. The stock options are exercisable in four equal annual installments commencing one year after the date of grant and have a ten year term. Holders are not entitled to receive dividends (if any) prior to vesting and exercise of the options. The following summarizes the stock option fair value assumptions:
| Stock Option Grant #1 | Stock Option Grant #2 | ||||||||||
| Exercise Price | $ | 2.36 | $ | 4.86 | |||||||
| Valuation method utilized | Black-Scholes | Monte Carlo | |||||||||
| Risk-free interest rate | 3.28 | % | 3.28 | % | |||||||
| Expected option term | 6.3 years | 10.0 years | |||||||||
| Company volatility | 74 | % | 74 | % | |||||||
| Dividend yield | — | % | — | % | |||||||
| Grant date fair value per award | $ | 1.61 | $ | 1.28 | |||||||
The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected stock option term. For Stock Option Grant #1, we are permitted to use the simplified approach to estimate the expected term of the stock options, which typically assumes exercise occurs at the mid-point between the end of the vesting period and the expiration date. The simplified approach is not allowed for premium-priced options (Stock Option Grant #2), which were estimated using a stock price multiple, as there is no option exercise history which to base an early exercise option. The expected stock option term represents the weighted average period of time that stock options granted are expected to be outstanding, based on vesting schedules and the contractual term of the stock options. Volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected stock option term.
99
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Long-Term Incentive Compensation Activity
The following table presents a summary of awards activity related to our current Equity Incentive Plan:
| Restricted Stock Awards | Restricted Stock Units | |||||||||||||||||||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||
| Balance, April 30, 2022 | 35,412 | $ | 10.59 | 1,205,079 | $ | 8.71 | ||||||||||||||||||||
| Granted | 11,804 | $ | 2.30 | 990,875 | $ | 2.37 | ||||||||||||||||||||
| Vested | (35,412) | $ | 10.59 | (627,330) | $ | 7.00 | ||||||||||||||||||||
| Forfeited | — | $ | — | (477,651) | $ | 5.54 | ||||||||||||||||||||
| Balance, April 29, 2023 | 11,804 | $ | 2.30 | 1,090,973 | $ | 5.33 | ||||||||||||||||||||
| Performance Share Units | Phantom Shares | |||||||||||||||||||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||
| Balance, April 30, 2022 | 528,567 | $ | 2.23 | 1,539,027 | $ | 2.72 | ||||||||||||||||||||
| Granted | — | $ | — | — | $ | — | ||||||||||||||||||||
| Vested | (241,820) | $ | 2.23 | (720,289) | $ | 2.39 | ||||||||||||||||||||
Forfeited (a) | (286,747) | $ | 2.23 | (216,595) | $ | 3.02 | ||||||||||||||||||||
| Balance, April 29, 2023 | — | $ | — | 602,143 | $ | 3.01 | ||||||||||||||||||||
| Stock Options | ||||||||||||||||||||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | Weighted Average Exercise Price | ||||||||||||||||||||||||
| Balance, April 30, 2022 | 2,702,937 | $ | 2.79 | $ | 5.82 | |||||||||||||||||||||
| Granted | 671,218 | $ | 1.44 | $ | 3.66 | |||||||||||||||||||||
Exercised (b) | — | $ | — | $ | — | |||||||||||||||||||||
| Forfeited | (591,222) | $ | 2.95 | $ | 6.02 | |||||||||||||||||||||
| Expired | (20,589) | $ | 6.91 | $ | 12.10 | |||||||||||||||||||||
| Balance, April 29, 2023 | 2,762,344 | $ | 2.40 | $ | 5.21 | |||||||||||||||||||||
| Exercisable, April 29, 2023 | 1,137,691 | $ | 2.13 | $ | 4.84 | |||||||||||||||||||||
(a) The PSUs forfeitures reflect a cumulative adjustment to reflect changes to the expected level of achievement of the respective grants.
(b) During the period ended April 29, 2023, no options were exercised with a total intrinsic value of $0.
The aggregate grant date fair value of stock options that vested during the 52 weeks ended April 29, 2023 and April 30, 2022 was $1,903 and $783, respectively. There were no stock options that vested during the 52 weeks ended May 1, 2021.
Total fair value of vested share awards during the periods ended April 29, 2023, April 30, 2022, and May 1, 2021 was $8,851, $9,651, and $6,631, respectively.
100
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Long-Term Incentive Compensation Expense
We recognized compensation expense for long-term incentive plan awards in selling and administrative expenses as follows:
| 52 weeks ended | |||||||||||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | |||||||||||||||||||||||||||
| Stock-based awards | |||||||||||||||||||||||||||||
| Restricted stock expense | $ | 172 | $ | 394 | $ | 226 | |||||||||||||||||||||||
| Restricted stock units expense | 2,813 | 3,399 | 3,487 | ||||||||||||||||||||||||||
Performance share units expense (a) | 10 | 120 | 298 | ||||||||||||||||||||||||||
| Stock option expense | 1,720 | 1,813 | 667 | ||||||||||||||||||||||||||
| Sub-total stock-based awards: | $ | 4,715 | $ | 5,726 | $ | 4,678 | |||||||||||||||||||||||
| Cash settled awards | |||||||||||||||||||||||||||||
| Phantom share units expense | $ | (299) | $ | 3,929 | $ | 3,575 | |||||||||||||||||||||||
| Total compensation expense for long-term incentive awards | $ | 4,416 | $ | 9,655 | $ | 8,253 | |||||||||||||||||||||||
(a) Long-term incentive compensation expense reflects cumulative adjustments to reflect changes to the expected level of achievement of the respective grants.
Total unrecognized compensation cost related to unvested awards as of April 29, 2023 was $6,290 and is expected to be recognized over a weighted-average period of 1.85 years.
Note 13. Income Taxes - Continuing Operations
For Fiscal 2023, Fiscal 2022 and Fiscal 2019.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees. For Fiscal2021, we had no material revenue or expense in jurisdictions outside the United States other than India.
Impact of U.S. Tax Reform
On March 27, 2020, the Coronavirus Aid, Relief, and Fiscal 2019,Economic Security Act (The “CARES Act”) was enacted. We have analyzed the provisions, which provide for a technical correction to allow for full expensing of qualified leasehold improvements, modifications to charitable contribution and net operating loss limitations (“NOLs”), modifications to the deductibility of business interest expense, as well as Alternative Minimum Tax (“AMT”) credit acceleration. The most significant impact of the legislation for the Company was billed $2,033,094 and $2,029,763, respectively, by E&Yan income tax benefit of $7,164 for audit services, including (a) the annual audit (including quarterly reviews)carryback of NOLs to higher tax rate years, recorded in Fiscal 2021. As of April 29, 2023, we recognized a current income tax receivable for NOL carrybacks in prepaid and other current assets on the consolidated balance sheet. We received a $7,841 refund in Fiscal 2022, a $15,774 refund in Fiscal 2023 and expect to receive additional refunds of approximately $10,019.
Income tax benefits for Fiscal 2023, Fiscal 2022 and Fiscal 2021 are as follows:
| 52 weeks ended | ||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | — | $ | (1,900) | $ | (35,130) | ||||||||||||||
| State | 301 | 444 | (524) | |||||||||||||||||
| International | 252 | 266 | 147 | |||||||||||||||||
| Total Current | 553 | (1,190) | (35,507) | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | 458 | (12,075) | (5,803) | |||||||||||||||||
| State | — | 4,113 | (1,970) | |||||||||||||||||
| International | — | — | — | |||||||||||||||||
| Total Deferred | 458 | (7,962) | (7,773) | |||||||||||||||||
| Total US tax provision | $ | 1,011 | $ | (9,152) | $ | (43,280) | ||||||||||||||
101
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Reconciliation between the effective income tax rate and the federal statutory income tax rate is as follows:
| 52 weeks ended | ||||||||||||||||||||
| April 29, 2023 | April 30, 2022 | May 1, 2021 | ||||||||||||||||||
Federal statutory income tax rate (a) | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||||||||
| State income taxes, net of federal income tax benefit | 3.6 | 4.6 | 4.4 | |||||||||||||||||
| Permanent book / tax differences | (1.2) | (0.8) | (1.0) | |||||||||||||||||
| CARES Act NOL Carryback | — | — | 4.1 | |||||||||||||||||
| Valuation allowance | (24.6) | (12.3) | (4.2) | |||||||||||||||||
| Other, net | 0.1 | 0.4 | 0.2 | |||||||||||||||||
| Effective income tax rate | (1.1) | % | 12.9 | % | 24.5 | % | ||||||||||||||
The effective tax rate for Fiscal 2023 is significantly lower as compared to the prior year comparable period due to the valuation allowance benefit of changing the tax fiscal year in the prior year.
One percentage point on our Fiscal 2023 effective tax rate is approximately $891. The permanent book / tax differences are principally comprised of non-deductible officer's compensation, and non-deductible stock compensation.
We account for income taxes using the asset and liability method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards.
The significant components of our deferred taxes consisted of the following:
| As of | ||||||||||||||
| April 29, 2023 | April 30, 2022 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Estimated accrued liabilities | $ | 5,840 | $ | 7,141 | ||||||||||
| Inventory | 19,426 | 16,113 | ||||||||||||
| Stock-based compensation | 1,145 | 1,879 | ||||||||||||
| Insurance liability | 347 | 374 | ||||||||||||
| Operating lease liabilities | 65,471 | 75,950 | ||||||||||||
| Tax credits | 886 | 440 | ||||||||||||
| Goodwill | 8,314 | 9,214 | ||||||||||||
| Net operating losses | 70,503 | 53,149 | ||||||||||||
| Interest carryforwards | 7,246 | 2,390 | ||||||||||||
| Other | 2,456 | 2,620 | ||||||||||||
| Gross deferred tax assets | 181,634 | 169,270 | ||||||||||||
| Valuation allowance | (56,962) | (33,209) | ||||||||||||
| Net deferred tax assets | 124,672 | 136,061 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Intangible asset amortization | (23,555) | (27,160) | ||||||||||||
| Operating lease right-of-use assets | (63,201) | (73,035) | ||||||||||||
| LIFO inventory valuation | (33,999) | (29,917) | ||||||||||||
| Property and equipment | (5,755) | (7,379) | ||||||||||||
| Gross deferred tax liabilities | (126,510) | (137,491) | ||||||||||||
| Net deferred tax liability | $ | (1,838) | $ | (1,430) | ||||||||||
102
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
As of April 29, 2023, we had $0 of unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Balance at May 2, 2020 | $ | 52 | |||
| Additions for tax positions of the current period | — | ||||
| Additions for tax positions of prior periods | — | ||||
| Reductions due to settlements | — | ||||
| Other reductions for tax positions of prior periods | (52) | ||||
| Balance at May 1, 2021 | $ | — | |||
| Additions for tax positions of the current period | — | ||||
| Additions for tax positions of prior periods | — | ||||
| Reductions due to settlements | — | ||||
| Other reductions for tax positions of prior periods | — | ||||
| Balance at April 30, 2022 | $ | — | |||
| Additions for tax positions of the current period | — | ||||
| Additions for tax positions of prior periods | — | ||||
| Reductions due to settlements | — | ||||
| Other reductions for tax positions of prior periods | — | ||||
| Balance at April 29, 2023 | $ | — | |||
Our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of both April 29, 2023 and April 30, 2022, we had accrued $0 for net interest and penalties.
In assessing the realizability of the deferred tax assets, management considered whether it is more likely than not that some or all of the deferred tax assets would be realized. In evaluating our ability to utilize our deferred tax assets, we considered all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. As of April 29, 2023, we recorded a valuation allowance of $56,962 compared to $33,209 as of April 30, 2022.
As of April 29, 2023, we had state net operating loss carryforwards (“NOLs”) of approximately $407,294 which will begin to expire in 2026, state tax credit carryforwards totaling $230 which will begin to expire in 2024, federal tax credit carryforward of $886 which will begin to expire in 2040 and federal NOLs of approximately $234,951 which have an indefinite carryforward period.
As of April 29, 2023, we recorded $201 of foreign withholding tax related to repatriations of earnings from certain foreign subsidiaries. If additional earnings in these foreign subsidiaries were repatriated in the future, additional income and withholding tax expense would be incurred. Additional income and withholding tax expense on any future repatriated earnings is estimated to be less than $100.
We are subject to U.S. federal income tax, as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are primarily Fiscal 2018 and forward. Some earlier years remain open for a small minority of states.
Note 14. Legal Proceedings
We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
103
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Note 15. Commitments and Contingencies
We generally operate our physical bookstores pursuant to multi-year school management contracts under which a school designates us to operate the official school physical bookstore on campus and we provide the school with regular payments that represent a percentage of store sales and, in some cases, include a minimum fixed guaranteed payment. We account for these service agreements for our physical bookstores under lease accounting. We recognize lease assets and lease liabilities on the consolidated balance sheets for substantially all fixed lease arrangements (excluding variable obligations) with a term greater than twelve months. For additional information on lease expense and minimum fixed lease obligations, excluding variable commissions, see Part II - Item 8. Financial Statements and Supplementary Data - Note 8. Leases.
Purchase obligations, which includes information technology contracts, as of April 29, 2023 are as follows:
| Less Than 1 Year | $ | 12,254 | |||
| 1-3 Years | 4,341 | ||||
| 3-5 Years | 476 | ||||
| Total | $ | 17,071 | |||
Note 16. Selected Quarterly Financial Information (Unaudited)
A summary of quarterly financial information for the 52 weeks ended April 29, 2023 and April 30, 2022 is as follows:
13 weeks ended (a) | 52 weeks ended | |||||||||||||||||||||||||||||||||||||
| July 30, 2022 | October 29, 2022 | January 28, 2023 | April 29, 2023 | April 29, 2023 | ||||||||||||||||||||||||||||||||||
| Sales | $ | 254,674 | $ | 608,633 | $ | 438,054 | $ | 241,847 | $ | 1,543,208 | ||||||||||||||||||||||||||||
| Gross profit | $ | 56,005 | $ | 138,141 | $ | 97,011 | $ | 58,282 | $ | 349,439 | ||||||||||||||||||||||||||||
(Loss) income from continuing operations, net of tax (b)(c)(d) | $ | (50,322) | $ | 24,168 | $ | (22,134) | $ | (41,852) | $ | (90,140) | ||||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax | $ | (2,385) | $ | (2,024) | $ | (2,915) | $ | (4,398) | $ | (11,722) | ||||||||||||||||||||||||||||
| Net (loss) income | $ | (52,707) | $ | 22,144 | $ | (25,049) | $ | (46,250) | $ | (101,862) | ||||||||||||||||||||||||||||
| (Loss) earnings per common share: | ||||||||||||||||||||||||||||||||||||||
| Basic and Diluted | ||||||||||||||||||||||||||||||||||||||
| Continuing operations | $ | (0.96) | $ | 0.46 | $ | (0.42) | $ | (0.80) | $ | (1.72) | ||||||||||||||||||||||||||||
| Discontinued operations | (0.05) | (0.04) | (0.06) | (0.08) | (0.22) | |||||||||||||||||||||||||||||||||
| Total Basic and Diluted Earnings per share | $ | (1.01) | $ | 0.42 | $ | (0.48) | $ | (0.88) | $ | (1.94) | ||||||||||||||||||||||||||||
| Weighted average common shares outstanding - Basic: | 52,172 | 52,438 | 52,602 | 52,604 | 52,454 | |||||||||||||||||||||||||||||||||
| Weighted average common shares outstanding - Diluted: | 52,172 | 53,195 | 52,602 | 52,604 | 52,454 | |||||||||||||||||||||||||||||||||
(a) For information related to quarterly seasonality and other variance components, see Part II - Item 7. Management Discussion and Analysis - Results of Operations and Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies - Seasonality.
(b) (Loss) income from continuing operations includes $375, $260, $4,127, and $5,341 of restructuring and other charges for the 13 weeks ended July 30, 2022, October 29, 2022, January 28, 2023 and April 29, 2023, respectively, and $10,103 for the 52 weeks ended April 29, 2023.
(c) (Loss) income from continuing operations includes an impairment loss (non-cash) of $6,008 for the 13 weeks ended January 28, 2023 and 52 weeks ended April 29, 2023.
(d) (Loss) income from continuing operations includes $7,011 and $22,683 of interest expense for the 13 and 52 weeks ended April 29, 2023, respectively. Interest expense increased by $4,724 and $12,587 primarily due to higher borrowings and higher interest rates compared to the prior year.
104
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
13 weeks ended (a) | 52 weeks ended | |||||||||||||||||||||||||||||||||||||
| July 31, 2021 | October 30, 2021 | January 29, 2022 | April 30, 2022 | April 30, 2022 | ||||||||||||||||||||||||||||||||||
| Sales | $ | 232,491 | $ | 618,698 | $ | 393,368 | $ | 251,177 | $ | 1,495,734 | ||||||||||||||||||||||||||||
| Gross profit | $ | 52,999 | $ | 138,653 | $ | 79,029 | $ | 72,151 | $ | 342,832 | ||||||||||||||||||||||||||||
(Loss) income from continuing operations, net of tax (b)(c)(d) | $ | (42,248) | $ | 24,982 | $ | (34,994) | $ | (9,299) | $ | (61,559) | ||||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax | $ | (1,380) | $ | (2,454) | $ | (1,807) | $ | (1,657) | $ | (7,298) | ||||||||||||||||||||||||||||
Net (loss) income ( | $ | (43,628) | $ | 22,528 | $ | (36,801) | $ | (10,956) | $ | (68,857) | ||||||||||||||||||||||||||||
| (Loss) earnings per common share: | ||||||||||||||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||||||||||||||
| Continuing operations | $ | (0.82) | $ | 0.48 | $ | (0.67) | $ | (0.18) | $ | (1.19) | ||||||||||||||||||||||||||||
| Discontinued operations | (0.03) | (0.05) | (0.04) | (0.03) | (0.14) | |||||||||||||||||||||||||||||||||
| Total Basic Earnings per share | $ | (0.85) | $ | 0.43 | $ | (0.71) | $ | (0.21) | $ | (1.33) | ||||||||||||||||||||||||||||
| Weighted average common shares outstanding - Basic: | 51,474 | 51,666 | 52,003 | 52,046 | 51,797 | |||||||||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||||||||||||||
| Continuing operations | $ | (0.82) | $ | 0.46 | $ | (0.67) | $ | (0.18) | $ | (1.19) | ||||||||||||||||||||||||||||
| Discontinued operations | (0.03) | (0.05) | (0.04) | (0.03) | (0.14) | |||||||||||||||||||||||||||||||||
| Total Diluted Earnings per share | $ | (0.85) | $ | 0.41 | $ | (0.71) | $ | (0.21) | $ | (1.33) | ||||||||||||||||||||||||||||
| Weighted average common shares outstanding - Diluted: | 51,474 | 54,568 | 52,003 | 52,046 | 51,797 | |||||||||||||||||||||||||||||||||
(a) For information related to quarterly seasonality and other variance components, see Part II - Item 7. Management Discussion and Analysis - Results of Operations and Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies - Seasonality.
(b) (Loss) income from continuing operations includes $1,905, $1,116, $46, and $(2,123) of restructuring and other charges for the 13 weeks ended July 31, 2021, October 30, 2021, January 29, 2022 and April 30, 2022, respectively, and $944 for the 52 weeks ended April 30, 2022.
(c) (Loss) income from continuing operations also includes an impairment loss (non-cash) of $6,411 for the 13 weeks ended January 29, 2022 and 52 weeks ended April 30, 2022.
(d) (Loss) income from continuing operations includes $(9,608) and $(9,152) of an income tax benefit for the 13 and 52 weeks ended April 30, 2022, respectively. The income tax benefit was primarily due to the change in pre-tax loss and the change in the assessment of the realization of deferred tax assets, driven by a change in our tax year.
Note 17. Subsequent Events
May 2023 Debt Amendments
On May 24, 2023, subsequent to quarter end, we amended our existing Credit Agreement to (i) increase the applicable margin with respect to the interest rate under the Credit Agreement to 3.75% per annum, in the case of interest accruing based on SOFR, and 2.75%, in the case of interest accruing based on an alternative base rate, in each case, without regard to a pricing grid, (ii) defer the reduction of advance rates used to calculate our borrowing capacity by an amount equal to 500 basis points previously required on May 31, 2023 to September 1, 2023, (iii) require cash flow reporting and variance testing commencing June 3, 2023 and (iv) defer partial prepayment of the term loan from the DSS segment sale proceeds to September 1, 2023. For additional information related to the Credit Agreement amendment, see the Company’s Report on Form 8-K dated May 24, 2023 and filed with the SEC on May 31, 2023.
July 2023 Debt Amendments
On July 28, 2023, we amended our existing Credit Agreement to (i) extend the maturity date of the Credit Agreement to December 28, 2024, (ii) reduce advance rates with respect to the borrowing base by 1000 basis points on September 2, 2024 (in lieu of the reductions previously contemplated for September 2023), (iii) subject to the conditions set forth in such amendment, add a CARES Act tax refund claim to the borrowing base, from April 1, 2024 through July 31, 2024, (iv) amend the financial maintenance covenant to require Availability (as defined in the Credit Agreement) at all times greater than the greater of (x) 10% of the Aggregate Loan Cap (as defined in the Credit Agreement) and (y) (A) $32,500 minus, subject to the conditions set
105
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
forth in such amendment, (B) (a) $7,500 for the period of April 1, 2024 through and including April 30, 2024, (b) $2,500 for the period of May 1, 2024 through and including May 31, 2024 and (c) $0 at all other times, (v) add a minimum Consolidated EBITDA (as defined in the Credit Agreement) financial maintenance covenant, and (vi) amend certain negative and affirmative covenants and add certain additional covenants, all as more particularly set forth in such amendment. The amendment also requires that we appoint a Chief Restructuring Officer and that, by August 11, 2023, we (i) appoint two independent members to the board of directors of the Company from prospective candidates that have been previously disclosed to the Administrative Agent and the Lenders and (ii) appoint a committee of the board of directors of the Company to consist of three board members (two of whom will be the new independent directors). The committee’s responsibilities will include, among other things, to explore, consider, solicit expressions of interest or proposals for, respond to any communications, inquiries or proposals regarding, and advise as to all strategic alternatives to effect a “Specified Liquidity Transaction” (as defined in the Credit Agreement). There can be no guarantee or assurances that any such transaction or transactions be consummated. We must pay (i) a fee of 0.50% of the outstanding principal amount of the commitments under the Credit Agreement March 2023 amendment (as defined in the Credit Agreement) on the closing date (in lieu of the deferred fee previously contemplated in connection with the March 2023 amendment (as defined in the Credit Agreement)) and (ii) a fee of 1.00% of the outstanding principal amount of the commitments under the Credit Agreement as of the closing date on the earlier to occur of September 2, 2024 and an Event of Default (as defined in the Credit Agreement).
On July 28, 2023, we amended our Term Loan to (i) extend the maturity date of the Term Loan Agreement to April 7, 2025, (ii) allow for interest to be paid in kind until September 2, 2024, (iii) amend the 1.50% anniversary fee to recur on June 7 of each year that the Term Loan Agreement remains outstanding, with 2024 fee deferred to the earlier of September 2, 2024 and the Termination Date (as defined in the Term Loan Agreement) and (iv) amend certain negative covenants and affirmative and add certain additional covenants. We must pay a fee of $50,000 to the lenders under the Term Loan Agreement on the earlier of September 2, 2024 and the Termination Date (as defined in the Term Loan Agreement).
106
Schedule II—Valuation and Qualifying Accounts
Receivables Valuation and Qualifying Accounts
(In thousands)
| Balance at beginning of period | Charge (recovery) to costs and expenses | Write-offs | Balance at end of period | |||||||||||||||||||||||
| Allowance for Doubtful Accounts | ||||||||||||||||||||||||||
| April 29, 2023 | $ | 2,243 | $ | 575 | $ | (1,662) | $ | 1,156 | ||||||||||||||||||
| April 30, 2022 | $ | 3,594 | $ | 2,750 | $ | (4,101) | $ | 2,243 | ||||||||||||||||||
| May 1, 2021 | $ | 1,986 | $ | 4,600 | $ | (2,992) | $ | 3,594 | ||||||||||||||||||
| Balance at beginning of period | Addition Charged to Costs | Deductions | Balance at end of period | |||||||||||||||||||||||
| Sales Returns Reserves | ||||||||||||||||||||||||||
| April 29, 2023 | $ | 2,723 | $ | 122,831 | $ | (123,128) | $ | 2,426 | ||||||||||||||||||
| April 30, 2022 | $ | 3,331 | $ | 123,559 | $ | (124,167) | $ | 2,723 | ||||||||||||||||||
| May 1, 2021 | $ | 5,063 | $ | 145,595 | $ | (147,327) | $ | 3,331 | ||||||||||||||||||
All other schedules are omitted because the conditions requiring their filing do not exist, or because the required information is provided in the consolidated financial statements, including the notes thereto.
107
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial disclosure.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management of the Company established and maintains disclosure controls and procedures that are designed to ensure that material information relating to the Company and its subsidiaries required to be performeddisclosed in the reports that are filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company’s management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Exchange Act), under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. Based on management’s evaluation, and considering the items noted below, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of April 29, 2023.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the independent auditorboard of directors, management and other personnel, to be ableprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: (i) pertain to form an opinionthe maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and (iii) that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements, (b)statements.
Under the auditsupervision and with the participation of management, including the Chief Executive Officer and Principal Financial Officer, the Company conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 framework). Based upon the Company’s evaluation under this framework, management concluded that the Company’s internal control over financial reporting was effective as of April 29, 2023.
The effectiveness of internal control over financial reporting was audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report included on page 111.
(c) consultationChanges in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting, with the exception of the remediation of the material weakness previously identified, during the most recent quarter ended April 29, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
108
MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The management of Barnes & Noble Education, Inc. is responsible for the contents of the Consolidated Financial Statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The Consolidated Financial Statements necessarily include amounts based on judgments and estimates. Financial information elsewhere in the Annual Report is consistent with that in the Consolidated Financial Statements.
The Company maintains a comprehensive accounting system, which includes controls designed to provide reasonable assurance as to the integrity and reliability of the financial records and the protection of assets. An internal audit staff is employed to regularly test and evaluate both internal accounting or disclosure treatmentcontrols and operating procedures, including compliance with the Company’s Code of transactions or events, (d) international statutory audits,Business Conduct and (e) services that onlyEthics. The Audit Committee of the Board of Directors, composed of directors who are not members of management, meets regularly with management, the independent auditor reasonably canregistered public accountants and the internal auditors to ensure that their respective responsibilities are properly discharged.
Ernst & Young LLP and the internal auditors have full and free independent access to the Audit Committee. The role of Ernst & Young LLP, an independent registered public accounting firm, is to provide an objective examination of the Consolidated Financial Statements and the underlying transactions in accordance with the standards of the Public Company Accounting Oversight Board. The report of Ernst & Young LLP appears on page 111 of this report on Form 10-K for the year ended April 29, 2023.
OTHER INFORMATION
The Company has included the Section 302 certifications of the Chief Executive Officer and the Principal Financial Officer of the Company as Exhibits 31.1 and 31.2 to its Annual Report on Form 10-K for Fiscal 2023 filed with the Securities and Exchange Commission, and the Company will submit to the New York Stock Exchange a certificate of the Chief Executive Officer of the Company certifying that he is not aware of any violation by the Company of New York Stock Exchange corporate governance listing standards.
109
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Barnes & Noble Education, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Barnes & Noble Education, Inc. and subsidiaries’ internal control over financial reporting as of April 29, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Barnes & Noble Education, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of April 29, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of April 29, 2023 and April 30, 2022, the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended April 29, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated July 31, 2023 which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as services associatedwe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with SEC registrationgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements periodic reportsin accordance with generally accepted accounting principles, and other documentsthat receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Iselin, New Jersey
July 31, 2023
110
Item 9B. OTHER INFORMATION
None.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our executive officers is incorporated by reference herein from the discussion under Part I - Item 1. Business - Executive Officers of this Annual Report on Form 10-K. The remaining information with respect to directors, executive officers, the code of ethics and corporate governance of the Company is incorporated herein by reference to the Company’s definitive Proxy Statement relating to the Company’s 2023 Annual Meeting of Stockholders to be filed with the SEC and reviewwithin 120 days of draft responsesthe Company’s fiscal year ended April 29, 2023 (the “Proxy Statement”).
The information with respect to SEC comment letters.
Audit-Related Fees. For Fiscal 2020 and Fiscal 2019,compliance with Section 16(a) of the Company was billed $33,300 and $41,700, respectively,Exchange Act is incorporated herein by E&Y for sales audits.
Tax Fees. For Fiscal 2020 and Fiscal 2019,reference to the Company was billed $1,500 and $20,700, respectively,Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information with respect to executive compensation is incorporated herein by E&Y for services relatedreference to consultation on tax matters.
Pre-Approval Policies and Procedures
the Proxy Statement.
The Audit Committee has adopted policies and procedures for pre-approving all non-audit work performedinformation with respect to compensation of directors is incorporated herein by its auditors. reference to the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The policyfollowing table sets forth equity compensation plan information as of April 29, 2023:
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column (a)) | |||||||||||||||||
| (a) | (b) | (c) | ||||||||||||||||||
| Equity compensation plans approved by security holders | 3,865,121 | $ | 5.23 | 1,990,014 | ||||||||||||||||
| Equity compensation plans not approved by security holders | N/A | N/A | N/A | |||||||||||||||||
| Total | 3,865,121 | $ | 5.23 | 1,990,014 | ||||||||||||||||
The information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the procedures and conditions for both pre-approval of audit-related servicesProxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information with respect to be performed by its auditors (assurancecertain relationships and related services that are reasonably relatedtransactions and director independence is incorporated herein by reference to the performanceProxy Statement.
111
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information with respect to principal accountant fees and services is incorporated herein by reference to the Proxy Statement.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
1.Consolidated Financial Statements of Barnes & Noble Education, Inc.:
Included in Part II of this Report:
Consolidated Statements of Operations for the auditors’ reviewyears ended April 29, 2023, April 30, 2022, and May 1, 2021
Consolidated Balance Sheets as of April 29, 2023 and April 30, 2022
Consolidated Statements of Cash Flows for the years ended April 29, 2023, April 30, 2022, and May 1, 2021
Consolidated Statements of Equity for the years ended April 29, 2023, April 30, 2022, and May 1, 2021
Notes to Consolidated Financial Statements, for the years ended April 29, 2023, April 30, 2022, and May 1, 2021
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on the consolidated financial statements of Barnes & Noble Education, Inc. for the years ended April 29, 2023, April 30, 2022, and May 1, 2021
2.Financial Statement Schedules of Barnes & Noble Education, Inc.:
Included in Part II of this report: Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not significant or not required, or because the required information is included in the financial statements or that are traditionally performed by the independent auditor) and specific pre-approval for all other services for the current fiscal year consistent with the SEC’s rules on auditor independence. Each year, the Audit Committee approves the engagement of the independent auditor and the projected fees for audit services for the then current fiscal year.
26
EXHIBIT INDEX
| Exhibit Number | Exhibit Description | |||||||
| Articles of Incorporation and By-Laws. | ||||||||
| ||||||||
| Instruments Defining the Rights of Securities; Description of Registrant’s Securities. | ||||||||
| Material contracts. | ||||||||
112
113
114
| Other. | ||||||||
| 101.INS | XBRL Instance Document | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
27
Item 16. FORM 10-K SUMMARY
None.
115
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the RegistrantBarnes & Noble Education, Inc. has duly caused this report to be signed on ourits behalf by the undersigned, thereunto duly authorized.
| BARNES & NOBLE EDUCATION, INC. | ||||||||||||||
| (Registrant) | ||||||||||||||
| By: | /s/ Michael P. Huseby | |||||||||||||
| Michael P. Huseby | ||||||||||||||
| Chief Executive Officer | ||||||||||||||
| Date: July 31, 2023 | ||||||||||||||
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Reportreport has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the dates indicated.
| Name | Title | Date | ||||||||||||
|
(Principal Executive Officer and Principal Financial Officer) |
| ||||||||||||
| Michael P. Huseby | ||||||||||||||
| ||||||||||||||
|
|
| ||||||||||||
| Seema C. Paul | ||||||||||||||
| ||||||||||||||
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| ||||||||||||
| John R. Ryan | ||||||||||||||
| ||||||||||||||
|
|
| ||||||||||||
| Emily C. Chiu | ||||||||||||||
| ||||||||||||||
| Director |
| ||||||||||||
| Mario R. Dell'Aera, Jr. | ||||||||||||||
| Director | July 31, 2023 | ||||||||||||
Daniel A. DeMatteo |
|
| ||||||||||||
| Director | July 31, 2023 | ||||||||||||
David G. Golden |
|
| ||||||||||||
| ||||||||||||||
| Director |
| ||||||||||||
| Kathryn Eberle Walker | ||||||||||||||
| ||||||||||||||
| Director |
| ||||||||||||
| Rory Wallace | ||||||||||||||
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| Director |
| ||||||||||||
| Denise Warren | ||||||||||||||
| ||||||||||||||
|
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28
116