UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JanuaryOctober 27, 2018
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto ��
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 Incorporation or Organization) | (I.R.S. Employer 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | |||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
| Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
As of JanuaryOctober 31, 2018, 72,793,64673,169,887 shares of Common Stock, par value $0.001 per share, were outstanding, which number includes 140,840150,368 shares of unvested restricted stock that have voting rights and are held by members of the Board of Directors and the Company’s employees.
BARNES & NOBLE, INC. AND SUBSIDIARIES
Fiscal Quarter Ended JanuaryOctober 27, 2018
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
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| Item 1: | Financial Statements |
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
| 13 weeks ended | 39 weeks ended | 13 weeks ended | 26 weeks ended | |||||||||||||||||||||||||||||
| January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||||||||||||||
Sales | $ | 1,231,771 | 1,300,908 | $ | 2,876,204 | 3,073,338 | $ | 771,188 | 791,117 | $ | 1,565,964 | 1,644,433 | ||||||||||||||||||||
Cost of sales and occupancy | 831,745 | 864,107 | 1,994,002 | 2,103,623 | 545,841 | 562,422 | 1,112,545 | 1,162,257 | ||||||||||||||||||||||||
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Gross profit | 400,026 | 436,801 | 882,202 | 969,715 | 225,347 | 228,695 | 453,419 | 482,176 | ||||||||||||||||||||||||
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Selling and administrative expenses | 273,044 | 278,962 | 769,067 | 801,499 | 227,659 | 253,728 | 448,047 | 496,023 | ||||||||||||||||||||||||
Depreciation and amortization | 28,245 | 29,052 | 81,842 | 90,083 | 24,448 | 27,199 | 48,333 | 53,597 | ||||||||||||||||||||||||
Goodwill impairment | 133,612 | — | 133,612 | — | ||||||||||||||||||||||||||||
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Operating income (loss) | (34,875 | ) | 128,787 | (102,319 | ) | 78,133 | ||||||||||||||||||||||||||
Operating loss | (26,760 | ) | (52,232 | ) | (42,961 | ) | (67,444 | ) | ||||||||||||||||||||||||
Interest expense, net and amortization of deferred financing fees | 2,536 | 2,076 | 7,254 | 5,666 | 3,432 | 2,678 | 6,684 | 4,718 | ||||||||||||||||||||||||
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Income (loss) before taxes | (37,411 | ) | 126,711 | (109,573 | ) | 72,467 | ||||||||||||||||||||||||||
Income tax provision (benefit) | 26,125 | 56,435 | (5,165 | ) | 37,016 | |||||||||||||||||||||||||||
Loss before taxes | (30,192 | ) | (54,910 | ) | (49,645 | ) | (72,162 | ) | ||||||||||||||||||||||||
Income tax benefit | (2,798 | ) | (24,816 | ) | (5,213 | ) | (31,290 | ) | ||||||||||||||||||||||||
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Net income (loss) | $ | (63,536 | ) | 70,276 | $ | (104,408 | ) | 35,451 | ||||||||||||||||||||||||
Net loss | $ | (27,394 | ) | (30,094 | ) | $ | (44,432 | ) | (40,872 | ) | ||||||||||||||||||||||
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Income (loss) per common share: | ||||||||||||||||||||||||||||||||
Loss per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | (0.87 | ) | 0.97 | $ | (1.44 | ) | 0.48 | $ | (0.38 | ) | (0.41 | ) | $ | (0.61 | ) | (0.56 | ) | ||||||||||||||
Diluted | $ | (0.87 | ) | 0.96 | $ | (1.44 | ) | 0.48 | $ | (0.38 | ) | (0.41 | )�� | $ | (0.61 | ) | (0.56 | ) | ||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 72,649 | 71,581 | 72,566 | 72,232 | 72,935 | 72,597 | 72,811 | 72,525 | ||||||||||||||||||||||||
Diluted | 72,649 | 71,714 | 72,566 | 72,387 | 72,935 | 72,597 | 72,811 | 72,525 | ||||||||||||||||||||||||
Dividends declared per common share | $ | 0.15 | 0.15 | $ | 0.45 | 0.45 | $ | 0.15 | 0.15 | $ | 0.30 | 0.30 | ||||||||||||||||||||
See accompanying notes to consolidated financial statements.
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)Loss
(In thousands)
(unaudited)
| 13 weeks ended | 39 weeks ended | |||||||||||||||
| January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | |||||||||||||
Net income (loss) | $ | (63,536 | ) | 70,276 | $ | (104,408 | ) | 35,451 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Decrease in postretirement plan liability (net of deferred tax expense of $0, $0, $0 and $30, respectively) | — | — | — | 47 | ||||||||||||
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Total comprehensive income (loss) | $ | (63,536 | ) | 70,276 | $ | (104,408 | ) | 35,498 | ||||||||
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| 13 weeks ended | 26 weeks ended | |||||||||||||||
| October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||
Net loss | $ | (27,394 | ) | (30,094 | ) | $ | (44,432 | ) | (40,872 | ) | ||||||
Other comprehensive income, net of tax | — | — | — | — | ||||||||||||
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Total comprehensive loss | $ | (27,394 | ) | (30,094 | ) | $ | (44,432 | ) | (40,872 | ) | ||||||
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See accompanying notes to consolidated financial statements.
BARNES & NOBLE, INC. AND SUBSIDIARIES
(In thousands, except per share data)
| January 27, 2018 | January 28, 2017 | April 29, 2017 | October 27, 2018 | October 28, 2017 | April 28, 2018 | |||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 11,500 | 11,628 | 11,993 | $ | 11,192 | 11,324 | 10,769 | ||||||||||||||||
Receivables, net | 62,952 | 70,434 | 67,294 | 63,718 | 73,903 | 64,562 | ||||||||||||||||||
Merchandise inventories, net | 975,055 | 1,010,343 | 946,909 | 1,145,700 | 1,177,080 | 958,196 | ||||||||||||||||||
Prepaid expenses and other current assets | 79,175 | 62,164 | 101,816 | 77,938 | 141,244 | 65,153 | ||||||||||||||||||
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Total current assets | 1,128,682 | 1,154,569 | 1,128,012 | 1,298,548 | 1,403,551 | 1,098,680 | ||||||||||||||||||
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Property and equipment: | ||||||||||||||||||||||||
Land and land improvements | 2,541 | 2,541 | 2,541 | 2,541 | 2,541 | 2,541 | ||||||||||||||||||
Buildings and leasehold improvements | 1,075,491 | 1,060,416 | 1,072,007 | 1,090,505 | 1,076,591 | 1,080,952 | ||||||||||||||||||
Fixtures and equipment | 1,650,352 | 1,597,435 | 1,608,433 | 1,550,430 | 1,644,472 | 1,523,485 | ||||||||||||||||||
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| 2,728,384 | 2,660,392 | 2,682,981 | 2,643,476 | 2,723,604 | 2,606,978 | |||||||||||||||||||
Less accumulated depreciation and amortization | 2,466,032 | 2,378,925 | 2,406,859 | 2,384,361 | 2,451,675 | 2,351,454 | ||||||||||||||||||
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Net property and equipment | 262,352 | 281,467 | 276,122 | 259,115 | 271,929 | 255,524 | ||||||||||||||||||
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Goodwill | 73,769 | 211,276 | 207,381 | 71,593 | 207,381 | 71,593 | ||||||||||||||||||
Intangible assets, net | 309,757 | 310,369 | 310,205 | 309,419 | 309,860 | 309,649 | ||||||||||||||||||
Othernon-current assets | 13,285 | 11,275 | 11,201 | 17,484 | 9,967 | 14,122 | ||||||||||||||||||
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Total assets | $ | 1,787,845 | 1,968,956 | 1,932,921 | $ | 1,956,159 | 2,202,688 | 1,749,568 | ||||||||||||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable | $ | 490,886 | 500,751 | 473,686 | $ | 621,579 | 656,620 | 458,896 | ||||||||||||||||
Accrued liabilities | 285,598 | 319,145 | 283,157 | 267,479 | 280,905 | 260,209 | ||||||||||||||||||
Gift card liabilities | 358,609 | 384,830 | 351,424 | 214,352 | 327,217 | 323,465 | ||||||||||||||||||
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Total current liabilities | 1,135,093 | 1,204,726 | 1,108,267 | 1,103,410 | 1,264,742 | 1,042,570 | ||||||||||||||||||
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Long-term debt | 59,805 | 18,200 | 64,900 | 278,325 | 242,833 | 158,700 | ||||||||||||||||||
Deferred taxes | 58,118 | 54,290 | 86,132 | 72,147 | 83,785 | 52,044 | ||||||||||||||||||
Other long-term liabilities | 91,712 | 105,212 | 99,311 | 85,842 | 95,155 | 84,271 | ||||||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||||||
Common stock; $0.001 par value; 300,000 shares authorized; 112,238, 111,648 and 111,933 shares issued, respectively | 112 | 112 | 112 | |||||||||||||||||||||
Common stock; $0.001 par value; 300,000 shares authorized; 112,752, 112,226 and 112,238 shares issued, respectively | 112 | 112 | 112 | |||||||||||||||||||||
Additionalpaid-in capital | 1,747,478 | 1,743,562 | 1,741,380 | 1,751,258 | 1,745,822 | 1,749,555 | ||||||||||||||||||
Accumulated other comprehensive income | 315 | 198 | 315 | 276 | 315 | 276 | ||||||||||||||||||
Retained earnings | (183,064 | ) | (22,045 | ) | (46,425 | ) | (212,684 | ) | (108,383 | ) | (216,236 | ) | ||||||||||||
Treasury stock, at cost, 39,585, 40,093 and 39,497 shares, respectively | (1,121,724 | ) | (1,135,299 | ) | (1,121,071 | ) | ||||||||||||||||||
Treasury stock, at cost, 39,732, 39,580 and 39,585 shares, respectively | (1,122,527 | ) | (1,121,693 | ) | (1,121,724 | ) | ||||||||||||||||||
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Total shareholders’ equity | 443,117 | 586,528 | 574,311 | 416,435 | 516,173 | 411,983 | ||||||||||||||||||
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Commitments and contingencies | — | — | — | — | — | — | ||||||||||||||||||
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Total liabilities and shareholders’ equity | $ | 1,787,845 | 1,968,956 | 1,932,921 | $ | 1,956,159 | 2,202,688 | 1,749,568 | ||||||||||||||||
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See accompanying notes to consolidated financial statements.
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity
For the 3926 weeks ended JanuaryOctober 27, 2018
(In thousands)
(unaudited)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Gains | Retained Earnings | Treasury Stock at Cost | Total | |||||||||||||||||||
Balance at April 29, 2017 | $ | 112 | 1,741,380 | 315 | (46,425 | ) | (1,121,071 | ) | $ | 574,311 | ||||||||||||||
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Adoption of ASU2016-09 (see Note 19) | — | 1,310 | — | 1,037 | — | 2,347 | ||||||||||||||||||
Net loss | — | — | — | (104,408 | ) | — | (104,408 | ) | ||||||||||||||||
Stock-based compensation expense | — | 4,788 | — | — | — | 4,788 | ||||||||||||||||||
Cash dividends declared | — | — | — | (32,719 | ) | — | (32,719 | ) | ||||||||||||||||
Accrued dividends for long-term incentive awards | — | — | — | (549 | ) | — | (549 | ) | ||||||||||||||||
Purchase of treasury stock related to stock-based compensation, 88 shares | — | — | — | — | (653 | ) | (653 | ) | ||||||||||||||||
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Balance at January 27, 2018 | $ | 112 | 1,747,478 | 315 | (183,064 | ) | (1,121,724 | ) | $ | 443,117 | ||||||||||||||
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| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Gains | Retained Earnings | Treasury Stock at Cost | Total | |||||||||||||||||||
Balance at April 28, 2018 | $ | 112 | 1,749,555 | 276 | (216,236 | ) | (1,121,724 | ) | $ | 411,983 | ||||||||||||||
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Net loss | — | — | — | (44,432 | ) | — | (44,432 | ) | ||||||||||||||||
Stock-based compensation expense | — | 1,703 | — | — | — | 1,703 | ||||||||||||||||||
Cash dividends declared/paid | — | — | — | (21,895 | ) | — | (21,895 | ) | ||||||||||||||||
Accrued dividends for long-term incentive awards | — | — | — | (165 | ) | — | (165 | ) | ||||||||||||||||
Purchase of treasury stock related to stock-based compensation, 147 shares | — | — | — | — | (803 | ) | (803 | ) | ||||||||||||||||
Adoption of ASU2014-09 (see Note 1) | — | — | — | 70,044 | — | 70,044 | ||||||||||||||||||
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Balance at October 27, 2018 | $ | 112 | 1,751,258 | 276 | (212,684 | ) | (1,122,527 | ) | $ | 416,435 | ||||||||||||||
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See accompanying notes to consolidated financial statements.
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| 39 weeks ended | 26 weeks ended | |||||||||||||||
| January 27, 2018 | January 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | (104,408 | ) | 35,451 | ||||||||||||
Adjustments to reconcile net income to net cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (44,432 | ) | (40,872 | ) | |||||||||||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||||||||||
Depreciation and amortization (including amortization of deferred financing fees) | 83,306 | 91,545 | 49,482 | 54,574 | ||||||||||||
Stock-based compensation expense | 4,788 | 5,534 | 1,703 | 3,132 | ||||||||||||
Impairment charges | 135,436 | 93 | ||||||||||||||
Deferred taxes | (25,667 | ) | — | |||||||||||||
Loss on disposal of property and equipment | 589 | 1,179 | 179 | 509 | ||||||||||||
Net decrease in other long-term liabilities | (7,599 | ) | (8,895 | ) | ||||||||||||
Net increase (decrease) in other long-term liabilities | 1,571 | (4,156 | ) | |||||||||||||
Net (increase) decrease in othernon-current assets | (3,614 | ) | 1,327 | (113 | ) | 221 | ||||||||||
Changes in operating assets and liabilities, net | 25,302 | 32,277 | (48,165 | ) | (119,903 | ) | ||||||||||
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Net cash flows provided by operating activities | 108,133 | 158,511 | ||||||||||||||
Net cash flows used in operating activities | (39,775 | ) | (106,495 | ) | ||||||||||||
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Cash flows from investing activities: | ||||||||||||||||
Purchases of property and equipment | (69,971 | ) | (73,665 | ) | (51,846 | ) | (49,532 | ) | ||||||||
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Net cash flows used in investing activities | (69,971 | ) | (73,665 | ) | (51,846 | ) | (49,532 | ) | ||||||||
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Cash flows from financing activities: | ||||||||||||||||
Proceeds from credit facility | 877,822 | 897,878 | 579,725 | 608,833 | ||||||||||||
Payments on credit facility | (882,917 | ) | (926,878 | ) | (460,100 | ) | (430,900 | ) | ||||||||
Cash dividends paid | (32,719 | ) | (32,955 | ) | (21,895 | ) | (21,779 | ) | ||||||||
Treasury stock repurchase plan | — | (23,281 | ) | |||||||||||||
Purchase of treasury stock related to stock-based compensation | (653 | ) | (1,580 | ) | (803 | ) | (622 | ) | ||||||||
Payment of new credit facility related fees | — | (474 | ) | |||||||||||||
Proceeds from exercise of common stock options | — | 312 | ||||||||||||||
Payment of amended credit facility related fees | (4,425 | ) | — | |||||||||||||
Cash dividends paid for long-term incentive awards | (188 | ) | (78 | ) | (458 | ) | (174 | ) | ||||||||
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Net cash flows used in financing activities | (38,655 | ) | (87,056 | ) | ||||||||||||
Net cash flows provided by financing activities | 92,044 | 155,358 | ||||||||||||||
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Net decrease in cash and cash equivalents | (493 | ) | (2,210 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 423 | (669 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | 11,993 | 13,838 | 10,769 | 11,993 | ||||||||||||
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Cash and cash equivalents at end of period | $ | 11,500 | 11,628 | $ | 11,192 | 11,324 | ||||||||||
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Changes in operating assets and liabilities, net: | ||||||||||||||||
Receivables, net | $ | 4,342 | 54,483 | $ | 844 | (6,609 | ) | |||||||||
Merchandise inventories, net | (28,146 | ) | (76,620 | ) | (187,504 | ) | (230,171 | ) | ||||||||
Prepaid expenses and other current assets | 22,641 | 43,718 | (12,785 | ) | (39,428 | ) | ||||||||||
Accounts payable, accrued liabilities and gift card liabilities | 26,465 | 10,696 | 151,280 | 156,305 | ||||||||||||
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Changes in operating assets and liabilities, net | $ | 25,302 | 32,277 | $ | (48,165 | ) | (119,903 | ) | ||||||||
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Supplemental cash flow information | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 5,729 | 4,125 | $ | 5,645 | 3,556 | ||||||||||
Income taxes (net of refunds) | $ | (1,416 | ) | (18,027 | ) | $ | (841 | ) | (113 | ) | ||||||
Non-cash financing activity: | ||||||||||||||||
Accrued cash dividends | $ | — | 50 | $ | — | 21 | ||||||||||
Accrued dividends for long-term incentive awards | $ | 938 | 514 | $ | 943 | 726 | ||||||||||
See accompanying notes to consolidated financial statements.
BARNES & NOBLE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the 3926 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017
(Thousands of dollars, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of Barnes & Noble, Inc. and its subsidiaries (collectively, Barnes & Noble or the Company).
In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of JanuaryOctober 27, 2018 and the results of its operations for the 13 and 3926 weeks and its cash flows for the 3926 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 Form10-K for the 52 weeks ended April 29, 201728, 2018 (fiscal 2017)2018).
Due to the seasonal nature of the business, the results of operations for the 3926 weeks ended JanuaryOctober 27, 2018 are not indicative of the results expected for the 52 weeks ending April 28, 201827, 2019 (fiscal 2018)2019).
1. Recent Accounting Pronouncements
Adopted Accounting Pronouncements |
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (ASU)2016-15,Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (ASU2016-15). This update clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company adopted ASU2016-15 effective April 29, 2018 using the retrospective approach with no impact on the Company’s consolidated statement of cash flows.
In May 2014, the FASB issued ASU2014-09,Revenue from Contracts with Customers, which was further amended in 2015 and 2016 (Topic 606). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes previous revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the previous revenue guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented (full retrospective method), or apply the requirements in the year of adoption, through a cumulative adjustment (modified retrospective method). The Company adopted Topic 606 effective April 29, 2018 using the modified retrospective method.
The majority of the Company’s revenue is generated from the sale of product in its retail stores, which will continue to be recognized when control of the product is transferred to the customer. The adoption of Topic 606 resulted in the following changes: 1) presentation of estimated merchandise returns as both an asset, equal to the inventory value net of processing costs, and a corresponding return liability, compared to the previous practice of recording an estimated net return liability; and 2) the timing of revenue recognition for gift card breakage. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. Prior to adoption of Topic 606, the Company recorded this amount in revenue on a straight-line basis over a12-month period beginning in the 13th month after the month the gift card was originally sold. Upon adoption, the Company now recognizes estimated gift card breakage as revenue proportionately as redemption occurs.
The below tables set forth the adjustments to the Company’s consolidated statement of earnings and consolidated balance sheet as a result of the newly adopted revenue recognition standard.
| 13 Weeks Ended October 27, 2018 | 26 Weeks Ended October 27, 2018 | |||||||||||||||||||||||
| As Reported | Balances Without Adoption of Topic 606 | Impact of Adoption Increase (Decrease) | As Reported | Balances Without Adoption of Topic 606 | Impact of Adoption Increase (Decrease) | |||||||||||||||||||
Sales | $ | 771,188 | 772,434 | (1,246 | ) | $ | 1,565,964 | 1,567,616 | (1,652 | ) | ||||||||||||||
Cost of sales and occupancy | 545,841 | 545,841 | — | 1,112,545 | 1,112,545 | — | ||||||||||||||||||
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Gross profit | $ | 225,347 | 226,593 | (1,246 | ) | $ | 453,419 | 455,071 | (1,652 | ) | ||||||||||||||
| October 27, 2018 | ||||||||||||
| As Reported | Balances Without Adoption of Topic 606 | Impact of Adoption Increase (Decrease) | ||||||||||
| Assets | ||||||||||||
Prepaid expenses and other current assets | $ | 77,938 | 77,615 | 323 | ||||||||
| Liabilities and Shareholders’ Equity |
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Accrued liabilities | $ | 267,479 | 266,868 | 611 | ||||||||
Gift card liabilities | $ | 214,352 | 302,846 | (88,494 | ) | |||||||
Deferred taxes | $ | 72,147 | 52,044 | 20,103 | ||||||||
Retained earnings | $ | (212,684 | ) | (281,363 | ) | 68,679 | ||||||
| Recent | Accounting Pronouncements |
In February 2018, the FASB issued ASU2018-02,Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects as a result of the newly enacted federal corporate income tax rate under the Tax Cuts and Jobs Act. This guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. Two transition methods are available: at the beginning of the period of adoption, or retrospective to each period in which the income tax effects of the Tax Cuts and Jobs Act related to items remaining in accumulated other comprehensive income are recognized. The Company does not expect the adoption will have a material impact on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU2016-02,Leases (Topic 842) (ASU2016-02), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous Generally Accepted Accounting Principles. ASU2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU2016-02 requires expanded disclosures about the nature and terms of lease agreements and is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company plans to adopt ASU2016-02 effective April 28, 2019. The Company remains on schedule and has implemented key system functionality to enable the preparation of restated financial information. The Company is currently evaluating the provisions of this standard and assessing its existing lease portfolio in order to determine the impact on its accounting systems, processes and internal controls over financial reporting. The Company expects the adoption of this standard will result in a significant increase to its long-term assets and liabilities on its consolidated balance sheet. However, the Company does not expect adoption will have a material impact on its consolidated statement of operations and cash flows.
2. Merchandise Inventories
Merchandise inventories, except NOOK merchandise inventories, are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under thefirst-in,first-out (FIFO) basis. NOOK merchandise inventories are recorded based on the average cost method and are valued at the lower of cost and net realizable value.
Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves fornon-returnable inventory are based on the Company’s history of liquidatingnon-returnable inventory.
The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.
3. Revenue Recognition
On April 29, 2018, the Company adopted Topic 606 using the modified retrospective approach for all contracts not completed as of the adoption date. Financial results for reporting periods beginning after April 28, 2018 are presented in accordance with Topic 606, while prior periods will continue to be reported in accordance with ourpre-adoption accounting policies and therefore have not been adjusted to conform to Topic 606.
The primary impact of adopting Topic 606 relates to the timing of revenue recognition for gift card breakage. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. Prior to adoption of Topic 606, the Company recorded this amount in revenue on a straight-line basis over a12-month period beginning in the 13th month after the month the gift card was originally sold. Upon adoption, the Company now recognizes estimated gift card breakage as revenue proportionately as redemption occurs. This change in accounting policy was accounted for through a cumulative effect adjustment to increase retained earnings during the first quarter of fiscal 2019. The Company reclassified $90,147 from gift card liabilities resulting in a cumulative effect adjustment of $70,044, net of tax, to retained earnings on the Company’s consolidated balance sheets and consolidated statement of changes in stockholders’ equity. Additionally, the adoption of Topic 606 resulted in insignificant financial statement presentation reclassifications related to sales return reserve. The Company does not expect the adoption of Topic 606 to have a significant impact on the consolidated financial statements on a prospective basis.
In accordance with Topic 606, revenue shall be recognized upon satisfaction of all contractual performance obligations and transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for corresponding goods or services. Substantially all of the Company’s productssales are single performance obligation arrangements for retail sale transactions for which the transaction price is equivalent to the stated price of the product or service, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the customer to deliver a product or service at the point of sale. Revenue from retail sales is recognized at the timepoint of sale, or shipment, other than those with multiple elementsnet of sales tax and Free On Board (FOB) destination point shipping terms. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience. ECommerce revenuefuture returns. Revenue from eCommerce sales of products ordered through the Company’s websites is recognized upon estimated delivery and receipt of the shipment by itsthe Company’s customers. Freight costs are included within the Company’s cost of sales and occupancy. Sales taxes collected from retail customersA provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are excluded from reported revenues.recorded. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.
In accordance with Accounting Standards Codification (ASC)605-25,Revenue Recognition, Multiple-Element Arrangements, and Accounting Standards Updates (ASU)2009-13 and2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price
using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK® device revenue is recognized at the segment point of sale.
The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on awhen-and-if-available basis with the purchase of a NOOK® from the Company. Using the relative selling-price method described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK® and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS is deferred and recognized on a straight-line basis over the2-year estimated life of a NOOK®device.
The average percentage of a NOOK®’s sales price that is deferred for undelivered items and recognized over its2-year estimated life ranges between 0% and 5%, depending on the type of device sold. The amount of NOOK®-related deferred revenue as of January 27, 2018, January 28, 2017 and April 29, 2017 was $82, $279 and $226, respectively. These amounts are classified on the Company’s balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.
The Company also pays certain vendors who distributed NOOK® a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK® based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC605-45-45,Reporting Revenue Gross as a Principal versus Net as an Agent, on a net basis. All other revenue is recognized on a gross basis.
The Company rents physical textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.
NOOK acquires the rights to distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model, in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore.sold. The majority of the Company’s eBooks sold are sold under the agency model.
The Barnes & Noble MemberMembership Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions viae-mail or direct mail, for an annual fee of $25.00, which isnon-refundable after the first 30 days. Revenue is recognized over the12-month period based upon historical spending patterns for Barnes & Noble members.
The following table summarizes disaggregated revenue from contracts with customers by product line:
| Sales by Product Line | 13 weeks ended | 26 weeks ended | ||||||||||||||
| October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||
Media(a) | 69 | % | 71 | % | 70 | % | 72 | % | ||||||||
Digital(b) | 2 | % | 3 | % | 3 | % | 3 | % | ||||||||
Other(c) | 29 | % | 26 | % | 27 | % | 25 | % | ||||||||
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Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Includes tangible books, music, movies, rentals and |
| (b) | Includes NOOK®, related accessories, eContent and warranties. |
| (c) | Includes Toys & Games, café products, gifts and miscellaneous other. |
4. Research and Development Costs for Software Products
The Company follows the guidance in ASC985-20,Cost of Software to Be Sold, Leased or Marketed, regarding research and development costs for software products to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as for the ongoing assessment of the recoverability of
capitalized costs. The Company’s products reach technological feasibility shortly before the products are released and, therefore, research and development costs are generally expensed as incurred.
5. Internal-Use Software and Website Development Costs
Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized over an estimated useful life of three to seven years. The Company capitalized costs, primarily related to labor, consulting, hardware and software, of $12,843$6,460 and $14,696$8,610 during the 3926 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively. Amortization of previously capitalized amounts was $5,543$5,844 and $5,403$5,471 during the 13 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively, and $16,388$11,688 and $18,152$10,845 during the 3926 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively. Costs related to the design or maintenance ofinternal-use software and website development are expensed as incurred.
6. Net Earnings (Loss) per Share
In accordance with ASC260-10-45,Share-Based Payment Arrangements and Participating Securities and theTwo-Class Method, unvested share-based payment awards that contain rights to receivenon-forfeitable dividends are considered participating securities. The Company’s unvested restricted shares and unvested restricted stock units granted prior to July 15, 2015 and shares issuable under the Company’s deferred compensation plan were considered participating securities. Cash dividends to restricted stock units and performance-based stock units granted on or after July 15, 2015 are not distributed until and except to the extent that the restricted stock units vest, and in the case of performance-based stock units, until and except to the extent that the performance metrics are achieved or are otherwise deemed satisfied. Stock options do not receive cash dividends. As such, these awards are not considered participating securities.
Basic earnings per common share are calculated by dividing the net income, adjusted for income allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the dilution that would occur if any potentially dilutive
instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method ortwo-class method. Other potentially dilutive securities include preferred stock, stock options, restricted stock units granted after July 15, 2015, and performance-based stock units and are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods.
During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. Due to the net loss during the 13 and 39 weeks ended JanuaryOctober 27, 2018 and October 28, 2017 and the 26 weeks ended October 27, 2018 and October 28, 2017, participating securities in the amounts of 142,237121,685, 116,574, 131,263 and 123,066,113,480, respectively, were excluded from the calculation of loss per share using thetwo-class method because the effect would be antidilutive. The Company’s outstandingnon-participating securities consisting of dilutive stock options and restricted stock units of 56,776, 132,686, 44,279131,519, 67,644, 143,269 and 155,11338,030 for the 13 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017 and the 3926 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively, were excluded from the calculation of loss per share using thetwo-class method because the effect would be antidilutive.
The following is a reconciliation of the Company’s basic and diluted income (loss)loss per share calculation:
| 13 weeks ended | 39 weeks ended | |||||||||||||||
| January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | |||||||||||||
Numerator for basic income (loss) per share: | ||||||||||||||||
Net income (loss) | $ | (63,536 | ) | 70,276 | $ | (104,408 | ) | 35,451 | ||||||||
Less allocation of dividends to participating securities | (21 | ) | (168 | ) | (59 | ) | (559 | ) | ||||||||
Less allocation of undistributed earnings to participating securities | — | (948 | ) | — | (42 | ) | ||||||||||
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Net income (loss) available to common shareholders | $ | (63,557 | ) | 69,160 | $ | (104,467 | ) | 34,850 | ||||||||
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Numerator for diluted income (loss) per share: | ||||||||||||||||
Net income (loss) available to common shareholders | $ | (63,557 | ) | 69,160 | $ | (104,467 | ) | 34,850 | ||||||||
Allocation of undistributed earnings to participating securities | — | 948 | — | 42 | ||||||||||||
Less diluted allocation of undistributed earnings to participating securities | — | (946 | ) | — | (42 | ) | ||||||||||
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Net income (loss) available to common shareholders | $ | (63,557 | ) | 69,162 | $ | (104,467 | ) | 34,850 | ||||||||
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Denominator for basic income (loss) per share: | ||||||||||||||||
Basic weighted average common shares | 72,649 | 71,581 | 72,566 | 72,232 | ||||||||||||
Denominator for diluted income (loss) per share: | ||||||||||||||||
Basic weighted average common shares | 72,649 | 71,581 | 72,566 | 72,232 | ||||||||||||
Average dilutive options | — | 68 | — | 77 | ||||||||||||
Average dilutivenon-participating securities | — | 65 | — | 78 | ||||||||||||
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Diluted weighted average common shares | 72,649 | 71,714 | 72,566 | 72,387 | ||||||||||||
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Income (loss) per common share: | ||||||||||||||||
Basic | $ | (0.87 | ) | 0.97 | $ | (1.44 | ) | 0.48 | ||||||||
Diluted | $ | (0.87 | ) | 0.96 | $ | (1.44 | ) | 0.48 | ||||||||
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| October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||
Numerator for basic loss per share: | ||||||||||||||||
Net loss | $ | (27,394 | ) | (30,094 | ) | $ | (44,432 | ) | (40,872 | ) | ||||||
Less allocation of dividends to participating securities | (23 | ) | (27 | ) | (44 | ) | (38 | ) | ||||||||
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Net loss available to common shareholders | $ | (27,417 | ) | (30,121 | ) | $ | (44,476 | ) | (40,910 | ) | ||||||
Numerator for diluted loss per share: | ||||||||||||||||
Net loss available to common shareholders | $ | (27,417 | ) | (30,121 | ) | $ | (44,476 | ) | (40,910 | ) | ||||||
Denominator for basic and diluted loss per share: | ||||||||||||||||
Basic and diluted weighted average common shares | 72,935 | 72,597 | 72,811 | 72,525 | ||||||||||||
Loss per common share: | ||||||||||||||||
Basic | $ | (0.38 | ) | (0.41 | ) | $ | (0.61 | ) | (0.56 | ) | ||||||
Diluted | $ | (0.38 | ) | (0.41 | ) | $ | (0.61 | ) | (0.56 | ) | ||||||
7. Segment Reporting
The Company’s two operating segments are B&N Retail and NOOK.
B&N Retail
This segment includes 630 bookstores as of JanuaryOctober 27, 2018, primarily under the Barnes & Noble Booksellers trade name. These Barnes & Noble stores generally offer a comprehensive trade book title base, a café, and departments dedicated to Juvenile,Kids, Toys & Games, DVDs, Music & Vinyl, Gift, Magazine, Bargain products and a dedicated NOOK® area. The stores also offer a calendar of ongoing events, including author appearances and children’s activities. The B&N Retail segment also includes the Company’s eCommerce website, www.barnesandnoble.com, and its publishing operation, Sterling Publishing Co., Inc.
NOOK
This segment includes the Company’s digital business, including the development and support of the Company’s NOOK® product offerings. The digital business includes digital content such as eBooks, digital newsstand and sales of NOOK® devices and accessories to B&N Retail.
Summarized financial information concerning the Company’s reportable segments is presented below:
| Sales by Segment | 13 weeks ended | 26 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
B&N Retail | $ | 753,185 | 769,709 | $ | 1,528,903 | 1,599,745 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOOK | 21,763 | 25,964 | 47,033 | 55,464 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Elimination(a) | (3,760 | ) | (4,556 | ) | (9,972 | ) | (10,776 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total | $ | 771,188 | 791,117 | $ | 1,565,964 | 1,644,433 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and Amortization | 13 weeks ended | 26 weeks ended | ||||||||||||||
| October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||
B&N Retail | $ | 21,888 | 24,117 | $ | 43,166 | 47,196 | ||||||||||
NOOK | 2,560 | 3,082 | 5,167 | 6,401 | ||||||||||||
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| |||||||||
Total | $ | 24,448 | 27,199 | $ | 48,333 | 53,597 | ||||||||||
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|
| |||||||||
| Operating Loss | 13 weeks ended | 26 weeks ended | ||||||||||||||
| October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||
B&N Retail | $ | (25,242 | ) | (49,311 | ) | $ | (41,110 | ) | (61,821 | ) | ||||||
NOOK | (1,518 | ) | (2,921 | ) | (1,851 | ) | (5,623 | ) | ||||||||
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Total | $ | (26,760 | ) | (52,232 | ) | $ | (42,961 | ) | (67,444 | ) | ||||||
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| |||||||||
| Capital Expenditures | 13 weeks ended | 26 weeks ended | ||||||||||||||
| October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||
B&N Retail | $ | 36,749 | 27,045 | $ | 48,979 | 45,944 | ||||||||||
NOOK | 1,493 | 1,782 | 2,867 | 3,588 | ||||||||||||
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Total | $ | 38,242 | 28,827 | $ | 51,846 | 49,532 | ||||||||||
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| |||||||||
| Total Assets(b) | October 27, 2018 | October 28, 2017 | ||||||
B&N Retail | $ | 1,931,335 | 2,174,430 | |||||
NOOK | 24,824 | 28,258 | ||||||
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| |||||
Total | $ | 1,956,159 | 2,202,688 | |||||
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| |||||
| (a) | Represents sales from NOOK to B&N Retail |
A reconciliation of operating income (loss) from reportable segments to income (loss) before taxes in the consolidated financial statements is as follows:
| 13 weeks ended | 39 weeks ended | |||||||||||||||
| January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | |||||||||||||
Reportable segments operating income (loss) | $ | (34,875 | ) | 128,787 | $ | (102,319 | ) | 78,133 | ||||||||
Interest expense, net and amortization of deferred financing costs | 2,536 | 2,076 | 7,254 | 5,666 | ||||||||||||
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| |||||||||
Consolidated income (loss) before taxes | $ | (37,411 | ) | 126,711 | $ | (109,573 | ) | 72,467 | ||||||||
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| |||||||||
| Useful Life | As of January 27, 2018 | |||||||||||||||
Amortizable Intangible Assets | Gross Carrying Amount | Accumulated Amortization | Total | |||||||||||||
Technology | 5-10 | $ | 10,710 | (10,303 | ) | $ | 407 | |||||||||
Other | 3-10 | 6,524 | (6,468 | ) | 56 | |||||||||||
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| $ | 17,234 | (16,771 | ) | $ | 463 | |||||||||||
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Unamortizable Intangible Assets | ||||
Trade name | $ | 293,400 | ||
Publishing contracts | 15,894 | |||
|
| |||
| $ | 309,294 | |||
|
| |||
Total amortizable and unamortizable intangible assets as of January 27, 2018 | $ | 309,757 | ||
|
| |||
| As of January 28, 2017 | ||||||||||||||||
Amortizable Intangible Assets | Useful Life | Gross Carrying Amount | Accumulated Amortization | Total | ||||||||||||
Technology | 5-10 | $ | 10,710 | (9,895 | ) | $ | 815 | |||||||||
Distribution contracts | 10 | 8,325 | (8,127 | ) | 198 | |||||||||||
Other | 3-10 | 6,418 | (6,356 | ) | 62 | |||||||||||
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| |||||||||||
| $ | 25,453 | (24,378 | ) | $ | 1,075 | |||||||||||
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|
| |||||||||||
Unamortizable Intangible Assets | ||||
Trade name | $ | 293,400 | ||
Publishing contracts | 15,894 | |||
|
| |||
| $ | 309,294 | |||
|
| |||
Total amortizable and unamortizable intangible assets as of January 28, 2017 | $ | 310,369 | ||
|
| |||
All amortizable intangible assets are being amortized over their useful life on a straight-linesell-through basis.
| (b) | Excludes intercompany balances. |
A reconciliation of operating loss from reportable segments to loss before taxes in the consolidated financial statements is as follows:
| 13 weeks ended | 26 weeks ended | |||||||||||||||
| October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||
Reportable segments operating loss | $ | (26,760 | ) | (52,232 | ) | $ | (42,961 | ) | (67,444 | ) | ||||||
Interest expense, net and amortization of deferred financing costs | 3,432 | 2,678 | 6,684 | 4,718 | ||||||||||||
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| |||||||||
Consolidated loss before taxes | $ | (30,192 | ) | (54,910 | ) | $ | (49,645 | ) | (72,162 | ) | ||||||
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| |||||||||
8. Intangible Assets and Goodwill
| As of October 27, 2018 | ||||||||||||||||
Amortizable Intangible Assets | Useful Life | Gross Carrying Amount | Accumulated Amortization | Total | ||||||||||||
Technology | 5-10 | $ | 10,710 | (10,608 | ) | $ | 102 | |||||||||
Other | 3-10 | 6,572 | (6,549 | ) | 23 | |||||||||||
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| |||||||||||
| $ | 17,282 | (17,157 | ) | $ | 125 | |||||||||||
|
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|
|
| |||||||||||
Unamortizable Intangible Assets(a) | ||||
Trade name | $ | 293,400 | ||
Publishing contracts | 15,894 | |||
|
| |||
| $ | 309,294 | |||
|
| |||
Total amortizable and unamortizable intangible assets as of October 27, 2018 | $ | 309,419 | ||
|
| |||
| As of October 28, 2017 | ||||||||||||||||
Amortizable Intangible Assets | Useful Life | Gross Carrying Amount | Accumulated Amortization | Total | ||||||||||||
Technology | 5-10 | $ | 10,710 | (10,200 | ) | $ | 510 | |||||||||
Other | 3-10 | 6,494 | (6,438 | ) | 56 | |||||||||||
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| |||||||||||
| $ | 17,204 | (16,638 | ) | $ | 566 | |||||||||||
|
|
|
|
|
| |||||||||||
Unamortizable Intangible Assets(a) | ||||
Trade name | $ | 293,400 | ||
Publishing contracts | 15,894 | |||
|
| |||
| $ | 309,294 | |||
|
| |||
Total amortizable and unamortizable intangible assets as of October 28, 2017 | $ | 309,860 | ||
|
| |||
Aggregate Amortization Expense | ||||
For the 39 weeks ended January 27, 2018 | $ | 514 | ||
For the 39 weeks ended January 28, 2017 | $ | 577 | ||
Estimated Amortization Expense | ||||
(12 months ending on or about April 30) | ||||
2018 | $ | 631 | ||
2019 | $ | 346 | ||
| (a) |
| |||||||||||||||||||||||||||||||||||
All amortizable intangible assets are being amortized over their useful life on a straight-line basis.
Aggregate Amortization Expense | ||||
For the 26 weeks ended October 27, 2018 | $ | 256 | ||
For the 26 weeks ended October 28, 2017 | $ | 382 | ||
Estimated Amortization Expense | ||||
(12 months ending on or about April 30) | ||||
2019 | $ | 380 | ||
2020 | $ | 1 | ||
The carrying amounts of goodwill, which relate to the B&N Retail reporting unit, as of October 27, 2018 and October 28, 2017 are as follows:
| Total Company | ||||
Balance as of October 28, 2017 | $ | 207,381 | ||
Fiscal 2018 benefit of excess tax amortization(b) | (2,176 | ) | ||
Fiscal 2018 impairment charge(c) | (133,612 | ) | ||
|
| |||
Balance as of October 27, 2018 | $ | 71,593 | ||
| (b) | The tax basis of goodwill arising from an acquisition during the 52 weeks ended January 29, 2005 exceeded the related basis for financial reporting |
| (c) | In fiscal
|
9. Gift Cards
The Company sells gift cards, which can be used in its stores, on www.barnesandnoble.com, on NOOK® devices and at Barnes & Noble Education, Inc. (B&N Education) stores. The Company does not charge administrative or dormancy fees on gift cards and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Gift cards redeemed at B&N Education are funded by the gift card liability at the Company. Over time, a portion of the gift cards issued is typically not redeemed. This is referred to as gift card breakage. Effective April 29, 2018, the Company adopted Topic 606. The adoption of Topic 606 resulted in changes in the timing of revenue recognition for gift card breakage. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. Prior to adoption of Topic 606, the Company recorded this amount in revenue on a straight-line basis over a12-month period beginning in the 13th month after the month the gift card was originally sold. Upon adoption, the Company now recognizes estimated gift card breakage as revenue proportionately as redemption occurs.
The Company’s contract liabilities relate to its gift card program. Below is a summary of the changes during the 26 weeks ended October 27, 2018:
The Company sells gift cards, which can be used in its stores, on www.barnesandnoble.com, on NOOK® devices and at Barnes & Noble Education, Inc. (B&N Education) stores. The Company does not charge administrative or dormancy fees on gift cards and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Gift cards redeemed at B&N Education are funded by the gift card liability at the Company. Over time, a portion of the gift cards issued is typically not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in revenue on a straight-line basis over a12-month period beginning in the13th month after the month the gift card was originally sold. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.
Gift card liabilities balance as of April 28, 2018 Adoption of Topic 606 Gift card breakage Gift card redemptions Gift card issuances Gift card liabilities balance as of October 27, 2018The Company recognized gift card breakage of $27,496 and $20,805 during the 13 weeks ended January 27, 2018 and January 28, 2017, respectively, and $37,224 and $30,561 during the 39 weeks ended January 27, 2018 and January 28, 2017, respectively. The Company had gift card liabilities of $358,609 and $384,830 as of January 27, 2018 and January 28, 2017, respectively. Total Company $ 323,465 (90,147 ) (8,045 ) (99,620 ) 88,699 $ 214,352
10. Other Long-Term Liabilities
Other long-term liabilities consist primarily of deferred rent, long-term insurance liabilities, asset retirement obligations and tax liabilities and reserves. The Company provides for minimum rent expense over the lease terms (including thebuild-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of tenant allowances) is classified as deferred rent. Other long-term liabilities also include store closing expenses, long-term deferred revenues and a health care and life insurance plan for certain retired employees. The Company had the following other long-term liabilities at October 27, 2018, October 28, 2017 and April 28, 2018:
Other long-term liabilities consist primarily of deferred rent, tax liabilities and reserves, long-term insurance liabilities and asset retirement obligations. The Company provides for minimum rent expense over the lease terms (including thebuild-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of tenant allowances) is classified as deferred rent. Other long-term liabilities also include store closing expenses, long-term deferred revenues and a health care and life insurance plan for certain retired employees. The Company had the following other long-term liabilities at January 27, 2018, January 28, 2017 and April 29, 2017:
| January 27, 2018 | January 28, 2017 | April 29, 2017 | October 27, 2018 | October 28, 2017 | April 28, 2018 | |||||||||||||||||||
Deferred rent | $ | 52,087 | 62,394 | 59,142 | $ | 52,329 | 55,150 | 50,720 | ||||||||||||||||
Tax liabilities and reserves | 8,711 | 9,157 | 8,711 | |||||||||||||||||||||
Insurance liabilities | 13,498 | 14,998 | 14,225 | 12,609 | 14,162 | 12,589 | ||||||||||||||||||
Asset retirement obligations | 13,207 | 13,381 | 11,482 | 12,502 | 12,538 | 11,629 | ||||||||||||||||||
Tax liabilities and reserves | 5,124 | 8,711 | 5,124 | |||||||||||||||||||||
Other | 4,209 | 5,282 | 5,751 | 3,278 | 4,594 | 4,209 | ||||||||||||||||||
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|
|
|
|
| |||||||||||||||||||
Total other long-term liabilities | $ | 91,712 | 105,212 | 99,311 | $ | 85,842 | 95,155 | 84,271 | ||||||||||||||||
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11. Income Taxes
The Company recorded an income tax provision of $26,125 on apre-tax loss of $37,411 during the 13 weeks ended January 27, 2018, which represented an effective income tax rate of (69.8)%. The Company recorded an income tax provision of $56,435 on apre-tax income of $126,711 during the 13 weeks ended January 28, 2017, which represented an effective income tax rate of 44.5%.
The Company recorded an income tax benefit of $5,165 on apre-tax loss of $109,573 during the 39 weeks ended January 27, 2018, which represented an effective income tax rate of 4.7%. The Company recorded an income tax provision of $37,016 on apre-tax income of $72,467 during the 39 weeks ended January 28, 2017,
which represented an effective income tax rate of 51.1%. The Company’s effective tax rates for the 13 and 39 weeks ended January 27, 2018 and January 28, 2017 differ from the statutory rates due to the impact of permanent items such as meals and entertainment,non-deductible executive compensation, tax credits, changes in uncertain tax positions, state tax provision, net of federal benefit and for the 13 and 39 weeks ended January 27, 2018, the impact of the Tax Cuts and Jobs Act, goodwill impairment, and changes to valuation allowance. The change in effective tax rates for the 13 and 39 weeks ended January 27, 2018 and January 28, 2017 was due to changes in uncertain tax positions, return to provision adjustments, goodwill impairment, valuation allowance and the impact of the Tax Cuts and Jobs Act.
During the 13 and 39 weeks ended January 27, 2018 the Company recognized tax expense of $11 and $915, respectively, as a result of the adoption of $2,798 on apre-tax loss of $30,192 during the 13 weeks ended October 27, 2018, which represented an effective income tax rate of 9.3%. The Company recorded an income tax benefit of $24,816 on apre-tax loss of $54,910 during the 13 weeks ended October 28, 2017, which represented an effective income tax rate of 45.2%.
The Company’s effective tax rates for the 13 weeks ended October 27, 2018 and October 28, 2017 differ from the statutory rates due to the impact of permanent items such as meals and entertainment,non-deductible executive compensation, tax credits, changes in uncertain tax positions, expected changes in valuation allowance based on forecasted full year income and state tax provision, net of federal benefit.
The Company recorded an income tax benefit of $5,213 on apre-tax loss of $49,645 during the 26 weeks ended October 27, 2018, which represented an effective income tax rate of 10.5%. The Company recorded an income tax benefit of $31,290 on apre-tax loss of $72,162 during the 26 weeks ended October 28, 2017, which represented an effective income tax rate of 43.4%.
The Company’s effective tax rates for the 26 weeks ended October 27, 2018 and October 28, 2017 differ from the statutory rates due to the impact of permanent items such as meals and entertainment,non-deductible executive compensation, tax credits, changes in uncertain tax positions, expected changes in valuation allowance based on forecasted full year income and state tax provision, net of federal benefit.
During the 13 weeks ended October 27, 2018 and October 28, 2017 and the 26 weeks ended October 27, 2018 and October 28, 2017, the Company recognized tax expense of $134, $338, $714 and $904, respectively, in accordance with ASU2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting, which requires all excess tax benefits or deficiencies from share-based payments to be recognized as income tax expense or benefit in the consolidated statement of operations as discrete in the reporting period in which they occur.
The Company believes that it is reasonably possible that approximately $1,149 of the remaining unrecognized tax benefits may be recognized as income tax expense or benefit in the consolidated statement of operations as discrete in the reporting period in which they occur.
The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits at January 27, 2018 could decrease by approximately $863 within the next twelve months, as a result of settlement of certain tax audits or lapses of statutes of limitations, which could impact the effective tax rate.
Effects of the Tax Cuts and Jobs Act
New tax legislation, commonly referred to as the Tax Cuts and Jobs Act or Tax Reform, was enacted on December 22, 2017. Certain aspects of the new law, including the federal corporate tax rate change, have an immediate impact, while other significant provisions may not have an impact untilwere recorded in the Company’s financial statements during fiscal year end 2018 or 2019.2018.
Given the significance of the legislation, the SECSecurities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act.
Items for which a reasonable estimate has beenwas determined include the impact of the change in the corporate tax rate from 35% to 21% and the changes to thenon-deductible executive compensation provisions. The Company bookedrecorded a discrete benefit of $26,403$27,128 on the remeasurement of its deferred tax assets and liabilities during the 13 weeks ended January 27,fiscal 2018. A full validation of deferred tax items will be performed as part of the Company’syear-end tax provision process. During the 13 weeks ended January 27,fiscal 2018, the Company also recorded a net tax detriment as a result of the changes to thenon-deductible executive compensation provisions. AsThe IRS issued Notice2018-68 during the Company awaits further guidance regardingsecond quarter of fiscal 2019, which clarified the transition rules, the tax impact recorded during the 13 weeks ended January 27, 2018 representsrule. As a provisional amount based on the guidance that is available.result, there have been no significant changes.
Other significant provisions that did not have an impact on the interimfiscal 2018 provision but may impact the Company’s income taxes at the Company’sfor future fiscal year end or in future years include: limitation on the current deductibility of net interest expense in excess of 30 percent30% of adjusted taxable income, a limitation of net operating losses generated after fiscal 2018 to 80% of taxable income, 100% bonus depreciation on certain assets, and entertainment and other expense deduction limitation.
The Company iscontinues to not be subject to any transition tax as there are no untaxed foreign earnings.
Valuation Allowance Considerations
The Company routinely performs an analysis of the realizability of its deferred tax assets and considers all evidence both positive and negative.negative to determine realizability of these assets. As a result of the Company’s analysis, a$3,894 of previously established valuation allowance against definite lived net operating losses was released through retained earnings as a direct result of $34,979 was recordedthe Company’s adoption of Topic 606 during the 1326 weeks ended JanuaryOctober 27, 2018. The Company alsostill maintains a valuation allowance against certain state items and definite lived net operating losses that was recorded in prior periods. The valuation allowance established in the current quarter represents a provisional amount in accordance with the Company’s preliminary computation consistent with the SAB 118 guidance.
12. Fair Values of Financial Instruments
In accordance with ASC 820,Fair Value Measurements and Disclosures(ASC 820), the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
| Level 1 | Observable inputs that reflect quoted prices in active markets | |||
| Level 2 | Inputs other than quoted prices in active markets that are either directly or indirectly observable | |||
| Level 3 | Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions | |||
The Company’s financial instruments include cash, receivables, gift cards, accrued liabilities, accounts payable and its credit facility. The fair values of cash, receivables, gift cards, accrued liabilities and accounts payable approximate carrying values because of the short-term nature of these instruments. The Company believes that its credit facility approximates fair value since interest rates are adjusted to reflect current rates.
13. Credit Facility
On August 3, 2015, the Company and certain of its subsidiaries entered into a credit agreement (Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of up to $700,000 (Revolving Credit Facility). On September 30, 2016, the Company amended the Credit Agreement to provide for a new“first-in,last-out” revolving credit facility (the FILO Credit Facility and, together with the Revolving Credit Facility, the Credit Facility) in an aggregate principal amount of up to $50,000, which supplements availability under the Revolving Credit Facility.$50,000. The Company generally must draw down the FILO Credit Facility before making any borrowings under the Revolving Credit Facility.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are On July 13, 2018, the joint lead arrangers forCompany entered into a second amendment to the Credit Facility. TheAgreement which, among other things, extended the maturity date of the $750,000 Credit Facility replacedto July 13, 2023 and reduced the prior credit facility. interest rate margins applicable to the loans thereunder (Amended Credit Facility).
Proceeds from the Amended Credit Facility are used for general corporate purposes, including seasonal working capital needs.
The Company and certain of its subsidiaries are permitted to borrow under the Credit Facility. TheAmended Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the Credit FacilityCompany and certain of its subsidiaries (collectively, the Loan Parties), but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. Borrowings under the Amended Credit Facility are limited to a specified percentage of eligible collateral. The Company has the option to request an increase in commitments under the Amended Credit Facility of up to $250,000, subject to certain restrictions.
The Amended Credit Facility allows the Company to declare and pay up to $70,000 in dividends annually to its stockholders without compliance with any availability or ratio-based limitations.
Interest under the Revolving Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin which is determined by reference to the level of excess availability under the Revolving Credit Facility. Through the end of the fiscal quarter during which the closing of the Revolving Credit Facility occurred, loans under the Revolving Credit Facility bore interest atbetween LIBOR plus 1.750% per annum in the case ofand LIBOR borrowings,plus 1.250% per annum or atbetween the alternate base rate plus 0.750% per annum in the alternative, and thereafter the interest rate began to fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.500% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.500%0.250% per annum),annum based upon the average daily availability under the Revolving Credit Facility for the immediately preceding fiscal quarter. Interest under the FILO Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is also determined by reference to the level of excess availability under the Revolving Credit Facility. Loans under the FILO Credit Facility bear interest at 1.000% per annum more than loans under the Revolving Credit Facility.
The Amended Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the Amended Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders would assume dominion and control over the Loan Parties’ cash.
The Amended Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Amended Credit Agreement also contains customary affirmative covenants and representations and warranties.
The Company wrote off $460$275 of deferred financing fees related to the prior credit facilityCredit Facility during the second quarter of fiscal 201613 weeks ended July 28, 2018 and the remaining unamortized deferred financing fees of $3,542$3,780 were deferred and are being amortized over the five-year term of the Amended Credit Facility. The Company also incurred $5,701$4,425 of fees to secure the Amended Credit Facility, which are being amortized over the five-year term accordingly. During the second quarter of fiscal 2017, the Company incurred $474 of fees to secure the FILO Credit Facility, which are being amortized over the same term as the Credit Facility.
The Company had $59,805$278,325 and $18,200$242,833 of outstanding debt under the Credit Facility as of JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively. The Company had $35,233$33,213 and $38,895$36,733 of outstanding letters of credit under the Credit Facility as of JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively.
14. Stock-Based Compensation
For the 13 and 3926 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, the Company recognized stock-based compensation expense in selling and administrative expenses as follows:
| 13 weeks ended | 39 weeks ended | |||||||||||||||
| January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | |||||||||||||
Restricted Stock Expense | $ | 250 | 210 | $ | 697 | 700 | ||||||||||
Restricted Stock Units Expense | 1,032 | 2,004 | 3,020 | 4,114 | ||||||||||||
Performance-Based Stock Unit Expense | 374 | 158 | 1,071 | 720 | ||||||||||||
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Stock-Based Compensation Expense | $ | 1,656 | 2,372 | $ | 4,788 | 5,534 | ||||||||||
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| October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | |||||||||||||
Restricted Stock Expense | $ | 167 | 237 | $ | 417 | 447 | ||||||||||
Restricted Stock Units Expense | 770 | 1,079 | 1,088 | 1,988 | ||||||||||||
Performance-Based Stock Unit Expense | 302 | 493 | 198 | 697 | ||||||||||||
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Stock-Based Compensation Expense | $ | 1,239 | 1,809 | $ | 1,703 | 3,132 | ||||||||||
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15. Defined Contribution Plan
The Company maintains a defined contribution plan (the Savings Plan) for the benefit of substantially all employees. Total Company contributions charged to employee benefit expenses for the Savings Plan were $2,660$2,419 and $2,621$2,789 for the 13 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively, and $8,498$5,151 and $8,782$5,838 for the 3926 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively.
16. Shareholders’ Equity
On October 20, 2015, the Company’s Board of Directors authorized a stock repurchase program (prior repurchase plan) of up to $50,000 of its common shares. On March 15, 2017, subsequent to completing the prior repurchase plan, the Company’s Board of Directors authorized a new stock repurchase program of up to $50,000 of its common shares. Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. The new stock repurchase program has no expiration date and may be suspended or discontinued at any time. The Company’s
repurchase plan is intended to comply with the requirements of Rule10b-18 under the Securities Exchange Act of 1934.1934, as amended. The Company did not repurchase shares under this plan during the 13 and 3926 weeks ended JanuaryOctober 27, 2018. During the 132018 and 39 weeks ended JanuaryOctober 28, 2017, the Company repurchased 311,020 shares at a cost of $3,493 and 2,019,798 shares at a cost of $23,282, respectively, under the prior repurchase plan.2017. The Company has remaining capacity of $50,000 under the new repurchase program as of JanuaryOctober 27, 2018.
As of JanuaryOctober 27, 2018, the Company has repurchased 39,584,90739,732,064 shares at a cost of approximately $1,087,067$1,087,870 since the inception of the Company’s stock repurchase programs. The repurchased shares are held in treasury.
The Company provided credits to eligible customers resulting from the settlement reached with Apple Inc. (Apple) in an antitrust lawsuit filed by various State Attorneys General and private class plaintiffs regarding the price of digital books. The Company’s customers were entitled to $95,707 in total credits as a result of the settlement, which was funded by Apple. If a customer’s credit was not used to make a purchase by June 24, 2017, the entire credit would have expired. The program concluded on July 1, 2017, through which date the Company’s customers had activated $60,400 in credits, of which $56,148 were redeemed. No balances were due from the Apple settlement fund as of January 27, 2018 related to this portion of the program.
On September 7, 2017, the court approved redistribution of remaining funds from the Apple settlement. Customers who redeemed some or all of their credits from the first distribution that concluded on July 1, 2017 were eligible to receive additional credits in October 2017. The Company’s customers were entitled to $14,815 in total credits as a result of the redistribution. These credits are funded by Apple and will expire on April 20, 2018. The Company estimated total activations of $10,180, which are recorded as a liability to customers to the extent they have not yet been activated and as a receivable from the Apple settlement fund to the extent they have not yet been reimbursed. As of January 27,3, 2018, the Company’s customers had activated $9,370Board of Directors approved the adoption of a short-term stockholder rights plan (Rights Plan) with an expiration date of October 2, 2019 and ownership trigger threshold of 20%. In connection with the Rights Plan, the Company’s Board of Directors authorized and declared a dividend, payable to stockholders of record on October 13, 2018, of one right (Right) per each share of common stock outstanding, to purchase 1/1,000th of a share of Series K Preferred Stock, par value $0.001 per share, of the Company, at a price of $24.00 per share (such amount, as may be adjusted from time to time as provided in credits,the Rights Agreement, the Purchase Price). If a person or group acquires beneficial ownership of 20% or more of the common shares outstanding or announces a tender offer or exchange offer, the consummation of which $8,520 were redeemed. Total receivables fromwould result in such person or group beneficially owning 20% or more of the Apple settlement fund were $1,674common shares outstanding, in each case, without prior approval of the Company’s Board of Directors, each holder of a Right (other than acquiring person or group whose Rights will become void) will have the right to purchase, upon payment of the Purchase Price and in accordance with the terms of the Rights Plan, a number of common shares having a market value of twice the Purchase Price. The complete terms of the Rights are set forth in a Rights Agreement (Rights Agreement) dated as of January 27, 2018.
On February 13,October 3, 2018, between the Company announced that it has implemented a new labor model for its stores that has resultedand Computershare Trust Company, N.A., as rights agent. The Rights expire on October 2, 2019 or upon an earlier redemption or exchange as provided in the elimination of certain store positions. The new model will allow stores to adjust staff up or down based on the needs of the business, increase store productivity and streamline store operations. The Company recorded a charge of $10,702 for aggregate employee-related severance costs in connection with these actions within selling and administrative expenses during the 13 weeks ended January 27, 2018.
The Company is involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, securities, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.
The Company records a liability when it believes that it is both probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount of a loss or potential loss. The Company may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if proceedings are in the early stages; (iii) if there is uncertainty as to the outcome of pending proceedings (including motions and appeals); (iv) if there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) if there are significant factual issues to be determined or resolved; (vi) if the proceedings involve a large number of parties; (vii) if relevant law is unsettled or novel or untested legal theories are presented; or (viii) if the proceedings are taking place in jurisdictions where the laws are complex or unclear. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.
With respect to the legal matters described below, the Company has determined, based on its current knowledge, that the amount of loss or range of loss that is reasonably possible, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control. As such,
there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company’s business, financial condition, results of operations, or cash flows.
The following is a discussion of the material legal matters involving the Company.
PIN Pad Litigation
As previously disclosed, the Company discovered that PIN pads in certain of its stores had been tampered with to allow criminal access to card data and PIN numbers on credit and debit cards swiped through the terminals. Following public disclosure of this matter on October 24, 2012, the Company was served with four putative class action complaints (three in federal district court in the Northern District of Illinois and one in the Northern District of California), each of which alleged on behalf of national and other classes of customers who swiped credit and debit cards in Barnes & Noble Retail stores common law claims such as negligence, breach of contract and invasion of privacy, as well as statutory claims such as violations of the Fair Credit Reporting Act, state data breach notification statutes, and state unfair and deceptive practices statutes. The actions sought various forms of relief including damages, injunctive or equitable relief, multiple or punitive damages, attorneys’ fees, costs, and interest. All four cases were transferred and/or assigned to a single judge in the United States District Court for the Northern District of Illinois, and a single consolidated amended complaint was filed. The Company filed a motion to dismiss the consolidated amended complaint in its entirety, and in September 2013, the Court granted the motion to dismiss without prejudice. The Plaintiffs then filed an amended complaint, and the Company filed a second motion to dismiss. On October 3, 2016, the Court granted the second motion to dismiss, and dismissed the case without prejudice; in doing so, the Court permitted plaintiffs to file a second amended complaint by October 31, 2016. On October 31, 2016, the plaintiffs filed a second amended complaint, and on January 25, 2017, the Company filed a motion to dismiss the second amended complaint. On June 13, 2017, the Court granted the Company’s motion to dismiss with prejudice. Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Seventh Circuit. The appeal is fully briefed, andOn April 11, 2018, the Court heard oral argument on December 6, 2017.of Appeals reversed the District Court’s decision granting the motion to dismiss the case, and remanded the case to the District Court for further proceedings. The Company filed with the Court of Appeals’ decisionAppeals a petition for rehearing and rehearing en banc; that petition was denied on May 10, 2018. The case is pending.currently pending in the District Court.
Cassandra Carag individually and on behalf of others similarly situated v. Barnes & Noble, Inc., Barnes & Noble Booksellers, Inc. and DOES 1 through 100 inclusive
On November 27, 2013, former Associate Store Manager Cassandra Carag (Carag) brought suit in Sacramento County Superior Court, asserting claims on behalf of herself and all other hourly(non-exempt) Barnes & Noble employees in California in the preceding four years for unpaid regular and overtime wages based on allegedoff-the-clock work, penalties and pay based on missed meal and rest breaks, and for improper wage statements, payroll records, and untimely pay at separation as a result of the alleged pay errors during employment. Via the complaint, Carag seeks to recover unpaid wages and statutory penalties for all hourly Barnes & Noble employees within California from November 27, 2009 to present. On February 13, 2014, the Company filed an answer to the complaint in the state court and concurrently requested removal of the action to federal court. On May 30, 2014, the federal court granted Plaintiff’s motion to remand the case to state court and denied Plaintiff’s motion to strike portions of the answer to the complaint (referring the latter motion to the lower court for future consideration). The Court has not yet scheduled any further hearings or deadlines.
Café Manager Class ActionsAction
Two former Café Managers have filed separate actions alleging similar claims of entitlement to unpaid compensation for overtime. In each action, the plaintiff seeks to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). Specifically, Christine Hartpence filed a complaint against Barnes & Noble, Inc. (Barnes & Noble) in Philadelphia County Court of Common Pleas on May 26, 2015, alleging that she is entitled to unpaid compensation for overtime under Pennsylvania law and seeking to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). On July 14, 2016, Ms. Hartpence amended her complaint to assert a purported collective action for alleged unpaid overtime compensation under the federal Fair Labor Standards Act (FLSA), by which she sought to act as a class representative for similarly situated Café Managers throughout the United States. On July 27, 2016, Barnes & Noble removed the case to the U.S. District Court of the Eastern District of Pennsylvania. Ms. Hartpence then voluntarily dismissed her complaint and subsequentlyre-filed a similar complaint in the Philadelphia County Court of Common Pleas. There-filed complaint alleged only claims of unpaid overtime under Pennsylvania law and class claims under Pennsylvania law that are limited to current and former Café Managers within Pennsylvania. On June 22, 2017, Ms. Hartpence filed an additional, separate action in Philadelphia County Court of Common Pleas in which she repeats her allegations under Pennsylvania law and asserts a similar claim for unpaid wages under New Jersey law, purportedly on behalf of herself and others similarly situated. The Court consolidated the two pending cases on November 1, 2017. On December 8, 2017, Barnes & Noble removed the consolidated action after Ms. Hartpence amended her complaint to add a cause of action under the FLSA in which Ms. Hartpence purports to assert claims on behalf of herself and a national class of all similarly situated Café Managers.
On September 20, 2016, Kelly Brown filed a complaint against Barnes & Noble in the U.S. District Court for the Southern District of New York in which she also alleges that she is entitled to unpaid compensation under the FLSAFair Labor Standards Act (FLSA) and Illinois law. Ms. Brown seeks to represent a national class of allallegedly similarly situated Café Managersemployees who performed the same position (Café Manager) under the FLSA, as well as an Illinois-based class under Illinois law. On November 9, 2016, Ms. Brown filed an amended complaint to add an
additional plaintiff named Tiffany Stewart, who is a former Café Manager who also alleges unpaid overtime compensation in violation of New York law and seeks to represent a class of similarly situated New York-based Café Managers under New York law. On May 2, 2017, the Court denied Plaintiffs’ Motion for Conditional Certification, without prejudice. The Plaintiffs filed a renewed motion for Conditional Certification on November 17, 2017, which is now fully briefed by the parties and pending before the Court.Court denied on June 25, 2018. There are currently 1824 former Café Managers who have joined the action asopt-in plaintiffs.
Bernardino v. Barnes & Noble Booksellers, Inc.
On June 16, 2017, a putative class action complaint was filed against Barnes & Noble Booksellers, Inc. (B&N Booksellers) in the United States District Court for the Southern District of New York, alleging violations
of the federal Video Privacy Protection Act and related New York law. The plaintiff, who seeks to represent a class of subscribers of Facebook, Inc. (Facebook) who purchased DVDs or other video media from the Barnes & Noble website, seeks damages, injunctive relief and attorneys’ fees, among other things, based on her allegation that B&N Booksellers supposedly knowingly disclosed her personally identifiable information to Facebook without her consent when she bought a DVD from Barnes & Noble’s website. On July 10, 2017, the plaintiff moved for a preliminary injunction requiring Barnes & Noble to change the operation of its website, which motion B&N Booksellers opposed. On July 31, 2017, B&N Booksellers moved to compel the case to arbitration, consistent with the terms of use on Barnes & Noble’s website. On August 28, 2017, the court denied the plaintiff’s motion for a preliminary injunction. On January 31, 2018, the court granted B&N Booksellers’ motion to compel arbitration, and the clerk of court closed the case on February 1, 2018. On March 2, 2018, the plaintiff filed an appeal in the United States Court of Appeals for the Second Circuit from the district court’s grant of B&N Booksellers’ motion to compel arbitration.
Parneros v. Barnes & Noble, Inc.
In January 2017,On August 28, 2018, Demos Parneros, the FASB issued ASU2017-04, Intangibles—Goodwillformer Chief Executive Officer of Barnes & Noble, Inc., filed a complaint against Barnes & Noble, Inc. in the United States District Court for the Southern District of New York. The plaintiff asserts claims for breach of contract and Other (Topic 350), Simplifyingdefamation under New York law. On October 5, 2018, the Testplaintiff filed an amended complaint asserting a third cause of action for Goodwill Impairment(ASU2017-04). The standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair valuebreach of the reporting unitcovenant of good faith and fair dealing. The plaintiff seeks injunctive relief, compensatory damages, and punitive damages, among other things, based on allegations that he did not violate the carrying value ofCompany’s policies prior to his employment termination, and that the reporting unit. The standard also clarifies the treatment of the income tax effect oftax-deductible goodwill when measuring goodwill impairment loss. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. The Company has early adopted ASU2017-04 onCompany’s press release damaged his reputation. On October 29, 2017, the first day of30, 2018, Barnes & Noble, Inc. filed its fiscal 2018 third quarter.
In August 2016, the FASB issued ASU2016-15,Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receiptsanswer, affirmative defenses and Cash Payments (ASU2016-15). This update clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. ASU2016-15 is effective forcounterclaims. Specifically, the Company beginning April 29, 2018asserted counterclaims for breach of fiduciary duty and faithless servant, based on allegations that the plaintiff violated his fiduciary duties of loyalty and good faith in connection with a potential transaction, as well as for a declaratory judgment that the plaintiff’s outstanding equity awards at the time of his termination were subject to cancellation under a retrospective approach. Since the standard only impacts classification in the statements of cash flows, adoption will not affect the Company’s cashAmended and cash equivalents.
In March 2016, the FASB issued ASU2016-09,Compensation—Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting(ASU2016-09). ASU2016-09 includes provisions to simplify certain aspects related to the accounting for share-based awards and the related financial statement presentation. ASU2016-09 provides for changes to accounting for stock compensation, including: 1) excess tax benefits and tax deficiencies related to share based payment awards to be recognized as income tax benefit or expense when the awards vest or are settled (previously such amounts were recognized in additionalpaid-in capital); entities must apply the new guidance on accounting for excess tax benefits and tax deficiencies prospectively, except for excess tax benefits that were identified from previous transactions that had not been previously recognized because the related tax deduction did not reduce income taxes payable; entities must use a modified retrospective transition method to recognize such excess tax benefits as a credit to retained earnings; any deferred tax assets recordedRestated 2009 Incentive Plan. Barnes & Noble, Inc. seeks, among other things, damages in connection with the modified retrospective recognitionplaintiff’s breach of excess tax benefits must be assessed for realizability, and, if necessary, a valuation allowance must be recognized through a cumulative-effect adjustment to retained earnings; 2) excess tax benefitshis fiduciary duties. The Court held an initial conference on November 13, 2018. The Court adopted the parties’ proposed scheduling order, which provides, inter alia, that discovery will be classified as an operating activity incompleted by June 14, 2019, that dispositive motions will be completed by August 23, 2019, and that the statement of cash flows; 3) the option to elect to estimate forfeituresparties will be ready for trial on or account for them when they occur; 4) classification of cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity in the statements of cash flows; and 5) eliminating the requirement to delay the recognition of excess tax benefits until it reduces current taxes payable.after October 23, 2019.
The Company adopted ASU2016-09 during the first quarter ended July 29, 2017. Accordingly, the primary effects of the adoption are as follows: 1) excess tax expense of $11 and $915, respectively, were recorded during the 13 and 39 weeks ended January 27, 2018 related to the prospective application of excess tax benefits and tax deficiencies related to stock-based compensation settlements, 2) using a modified retrospective application, the Company recorded unrecognized excess tax benefits of $1,823 as a cumulative-effect adjustment, which increased retained earnings, and reduced deferred taxes by the same, 3) using a modified retrospective application, the Company has elected to recognize forfeitures as they occur and recorded a $1,310 increase to additionalpaid-in capital, a $786 reduction to retained earnings, and a $524 reduction to deferred taxes to reflect the incremental stock-based compensation expense, net of the related tax impacts, that would have been recognized in prior years under the modified guidance, and 4) $88 in excess tax benefits from stock-based compensation was reclassified from cash flows from financing activities to cash flows from operating activities for the 39 weeks ended January 28, 2017, in the Consolidated Statements of Cash Flows.
In February 2016, the FASB issued ASU2016-02,Leases (Topic 842) (ASU2016-02), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous Generally Accepted Accounting Principles. ASU2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU2016-02 requires expanded disclosures about the nature and terms of lease agreements and is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company plans to adopt ASU2016-02 effective April 28, 2019. The Company remains on schedule and has implemented key system functionality to enable the preparation of restated financial information. The Company is currently evaluating the provisions of this standard and assessing its existing lease portfolio in order to determine the impact on its accounting systems, processes and internal controls over financial reporting. The Company expects the adoption of this standard will result in a significant increase to its long-term assets and liabilities on its consolidated balance sheet. However, the Company does not expect adoption will have a material impact on its consolidated statement of operations and cash flows.
In July 2015, the FASB issued ASU2015-11,Simplifying the Measurement of Inventory(ASU2015-11), modifying the accounting for inventory. Under ASU2015-11, the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. ASU2015-11 defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU2015-11 is applicable to inventory that is accounted for under thefirst-in,first-out method and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU2015-11 effective April 30, 2017. The majority of the Company’s merchandise inventories are valued using the retail inventory method, which is outside the scope of ASU2015-11. The remaining inventory of the Company’s merchandise inventories are valued at the lower of cost and net realizable value using the average cost method. The Company applied the amendments in this update prospectively to the measurement of inventory after the date of adoption with no material impact to the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU2014-09. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU2014-09, as amended by ASU2015-14, ASU2016-08, ASU2016-10, ASU2016-12 and ASU2016-20, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted for annual reporting periods beginning after December 15, 2016. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year
of adoption, through a cumulative adjustment. The Company plans to adopt ASU2014-09 effective April 29, 2018. The Company currently anticipates adopting the standard using the modified retrospective method. The Company’s implementation efforts have included reviewing revenue streams to identify any differences in the timing, measurement, or presentation of revenue recognition. The Company currently believes that the primary impact will be changes to the timing of recognition of revenues related to gift card breakage. The Company will continue to assess the impact on all areas of its revenue recognition, disclosure requirements and changes that may be necessary to its internal controls over financial reporting. The Company is continuing to evaluate the impact of adopting this ASU on its consolidated financial statements. The Company remains on schedule to adopt this ASU effective April 29, 2018.
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Liquidity and Capital Resources
The primary sources of Barnes & Noble’s cash are net cash flows from operating activities, funds available under its credit facility and short-term vendor financing.
Credit Facility
On August 3, 2015, the Company and certain of its subsidiaries entered into a credit agreement (Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of up to $700.0 million (Revolving Credit Facility). On September 30, 2016, the Company amended the Credit Agreement to provide for a new“first-in,last-out” revolving credit facility (the FILO Credit Facility and, together with the Revolving Credit Facility, the Credit Facility) in an aggregate principal amount of up to $50.0 million, which supplements availability under the Revolving Credit Facility.million. The Company generally must draw down the FILO Credit Facility before making any borrowings under the Revolving Credit Facility.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are On July 13, 2018, the joint lead arrangers forCompany entered into a second amendment to the Credit Facility. TheAgreement which, among other things, extended the maturity date of the $750.0 million Credit Facility replacedto July 13, 2023 and reduced the prior credit facility. interest rate margins applicable to the loans thereunder (Amended Credit Facility).
Proceeds from the Amended Credit Facility are used for general corporate purposes, including seasonal working capital needs.
The Company and certain of its subsidiaries are permitted to borrow under the Credit Facility. TheAmended Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the Credit FacilityCompany and certain of its subsidiaries (collectively, the Loan Parties), but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. Borrowings under the Amended Credit Facility are limited to a specified percentage of eligible collateral. The Company has the option to request an increase in commitments under the Amended Credit Facility of up to $250.0 million, subject to certain restrictions.
The Amended Credit Facility allows the Company to declare and pay up to $70.0 million in dividends annually to its stockholders without compliance with any availability or ratio-based limitations.
Interest under the Revolving Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin which is determined by reference to the level of excess availability under the Revolving Credit Facility. Through the end of the fiscal quarter during which the closing of the Revolving Credit Facility occurred, loans under the Revolving Credit Facility bore interest atbetween LIBOR plus 1.750% per annum in the case ofand LIBOR borrowings,plus 1.250% per annum or atbetween the alternate base rate plus 0.750% per annum in the alternative, and thereafter the interest rate began to fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.500% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.500%0.250% per annum),annum, based upon the average daily availability under the Revolving Credit
Facility for the immediately preceding fiscal quarter. Interest under the FILO Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is also determined by reference to the level of excess availability under the Revolving Credit Facility. Loans under the FILO Credit Facility bear interest at 1.000% per annum more than loans under the Revolving Credit Facility.
The Amended Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the Amended Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders would assume dominion and control over the Loan Parties’ cash.
The Amended Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Amended Credit Agreement also contains customary affirmative covenants and representations and warranties.
The Company wrote off $0.5$0.3 million of deferred financing fees related to the prior credit facilityCredit Facility during the second quarter of fiscal 201613 weeks ended July 28, 2018 and the remaining unamortized deferred financing fees of $3.5$3.8 million were deferred and are being amortized over the five-year term of the Amended Credit Facility. The Company also incurred $5.7$4.4 million of fees to secure the Amended Credit Facility, which are being amortized over the five-year term accordingly. During the second quarter of fiscal 2017, the Company incurred $0.5 million of fees to secure the FILO Credit Facility, which are being amortized over the same term as the Credit Facility.
The Company had $59.8$278.3 million and $18.2$242.8 million of outstanding debt under the Credit Facility as of JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively. The Company had $35.2$33.2 million and $38.9$36.7 million of outstanding letters of credit under the Credit Facility as of JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively.
Cash Flows
The Company’s cash and cash equivalents were $11.5$11.2 million as of JanuaryOctober 27, 2018, compared with $11.6$11.3 million as of JanuaryOctober 28, 2017. The decrease in cash and cash equivalents of $0.1 million versusas compared to the prior year period was due to changes in working capital and cash flows as outlined below.
Net cash flows provided byused in operating activities were $108.1$39.8 million for the 3926 weeks ended JanuaryOctober 27, 2018 as compared to $158.5$106.5 million for the 3926 weeks ended JanuaryOctober 28, 2017. The unfavorablefavorable year-over-year comparison was primarily attributable to changesthe timing of purchases and returns to publishers as well as the change in working capital and the sales decline.Company’s statutory income tax rate due to Tax Reform.
Net cash flows used in investing activities were $70.0$51.8 million for the 3926 weeks ended JanuaryOctober 27, 2018 as compared to $73.7$49.5 million for the 3926 weeks ended JanuaryOctober 28, 2017. The Company’s investing activitiesincrease was primarily consistedrelated to the timing of capital expenditures for the maintenance of existing stores, merchandising initiatives, new store construction and enhancements to systems and the website.expenditure.
Net cash flows used inprovided by financing activities were $38.7$92.0 million for the 3926 weeks ended JanuaryOctober 27, 2018 as compared to $87.1$155.4 million for the 3926 weeks ended JanuaryOctober 28, 2017. The Company’s financing activities during the 39 weeks ended January 27, 2018 consisteddecrease was primarily related to reduced usage of common dividends and net payments on the Credit Facility. Financing activities during the 39 weeks ended January 28, 2017 consisted primarily of common dividends, net payments on the Credit Facility within the year, cash dividends and share repurchases.bank fees related to the Amended Credit Facility.
Over the past 12 months, the Company has returned $43.6$43.7 million in cash to its shareholders through dividends.
Additional year-over-year balance sheet changes include the following:
Receivables, net decreased $7.5$10.2 million, or 10.6%13.8%, to $63.0$63.7 million as of JanuaryOctober 27, 2018, compared to $70.4$73.9 million as of JanuaryOctober 28, 2017, primarily duerelated to lower sales and the lowerprior year eBook settlement receivable.settlement.
Merchandise inventories, net decreased $35.3$31.4 million, or 3.5%2.7%, to $975.1 million$1.146 billion as of JanuaryOctober 27, 2018, compared to $1.010$1.177 billion as of JanuaryOctober 28, 2017.2017 on lower sales volume.
Prepaid expenses and other current assets increased $17.0decreased $63.3 million, or 27.4%44.8%, to $79.2$77.9 million as of JanuaryOctober 27, 2018, compared to $62.2$141.2 million as of JanuaryOctober 28, 2017, primarily related to income taxes.
Property and equipment, net decreased $19.1$12.8 million, or 6.8%4.7%, to $262.4$259.1 million as of JanuaryOctober 27, 2018, compared to $281.5$271.9 million as of JanuaryOctober 28, 2017, as depreciation outpaced capital expenditures.
Goodwill decreased $137.5$135.8 million, or 65.1%65.5%, to $73.8$71.6 million as of JanuaryOctober 27, 2018, compared to $211.3$207.4 million as of JanuaryOctober 28, 2017, primarily related to the $133.6 million impairment charge.charge recorded during third quarter of fiscal 2018.
Othernon-current assets net decreased $0.6increased $7.5 million, or 0.2%75.4%, to $309.8$17.5 million as of JanuaryOctober 27, 2018, compared to $310.4$10.0 million as of January 28, 2017, on additional amortization.
Accounts payable decreased $9.9$35.0 million, or 2.0%5.3%, to $490.9$621.6 million as of JanuaryOctober 27, 2018, compared to $500.8$656.6 million as of JanuaryOctober 28, 2017. Accounts payable represented 50.3%54.3% and 49.6%55.8% of merchandise inventories as of JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively. This ratio is subject to changes in product mix and the timing of purchases, payments and returns.
Accrued liabilities decreased $33.5$13.4 million, or 10.5%4.8%, to $285.6$267.5 million as of JanuaryOctober 27, 2018, compared to $319.1$280.9 million as of JanuaryOctober 28, 2017. Accrued liabilities include deferred income, compensation, occupancy related, legal and other selling and administrative miscellaneous accruals.
Gift card liabilities decreased $26.2$112.9 million, or 6.8%34.5%, to $358.6$214.4 million as of JanuaryOctober 27, 2018, compared to $384.8$327.2 million as of JanuaryOctober 28, 2017. The Company estimatesdecrease is primarily due to the portionadoption of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns.Topic 606. The Company recognized gift card breakage of $27.5$3.6 million and $20.8$4.9 million during the 13 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively, and $37.2$8.0 million and $30.6$9.7 million during the 3926 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017, respectively. Gift card breakage increased over last year as redemptions continue to run lower than historical patterns. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.
Other long-term liabilities decreased $9.3 million, or 7.1%9.8%, to $58.1$85.8 million as of JanuaryOctober 27, 2018, compared to $54.3$95.2 million as of January 28, 2017, due to the remeasurement of deferred taxes as a result of the Tax Cuts and Jobs Act and the deferred tax impact of the goodwill impairment charge, partially offset by the valuation allowance recorded.
The Company has arrangements with third-party manufacturers to produce certain NOOK® products. These manufacturers procurerent and assemble unfinished parts and components from third-party suppliers based on forecasts provided by the Company. Given production lead times, commitments are generally made far in advance of finished product delivery. Based on current purchase commitments and product development plans, the Company did not record any provision for purchase commitments. Future charges may be required based on changes in forecasted sales or strategic direction.tax reserves.
Segments
The Company identifies its operating segments based on the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management and makes decisions on the allocation of resources. The Company’s two operating segments are B&N Retail and NOOK.
Seasonality
The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating income typically realized during its third fiscal quarter, which includes the holiday selling season.
The NOOK business, like that of many technology companies, is impacted by the launch of new products and the promotional efforts to support those new products, as well as the traditional retail holiday selling seasonality.
Business Overview
Barnes & Noble has been experiencing declining sales trends primarily due to lower store traffic. The Company has been able to offset some of the traffic decline through its efforts to increase conversion through higher customer engagement. Additionally, the Company has been able to partially mitigate the impact of the sales decline on profit levels through cost reductions. While the Company believes it has lost share on its recent sales performance, it sees opportunities in an industry that has become more stable.
To improve its performance, the Company has initiated a strategic turnaround plan. The Company’s long-termmulti-year strategic plan, is focused on strengthening the core business by enhancing the customer value proposition; improving profitability through an aggressive expense management program, which will be used to fund growth initiatives; accelerating execution through simplification; and innovating for the future, which will position the Company for long-term growth.
To strengthen its core business, the Company is focused on enhancing thisits customer value proposition by improving its merchandise mix, enhancingofferings, enriching the overall shopping experience, increasing the value of its Membership programProgram and improvingexpanding its omni-channel capabilities. The Company will continue to leverage the strength of its Barnes & Noble brand, knowledgeable booksellers, vast book selection and retail footprint to attract customers to its omni-channel offerings and grow sales.
Merchandising initiatives are focused on increasing the numberimpact of value offers,promotional activities, narrowing product assortments, improving SKU productivity, improvingrefining inventory management processes, testing changes to existing store layouts and remerchandising select business units in stores. The Company believes there is opportunity to increase conversion through higher customer engagement and by improving navigation and discovery throughout the store, including a customer friendlycustomer-friendly and more intuitive organization of books and improved signage for easier browsing within and across sections.
In-store events also drive traffic, reinforcing Barnes & Noble as a community centerdestination where customers can meet, browse and discover. The Company is also utilizing social media, where booksellers communicate events, promotions and new product offerings with customers at the local level.level in order to drive additional traffic.
The Company’s MemberMembership Program provides the Company with valuable data and insights into its customer base, enabling the Company to better understand and market to its customers. Members are more productive thannon-members, as they spend more and visit more often. The Company continues to test programs to grow sales to both members andnon-members, increase membership, improve price perception and enhance its overall customer value proposition.
To improve profitability and accelerate execution, theThe Company is focused on simplification throughout its organization to create efficiencies and reinvest resources to support sales growth. The Company is also committed to right sizing its cost structure. At B&N Retail, the Company is focusedhas implemented a new labor model for its stores, which allows Store Managers to adjust staff up or down based on increasingthe needs of the business, increase store productivity and supply chain productivity, streamlining operations and eliminatingnon-productive spend.streamline store operations. At NOOK, the Company exitednon-core businesses and outsourced certain functions. NOOK expects to continue tore-calibrate its cost structure commensurate with sales, further reducing its losses.sales.
In addition to initiatives focused on growing sales through its existing store base, the Company is innovating for the future and is currently testing new bookstore formats,opening smaller, newly designed prototype stores, which it believes could foster sales growth in the future. The Company has also created a Test & Learn pipeline process, through which it is testing a number of new initiatives to improve future performance.
Results of Operations
The following tables summarize the Company’s results of operations for the 13 and 3926 weeks ended JanuaryOctober 27, 2018 compared with the 13 and 3926 weeks ended JanuaryOctober 28, 2017.
Sales
| 13 weeks ended | 39 weeks ended | 13 weeks ended | 26 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dollars in thousands | January 27, 2018 | % of Total | January 28, 2017 | % of Total | January 27, 2018 | % of Total | January 28, 2017 | % of Total | October 27, 2018 | % of Total | October 28, 2017 | % of Total | October 27, 2018 | % of Total | October 28, 2017 | % of Total | ||||||||||||||||||||||||||||||||||||||||||||||||
B&N Retail | $ | 1,210,417 | 98.3 | % | $ | 1,276,039 | 98.1 | % | $ | 2,810,162 | 97.7 | % | $ | 2,988,471 | 97.2 | % | $ | 753,185 | 97.7 | % | $ | 769,709 | 97.3 | % | $ | 1,528,903 | 97.6 | % | $ | 1,599,745 | 97.3 | % | ||||||||||||||||||||||||||||||||
NOOK | 30,930 | 2.5 | % | 38,434 | 3.0 | % | 86,394 | 3.0 | % | 114,524 | 3.7 | % | 21,763 | 2.8 | % | 25,964 | 3.3 | % | 47,033 | 3.0 | % | 55,464 | 3.4 | % | ||||||||||||||||||||||||||||||||||||||||
Elimination | (9,576 | ) | (0.8 | )% | (13,565 | ) | (1.0 | )% | (20,352 | ) | (0.7 | )% | (29,657 | ) | (1.0 | )% | (3,760 | ) | (0.5 | )% | (4,556 | ) | (0.6 | )% | (9,972 | ) | (0.6 | )% | (10,776 | ) | (0.7 | )% | ||||||||||||||||||||||||||||||||
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Total Sales | $ | 1,231,771 | 100.0 | % | $ | 1,300,908 | 100.0 | % | $ | 2,876,204 | 100.0 | % | $ | 3,073,338 | 100.0 | % | $ | 771,188 | 100.0 | % | $ | 791,117 | 100.0 | % | $ | 1,565,964 | 100.0 | % | $ | 1,644,433 | 100.0 | % | ||||||||||||||||||||||||||||||||
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During the 13 weeks ended JanuaryOctober 27, 2018, the Company’s sales decreased $69.1$19.9 million, or 5.3%2.5%, to $1.232 billion$771.2 million from $1.301 billion$791.1 million during the 13 weeks ended JanuaryOctober 28, 2017. The changes by segment are as follows:
B&N Retail sales decreased $16.5 million, or 2.1%, to $753.2 million for the 13 weeks ended JanuaryOctober 27, 2018 from $769.7 million during the same period one year ago, and accounted for 97.7% of total Company sales. Comparable store sales decreased $65.6$8.9 million, or 5.1%1.4%, as compared to the prior year as lower store traffic was substantially mitigated by conversion and average transaction values. Closed stores decreased sales by $5.9 million, while new stores increased sales by $2.1 million. Online sales decreased $4.4 million, or 7.4%, as compared to the prior year on lower promotional activity.
Of the $8.9 million decrease in comparable store sales, book categories decreased sales by $13.0 million, or 3.0%, whilenon-book categories increased sales by $4.1 million, or 1.9%.
NOOK sales decreased $4.2 million, or 16.2%, to $1.210$21.8 million during the 13 weeks ended October 27, 2018 from $26.0 million during the 13 weeks ended October 28, 2017, and accounted for 2.8% of total Company sales.
Elimination sales, which represent sales from NOOK to B&N Retail on a sell-through basis, decreased $0.8 million, or 17.5%, as compared to the prior year. NOOK sales, net of elimination, accounted for 2.3% of total Company sales.
During the 13 weeks ended October 27, 2018, the Company had two store openings and one store closing.
During the 26 weeks ended October 27, 2018, the Company’s sales decreased $78.5 million, or 4.8%, to $1.566 billion from $1.276$1.644 billion during the 26 weeks ended October 28, 2017. The changes by segment are as follows:
B&N Retail sales decreased $70.8 million, or 4.4%, to $1.529 billion for the 26 weeks ended October 27, 2018 from $1.600 billion during the same period one year ago, and accounted for 98.3%97.6% of total Company sales. Comparable store sales decreased $62.1$52.8 million, or 5.8%3.9%, as compared to the prior year as lower store traffic was partially mitigated by conversion and average transaction values. Online sales decreased $12.4 million, or 10.8%, as compared to the prior year on lower store traffic.promotional activity. Closed stores decreased sales by $8.4$12.3 million, while new stores increased sales by $2.5$3.8 million. Online sales decreased $5.9 million, or 5.2%. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc., which increased by $1.9$2.1 million, or 21.7%11.6%, versusas compared to the prior year. Gift card breakage also increased $6.7 million as redemptions continue to run lower than historical patterns.
Of the $62.1$52.8 million decrease in comparable store sales,non-book core book categories decreased sales by $31.0$48.7 million, or 7.5%. Book5.3%, whilenon-book categories decreased sales by $26.4$4.1 million, or 4.1%0.9%. Coloring books and Artist supplies decreased comparable sales by 1.0%. Comparable sales of NOOK® products at B&N Retail stores decreased $4.7 million, or 35.5%, primarily on lower device unit volume and lower average selling prices.
NOOK sales decreased $7.5$8.4 million, or 19.5%15.2%, to $30.9$47.0 million during the 1326 weeks ended JanuaryOctober 27, 2018 from $38.4$55.5 million during the 1326 weeks ended JanuaryOctober 28, 2017, and accounted for 2.5%3.0% of total Company sales. Digital content sales decreased $4.6 million, or 18.6%, compared to the prior year on lower unit sales. Device and accessories sales decreased $2.9 million, or 21.1%, primarily on lower unit sales and lower average selling prices.
During the 1326 weeks ended JanuaryOctober 27, 2018, B&N Retailthe Company had two store openings and fourtwo store closings.
During the 39 weeks ended January 27, 2018, the Company’s sales decreased $197.1 million, or 6.4%, to $2.876 billion from $3.073 billion during the 39 weeks ended January 28, 2017. The changes by segment are as follows:
Of the $144.2 million decrease in comparable store sales, book categories decreased sales by $67.4 million, or 4.2%, due primarily to declines in Juvenile as the prior year included the release ofHarry Potter and the Cursed Child, Trade titles and Bargain (primarily coloring books).Non-book core categories decreased sales by $67.0 million, or 7.6%, across most departments. Coloring books and Artist supplies decreased comparable sales by 0.9%. Comparable sales of NOOK® products at B&N Retail stores decreased $9.8 million, or 32.8%, primarily on lower average selling prices due to product mix and lower device unit volume.
During the 39 weeks ended January 27, 2018, B&N Retail had two store openings and five store closings.
Cost of Sales and Occupancy
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Dollars in thousands | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | ||||||||||||||||||||||||||||||||||||||||||||||||
B&N Retail | $ | 825,858 | 68.2 | % | $ | 853,788 | 66.9 | % | $ | 1,972,277 | 70.2 | % | $ | 2,068,998 | 69.2 | % | $ | 538,869 | 71.5 | % | $ | 555,273 | 72.1 | % | $ | 1,098,286 | 71.8 | % | $ | 1,146,419 | 71.7 | % | ||||||||||||||||||||||||||||||||
NOOK | 15,463 | 50.0 | % | 23,884 | 62.1 | % | 42,077 | 48.7 | % | 64,282 | 56.1 | % | 10,732 | 49.3 | % | 11,705 | 45.1 | % | 24,231 | 51.5 | % | 26,614 | 48.0 | % | ||||||||||||||||||||||||||||||||||||||||
Elimination | (9,576 | ) | (31.0 | )% | (13,565 | ) | (35.3 | )% | (20,352 | ) | (23.6 | )% | (29,657 | ) | (25.9 | )% | (3,760 | ) | (17.3 | )% | (4,556 | ) | (17.5 | )% | (9,972 | ) | (21.2 | )% | (10,776 | ) | (19.4 | )% | ||||||||||||||||||||||||||||||||
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Total Cost of Sales and Occupancy | $ | 831,745 | 67.5 | % | $ | 864,107 | 66.4 | % | $ | 1,994,002 | 69.3 | % | $ | 2,103,623 | 68.4 | % | $ | 545,841 | 70.8 | % | $ | 562,422 | 71.1 | % | $ | 1,112,545 | 71.0 | % | $ | 1,162,257 | 70.7 | % | ||||||||||||||||||||||||||||||||
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The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies and other operating expenses), rental expense and common area maintenance, and real estate taxes, partially offset by landlord tenant allowances amortized over the life of the lease.
During the 13 weeks ended JanuaryOctober 27, 2018, cost of sales and occupancy decreased $32.4$16.6 million, or 3.7%2.9%, to $831.7$545.8 million from $864.1$562.4 million during the 13 weeks ended JanuaryOctober 28, 2017. Cost of sales and occupancy increaseddecreased as a percentage of sales to 67.5%70.8% from 66.4%71.1% during the same period one year ago. The changes by segment are as follows:
B&N Retail cost of sales and occupancy decreased as a percentage of sales to 71.5% from 72.1%, or 60 basis points, during the same period one year ago primarily due to lower store markdowns (30 basis points), higher vendor incentives (20 basis points), and decreased online promotions (20 basis points). The remaining variance was due to sales mix, sales deleverage and timing differences.
NOOK cost of sales and occupancy increased as a percentage of sales to 68.2%49.3% from 66.9%, or 130 basis points,45.1% during the same period one year ago primarily due to increased promotions (45 basis points), occupancy deleverage (45 basis points) and higher markdowns (35 basis points). The remaining variance was attributable to timing differenceson sales mix and sales mix.
deleverage.
During the 3926 weeks ended JanuaryOctober 27, 2018, cost of sales and occupancy decreased $109.6$49.7 million, or 5.2%4.3%, to $1.994$1.113 billion from $2.104$1.162 billion during the 3926 weeks ended JanuaryOctober 28, 2017. Cost of sales and occupancy increased as a percentage of sales to 69.3%71.0% from 68.4%70.7% during the same period one year ago. The changes by segment are as follows:
B&N Retail cost of sales and occupancy increased as a percentage of sales to 70.2%71.8% from 69.2%71.7%, or 9515 basis points, during the same period one year ago primarily on occupancy deleverage (60(65 basis points), partially offset by lower store markdowns (20 basis points), higher vendor incentives (20 basis points) and higher markdownsdecreased online promotions (10 basis points). The remaining variance was attributable to sales deleverage, sales mix and general timing of expenses.differences.
NOOK cost of sales and occupancy decreasedincreased as a percentage of sales to 48.7%51.5% from 56.1%48.0% during the same period one year ago primarily on lower occupancy costssales mix and sales mix.deleverage.
Gross Profit
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Dollars in thousands | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | ||||||||||||||||||||||||||||||||||||||||||||||||
B&N Retail | $ | 384,559 | 31.8 | % | $ | 422,251 | 33.1 | % | $ | 837,885 | 29.8 | % | $ | 919,473 | 30.8 | % | $ | 214,316 | 28.5 | % | $ | 214,436 | 27.9 | % | $ | 430,617 | 28.2 | % | $ | 453,326 | 28.3 | % | ||||||||||||||||||||||||||||||||
NOOK | 15,467 | 72.4 | % | 14,550 | 58.5 | % | 44,317 | 67.1 | % | 50,242 | 59.2 | % | 11,031 | 61.3 | % | 14,259 | 66.6 | % | 22,802 | 61.5 | % | 28,850 | 64.6 | % | ||||||||||||||||||||||||||||||||||||||||
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Total Gross Profit | $ | 400,026 | 32.5 | % | $ | 436,801 | 33.6 | % | $ | 882,202 | 30.7 | % | $ | 969,715 | 31.6 | % | $ | 225,347 | 29.2 | % | $ | 228,695 | 28.9 | % | $ | 453,419 | 29.0 | % | $ | 482,176 | 29.3 | % | ||||||||||||||||||||||||||||||||
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The Company’s consolidated gross profit decreased $36.8$3.3 million, or 8.4%1.5%, to $400.0$225.3 million during the 13 weeks ended JanuaryOctober 27, 2018 from $436.8$228.7 million during the 13 weeks ended JanuaryOctober 28, 2017. This change was due to the matters discussed above.
The Company’s consolidated gross profit decreased $87.5$28.8 million, or 9.0%6.0%, to $882.2$453.4 million during the 3926 weeks ended JanuaryOctober 27, 2018 from $969.7$482.2 million during the 3926 weeks ended JanuaryOctober 28, 2017. This change was due to the matters discussed above.
Selling and Administrative Expenses
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Dollars in thousands | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | ||||||||||||||||||||||||||||||||||||||||||||||||
B&N Retail | $ | 259,198 | 21.4 | % | $ | 262,024 | 20.5 | % | $ | 727,149 | 25.9 | % | $ | 738,176 | 24.7 | % | $ | 217,670 | 28.9 | % | $ | 239,630 | 31.1 | % | $ | 428,561 | 28.0 | % | $ | 467,951 | 29.3 | % | ||||||||||||||||||||||||||||||||
NOOK | 13,846 | 64.8 | % | 16,938 | 68.1 | % | 41,918 | 63.5 | % | 63,323 | 74.6 | % | 9,989 | 55.5 | % | 14,098 | 65.9 | % | 19,486 | 52.6 | % | 28,072 | 62.8 | % | ||||||||||||||||||||||||||||||||||||||||
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Total Selling and Administrative Expenses | $ | 273,044 | 22.2 | % | $ | 278,962 | 21.4 | % | $ | 769,067 | 26.7 | % | $ | 801,499 | 26.1 | % | $ | 227,659 | 29.5 | % | $ | 253,728 | 32.1 | % | $ | 448,047 | 28.6 | % | $ | 496,023 | 30.2 | % | ||||||||||||||||||||||||||||||||
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Selling and administrative expenses decreased $5.9$26.1 million, or 2.1%10.3%, to $273.0$227.7 million during the 13 weeks ended JanuaryOctober 27, 2018 from $279.0$253.7 million during the 13 weeks ended JanuaryOctober 28, 2017. Selling and administrative expenses increaseddecreased as a percentage of sales to 22.2%29.5% from 21.4% as compared to32.1% during the same period one year ago. The changes by segment are as follows:
B&N Retail selling and administrative expenses decreased $2.8$22.0 million as compared to prior year, increasing 90or 225 basis points as a percentage of sales to 21.4%28.9% from 20.5%. The Company implemented a31.1%, primarily due to lower store payroll (150 basis points on store sales) on the implementation of the new store labor model for its stores, resulting induring the eliminationfourth quarter of certain store positions. The estimated severancefiscal 2018, lower employee benefit costs are $10.7 million (75(80 basis points). Store on lower payroll (excluding the severance charge) increased 25and timing of claims and lower professional fees (25 basis points (on store sales) as sales deleverage and wage increases werepoints) on prior year strategic initiatives, partially offset by productivity gains. The current year also includes higher employee benefit costs (15 basis points) and a higher store impairment charge (15 basis points). These increases were partially offset by lower bonus accruals (50legal fees (35 basis points). The remaining variance was attributable to indirect procurement savings, sales deleverage and the general timing of expenses.
NOOK selling and administrative expenses decreased $3.1$4.1 million as compared to prior year, decreasing as a percentage of sales to 64.8%55.5% from 68.1%65.9% for the quarterquarter. The dollar decrease was primarily attributable to continued cost rationalization efforts, including lower compensation expense andas well as lower variable costs on the sales decline, partially offset by higher legal and advertising expenses. In addition, expenses were favorably impacted by the channel partner settlement.decline.
Selling and administrative expenses decreased $32.4$48.0 million, or 4.0%9.7%, to $769.1$448.0 million during the 3926 weeks ended JanuaryOctober 27, 2018 from $801.5$496.0 million during the 3926 weeks ended JanuaryOctober 28, 2017. Selling and administrative expenses increaseddecreased as a percentage of sales to 26.7%28.6% from 26.1% as compared to30.2% during the same period one year ago. The changes by segment are as follows:
B&N Retail selling and administrative expenses decreased $11.0$39.4 million as compared to prior year. As a percent of sales, B&N Retail expenses increasedyear, or 120 basis points as a percentage of sales to 25.9%28.0% from 24.7%. The Company implemented a new labor model for its stores, resulting in the elimination of certain store positions. The estimated severance costs are $10.7 million (40 basis points). Excluding this charge, severance costs decreased 50 basis points on prior year cost reductions. The current year also includes higher29.3%, primarily due to lower store payroll (70(135 basis points on store sales) on sales deleverage and wage increases,the implementation of the new store labor model during the fourth quarter of fiscal 2018, partially offset by higher employee benefit costslegal fees (25 basis points) on increased medical claims, increased legal and professional fees (20 basis points) partially related to strategic consulting and higher website expenses (15 basis points). The remaining variance was attributable to indirect procurement savings, sales deleverage and the general timing of expenses.
NOOK selling and administrative expenses decreased $21.4$8.6 million as compared to prior year, decreasing as a percentage of sales to 63.5%52.6% from 74.6%.62.8% for the year. The prior year included severance and transitional costs of $9.1 million related to the outsourcing of certain services and the closure of NOOK’s California and Taiwan offices. Excluding these costs, thedollar decrease in dollars was primarily attributable to continued cost rationalization efforts, including lower compensation expense, lower severance and consulting costs, as well as lower variable costs on the sales decline, partially offset by higher legal costs. The current year also includes a favorable expense impact from the channel partner settlement.decline.
Depreciation and Amortization
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Dollars in thousands | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | ||||||||||||||||||||||||||||||||||||||||||||||||
B&N Retail | $ | 25,295 | 2.1 | % | $ | 25,236 | 2.0 | % | $ | 72,491 | 2.6 | % | $ | 74,756 | 2.5 | % | $ | 21,888 | 2.9 | % | $ | 24,117 | 3.1 | % | $ | 43,166 | 2.8 | % | $ | 47,196 | 3.0 | % | ||||||||||||||||||||||||||||||||
NOOK | 2,950 | 13.8 | % | 3,816 | 15.3 | % | 9,351 | 14.2 | % | 15,327 | 18.1 | % | 2,560 | 14.2 | % | 3,082 | 14.4 | % | 5,167 | 13.9 | % | 6,401 | 14.3 | % | ||||||||||||||||||||||||||||||||||||||||
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Total Depreciation and Amortization | $ | 28,245 | 2.3 | % | $ | 29,052 | 2.2 | % | $ | 81,842 | 2.8 | % | $ | 90,083 | 2.9 | % | $ | 24,448 | 3.2 | % | $ | 27,199 | 3.4 | % | $ | 48,333 | 3.1 | % | $ | 53,597 | 3.3 | % | ||||||||||||||||||||||||||||||||
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During the 13 weeks ended JanuaryOctober 27, 2018, depreciation and amortization decreased $0.8$2.8 million, or 2.8%10.1%, to $28.2$24.4 million from $29.1$27.2 million during the same period one year ago. This decrease was primarily attributable to fully depreciated assets and store closures, partially offset by additional capital expenditures.
During the 3926 weeks ended JanuaryOctober 27, 2018, depreciation and amortization decreased $8.2$5.3 million, or 9.1%9.8%, to $81.8$48.3 million from $90.1$53.6 million during the same period one year ago. This decrease was primarily attributable to fully depreciated assets and store closures, partially offset by additional capital expenditures.
Goodwill ImpairmentOperating Loss
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Dollars in thousands | January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | October 27, 2018 | % of Sales | October 28, 2017 | % of Sales | ||||||||||||||||||||||||||||||||||||
Goodwill Impairment | $ | 133,612 | $ | — | $ | 133,612 | $ | — | ||||||||||||||||||||||||||||||||||||||||
B&N Retail | $ | (25,242 | ) | (3.4 | )% | $ | (49,311 | ) | (6.4 | )% | $ | (41,110 | ) | (2.7 | )% | $ | (61,821 | ) | (3.9 | )% | ||||||||||||||||||||||||||||
NOOK | (1,518 | ) | (8.4 | )% | (2,921 | ) | (13.6 | )% | (1,851 | ) | (5.0 | )% | (5,623 | ) | (12.6 | )% | ||||||||||||||||||||||||||||||||
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Total Operating Loss | $ | (26,760 | ) | (3.5 | )% | $ | (52,232 | ) | (6.6 | )% | $ | (42,961 | ) | (2.7 | )% | $ | (67,444 | ) | (4.1 | )% | ||||||||||||||||||||||||||||
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The costs in excessCompany’s consolidated operating loss decreased $25.5 million, or 48.8%, to an operating loss of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets. ASC350-30,Goodwill and Other Intangible Assets, requires that goodwill and other unamortizable intangible assets be tested for impairment at least annually or earlier if there are impairment indicators.
In January 2017, the FASB issued ASU2017-04, which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment.
The Company completed its annual goodwill impairment test as of the first day of the third quarter of fiscal 2018. Given the lower than expected sales results, the Company revised its forecasted outlook. Following the announcement of its holiday sales results and revised outlook, the market price of the Company’s common stock sharply declined. Due to these impairment indicators, the Company performed an interim test of its goodwill during the period. While the Company has initiated a strategic turnaround plan focused on stabilizing sales, improving productivity and reducing expenses, achievement of its long-term goals requires a significant multi-year transformation. As a result of performing the interim test of impairment, the Company recognized an impairment of its B&N Retail reporting unit of $133.6$26.8 million during the 13 weeks ended JanuaryOctober 27, 2018.
Operating Income (Loss)
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Dollars in thousands | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | January 27, 2018 | % of Sales | January 28, 2017 | % of Sales | ||||||||||||||||||||||||
B&N Retail | $ | (33,546 | ) | (2.8 | )% | $ | 134,991 | 10.6 | % | $ | (95,367 | ) | (3.4 | )% | $ | 106,541 | 3.6 | % | ||||||||||||||
NOOK | (1,329 | ) | (6.2 | )% | (6,204 | ) | (24.9 | )% | (6,952 | ) | (10.5 | )% | (28,408 | ) | (33.5 | )% | ||||||||||||||||
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Total Operating Income (Loss) | $ | (34,875 | ) | (2.8 | )% | $ | 128,787 | 9.9 | % | $ | (102,319 | ) | (3.6 | )% | $ | 78,133 | 2.5 | % | ||||||||||||||
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The Company’s consolidated operating income decreased $163.7 million, or 127.1%, to2018 from an operating loss of $34.9$52.2 million during the 13 weeks ended January 27, 2018 from an operating income of $128.8 million during the 13 weeks ended JanuaryOctober 28, 2017. This change was due to the matters discussed above.
The Company’s consolidated operating incomeloss decreased $180.5$24.5 million, or 231.0%36.3%, to an operating loss of $102.3$43.0 million during the 3926 weeks ended JanuaryOctober 27, 2018 from an operating incomeloss of $78.1$67.4 million during the 3926 weeks ended JanuaryOctober 28, 2017. This change was due to the matters discussed above.
Interest Expense, Net and Amortization of Deferred Financing Fees
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Dollars in thousands | January 27, 2018 | January 28, 2017 | % of Change | January 27, 2018 | January 28, 2017 | % of Change | October 27, 2018 | October 28, 2017 | % of Change | October 27, 2018 | October 28, 2017 | % of Change | ||||||||||||||||||||||||||||||||||||
Interest Expense, Net and Amortization of Deferred Financing Fees | $ | 2,536 | $ | 2,076 | 22.2 | % | $ | 7,254 | $ | 5,666 | 28.0 | % | $ | 3,432 | $ | 2,678 | 28.2 | % | $ | 6,684 | $ | 4,718 | 41.7 | % | ||||||||||||||||||||||||
Net interest expense and amortization of deferred financing fees increased $0.5$0.8 million, or 22.2%28.2%, to $2.5$3.4 million during the 13 weeks ended JanuaryOctober 27, 2018 from $2.1$2.7 million during the 13 weeks ended JanuaryOctober 28, 2017 primarily on higher average borrowings.
Net interest expense and amortization of deferred financing fees increased $1.6$2.0 million, or 28.0%41.7%, to $7.3$6.7 million during the 3926 weeks ended JanuaryOctober 27, 2018 from $5.7$4.7 million during the 3926 weeks ended JanuaryOctober 28, 2017 primarily on higher average borrowings.
Income Tax Provision (Benefit)Benefit
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Dollars in thousands | January 27, 2018 | Effective Rate | January 28, 2017 | Effective Rate | January 27, 2018 | Effective Rate | January 28, 2017 | Effective Rate | October 27, 2018 | Effective Rate | October 28, 2017 | Effective Rate | October 27, 2018 | Effective Rate | October 28, 2017 | Effective Rate | ||||||||||||||||||||||||||||||||||||||||||||||||
Income Tax Provision (Benefit) | $ | 26,125 | (69.8 | )% | $ | 56,435 | 44.5 | % | $ | (5,165 | ) | 4.7 | % | $ | 37,016 | 51.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Income Tax Benefit | $ | (2,798 | ) | 9.3 | % | $ | (24,816 | ) | 45.2 | % | $ | (5,213 | ) | 10.5 | % | $ | (31,290 | ) | 43.4 | % | ||||||||||||||||||||||||||||||||||||||||||||
The Company recorded an income tax provisionbenefit of $26.1$2.8 million on apre-tax loss of $37.4$30.2 million during the 13 weeks ended JanuaryOctober 27, 2018, which represented an effective income tax rate of (69.8)%9.3%. The Company recorded an income tax provisionbenefit of $56.4$24.8 million on apre-tax incomeloss of $126.7$54.9 million during the 13 weeks ended JanuaryOctober 28, 2017, which represented an effective income tax rate of 44.5%45.2%. The Company’s effective tax rates for the 13 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017 differ from the statutory rates due to the impact of permanent items such as meals and entertainment,non-deductible executive compensation, tax credits, changes in uncertain tax positions, expected changes in valuation allowance based on forecasted full year income and state tax provision, net of federal benefit and for the 13 weeks ended January 27, 2018, the impact of the Tax Cuts and Jobs Act, goodwill impairment, and changes to valuation allowance. The change in effective tax rates for the 13 weeks ended January 27, 2018 and January 28, 2017 was due to changes in uncertain tax positions, return to provision adjustments, goodwill impairment, valuation allowance, and the impact of the Tax Cuts and Jobs Act.benefit.
The Company recorded an income tax benefit of $5.2 million on apre-tax loss of $109.6$49.6 million during the 3926 weeks ended JanuaryOctober 27, 2018, which represented an effective income tax rate of 4.7%10.5%. The Company
recorded an income tax provisionbenefit of $37.0$31.3 million on apre-tax incomeloss of $72.5$72.2 million during the 3926 weeks ended JanuaryOctober 28, 2017, which represented an effective income tax rate of 51.1%43.4%. The Company’s effective tax rates for the 3926 weeks ended JanuaryOctober 27, 2018 and JanuaryOctober 28, 2017 differ from the statutory rates due to the impact of permanent items such as meals and entertainment,non-deductible executive compensation, tax credits, changes in uncertain tax positions, expected changes in valuation allowance based on forecasted full year income and state tax provision, net of federal benefit and for the 39 weeks ended January 27, 2018, the impact of the Tax Cuts and Jobs Act, goodwill impairment, and changes to valuation allowance. The change in effective tax rates for the 39 weeks ended January 27, 2018 and January 28, 2017 was due to changes in uncertain tax positions, return to provision adjustments, goodwill impairment, valuation allowance and the impact of the Tax Cuts and Jobs Act.benefit.
The Company believes that it is reasonably possible that approximately $1.1 million of the total amount ofremaining unrecognized tax benefits at January 27, 2018 could decrease by approximately $0.9 millionmay be recognized within the next twelve months, as a result of settlement of certain tax audits or lapses of statutes of limitations, which could impact the effective tax rate.
Net Income (Loss)Loss
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Dollars in thousands | January 27, 2018 | January 28, 2017 | January 27, 2018 | January 28, 2017 | October 27, 2018 | October 28, 2017 | October 27, 2018 | October 28, 2017 | ||||||||||||||||||||||||
Net Income (loss) | $ | (63,536 | ) | $ | 70,276 | $ | (104,408 | ) | $ | 35,451 | ||||||||||||||||||||||
Net Loss. | $ | (27,394 | ) | $ | (30,094 | ) | $ | (44,432 | ) | $ | (40,872 | ) | ||||||||||||||||||||
As a result of the factors discussed above, the Company reported consolidated net loss of $63.5$27.4 million during the 13 weeks ended JanuaryOctober 27, 2018, compared with consolidated net incomeloss of $70.3$30.1 million during the 13 weeks ended JanuaryOctober 28, 2017.
As a result of the factors discussed above, the Company reported consolidated net loss of $104.4$44.4 million during the 3926 weeks ended JanuaryOctober 27, 2018, compared with consolidated net incomeloss of $35.5$40.9 million during the 3926 weeks ended JanuaryOctober 28, 2017.
Critical Accounting Policies
During the 3926 weeks ended JanuaryOctober 27, 2018, except for the adoption of ASU2016-09 during the first quarter of fiscal 2018 and adoption of ASU2017-04during the third quarter of fiscal 2018,Topic 606, there were no changes in the Company’s policies regarding the use of estimates and other critical accounting policies.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” found in the Company’s Annual Report on Form10-K for the fiscal year ended April 29, 201728, 2018 for additional information relating to the Company’s use of estimates and other critical accounting policies.
Disclosure Regarding Forward-Looking Statements
This quarterly report on Form10-Q contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information relating to Barnes & Noble that are based on the beliefs of the management of Barnes & Noble as well as assumptions made by and information currently available to the management of Barnes & Noble. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to Barnes & Noble or the management of Barnes & Noble, identify forward-looking statements.
Such statements reflect the current views of Barnes & Noble with respect to future events, the outcome of which is subject to certain risks, including, among others, the general economic environment and consumer spending patterns, decreased consumer demand for Barnes & Noble’s products, low growth or declining sales and net income due to various factors, including store closings, higher-than-anticipated or increasing costs, including with respect to store closings, relocation, occupancy (including in connection with lease renewals) and labor costs, the effects of competition, the risk of insufficient access to financing to implement future business initiatives, risks associated with data privacy and information security, risks associated with Barnes & Noble’s
supply chain, including possible delays and disruptions and increases in shipping rates, various risks associated with the digital business, including the possible loss of customers, declines in digital content sales, risks and costs associated with ongoing efforts to rationalize the digital business, risks associated with the eCommerce business, including the possible loss of eCommerce customers and declines in eCommerce sales, the risk that financial and operational forecasts and projections are not achieved, the performance of Barnes & Noble’s initiatives including but not limited to new store concepts and eCommerce initiatives, unanticipated adverse litigation results or
effects, potential infringement of Barnes & Noble’s intellectual property by third parties or by Barnes & Noble of the intellectual property of third parties, and other factors, including those factors discussed in detail in Item 1A, “Risk Factors,” in Barnes & Noble’s Annual Report on Form10-K for the fiscal year ended April 29, 2017,28, 2018, and in Barnes & Noble’s other filings made hereafter from time to time with the SEC.
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 as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to Barnes & Noble or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Barnes & Noble undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of thisForm 10-Q.
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk |
The Company limits its interest rate risks by investing certain of its excess cash balances in short-term, highly-liquid instruments with an original maturity of one year or less. The Company does not expect any material losses from its invested cash balances and the Company believes that its interest rate exposure is modest. As of JanuaryOctober 27, 2018, the Company’s cash and cash equivalents totaled approximately $11.5$11.2 million. A 50 basis point increase in annual interest rates would have increased the Company’s interest income by $0.0 million in the thirdsecond quarter of fiscal 2018.2019. Conversely, a 50 basis point decrease in annual interest rates would have reduced interest income by $0.0 million in the thirdsecond quarter of fiscal 2018.2019.
Additionally, the Company may from time to time borrow money under its credit facility at various interest rate options based on the Base Rate or LIBO Rate (each term as defined in the amended and restated credit agreement described in the Quarterly Report under the section titled “Notes to Consolidated Financial Statements”) depending upon certain financial tests. Accordingly, the Company may be exposed to interest rate risk on borrowings under its credit facility. The Company had borrowings under its credit facility of $59.8$278.3 million at JanuaryOctober 27, 2018 and $18.2$242.8 million at JanuaryOctober 28, 2017. A 50 basis point increase in annual interest rates would have increased the Company’s interest expense by $0.2$0.3 million in the thirdsecond quarter of fiscal 2018.2019. Conversely, a 50 basis point decrease in annual interest rates would have reduced interest expense by $0.2$0.3 million in the thirdsecond quarter of fiscal 2018.2019.
The Company does not have any material foreign currency exposure as nearly all of its business is transacted in United States currency.
| Item 4: | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The management of the Company established and maintains disclosure controls and procedures that are designed to ensure that material information relating to the Company and its subsidiaries required to be disclosed in the reports that are filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’smembers of the Office of the Chief Executive Officer of the Company and Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding
required disclosures. As of the end of the period covered by this report, the Company’s management conducted an evaluation (as required under Rules13a-15(b) and15d-15(b) under the Exchange Act), under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s “disclosure controls and procedures” (as such term is defined in Rules13a-15(e) and15d-15(e) under the Exchange Act). A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Based on management’s evaluation, the principal executive officerofficers and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
| Item 1. | Legal Proceedings |
The Company is involved in a varietySee Item 1 of claims, suits, investigations and proceedings that arise from timePart I, “Notes to time in the ordinary course of its business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, securities, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.
The Company records a liability when it believes that it is both probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount of a loss or potential loss. The Company may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if proceedings are in the early stages; (iii) if there is uncertainty as to the outcome of pending proceedings (including motions and appeals); (iv) if there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) if there are significant factual issues to be determined or resolved; (vi) if the proceedings involve a large number of parties; (vii) if relevant law is unsettled or novel or untested legal theories are presented; or (viii) if the proceedings are taking place in jurisdictions where the laws are complex or unclear. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.
With respect to the legal matters described below, the Company has determined, based on its current knowledge, that the amount of loss or range of loss that is reasonably possible, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company’s business, financial condition, results of operations, or cash flows.
The following is a discussion of the material legal matters involving the Company.
PIN Pad Litigation
As previously disclosed, the Company discovered that PIN pads in certain of its stores had been tampered with to allow criminal access to card data and PIN numbers on credit and debit cards swiped through the terminals. Following public disclosure of this matter on October 24, 2012, the Company was served with four putative class action complaints (three in federal district court in the Northern District of Illinois and one in the Northern District of California), each of which alleged on behalf of national and other classes of customers who swiped credit and debit cards in Barnes & Noble Retail stores common law claims such as negligence, breach of contract and invasion of privacy, as well as statutory claims such as violations of the Fair Credit Reporting Act, state data breach notification statutes, and state unfair and deceptive practices statutes. The actions sought various forms of relief including damages, injunctive or equitable relief, multiple or punitive damages, attorneys’ fees, costs, and interest. All four cases were transferred and/or assigned to a single judge in the United States District Court for the Northern District of Illinois, and a single consolidated amended complaint was filed. The Company filed a motion to dismiss the consolidated amended complaint in its entirety, and in September 2013,
the Court granted the motion to dismiss without prejudice. The Plaintiffs then filed an amended complaint, and the Company filed a second motion to dismiss. On October 3, 2016, the Court granted the second motion to dismiss, and dismissed the case without prejudice; in doing so, the Court permitted plaintiffs to file a second amended complaint by October 31, 2016. On October 31, 2016, the plaintiffs filed a second amended complaint, and on January 25, 2017 the Company filed a motion to dismiss the second amended complaint. On June 13, 2017, the Court granted the Company’s motion to dismiss with prejudice. Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Seventh Circuit. The appeal is fully briefed, and the Court heard oral argument on December 6, 2017. The Court of Appeals’ decision is pending.
Cassandra Carag individually and on behalf of others similarly situated v. Barnes & Noble, Inc., Barnes & Noble Booksellers, Inc. and DOES 1 through 100 inclusive
On November 27, 2013, former Associate Store Manager Cassandra Carag (Carag) brought suit in Sacramento County Superior Court, asserting claims on behalf of herself and all other hourly(non-exempt) Barnes & Noble employees in California in the preceding four years for unpaid regular and overtime wages based on allegedoff-the-clock work, penalties and pay based on missed meal and rest breaks, and for improper wage statements, payroll records, and untimely pay at separation as a result of the alleged pay errors during employment. Via the complaint, Carag seeks to recover unpaid wages and statutory penalties for all hourly Barnes & Noble employees within California from November 27, 2009 to present. On February 13, 2014, the Company filed an answer to the complaint in the state court and concurrently requested removal of the action to federal court. On May 30, 2014, the federal court granted Plaintiff’s motion to remand the case to state court and denied Plaintiff’s motion to strike portions of the answer to the complaint (referring the latter motion to the lower court for future consideration). The Court has not yet scheduled any further hearings or deadlines.
Café Manager Class Actions
Two former Café Managers have filed separate actions alleging similar claims of entitlement to unpaid compensation for overtime. In each action, the plaintiff seeks to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). Specifically, Christine Hartpence filed a complaint against Barnes & Noble, Inc. (Barnes & Noble) in Philadelphia County Court of Common Pleas on May 26, 2015, alleging that she is entitled to unpaid compensation for overtime under Pennsylvania law and seeking to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). On July 14, 2016, Ms. Hartpence amended her complaint to assert a purported collective action for alleged unpaid overtime compensation under the federal Fair Labor Standards Act (FLSA), by which she sought to act as a class representative for similarly situated Café Managers throughout the United States. On July 27, 2016, Barnes & Noble removed the case to the U.S. District Court of the Eastern District of Pennsylvania. Ms. Hartpence then voluntarily dismissed her complaint and subsequentlyre-filed a similar complaint in the Philadelphia County Court of Common Pleas. There-filed complaint alleged only claims of unpaid overtime under Pennsylvania law and class claims under Pennsylvania law that are limited to current and former Café Managers within Pennsylvania. On June 22, 2017, Ms. Hartpence filed an additional, separate action in Philadelphia County Court of Common Pleas in which she repeats her allegations under Pennsylvania law and asserts a similar claim for unpaid wages under New Jersey law, purportedly on behalf of herself and others similarly situated. The Court consolidated the two pending cases on November 1, 2017. On December 8, 2017, Barnes & Noble removed the consolidated action after Ms. Hartpence amended her complaint to add a cause of action under the FLSA in which Ms. Hartpence purports to assert claims on behalf of herself and a national class of all similarly situated Café Managers.
On September 20, 2016, Kelly Brown filed a complaint against Barnes & Noble in the U.S. District Court for the Southern District of New York in which she also alleges that she is entitled to unpaid compensation under the FLSA and Illinois law. Ms. Brown seeks to represent a national class of all similarly situated Café Managers under the FLSA, as well as an Illinois-based class under Illinois law. On November 9, 2016, Ms. Brown filed an amended complaint to add an additional plaintiff named Tiffany Stewart, who is a former Café Manager who
also alleges unpaid overtime compensation in violation of New York law and seeks to represent a class of similarly situated New York-based Café Managers under New York law. On May 2, 2017, the Court denied Plaintiffs’ Motion for Conditional Certification, without prejudice. The Plaintiffs filed a renewed motion for Conditional Certification on November 17, 2017, which is now fully briefed by the parties and pending before the Court. There are currently 18 former Café Managers who have joined the action asopt-in plaintiffs.
Bernardino v. Barnes & Noble Booksellers, Inc.
On June 16, 2017, a putative class action complaint was filed against Barnes & Noble Booksellers, Inc. (B&N Booksellers) in the United States District Court for the Southern District of New York, alleging violations of the federal Video Privacy Protection Act and related New York law. The plaintiff, who seeks to represent a class of subscribers of Facebook, Inc. (Facebook) who purchased DVDs or other video media from the Barnes & Noble website, seeks damages, injunctive relief and attorneys’ fees, among other things, based on her allegation that B&N Booksellers supposedly knowingly disclosed her personally identifiable information to Facebook without her consent when she bought a DVD from Barnes & Noble’s website. On July 10, 2017, the plaintiff moved for a preliminary injunction requiring Barnes & Noble to change the operation of its website, which motion B&N Booksellers opposed. On July 31, 2017, B&N Booksellers moved to compel the case to arbitration, consistent with the terms of use on Barnes & Noble’s website. On August 28, 2017, the court denied the plaintiff’s motion for a preliminary injunction. On January 31, 2018, the court granted B&N Booksellers’ motion to compel arbitration, and the clerk of court closed the case on February 1, 2018.Consolidated Financial Statements, Note 17. Legal Proceedings.”
| Item 1A. | Risk Factors |
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on FormForm 10-K for the fiscal year ended April 29, 2017.28, 2018.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases by the Company of shares of its common stock:
Period | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||
October 29, 2017—November 25, 2017 | — | $ | — | — | $ | 50,000,000 | ||||||||||
November 26, 2017—December 30, 2017 | 1,233 | $ | 6.70 | — | $ | 50,000,000 | ||||||||||
December 31, 2017—January 27, 2018 | 3,523 | $ | 6.50 | — | $ | 50,000,000 | ||||||||||
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Total | 4,756 | $ | 6.55 | — | ||||||||||||
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Period | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||
July 29, 2018 – August 25, 2018 | 14,922 | $ | 5.93 | — | $ | 50,000,000 | ||||||||||
August 26, 2018 – September 29, 2018 | — | $ | — | — | $ | 50,000,000 | ||||||||||
September 30, 2018 – October 27, 2018 | 731 | $ | 5.55 | — | $ | 50,000,000 | ||||||||||
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Total | 15,653 | $ | 5.92 | — | ||||||||||||
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| (a) | The shares on this table above represent shares relinquished by employees in exchange for the Company’s agreement to pay federal and state withholding obligations resulting from the vesting of the Company’s restricted stock units, which are not drawn against the Company’s stock repurchase program. All of the restricted stock units vested during these periods were originally granted pursuant to the Company’s 2009 Amended and Restated Incentive Plan. This Incentive Plan provides for the withholding of shares to satisfy tax obligations due upon the vesting of restricted stock units. |
On October 20, 2015, the Company’s Board of Directors authorized a stock repurchase program (prior repurchase plan) of up to $50.0 million of its common shares. On March 15, 2017, subsequent to completing the prior repurchase plan, the Company’s Board of Directors authorized a new stock repurchase program of up to $50.0 million of its common shares. Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. The new stock repurchase program has no expiration date and may be suspended or discontinued at any time. The Company’s repurchase plan is intended to comply with the requirements of Rule10b-18 under the Securities Exchange Act of 1934.1934, as amended. The Company did not repurchase shares under this plan during the 13 and 3926 weeks ended JanuaryOctober 27, 2018. During the 132018 and 39 weeks ended JanuaryOctober 28, 2017, the Company repurchased 311,020 shares at a cost of $3.5 million and 2,019,798 shares at a cost of $23.3 million, respectively, under the prior repurchase plan.2017. The Company has remaining capacity of $50.0 million under the new repurchase program as of JanuaryOctober 27, 2018.
As of JanuaryOctober 27, 2018, the Company has repurchased 39,584,90739,732,064 shares at a cost of approximately $1.09 billion since the inception of the Company’s stock repurchase programs. The repurchased shares are held in treasury.
| Item 6. | Exhibits |
Exhibits filed with this Form10-Q:
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) | ||
By: | /s/ ALLEN W. LINDSTROM | |
| Allen W. Lindstrom | ||
Chief Financial Officer and a Member of the Office of the Chief Executive Officer | ||
| (principal financial officer) | ||
By: | /s/ PETER M. HERPICH | |
| Peter M. Herpich | ||
| Vice President and Corporate Controller | ||
| (principal accounting officer) | ||
March 1,November 20, 2018
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