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 November 1, 1997May 2, 1998
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
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
- ----------------------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- ------------------------------------------------------------------------------------------------------------------------------------
(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 November 28,
1997: 67,878,084.May 29,
1998: 68,242,752.
BARNES & NOBLE, INC. AND SUBSIDIARIES
November 1, 1997May 2, 1998
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 the 39 weeks ended November 1,May 3, 1997 and October 26, 1996.................................................................. 3
Consolidated Balance Sheets - November 1,May 2, 1998, May 3, 1997 October 26, 1996 and
February 1, 1997.............January 31, 1998 ............................................... 4
Consolidated Statements of Cash Flows - For the 3913 weeks ended
November 1, 1997May 2, 1998 and October
26, 1996..........................................May 3, 1997..................................... 6
Notes to Consolidated Financial Statements..........Statements........................ 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations...............Operations.......................................... 9
PART II - OTHER INFORMATION................................... 14INFORMATION.................................................
Item 1. Legal Proceedings................................................. 13
Item 6. Exhibits and Reports on Form 8-K.................................. 13
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 39 weeks ended
------------------------------------------ ----------------------------------------
November 1, October 26, November 1, October 26,
1997 1996 1997 1996
------------------ ------------------ ------------------- ----------------
Revenues $ 614,831 532,563 1,828,310 1,565,639
Cost of sales, buying and
occupancy 388,863 341,171 1,176,103 1,014,883
---------- ---------- ----------- -----------
Gross profit 225,968 191,392 652,207 550,756
---------- ---------- ----------- -----------
Selling and administrative
expenses 129,080 110,047 375,506 319,459
Rental expense 64,065 56,669 189,441 163,933
Depreciation and amortization 19,746 15,464 56,419 43,319
Pre-opening expenses 3,076 4,634 10,297 13,986
---------- ---------- ----------- -----------
Operating profit 10,001 4,578 20,544 10,059
Interest (net of interest income
of $93, $1,303, $312, and $1,580,
respectively) and amortization of
deferred financing fees 9,889 9,592 29,293 28,105
---------- ---------- ----------- -----------
Earnings (loss) before provision
(benefit) for income taxes 112 (5,014) (8,749) (18,046)
Provision (benefit) for income taxes 47 (2,392) (3,587) (7,310)
---------- ---------- ----------- ------------
Net earnings (loss) $ 65 (2,622) (5,162) (10,736)
========== ========== =========== ============
Net earnings (loss) per common share $ 0.00 (0.04) (0.08) (0.16)
Weighted average common shares
outstanding 72,508,000 66,090,000 67,017,000 66,012,000
13 weeks ended
----------------------------
May 2, May 3,
1998 1997
------------ ------------
Revenues ......................................... $ 666,344 595,731
Cost of sales 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 interest income of $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 finacialfinancial statements.
3
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars)dollars, except per share data)
November 1, October 26, February 1,May 2, May 3, January 31,
1998 1997 1996 1997
------------------- ---------------- ----------------1998
---------- ---------- ----------
(unaudited)
ASSETS
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 11,753 19,019 12,44710,801 10,347 12,697
Receivables, net 63,501 61,366 45,558................................................... 29,997 40,433 43,858
Merchandise inventories 936,923 827,845 732,203............................................ 856,582 731,483 852,107
Prepaid expenses and other current assets 88,908 42,571 76,747
---------.......................... 99,178 76,654 68,902
---------- ---------- ----------
Total current assets 1,101,085 950,801 866,955
---------............................................. 996,558 858,917 977,564
---------- ---------- ----------
Property and equipment:
Land and land improvements ......................................... 681 681 681
Buildings and leasehold improvements 341,562 332,176 326,392............................... 352,083 333,867 347,598
Fixtures and equipment 345,927 260,930 289,684............................................. 392,814 307,575 378,058
---------- ---------- ----------
688,170 593,787 616,757745,578 642,123 726,337
Less accumulated depreciation and amortization
230,067 172,183 181,983265,650 198,151 244,207
---------- ---------- ----------
Net property and equipment 458,103 421,604 434,774................................ 479,928 443,972 482,130
---------- ---------- ----------
Intangible assets, net 91,052 94,220 93,494................................................. 89,423 92,680 90,237
Other noncurrent assets 59,391 65,108 51,424
----------- ----------- -----------................................................ 40,704 51,601 41,240
---------- ---------- ----------
Total assets $ 1,709,631 1,531,733 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)
November 1, October 26, February 1,May 2, May 3, January 31,
1998 1997 1996 1997
------------------- ------------------ -----------------1998
---------- ---------- ----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility .......................................... $ - 140,000 40,000-- 79,300 --
Accounts payable 555,614 477,873 373,340................................................... 432,711 364,166 459,795
Accrued liabilities 218,160 187,448 240,923
---------................................................ 215,524 209,160 253,050
---------- ---------- ----------
Total current liabilities 773,774 805,321 654,263
---------....................................... 648,235 652,626 712,845
---------- ---------- ----------
Long-term debt 405,200......................................................... 358,600 290,000 290,000284,800
Other long-term liabilities 57,866 42,795 46,395............................................ 65,382 50,570 61,771
Shareholders' equity:
Common stock; $.001 par value; 100,000,000
shares authorized; 67,875,339, 66,338,37868,235,489, 66,506,674 and
66,376,25067,921,830 shares issued and outstanding,
respectively .................................................... 68 66 6667 68
Additional paid-in capital 468,227 445,854 446,265......................................... 474,836 448,110 468,860
Retained earnings (deficit) 4,496 (52,303) 9,658
---------.................................................. 59,492 5,797 62,827
---------- ---------- ----------
Total shareholders' equity 472,791 393,617 455,989
---------...................................... 534,396 453,974 531,755
---------- ---------- ----------
Commitments and contingencies
------------------- ---------- ----------
Total liabilities and shareholders' equity $1,709,631 1,531,733 1,446,647
=========......................... $1,606,613 1,447,170 1,591,171
========== ========== ==========
See accompanying notes to consolidated financial statements.
5
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(thousands of dollars)
(unaudited)
3913 weeks ended
-------------------------------------------
November 1, October 26,----------------------------
May 2, May 3,
1998 1997
1996
------------------ --------------------------- --------
Cash flows from operating activities:
Net loss ............................................................................... $ (5,162) (10,736)(3,335) (3,861)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization 57,913 44,669.................................................... 22,010 18,243
Loss (gain) on disposalsdisposal of property and equipment 388 (172)....................................... 205 54
Increase in other long-term liabilities for scheduled rent
increases in long-term leases 12,125 11,479................................................ 3,565 4,123
Changes in operating assets and liabilities, net (75,967) (48,449)
---------- ---------................................. (85,452) (34,941)
-------- --------
Net cash flows from operating activities (10,703) (3,209)
---------- ----------..................................... (63,007) (16,382)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (77,694) (142,954).................................................... (19,314) (26,191)
Proceeds from sales of property and equipment - 171.......................................... 200 --
Net increasedecrease (increase) in other noncurrent assets (9,461) (15,983)
----------- ---------..................................... 449 (673)
-------- --------
Net cash flows from investing activities (87,155) (158,766)
----------............................................ (18,665) (26,864)
-------- --------
Cash flows from financing activities:
Net increase in revolving credit facility 75,200 67,600
Proceeds from issuance of long-term debt - 100,000.............................................. 73,800 39,300
Proceeds from exercise of common stock options including related
tax benefits 21,964 4,118
----------........................................................................ 5,976 1,846
-------- --------
Net cash flows from financing activities 97,164 171,718
----------.......................................... 79,776 41,146
-------- --------
Net (decrease) increasedecrease in cash and cash equivalents (694) 9,743.................................................. (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 ................................................. $ 11,753 19,019
========== =========10,801 10,347
======== ========
Changes in operating assets and liabilities, net:
Receivables, net ....................................................................... $ (17,943) (7,347)13,861 5,125
Merchandise inventories (204,720) (87,494)................................................................ (4,475) 720
Prepaid expenses and other current assets (12,161) 3,184.............................................. (30,276) 93
Accounts payable and accrued liabilities 158,857 43,208............................................... (64,562) (40,879)
-------- -----------------
Changes in operating assets and liabilities, net $ (75,967) (48,449)
========= =========.................................... $(85,452) (34,941)
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest ............................................................................ $ 22,204 21,3345,171 3,673
Income taxes ........................................................................ $ 18,234 17,09914,918 13,331
See accompanying notes to consolidated financial statements.
6
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 3913 weeks ended November 1,May 2, 1998 and May 3, 1997 and October 26, 1996
(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 November 1, 1997May 2, 1998 and the results of its
operations and its cash flows for the 3913 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 3913 weeks ended November 1, 1997May 2, 1998 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%, 78%79% and 79%83% of the Company's merchandise
inventories as of November 1,May 2, 1998, May 3, 1997 October 26, 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 $7,300, $6,026$4,352, $8,800 and $8,800$5,102 as of November 1,May 2, 1998, May 3,
1997 October 26, 1996
and February 1, 1997,January 31, 1998, respectively.
(2) Income Taxes
The tax provisions for the periods ended November 1,May 2, 1998 and May 3, 1997 and October
26, 1996
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, distributed on September 22, 1997, to shareholders
of record as of September 2, 1997. 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 3913 weeks ended November 1,May 2, 1998 and May 3, 1997 and October 26, 1996
(thousands of dollars)
(unaudited)
During the 39 weeks ended November 1, 1997, options2000. Adoption is not expected to purchase
approximately 1,384,300 shares 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) Subsequent Event
On November 18,Company 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 1997 the Company closed an $850,000 senior credit
facility (the New Facility) with a syndicate led by The Chase Manhattan Bank.
The New Facility, structured as a five-year revolving credit, refinanced an
existing $450,000 revolving credit and $100,000 term loan facility (the Old
Facility). Net proceeds will be used for general corporate purposes and to
redeem all of the Company's outstanding $190 million 11 7/8% senior subordinated
notes which are callable on January 15, 1998.
The New Facility permits borrowings at various interest rate options
based on the prime rate or London Interbank Offer Rate (LIBOR) depending upon
certain financial tests. The initial LIBOR spread was set at 0.625% as of
November 18, 1997. In addition, the agreement requires the Company to pay a
commitment fee up to 0.25% of the unused portion depending upon certain
financial tests. The initial commitment fee was set at 0.175% of the unused
portion of the facility as of November 18, 1997. The New Facility contains
covenants, limitations and events of default typical of credit facilities of
this size and nature.
The amount outstanding under the Company's Old Facility as of
November 1, 1997, which was refinanced pursuant to the consummation of the New
Facility, has been classified as long-term debt in the accompanying consolidated
balance sheets due to the terms of the New Facility, and the Company's intent
and ability to maintain principal amounts outstanding through November 2002.
As a result of these refinancings, the Company expects to record an
extraordinary loss due to the early extinquishment of debt approximating $11,500
(net of applicable taxes) during its fourth quarter. The extraordinary loss
represents the payment of a call premium associated with the redemption of the
senior subordinated notes and the write-off of unamortized fees.
(5) Earnings Per Common Share
In February, 1997, the Financial Accounting Standards Board issuedadopted 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 the Company's cash are net cash flows from operating
activities, funds available under its revolvingsenior credit facility and short-term
vendor financing.
The Company's cash and cash equivalents were $10.8 million as of May 2, 1998
compared with $10.3 million as of May 3, 1997. Consolidated cash flows from
operating activities, net of capital expenditures, for the last twelve months
rose to $7.6 million, up from a deficit of ($8.0) million during the prior
period. During the 3913 weeks ended November 1, 1997,May 2, 1998, consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA) increased 44.2%$1.2 million
to $77.0$22.0 million from $53.4$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 year period, and reflected increasingreflecting higher
gross margins attributable to lower merchandise costs and a better sales mix, plus improving expense leverage primarily(primarily in Barnes & Noble
store operating, rental and pre-opening costs. In addition, the Company's EBITDA margin increased to
4.2% during 1997 from 3.4% during 1996. Correspondingly, the Company generated
sufficient net cash flows from operating activities of $112.0 million on a
trailing 12-month basis as of November 1, 1997, to fund its capital expenditures
and working capital of $106.6 million which compared to a net deficit of
($157.4) million during the corresponding prior 12-month period.costs).
Merchandise inventories increased $109.1$125.1 million to $936.9$856.6 million as of November 1, 1997, up 13.2% from $827.8May
2, 1998, compared with $731.5 million as of October 26, 1996, primarily
dueMay 3, 1997. The increase
supported the Company's revenue growth of 11.9% and a planned expansion in the
Company's distribution center inventory to over 600,000 titles available for
immediate shipping to both online customers and the 78 new Barnes & Noble stores opened since October 26, 1996.retail stores.
The Company's investing activities consist principally of capital expenditures
for new store construction, system enhancements, and store relocations/remodels.remodels
and capital expenditures incurred by barnesandnoble.com. Capital expenditures
totaled $77.7$19.3 million and $143.0$26.1 million during the 3913 weeks ended November 1,May 2, 1998
and May 3, 1997, and October 26, 1996, respectively. Capital expenditures during 1997the first quarter
of 1998 reflected 13the opening of 14 fewer new Barnes & Noble stores; in
addition, 1996 capital expenditures includedstores compared
with the same period of the prior year.
The ratio of debt to equity was 0.67:1.00 as of May 2, 1998, compared with
0.81:1.00 as of May 3, 1997. This significant technology and systems
expenditures.
On November 18, 1997,improvement during a period of
record growth is the Company closed an $850.0 million senior credit
facility with a syndicate led by The Chase Manhattan Bank. The new facility,
structured as a five-year revolving credit, refinanced an existing $450.0
million revolving credit and a $100.0 million term loan. The pricing, relative
to LIBOR, has been significantly reduced, primarily in recognitionresult of the Company's continued positive cash flows,
expanded gross margin, improved operating leverage and strong financial performance. Under the old credit agreement, the
Company's LIBOR spread ranged from 1.000% to 2.250% depending upon certain
financial tests. Under the new credit agreement, the LIBOR spread ranges from
0.375% to 0.875%, depending upon certain financial tests, with the initial
spread set at 0.625% as of November 18, 1997. Net proceeds will be used for
general corporate purposes and to redeem all of the Company's outstanding $190.0
million 11 7/8% senior subordinated notes which are callableemphasis on
January 15,
1998. During the fourth quarter, the Company expects to record an extraordinary
loss of $11.5 million (net of applicable taxes) due to the early extinquishment
of debt which represents a call premium of 5.9% to be paid on the notes and
the write-off of unamortized fees.working capital management.
Total debt decreased 5.8%2.9% to $405.2$358.6 million as of November 1, 1997May 2, 1998 from $430.0$369.3
million as of October 26, 1996.May 3, 1997. Average borrowings under the oldCompany's senior
credit facility decreased $7.8were $347.7 million and $355.2 million during the 13 weeks
ended May 2, 1998 and May 3, 1997, in comparison to 1996,respectively, and peaked at $222.9$380.8 million
and $263.8$380.2 million during the same periods, respectively.periods. The reduced average borrowings,
which reflected continued emphasis on working capital
management, inventory turnover and expense controls, were accomplished during a period of 16.8%11.9.% revenue growth. The amount outstanding undergrowth and strategic
investment in barnesandnoble.com, reflect the old revolving
credit facility as of November 1, 1997 was classified as long-term
9
debt in the accompanying consolidated balance sheets, as the Company has the
intentCompany's commitment to
working capital management and the ability, supported by the terms of the new revolving credit
agreement, to maintain through November 2002, principal amounts outstanding
under the agreement.expense controls.
Based upon the Company's current operating levels and expansion plans,
management believes net cash flows from operating activities and the capacity
under its revolving$850.0 million senior credit facility will be sufficient to meet the
Company's working capital capital investments and debt service requirements and support the
development of its short- and long-term strategies for at least the next
twelve months.
On August 21, 1997, the Company's BoardThe Company is continuing its comprehensive evaluation of Directors declared a two-for-one
stock split of its common stock effective for all shareholders of record as of
September 2, 1997. The split was effectedcomputer systems
and microprocessors and is in the formprocess 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
does not expect such costs to have a stock dividend. The
two-for-one stock split occurredmaterial adverse impact on September 22, 1997, by the distributionfinancial
position or results of one additional share for each shareoperations of common stock held at the close of
business on September 2, 1997.Company.
The Company did not declare or pay any cash dividends during the 39-week13-week
periods ended November 1, 1997May 2, 1998 and October 26, 1996.May 3, 1997.
Results of Operations
13 weeks ended November 1, 1997May 2, 1998 compared with the 13 weeks ended October 26,
1996May 3, 1997
Revenues
During the 13 weeks ended November 1, 1997,May 2, 1998, the Company's revenues grew 15.4%11.9% to
$614.8$666.3 million from $532.6$595.7 million during the 13 weeks ended October 26, 1996.May 3, 1997.
During the thirdfirst quarter, Barnes & Noble store revenues rose 22.0%14.4% to $503.7$551.0
million from $412.7$481.6 million during the same period a year ago. As a percentage
of total revenues, Barnes & Noble store revenues represented 81.9%82.7% of
consolidated revenues during 1997,1998, up from 77.5%80.8% during 1996.1997.
During the thirdfirst quarter, the 22.0%14.4% increase in Barnes & Noble store revenues
resulted from a same store sales gain of 9.3%6.1% coupled with 7851 new stores
opened since October 26, 1996May 3, 1997 which contributed a 21.2%13.1% increase in square footage.
Management attributed 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 and a reduction in self-cannibalization. The number of
comparable Barnes & Noble stores, as a percentage of total Barnes & Noble
stores, increased to 76.5%85.5% as of November 1, 1997May 2, 1998 compared to 61.0%with 74.0% as of October 26, 1996. RevenuesMay 3,
1997. First quarter revenues generated by BarnesandNoble.com, which were not
significant during the thirdbarnesandnoble.com rose to $9.4
million, a 14.1% increase over revenues of $8.2 million reported for its
fourth quarter were classified as Barnes & Noble store
revenues.of fiscal 1997, continuing a string of successive double digit
quarterly increases.
During the thirdfirst quarter, B. Dalton revenues, which represented 17.1%15.1% of total
revenues in comparison with 18.2% during 1997, in comparison to 21.6% during 1996, declined 8.3%7.7% primarily as a
result of six B. Dalton store closings and a 7.4%6.4% reduction in its square footage since October 26, 1996.May
3, 1997. In addition, B. Dalton's same store sales decreased (0.4%)were flat during the thirdfirst
quarter.
During the thirdfirst quarter, the Company opened 16two Barnes & Noble stores and
closed one,four, bringing its total number of Barnes & Noble stores to 469 and their total
square footage to 10.4481 with
10.8 million square feet. During the same period, theThe Company opened three and closed sixeight B. Dalton stores, ending
the period with 556520 B. Dalton stores and 2.12.0 million square feet. As of November 1, 1997May 2,
1998 the Company operated 1,0251,001 stores in 5049 states and the District of
Columbia.
10
Cost of Sales Buying and Occupancy
During the 13 weeks ended November 1, 1997,May 2, 1998, cost of sales buying and occupancy increased
$47.7$43.9 million, or 14.0%9.8%, to $388.9$492.1 million from $341.2$448.2 million during the 13
weeks ended October 26, 1996.May 3, 1997. As a percentage of revenues, cost of sales buying and
occupancy decreased to 63.3%73.9% during the thirdfirst quarter from 64.1%75.2% during the
same period one year ago. IncreasingLess reliance on wholesalers due to increased
fulfillment through the Company's distribution center, fulfillment, a better sales mix and
enhancements to fastthe Company's inventory replenishment systems,system, resulted in lower 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 $19.1$26.8 million or 17.3%, to $129.1$149.6 million
during the 13 weeks ended November 1, 1997May 2, 1998 from $110.0$122.8 million during the 13 weeks
ended October 26, 1996.May 2, 1997. During the thirdfirst quarter, selling and administrative
expenses increased as a percentage of revenues to 21.0%22.4% from 20.7%20.6% during the
prior year period. The 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 expense increased $7.4 million, or 13.1%, to $64.1 million during the 13
weeks ended November 1, 1997 from $56.7 million during the 13 weeks ended
October 26, 1996. As a percentage of revenues, rental expense decreased to 10.4%
during the third quarter from 10.6% during the same period last year due to the
improving expense leverage of the Barnes & Noble stores. During the thirdfirst quarter, depreciation and amortization increased $4.2
million, or 27.7%23.5%, to $19.7$21.9 million from $15.5$17.7 million during the same period
last year, as a result of the depreciation on the 7851 new Barnes & Noble stores
opened since October 26,
1996May 3, 1997 and depreciation attributable to BarnesandNoble.com.'sbarnesandnoble.com's
capital expenditures.
Pre-opening Expenses
Pre-opening expenses decreased $1.6$1.3 million, or 33.6%32.4%, to $3.1$2.6 million during
the 13 weeks ended November 1, 1997May 2, 1998 from $4.6$3.9 million during the 13 weeks ended October 26, 1996,May
3, 1997, primarily as a result of 1936 fewer Barnes & Noble store openings
during the 52 weeks ended November 1, 1997May 2, 1998 in comparison to the corresponding prior
year period.
Operating Profit
The Company's consolidated operating profit increaseddecreased to $10.0 million during the 13 weeks
ended November 1, 1997 from $4.6 million during the 13 weeks ended October 26,
1996. As a percentage of revenues, the operating profit margin increased to 1.6%
during 1997 from 0.9% during 1996.
Net Earnings (Loss)
As a result of the factors discussed above, the Company reported net earnings of $0.1 million during
the 13 weeks ended November 1, 1997 compared to a net loss
of ($2.6)May 2, 1998 from $3.1 million during the 13 weeks ended October 26, 1996. During the thirdMay
3, 1997. barnesandnoble.com's first quarter the net earnings per common share improved to $0.00 per share (based on
72.5 million shares) from a netoperating loss of ($0.04) per share (based on 66.113.6) million
shares)was offset by a $13.7 million operating profit generated by the retail
business. The $13.7 million operating profit for the retail business was up
over 300% from $3.4 million in the prior year, reflecting strong Barnes &
Noble store revenue gains, expanding gross margins and increasing operating
leverage.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees decreased to
$5.8 million during the same period a year ago.
11
3913 weeks ended November 1, 1997 compared toMay 2, 1998 from $9.6 million during the
3913 weeks ended October 26, 1996
Revenues
Revenues totaled $1.828 billion duringMay 3, 1997. Interest expense decreased due to a decrease in the
39 weeks ended November 1, 1997, a
16.8% increase over revenues of $1.566 billion during the 39 weeks ended October
26, 1996. During 1997, total revenues rose primarilyaverage interest rate on borrowings as a result of the 24.8%
increaseCompany's refinancing of
its senior credit facility in Barnes & Noble store revenues to $1.489 billion from $1.193 billionNovember 1997 and lower average borrowings during
1996. Barnes & Noble store revenues, as a percentage of total revenues,
rose to 81.4% during 1997 up from 76.2% during 1996.
The year-to-date increase in Barnes & Noble store revenues was attributable to a
9.7% gain in same store sales and 78 new stores opened since October 26, 1996.
B. Dalton stores generated 17.7% of total revenues during 1997 in comparison to
22.8% during 1996. Year-to-date B. Dalton revenues declined 9.8% as a result of
the decrease in square footage and the decline in same store sales of (2.7%).
Revenues generated by BarnesandNoble.com, which were not significant, were
classified as Barnes & Noble store revenues.
During the 3913 weeks ended November 1, 1997,May 2, 1998 as compared with the Company opened 46 and closed
eight Barnes & Noble stores and opened three and closed 24 B. Dalton stores.
Cost of Sales, Buying and Occupancy
During the 3913 weeks ended November 1, 1997, cost of sales, buying and occupancy
increased $161.2 million, or 15.9%, to $1.176 billion from $1.015 billion during
the 39 weeks ended October 26, 1996. As a percentage of revenues, cost of sales,
buying and occupancy decreased to 64.3% during 1997 from 64.8% during 1996. The
expanding gross margins were the result of the Company's strategic investments
in distribution and technology along with a better sales mix.
Selling and Administrative Expenses
Selling and administrative expenses increased $56.0 million, or 17.5%, to $375.5
million during the 39 weeks ended November 1, 1997 from $319.5 million during
the 39 weeks ended October 26, 1996. However, as a percentage of revenues,
selling and administrative expenses were virtually flat at 20.5% and 20.4%
during 1997 and 1996, respectively. These results reflected the improving Barnes
& Noble store operating leverage which was largely offset by the operating
expenses of BarnesandNoble.com.
Rental Expense, Depreciation and Amortization
Rental expense increased $25.5 million, or 15.6%, to $189.4 million during the
39 weeks ended November 1, 1997 from $163.9 million during the 39 weeks ended
October 26, 1996. As a percentage of revenues, rental expense decreased to 10.4%
during 1997 from 10.5% during 1996 due to the improving expense leverage of the
Barnes & Noble stores. Depreciation and amortization increased $13.1 million, or
30.2%, to $56.4 million during the 39 weeks ended November 1, 1997 from $43.3
million during the 39 weeks ended October 26, 1996 as a result of the
depreciation on the new Barnes & Noble stores opened since October 26, 1996 and
depreciation attributable to BarnesandNoble.com.'s capital expenditures.
12
Pre-opening Expenses
Pre-opening expenses decreased $3.7 million, or 26.4%, to $10.3 million during
the 39 weeks ended November 1, 1997 from $14.0 million during the 39 weeks ended
October 26, 1996 primarily as a result of 19 fewer Barnes & Noble store openings
during the 52 weeks ended November 1, 1997 compared to the corresponding prior
year period.
Operating Profit
As a result of the factors discussed above, the Company's operating profit
increased to $20.5 million during the 39 weeks ended November 1, 1997 from $10.1
million during the 39 weeks ended October 26, 1996. As a percentage of revenues,
the operating profit margin increased to 1.1% during 1997 from 0.6% during 1996.May 3, 1997.
Benefit Forfor Income Taxes
The benefit for income taxes during the 3913 weeks ended November 1, 1997,May 2, 1998 was $3.6$ 2.3
million compared to $7.3with $2.7 million during the 3913 weeks ended October 26,
1996.May 3, 1997. Tax
benefits were based upon management's estimate of the Company's annualized
effective tax rates.
Net Loss
As a result of the factors discussed above, the Company'sCompany reported a
consolidated net loss declined
51.9% toof ($5.2)3.3) million during the 3913 weeks ended November 1, 1997 fromMay 2, 1998
compared with a net loss of ($10.7)3.9) million during the 3913 weeks ended October 26, 1996.May 3,
1997. During 1997,the first quarter, the net loss per common share improved 50% towas ($0.08)0.05) per
share (based on 67.068.1 million shares) fromcompared with a net loss of ($0.16)0.06) per
share (based on 66.066.4 million shares) during 1996.the same period a year ago. The
consolidated first quarter net loss reflects barnesandnoble.com's net loss of
($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 13 weeks ending May 2, 1998 compared with a net
loss of ($3.7) million or ($0.06) per share during the 13 weeks 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, changes in productdecreased consumer demand real estate market fluctuations,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, changesthe performance of the
Company's online initiatives such as barnesandnoble.com, unanticipated
increases in tax and other governmental rules and regulations
applicable to the Companymerchandise 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.
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PART II - OTHER INFORMATION
Item 1: 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 California against the Company and Borders Group Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each 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 consolidated financial position or results of
operations.
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.
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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: DecemberJune 16, 19971998 By: /s/ William F. Duffy
--------------------
William F. DuffyMarie J. Toulantis
----------------------
Marie J. Toulantis
Executive Vice President, Finance
and Chief
Accounting Officer
1514