SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended AugustMay 2, 19971998
OR
/ /|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number: 1-12302
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BARNES & NOBLE, INC.
- ---------------------------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1196501
- ------------------------------- --------------------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 Fifth Avenue, New York, NY 10011
- ---------------------------------------- ---------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(212) 633-3300
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X|X| No ----- -----|_|
Number of shares of $.001 par value common stock outstanding as of AugustMay 29,
1997: 33,877,189 (before giving effect to the two-for-one stock
split in the form of a stock dividend payable Spetmber 22, 1997 to shareholders
of record on September 2, 1997)1998: 68,242,752.
BARNES & NOBLE, INC. AND SUBSIDIARIES
AugustMay 2, 19971998
Index to Form 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Operations - For the 13 weeks ended
May 2, 1998 and May 3, 1997 .................................... 3
Consolidated Balance Sheets - May 2, 1998, May 3, 1997 and
January 31, 1998 ............................................... 4
Consolidated Statements of Cash Flows - For the 13 weeks ended
May 2, 1998 and May 3, 1997..................................... 6
Notes to Consolidated Financial Statements........................ 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9
PART II - OTHER INFORMATION.................................................
Item 1. Legal Proceedings................................................. 13
Item 6. Exhibits and Reports on Form 8-K.................................. 13 weeks and the 26 weeks
ended August 2, 1997 and July 27, 1996................................... 3
Consolidated Balance Sheets - August 2, 1997, July 27, 1996 and February 1,
1997..................................................................... 4
Consolidated Statements of Cash Flows - For the 26 weeks ended August 2,
1997 and July 27, 1996................................................... 6
Notes to Consolidated Financial Statements................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 9
PART II - OTHER INFORMATION............................................................ 15
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(thousands of dollars, except per share data)
(unaudited)
- -------------------------------------------------------------------------------------------------------------------------
13 weeks ended 26 weeks ended
-------------------------------- --------------------------------
August 2, July 27, August 2, July 27,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues $ 617,748 524,321 1,213,479 1,033,07613 weeks ended
----------------------------
May 2, May 3,
1998 1997
------------ ------------
Revenues ......................................... $ 666,344 595,731
Cost of sales, buying and
occupancy 398,616 340,236 787,240 673,712
------------ ------------ ------------ ------------
Gross profit 219,132 184,085 426,239 359,364
------------ ------------ ------------ ------------
Selling and administrative
expenses 126,186 105,185 246,426 209,412
Rental expense 63,212 54,149 125,376 107,264
Depreciation and amortization 18,926 14,266 36,673 27,855
Pre-opening expenses 3,367 4,863 7,221 9,352
------------ ------------ ------------ ------------
Operating profit 7,441 5,622 10,543 5,481
Interest (net of interest income of
$107, $86, $219 and $277,
respectively) and amortization of
deferred financing fees 9,756 10,169 19,404 18,513
------------ ------------ ------------ ------------
Loss before benefit for income taxes (2,315) (4,547) (8,861) (13,032)
Benefit for income taxes (949) (1,826) (3,634) (4,918)
------------ ------------ ------------ ------------
Net loss $ (1,366) (2,721) (5,227) (8,114)
============ ============ ============ ============
Net loss per common share* $ (0.02) (0.04) (0.08) (0.12)
Weighted average common shares outstanding* 66,820,000 66,010,000 66,630,000 65,972,000
* Reflects the effect of the two-for-one stock split in the formsales and occupancy ...................... 492,114 448,217
------------ ------------
Gross profit ................................. 174,230 147,514
------------ ------------
Selling and administrative expenses .............. 149,608 122,811
Depreciation and amortization .................... 21,923 17,747
Pre-opening expenses ............................. 2,604 3,854
------------ ------------
Operating profit ............................. 95 3,102
Interest (net of a stock
dividend payable September 22, 1997 to shareholdersinterest income of record on September 2,
1997.$105 and $112,
respectively) and amortization of deferred
financing fees ............................... 5,750 9,648
------------ ------------
Loss before benefit for income taxes ...... (5,655) (6,546)
Benefit for income taxes ......................... (2,320) (2,685)
------------ ------------
Net loss ..................................... $ (3,335) (3,861)
============ ============
Net loss per common share
Basic ..................................... $ (0.05) (0.06)
Diluted ................................... $ (0.05) (0.06)
Weighted average common shares outstanding
Basic ..................................... 68,101,000 66,441,000
Diluted ................................... 68,101,000 66,441,000
See accompanying notes to consolidated financial statements.
3
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars)dollars, except per share data)
- -------------------------------------------------------------------------------------------------
AugustMay 2, July 27, February 1,May 3, January 31,
1998 1997 1996 19971998
---------- ---------- ----------
(unaudited)
ASSETS
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 8,768 16,557 12,44710,801 10,347 12,697
Receivables, net 46,970 44,462 45,558................................................... 29,997 40,433 43,858
Merchandise inventories 733,283 682,703 732,203............................................ 856,582 731,483 852,107
Prepaid expenses and other current assets 86,930 51,245 76,747.......................... 99,178 76,654 68,902
---------- ---------- ----------
Total current assets 875,951 794,967 866,955............................................. 996,558 858,917 977,564
---------- ---------- ----------
Property and equipment:
Land and land improvements ......................................... 681 681 681
Buildings and leasehold improvements 341,099 306,726 326,392............................... 352,083 333,867 347,598
Fixtures and equipment 321,289 239,304 289,684............................................. 392,814 307,575 378,058
---------- ---------- ----------
663,069 546,711 616,757745,578 642,123 726,337
Less accumulated depreciation and amortization
212,294 158,827 181,983265,650 198,151 244,207
---------- ---------- ----------
Net property and equipment 450,775 387,884 434,774................................ 479,928 443,972 482,130
---------- ---------- ----------
Intangible assets, net 91,885 95,170 93,494................................................. 89,423 92,680 90,237
Other noncurrent assets 59,180 59,351 51,424................................................ 40,704 51,601 41,240
---------- ---------- ----------
Total assets $1,477,791 1,337,372 1,446,647....................................................... $1,606,613 1,447,170 1,591,171
========== ========== ==========
(Continued)
4
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars)dollars, except per share data)
- ------------------------------------------------------------------------------------------------------
AugustMay 2, July 27, February 1,May 3, January 31,
1998 1997 1996 19971998
---------- ---------- ----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility .......................................... $ 80,500 110,000 40,000
Current portion of long-term debt 7,500 -- 79,300 --
Accounts payable 394,043 323,045 373,340................................................... 432,711 364,166 459,795
Accrued liabilities 191,250 182,598 240,923................................................ 215,524 209,160 253,050
---------- ---------- ----------
Total current liabilities 673,293 615,643 654,263....................................... 648,235 652,626 712,845
---------- ---------- ----------
Long-term debt 282,500......................................................... 358,600 290,000 290,000284,800
Other long-term liabilities 53,932 38,325 46,395............................................ 65,382 50,570 61,771
Shareholders' equity:
Common stock; $.001 par value; 100,000,000
shares authorized; 67,579,454, 66,029,42668,235,489, 66,506,674 and
66,376,25067,921,830 shares issued and outstand-
ing, respectively*outstanding,
respectively .................................................... 68 66 6667 68
Additional paid-in capital* 463,567 443,019 446,265capital ......................................... 474,836 448,110 468,860
Retained earnings (deficit) 4,431 (49,681) 9,658.................................................. 59,492 5,797 62,827
---------- ---------- ----------
Total shareholders' equity 468,066 393,404 455,989...................................... 534,396 453,974 531,755
---------- ---------- ----------
Commitments and contingencies
---------- ---------- ----------
Total liabilities and shareholders' equity $1,477,791 1,337,372 1,446,647......................... $1,606,613 1,447,170 1,591,171
========== ========== ==========
*Reflects the effect of the two-for-one stock split in the form of a
stock dividend payable September 22, 1997 to shareholders of record on
September 2, 1997.
See accompanying notes to consolidated financial statements.
5
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(thousands of dollars)
(unaudited)
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2613 weeks ended
---------------------------------
August----------------------------
May 2, May 3,
1998 1997
July 27, 1996
------------ -------------------- --------
Cash flows from operating activities:
Net loss ............................................................................... $ (5,227) (8,114)(3,335) (3,861)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization 37,667 28,708.................................................... 22,010 18,243
Loss on disposal of property and equipment ....................................... 205 54 319
Increase in other long-term liabilities for scheduled rent
increases in long-term leases 8,212 7,461................................................ 3,565 4,123
Changes in operating assets and liabilities, net (42,321) (55,698)
------------ ------------................................. (85,452) (34,941)
-------- --------
Net cash flows from operating activities (1,615) (27,324)
------------ ------------..................................... (63,007) (16,382)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (51,119) (94,718).................................................... (19,314) (26,191)
Proceeds from sales of property and equipment .......................................... 200 --
169
Net increasedecrease (increase) in other noncurrent assets (8,749) (9,729)
------------ ------------..................................... 449 (673)
-------- --------
Net cash flows from investing activities (59,868) (104,278)
------------ ------------............................................ (18,665) (26,864)
-------- --------
Cash flows from financing activities:
Net increase in revolving credit facility 40,500 37,600
Proceeds from issuance of long-term debt -- 100,000.............................................. 73,800 39,300
Proceeds from exercise of common stock options including related
tax benefits 17,304 1,283
------------ ------------........................................................................ 5,976 1,846
-------- --------
Net cash flows from financing activities 57,804 138,883
------------ ------------.......................................... 79,776 41,146
-------- --------
Net (decrease) increasedecrease in cash and cash equivalents (3,679) 7,281.................................................. (1,896) (2,100)
Cash and cash equivalents at beginning of period ........................................... 12,697 12,447
9,276
------------ -------------------- --------
Cash and cash equivalents at end of period ................................................. $ 8,768 16,557
============ ============10,801 10,347
======== ========
Changes in operating assets and liabilities, net:
Receivables, net ....................................................................... $ (1,412) 4,55713,861 5,125
Merchandise inventories (1,080) 57,648................................................................ (4,475) 720
Prepaid expenses and other current assets (10,183) (1,703).............................................. (30,276) 93
Accounts payable and accrued liabilities (29,646) (116,200)
------------ ------------............................................... (64,562) (40,879)
-------- --------
Changes in operating assets and liabilities, net $ (42,321) (55,698)
============ ============.................................... $(85,452) (34,941)
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest ............................................................................ $ 18,700 16,9655,171 3,673
Income taxes ........................................................................ $ 17,839 14,55314,918 13,331
See accompanying notes to consolidated financial statements.
6
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 2613 weeks ended AugustMay 2, 19971998 and July 27, 1996May 3, 1997
(thousands of dollars)
(unaudited)
The unaudited consolidated financial statements include the accounts
of Barnes & Noble, Inc. and its wholly-ownedwholly owned subsidiaries (collectively, the
Company).
In the opinion of the Company's management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
its consolidated financial position as of AugustMay 2, 19971998 and the results of its
operations and its cash flows for the 2613 weeks then ended. These consolidated
financial statements are condensed and therefore do not include all of the
information and footnotes required by generally accepted accounting
principles. The consolidated financial statements should be read in
conjunction with the Company's annual report on Form 10-K for the 5352 weeks
ended February 1, 1997.January 31, 1998. The Company follows the same accounting policies in
preparation of interim reports. Certain prior year amounts have been
reclassified to conform to the 1998 presentation.
Due to the seasonal nature of the business, the results of operations
for the 2613 weeks ended AugustMay 2, 19971998 are not indicative of the results to be
expected for the 52 weeks ending January 31, 1998.30, 1999.
(1) Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market.
Cost is determined using the retail inventory method on the first-in,
first-out (FIFO) basis for 81%84%, 79% and 79%83% of the Company's merchandise
inventories as of AugustMay 2, 1998, May 3, 1997 July 27, 1996 and February 1, 1997,January 31, 1998, respectively.
The remaining merchandise inventories are valued on the last-in, first-out
(LIFO) method.
If substantially all of the merchandise inventories currently valued
at LIFO costs were valued at current costs, merchandise inventories would
increase approximately $8,300, $6,426$4,352, $8,800 and $8,800$5,102 as of AugustMay 2, 1998, May 3,
1997 July 27,
1996 and February 1, 1997,January 31, 1998, respectively.
(2) Income Taxes
The tax provisions for the 26 weeksperiods ended AugustMay 2, 19971998 and July 27,
1996May 3, 1997
are based upon management's estimate of the Company's annualized effective tax
rate.
(3) Shareholders' Equity
On August 21, 1997,Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. The pronouncement requires all costs related to the development
of internal use software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized
over the estimated useful life of the software. In accordance with SOP 98-1,
the Company declared a two-for-one stock split inwill adopt its provisions effective for the form of a stock dividend, to be distributed on September 22, 1997, to
shareholders of record as of September 2, 1997. The number of shares issued at
August 2, 1997 after giving effect to the split was 67,579,454 common shares
(33,789,727 common shares before the split). All common share and per share
amounts have been adjusted to give retroactive effect to this split.fiscal year ending
January 29,
7
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 2613 weeks ended AugustMay 2, 19971998 and July 27, 1996May 3, 1997
(thousands of dollars)
(unaudited)
During the 26 weeks ended August 2, 1997, options2000. Adoption is not expected to purchase
approximately 1,339,164 shares (669,582 before the split) ofhave a material effect on the Company's
Common Stock were granted, at market valueconsolidated financial statements as the Company's policies are substantially
in compliance with SOP 98-1.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on datethe Costs of grant,Start-Up Activities"
(SOP 98-5). SOP 98-5 requires an entity to employees underexpense all start-up activities (as
defined) as incurred. In accordance with SOP 98-5, the 1996 Incentive Plan.
(4) Earnings Per Common ShareCompany will adopt its
provisions effective for the fiscal year ending January 29, 2000. The impact
of adoption of SOP 98-5 is not expected to have a material effect on the
Company's consolidated financial statements.
In February, 1997 the Financial Accounting Standards Board issuedCompany adopted Statement of Financial Accounting
Standards No. 128 , "Earnings per Share" ("SFAS No. 128")(SFAS 128). Under SFAS No. 128, the
presentation of Primaryprimary and Fully
Diluted Earningsfully diluted earnings per Share will beshare is replaced by
basic and diluted earnings per share. Basic and Diluted Earningsearnings per Share. The presentation of Basic Earnings per Sharecommon share includes
no potentialdilutive effect of common stock equivalents and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per common share reflects, in
periods in which they have a dilutive effect, the impact of common shares
issuable upon exercise of stock options. For the first quarter of 1998 and
thus no dilution. In accordance with SFAS 128,1997 incremental shares attributed to outstanding stock options were not
included because the Company
will adoptresult would be anti-dilutive. All historical data
weighted average share and per share amounts have been restated to reflect the
provisionsadoption of SFAS No. 128 effective January 31, 1998 and
restate all prior periods to conform to this new pronouncement. Adoption is not
expected to have any material effect on the Company's reported Earnings per
Share.128.
8
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The primary sources of cash for seasonal working capital requirements and
capital investments are the Company's cash are net cash flows from operating
activities, funds available under its revolvingsenior credit facility and short-term
vendor financing.
CashThe Company's cash and cash equivalents as of August 2, 1997 were $8.8 million in comparison
to $16.6$10.8 million as of July 27, 1996. The Company used cash primarily for
investments in new Barnes & Noble stores, its new wholly-owned Internet
subsidiary, BarnesandNoble.com Inc., which began operations in May 1997, and its
second investment in Chapters Inc., the largest bookseller in Canada. In
addition, the Company continued to invest in technology system enhancements.
During the twelve months ended August 2, 1997, the Company's emphasis on
inventory turnover, expanding gross margins and improving operating leverage was
reflected in its positive net1998
compared with $10.3 million as of May 3, 1997. Consolidated cash flows from
operating activities, (netnet of capital investments) of $17.0expenditures, for the last twelve months
rose to $7.6 million, which compared toup from a deficit of ($202.7)8.0) million during the corresponding prior-yearprior
period. During 1997's first half,the 13 weeks ended May 2, 1998, consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA) increased 41.6%$1.2 million
to $47.2$22.0 million from $33.3$20.8 million. During the first quarter, the Company's
wholly owned subsidiary, barnesandnoble.com, reported a loss before interest,
taxes, depreciation and amortization of ($12.2) million reflecting continuing
strategic investment spending and increased operating costs. For the first
quarter, EBITDA in the retail business increased $13.1 million to $34.2
million from $21.1 million during the prior-yearprior year period, reflecting increasedhigher
gross margins attributable to lower merchandise costs and a better sales mix, plus improvedimproving expense leverage mostly(primarily in Barnes & Noble
"super"
store operating, rental and pre-opening costs. Correspondingly,costs).
Merchandise inventories increased $125.1 million to $856.6 million as of May
2, 1998, compared with $731.5 million as of May 3, 1997. The increase
supported the Company's year-to-date EBITDA margin increasedrevenue growth of 11.9% and a planned expansion in the
Company's distribution center inventory to 3.9%over 600,000 titles available for
immediate shipping to both online customers and the retail stores.
The Company's investing activities consist principally of revenues from 3.2%capital expenditures
for new store construction, system enhancements, store relocations/remodels
and capital expenditures incurred by barnesandnoble.com. Capital expenditures
totaled $19.3 million and $26.1 million during the 13 weeks ended May 2, 1998
and May 3, 1997, respectively. Capital expenditures during the first quarter
of 1998 reflected the opening of 14 fewer new Barnes & Noble stores compared
with the same period lastof the prior year.
Merchandise inventories increased $50.6 millionThe ratio of debt to $733.3equity was 0.67:1.00 as of May 2, 1998, compared with
0.81:1.00 as of May 3, 1997. This significant improvement during a period of
record growth is the result of the Company's continued positive cash flows,
expanded gross margin, improved operating leverage and strong emphasis on
working capital management.
Total debt decreased 2.9% to $358.6 million as of AugustMay 2, 19971998 from $682.7$369.3
million as of July 27, 1996. The 7.4% increase in
merchandise inventories compared favorably to the Company's total revenue and
retail square footage growth of 17.5% and 17.6%, respectively. With better
in-stock positions year-over-year and inventory turnover of 2.5 times, the
Company reduced the average inventory per Barnes & Noble "super" store more
than 5% by the end of 1997's second quarter in comparison to one year ago.
Capital expenditures totaled $51.1 million and $94.7 million during the 26
weeks ended August 2, 1997 and July 27, 1996, respectively. Year-to-date
capital expenditures in the Company's retail stores decreased with six fewer
Barnes & Noble "super" store openings and lower technology expenditures
compared to the same period last year.
Total debt decreased 7.4% to $370.5 million as of August 2, 1997 from $400.0
million as of July 27, 1996.May 3, 1997. Average borrowings under the Company's senior
credit facilities increased $6.7facility were $347.7 million and $355.2 million during the first half of13 weeks
ended May 2, 1998 and May 3, 1997, in
comparison to the last-year period,respectively, and peaked at $194.7$380.8 million
and $230.5$380.2 million during the same periods, respectively.periods. The reductionreduced average borrowings,
which were accomplished during a period of 11.9.% revenue growth and strategic
investment in total debt
outstanding at August 2, 1997barnesandnoble.com, reflect the Company's commitment to
working capital management and the lower peak were achieved despite the
17.6% increase in retail square footage and the 7.4% increase in merchandise
inventories during the first half.expense controls.
Based upon the Company's current operating levels and the Company's expansion plans,
management believes net cash flows from operating activities short-term vendor
financing and the capacity
under its revolving$850.0 million senior credit facility will be sufficient to meet the
Company's working capital and debt service requirements and support the
development of its short- and long-term strategies for at least the next
twelve months.
The Company is continuing its comprehensive evaluation of all computer systems
and microprocessors and is in the process of replacing, modifying and/or
converting those systems which are not yet Year 2000 compliant. The
incremental costs over the next two years are being determined as part of the
continuing evaluation. Management
9
On August 21, 1997,does not expect such costs to have a material adverse impact on the Company's Boardfinancial
position or results of Directors declared a two-for-one
stock splitoperations of its common stock effective for all shareholders of record as of
September 2, 1997. The split will be effected in the form of a stock dividend.
The two-for-one stock split will occur on September 22, 1997, by the
distribution of one additional share for each share of common stock held of
record at the close of business on September 2, 1997.Company.
The Company did not declare or pay any cash dividends during the 26-week13-week
periods ended AugustMay 2, 19971998 and July 27, 1996.May 3, 1997.
Results of Operations
13 weeks ended AugustMay 2, 1998 compared with the 13 weeks ended May 3, 1997 and July 27, 1996
Revenues
During the 13 weeks ended AugustMay 2, 1997,1998, the Company's revenue growth of 17.8%revenues grew 11.9% to
$617.7$666.3 million from $524.3$595.7 million during the 13 weeks ended July 27, 1996,
exceeded the 17.1% revenue growth realized during the first quarter.May 3, 1997.
During the secondfirst quarter, Barnes & Noble "super" store revenues rose 26.2%14.4% to $503.6$551.0
million from $399.1$481.6 million during the same period a year ago. As a percentage
of total revenues, during the second quarter, Barnes & Noble "super" store revenues represented 81.5%,82.7% of
consolidated revenues during 1998, up from 76.1%80.8% during 1997.
During the same period last year.
The secondfirst quarter, the 14.4% increase in Barnes & Noble store revenues
resulted from a same store sales gain of 10.6%,6.1% coupled with 51 new stores
opened since May 3, 1997 which contributed a 25%13.1% increase in retail square footage, resulted in the 26.2% increase in Barnes
& Noble "super" store revenues.footage.
Management attributesattributed the strong same store sales performance to, among other
things, an increase in the number of stores eligible for inclusion in the same
store sales base. In addition, management estimates approximately
100 basis pointsbase and a reduction in self-cannibalization. The number of
the 10.6% increase during 1997's second quarter was due to
the impact of the summer Olympics during the same period last year. Revenues
generated by BarnesandNoble.com, which were not significant during 1997's second
quarter, were classified ascomparable Barnes & Noble store revenues.stores, as a percentage of total Barnes & Noble
stores, increased to 85.5% as of May 2, 1998 compared with 74.0% as of May 3,
1997. First quarter revenues generated by barnesandnoble.com rose to $9.4
million, a 14.1% increase over revenues of $8.2 million reported for its
fourth quarter of fiscal 1997, continuing a string of successive double digit
quarterly increases.
During 1997's secondthe first quarter, B. Dalton revenues, which represented 17.6%15.1% of total
revenues during 1997's second quarter in comparison to 23.0%with 18.2% during the
same period one year ago,1997, declined 9.9%7.7% primarily as the Company continued to close B.
Dalton stores. B. Dalton's retaila
result of store closings and a 6.4% reduction in its square footage declined (8.1%) since July 27,
1996.May
3, 1997. In addition, B. Dalton's same store sales decreased (2.5%)were flat during 1997's secondthe first
quarter.
During the 13 weeks ended August 2, 1997,first quarter, the Company opened 14two Barnes & Noble stores and
closed six,four, bringing its total number of Barnes & Noble stores to 454. During the same period,481 with
10.8 million square feet. The Company closed eight B. Dalton closed eight stores, ending
the period with 559 stores.520 B. Dalton stores and 2.0 million square feet. As of AugustMay 2,
19971998 the Company operated 1,0131,001 stores in 5049 states and the District of
Columbia.
Cost of Sales Buying and Occupancy
During the 13 weeks ended AugustMay 2, 1997,1998, cost of sales buying and occupancy increased
$58.4$43.9 million, or 17.2%9.8%, to $398.6$492.1 million from $340.2$448.2 million during the 13
weeks ended July 27, 1996.May 3, 1997. As a percentage of revenues, cost of sales buying and
occupancy decreased to 64.5%73.9% during 1997's secondthe first quarter 10
from 64.9%75.2% during the
same period one year ago. During the second quarter, the
Company sourced more productLess reliance on wholesalers due to increased
fulfillment through its distribution center directly
from publishers thereby reducing the Company's reliance on wholesalers. The
direct purchasing,distribution center, a better sales mix and
enhancements to fastthe Company's inventory replenishment systemssystem, resulted in low inventory growth relative to cost of
sales, a
betterhigher in-stock position and increasingimproved gross margins.
10
Selling and Administrative Expenses
Selling and administrative expenses increased $21.0$26.8 million or 20.0%, to $126.2$149.6 million
during the 13 weeks ended AugustMay 2, 19971998 from $105.2$122.8 million during the 13 weeks
ended July 27, 1996.May 2, 1997. During 1997's secondthe first quarter, selling and administrative
expenses increased as a percentage of revenues to 20.4%22.4% from 20.1%20.6% during the
prior-yearprior year period. This marginalThe increase was primarily attributable to BarnesandNoble.com'sincreased
operating costs.
Rental Expense,costs associated with the Company's strategic investment in
barnesandnoble.com.
Depreciation and Amortization
Rental expenseDuring the first quarter, depreciation and amortization increased $9.1$4.2
million, or 16.7%23.5%, to $63.2$21.9 million from $17.7 million during the same period
last year, as a result of the depreciation on the 51 new Barnes & Noble stores
opened since May 3, 1997 and depreciation attributable to barnesandnoble.com's
capital expenditures.
Pre-opening Expenses
Pre-opening expenses decreased $1.3 million, or 32.4%, to $2.6 million during
the 13 weeks ended AugustMay 2, 19971998 from $54.1$3.9 million during the 13 weeks ended July
27, 1996. As a percentage of revenues, rental expense decreased to 10.2% during
1997's second quarter from 10.3% during the same period last year due to the
improving expense leverage of the Barnes & Noble "super" stores. Depreciation
and amortization increased $4.6 million, or 32.7%, to $18.9 million during
1997's second quarter from $14.3 million during the same period last year. The
depreciation on the 85 Barnes & Noble "super" stores opened since July 27, 1996
constituted the majority of the increase.
Pre-opening Expenses
Pre-opening expenses decreased $1.5 million, or 30.8%, to $3.4 million during
the 13 weeks ended August 2,May
3, 1997, from $4.9 million during the 13 weeks ended
July 27, 1996,primarily as a result of the 2436 fewer Barnes & Noble "super" store openings
during the 52 weeks ended AugustMay 2, 19971998 in comparison to the corresponding prior-yearprior
year period.
Operating Profit
As a result of the factors discussed above, theThe Company's consolidated operating profit increased 32.4%decreased to $7.4$0.1 million during
the 13 weeks ended AugustMay 2, 19971998 from $5.6$3.1 million during the 13 weeks ended July 27, 1996. AsMay
3, 1997. barnesandnoble.com's first quarter operating loss of ($13.6) million
was offset by a percentage of
revenues during the second quarter, the$13.7 million operating profit margin increased to
1.2%generated by the retail
business. The $13.7 million operating profit for the retail business was up
over 300% from 1.1% during$3.4 million in the same period oneprior year, ago.reflecting strong Barnes &
Noble store revenue gains, expanding gross margins and increasing operating
leverage.
Interest Expense, Net and Amortization of Deferred Financing Fees
InterestNet interest expense net of interest income, and amortization of deferred financing fees were virtually unchangeddecreased to
$5.8 million during the 13-week periods13 weeks ended AugustMay 2, 1998 from $9.6 million during the
13 weeks ended May 3, 1997. Interest expense decreased due to a decrease in the
average interest rate on borrowings as a result of the Company's refinancing of
its senior credit facility in November 1997 and July 27, 1996.
11
lower average borrowings during
the 13 weeks ended May 2, 1998 as compared with the 13 weeks ended May 3, 1997.
Benefit Forfor Income Taxes
The benefit for income taxes during the 13 weeks ended AugustMay 2, 19971998 was $0.9$ 2.3
million compared to $1.8with $2.7 million during the 13 weeks ended July 27, 1996.May 3, 1997. Tax
benefits during these periods were based upon management's estimate of the Company's annualized
effective tax rates. Permanent differences, primarily
amortization of goodwill, increase the effective tax rate.
Net Loss
As a result of the factors discussed above, the Company reported a
consolidated net loss of ($1.4)3.3) million during the 13 weeks ended AugustMay 2, 19971998
compared towith a net loss of ($2.7)3.9) million during the 13 weeks ended July 27, 1996.May 3,
1997. During 1997's
secondthe first quarter, the net loss per common share improved towas ($0.2)0.05) per
share (based on 66.868.1 million shares after giving effect to the stock split) fromshares) compared with a net loss of ($0.04)0.06) per
share (based on 66.066.4 million shares after giving effect to the
stock split)shares) during the same period a year ago. ResultsThe
consolidated first quarter net loss reflects barnesandnoble.com's net loss of
Operations
26 weeks ended August 2, 1997 and July 27, 1996
Revenues
Revenues totaled $1.213 billion($8.0) million or ($0.12) per share. Excluding barnesandnoble.com, net
earnings for the Company's retail operations increased to $4.7 million or
$0.07 per share during the 2613 weeks ended Augustending May 2, 1997, a
17.5% increase over revenues of $1.033 billion during the 26 weeks ended July
27, 1996. During the first half of 1997, total revenues rose primarily due to
the 26.2% increase in Barnes & Noble "super" store revenues to $985.2 million
from $780.6 million during the same period a year ago. For the same respective
periods, Barnes & Noble "super" store revenues, as a percentage of total
revenues, rose to 81.2%, up from 75.6%.
The year-to-date increase in Barnes & Noble "super" store revenues was
attributable to a 10.0% gain in same store sales and an increase in retail
square footage of 25.0%. B. Dalton stores generated 17.9% of total revenues
year-to-date in comparison to 23.5% during the same period one year ago.
Year-to-date B. Dalton revenues declined (10.4%) as a result of the (8.1%)
decrease in retail square footage and the (3.7%) decrease in same store sales.
Revenues generated by BarnesandNoble.com, which were not significant during the
first half of 1997, were classified as Barnes & Noble store revenues.
During the 26 weeks ended August 2, 1997, the Company opened 30 and closed
seven Barnes & Noble stores and closed 18 B. Dalton stores.
Cost of Sales, Buying and Occupancy
During the 26 weeks ended August 2, 1997, cost of sales, buying and occupancy
increased $113.5 million, or 16.9%, to $787.2 million from $673.7 million
during the 26 weeks ended July 27, 1996. As a percentage of revenues, cost of
sales, buying and occupancy decreased to 64.9% during 1997's first half from
65.2% during the same period last year. Investments in the Company's
distribution center and technology systems during the last two fiscal years,
combined1998 compared with a better sales mix, contributed to its expanding gross margins.
12
Selling and Administrative Expenses
Selling and administrative expenses increased $37.0 million, or 17.7%, to
$246.4 million during the 26 weeks ended August 2, 1997 from $209.4 million
during the 26 weeks ended July 27, 1996. However, as a percentage of revenues,
selling and administrative expenses were flat at 20.3% during the 26-week
periods ended August 2, 1997 and July 27, 1996. These results reflected the
improving Barnes & Noble "super" store operating leverage which was offset by
the operating expenses of BarnesandNoble.com.
Rental Expense, Depreciation and Amortization
Rental expense increased $18.1 million, or 16.9%, to $125.4 million during the
26 weeks ended August 2, 1997 from $107.3 million during the 26 weeks ended
July 27, 1996. As a percentage of revenues, rental expense decreased to 10.3%
during 1997's first half from 10.4% during the corresponding prior-year period
due to the improving expense leverage of the Barnes & Noble "super" stores.
Depreciation and amortization increased $8.8 million, or 31.7%, to $36.7
million during the 26 weeks ended August 2, 1997 from $27.9 million during the
26 weeks ended July 27, 1996. Depreciation on the 85 Barnes & Noble stores
opened since July 27, 1996 constituted most of the increase.
Pre-opening Expenses
Pre-opening expenses decreased $2.2 million, or 22.8%, to $7.2 million during
the 26 weeks ended August 2, 1997 from $9.4 million during the 26 weeks ended
July 27, 1996 primarily as a result of 24 fewer Barnes & Noble store openings
during the 52 weeks ended August 2, 1997 compared to the corresponding prior-
year period.
Operating Profit
As a result of the factors discussed above, the Company's operating profit
increased 92.4% to $10.5 million during the 26 weeks ended August 2, 1997 from
$5.5 million during the 26 weeks ended July 27, 1996. As a percentage of
revenues, the operating profit margin increased to 0.9% during 1997's first
half from 0.5% during the same period one year ago.
Interest Expense, Net and Amortization of Deferred Financing Fees
Interest expense, net of interest income, and amortization of deferred
financing fees increased to $19.4 million during the 26 weeks ended August 2,
1997 from $18.5 million during the 26 weeks ended July 27, 1996. The marginal
increase in the Company's cost of debt resulted primarily from the increase in
capacity under the senior credit facilities of $125.0 million to $550.0 million
in May 1997 from $425.0 million plus the increase in average borrowings under
the facilities of $6.7 million.
Benefit For Income Taxes
The benefit for income taxes during the 26 weeks ended August 2, 1997, was $3.6
million compared to $4.9 million during the 26 weeks ended July 27, 1996. Tax
benefits during these periods were based upon management's estimate of the
Company's annualized effective tax rates. Permanent differences, primarily
amortization of goodwill, increase the effective tax rate.
13
Net Loss
As a result of the factors discussed above, the Company's net loss declined
35.6% to ($5.2) million during the 26 weeks ended August 2, 1997 from a net
loss of ($8.1)3.7) million or ($0.06) per share during the 2613 weeks ended July 27, 1996. For the first
half of 1997, the net loss per common share improved 33.3% to ($0.08) per share
(based on 66.6 million shares after giving effect to the split) from ($0.12)
per share (based on 66.0 million shares after giving effect to the split) for
the corresponding prior-year period.ending May 3,
1997.
11
Forward-Looking Statements
This report may contain certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company that are based on the beliefs of the
management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used in this
report, the words "anticipate," "believe," "estimate," "expect," "intend,"
"plan" and similar expressions, as they relate to the Company or the
management of the Company, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events, the outcome of which is subject to certain risks, including among
others general economic and market conditions, decreased consumer demand for
the Company's products, possible disruptions in the Company's computer or
telephone systems, increased or unanticipated costs or effects associated with
year 2000 compliance by the Company or its service or supply providers,
possible work stoppages, or increases in labor costs, possible increases in
shipping rates or interruptions in shipping service, effects of competition,
possible disruptions or delays in the opening of new stores or the level and volatility ofinability
to relocation suitable sites for new stores, higher than anticipated store
closing or relocation costs, higher interest rates, the performance of the
Company's online initiatives such as barnesandnoble.com, unanticipated
increases in merchandise or occupancy costs, and other factors thatwhich may be
outside of the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described hereintherein as
anticipated, believed, estimated, expected, intended or planned. Subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements in this paragraph.
1412
PART II - OTHER INFORMATION
Item 4: Submission1: Legal Proceedings
In March 1998, the American Booksellers Association and twenty-six independent
bookstores filed a lawsuit in the United States District Court for the
Northern District of matters to a voteCalifornia against the Company and Borders Group Inc.
alleging violations of Security Holdersthe Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Company's Annual MeetingComplaint seeks
injunctive and declaratory relief; treble damages on behalf of Stockholders was held on June
4, 1997. The following individuals were electedeach of the
bookstore plaintiffs, and, with respect to the California bookstore
plaintiffs, any other damages permitted by California law; disgorgement of
money, property and gains wrongfully obtained in connection with the purchase
of books for resale, or offered for resale, in California from March 18, 1994
until the action is completed and pre-judgment interest on any amounts awarded
in the action, as well as attorney fees and costs. The Company intends to
vigorously defend this action.
In addition to the above action, various claims and lawsuits arising in the
normal course of business are pending against the Company. The subject matter
of these proceedings primarily includes commercial disputes and employment
issues. The results of these proceedings are not expected to have a material
adverse effect on the Company's Boardconsolidated financial position or results of
Directors to hold office for a term of
three years and until their respective successors are duly
elected and qualified.
Nominee In Favor Withheld
------- -------- --------
Irene R. Miller 30,086,827 75,671
William Dillard, II 30,085,746 76,752
Michael N. Rosen 29,981,809 180,689
Ratification of the selection of BDO Seidman, LLP as
independent certified public accountants for the fiscal year
ending January 31, 1998.
In Favor Against Abstained
-------- ------- ---------
30,132,303 8,175 22,020operations.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit filed with this Form 10-Q:
None.Exhibit 27 : Financial Data Schedule
(b) No report on Form 8-K was filed by the registrant during the
fiscal quarter for which this report is filed.
1513
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARNES & NOBLE, INC.
(Registrant)
Date: September 15, 1997June 16, 1998 By: /s/ William F. Duffy
---------------------------------
William F. DuffyMarie J. Toulantis
----------------------
Marie J. Toulantis
Executive Vice President, Finance
and Chief
Accounting Officer14