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Barnes & Noble Reports Fiscal 2015 Third Quarter Financial Results

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Barnes & Noble, Inc. (NYSE:BKS) today reported sales and earnings for its fiscal 2015 third quarter ended January 31, 2015.

Third quarter consolidated revenues of $1.96 billion declined $35 million as compared to the prior year. Third quarter consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) increased 14% as compared to the prior year to $197 million.

“We are pleased with the performance of our businesses,” said Michael P. Huseby, Chief Executive Officer of Barnes & Noble, Inc. “Retail Core comparable sales increased 1.7% on the continued stabilization of the physical book business, as well as continued growth in non-book core categories such as Educational Toys & Games and Gifts. While College continues to invest in its future, its top line sales grew through new school acquisitions and better than expected comparable sales trends. NOOK’s EBITDA loss was cut in half due to ongoing cost rationalization efforts. This performance across all businesses further supports our belief that now is the right time to separate the College business. The separation will allow each business to optimize their strategic opportunities, given their respective growth profiles, and specifically enable College to pursue opportunities in the growing educational services market.”

Third Quarter 2015 Results from Operations

Segment results for the fiscal 2015 and fiscal 2014 third quarters are as follows:

Revenues (unaudited) EBITDA(2) (unaudited)
$ in millions Increase/(Decrease) Increase/(Decrease)
Q3 2015 Q3 2014 $ % Q3 2015 Q3 2014 $ %
Retail $1,395.9 $1,410.3 ($14.4) -1.0% $198.6 $199.6 ($1.0) -0.5%
College $521.0 $486.2 $34.8 7.2% $28.1 $35.2 ($7.1) -20.3%
NOOK $77.5 $156.9 ($79.4) -50.6% ($29.3) ($61.8) $32.5 52.5%
Elimination (1) ($33.3) ($57.6) $24.3 -42.2% n/a n/a n/a n/a
Total $1,961.2 $1,995.8 ($34.6) -1.7% $197.4 $173.1 $24.3 14.0%
(1) Represents the elimination of intercompany sales from NOOK to Barnes & Noble Retail and Barnes & Noble College on a sell-through basis.
(2) This non-GAAP measure has been reconciled to the comparable GAAP measure as required under SEC rules regarding the use of non-GAAP financial measures on the attached Segment Information table.

Retail

The Retail segment, which includes the Barnes & Noble bookstores and BN.com, had revenues of $1.4 billion for the quarter, decreasing 1.0% as compared to the prior year. The sales decrease was primarily attributable to lower sales of NOOK products, leading to a comparable store sales decline of 0.3% for the quarter, as well as store closures. “Core” comparable store sales, which exclude sales of NOOK products, increased 1.7% for the quarter on higher sales of both book and non-book core categories.

Retail generated EBITDA of $199 million in the quarter, essentially flat as compared to a year ago. Retail EBITDA benefitted from a higher mix of higher margin core products and lower core product markdowns, which was offset by the previously disclosed charge of $7 million relating to the termination of the Company’s pension plan.

College

The College segment had revenues of $521 million, increasing 7.2% as compared to a year ago. In addition to new store growth, third quarter sales benefitted from a later shift in the fiscal calendar. The quarter ended on January 31st this year, as compared to January 25th last year, and, therefore, included an additional week of the spring back-to-school rush season.

For the comparable sales period, comparable College store sales decreased 1.4% for the quarter. The spring back-to-school rush season extended past the close of the Company’s fiscal third quarter. Factoring in the two additional weeks in February that contributed to this year’s rush season, comparable store sales decreased 1.0%. Comparable sales comparisons are not impacted by the calendar timing difference noted above.

College EBITDA declined $7 million as compared to a year ago to $28 million, as revenue growth was offset by continued investments to support business growth and the digital education platform. Margins also declined on higher textbook rental deferrals and comparisons to a prior year favorable LIFO adjustment.

NOOK

The NOOK segment (including digital content, devices and accessories) had revenues of $78 million for the quarter, decreasing 50.6% from a year ago. Device and accessories sales were $37 million for the quarter, a decrease of 62.8% from a year ago, due to lower unit selling volume. Digital content sales were $41 million for the quarter, a decline of 29.3% compared to a year ago, due primarily to the lower device unit sales volume.

Despite the sales decline, NOOK EBITDA losses decreased $32 million, or 52.5%, as compared to a year ago to $29 million. Margins improved on product mix and lower occupancy costs, while expenses declined on continued cost rationalization efforts.

Consolidated Results

Consolidated third quarter net earnings were $72 million, or $0.93 per share, compared to net earnings of $63 million, or $0.86 per share, in the prior year.

Outlook

For fiscal year 2015, the Company continues to expect Retail comparable bookstore sales to decline in the low-single digits, while Retail Core comparable bookstore sales are expected to be approximately flat. Based on the better than expected comparable sales performance, the company now expects College comparable store sales to be approximately flat for the fiscal year. The Company also expects full fiscal year EBITDA losses in the NOOK segment to decline versus the prior year.

Conference Call

A conference call with Barnes & Noble, Inc.’s senior management will be webcast beginning at 10:00 A.M. ET on Tuesday, March 10, 2015, and is accessible at www.barnesandnobleinc.com/webcasts.

Barnes & Noble, Inc. will report fiscal 2015 year-end results on or about June 25, 2015.

About Barnes & Noble, Inc.

Barnes & Noble, Inc. (NYSE:BKS) is a Fortune 500 company and the leading retailer of content, digital media and educational products. The Company operates 649 Barnes & Noble bookstores in 50 states, and one of the Web’s largest e-commerce sites, BN.com (www.bn.com). The NOOK digital business offers award-winning NOOK(R) products and an expansive collection of digital reading and entertainment content through the NOOK Store(R) (www.nook.com), while Barnes & Noble College Booksellers, LLC operates 717 bookstores serving over five million students and faculty members at colleges and universities across the United States.

General information on Barnes & Noble, Inc. can be obtained by visiting the Company’s corporate website: www.barnesandnobleinc.com.

Forward-Looking Statements

This press release 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 effect of the proposed separation of Barnes & Noble Education (including with respect to the timing of the completion thereof), 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, possible disruptions in Barnes & Noble’s computer systems, telephone systems or supply chain, possible risks associated with data privacy, information security and intellectual property, possible work stoppages or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible risks that inventory in channels of distribution may be larger than able to be sold, possible risks associated with changes in the strategic direction of the device business, including possible reduction in sales of content, accessories and other merchandise and other adverse financial impacts, possible risk that component parts will be rendered obsolete or otherwise not be able to be effectively utilized in devices to be sold, possible risk that financial and operational forecasts and projections are not achieved, possible risk that returns from consumers or channels of distribution may be greater than estimated, the risk that digital sales growth is less than expectations and the risk that it does not exceed the rate of investment spend, higher-than-anticipated store closing or relocation costs, higher interest rates, the performance of Barnes & Noble’s online, digital and other initiatives, the success of Barnes & Noble’s strategic investments, unanticipated increases in merchandise, component or occupancy costs, unanticipated adverse litigation results or effects, product and component shortages, risks associated with the commercial agreement with Samsung, the potential adverse impact on the Company’s businesses resulting from the Company’s prior reviews of strategic alternatives , the risk that the transactions with Pearson and Samsung do not achieve the expected benefits for the parties or impose costs on the Company in excess of what the Company anticipates, including the risk that Nook Digital’s applications are not commercially successful or that the expected distribution of those applications is not achieved, risks associated with the international expansion previously undertaken, including any risks associated with a reduction of international operations following termination of the Microsoft commercial agreement, the risk that Barnes & Noble Education is not able to perform its obligations under the Pearson commercial agreement and the consequences thereof, the risk that Nook Digital is not able to perform its obligations under the Samsung commercial agreement and the consequences thereof; the risks associated with the termination of Microsoft commercial agreement, including potential customer losses, risks associated with the restatement contained in, the delayed filing of, and the material weakness in internal controls described in Barnes & Noble’s Annual Report on Form 10-K for the fiscal year ended April 27, 2013, risks associated with the SEC investigation disclosed in the quarterly report on Form 10-Q for the fiscal quarter ended October 26, 2013, risks associated with the ongoing efforts to rationalize the NOOK business and the expected costs and benefits of such efforts and associated risks and other factors which may be outside of Barnes & Noble’s control, including those factors discussed in detail in Item 1A, “Risk Factors,” in Barnes & Noble’s Annual Report on Form 10-K for the fiscal year ended May 3, 2014, 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 this communication.

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
13 weeks ended 13 weeks ended 39 weeks ended 39 weeks ended
January 31, 2015 January 25, 2014 January 31, 2015 January 25, 2014
Sales $ 1,961,151

1,995,790 $ 4,885,418

5,059,451
Cost of sales and occupancy 1,333,114 1,392,349 3,414,801 3,625,867
Gross profit 628,037 603,441 1,470,617 1,433,584
Selling and administrative expenses 430,663 430,369 1,175,869 1,193,788
Depreciation and amortization 47,853 54,356 147,585 163,039

Operating income

149,521 118,716 147,163 76,757
Interest expense, net 3,552 7,761 14,774 22,868

Income before taxes

145,969 110,955 132,389 53,889
Income taxes 73,801 47,725 76,372 64,453

Net income (loss)

$ 72,168 63,230 $ 56,017 (10,564)

Income (loss) per common share:
Basic $ 0.96 0.95 $ 0.58 (0.40)
Diluted $ 0.93 0.86 $ 0.58 (0.40)
Weighted average common shares outstanding:
Basic 61,589 59,033 60,056 58,919
Diluted 73,711 71,033 60,128 58,919
Percentage of sales:
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy 68.0% 69.8% 69.9% 71.7%
Gross profit 32.0% 30.2% 30.1% 28.3%
Selling and administrative expenses 22.0% 21.6% 24.1% 23.6%
Depreciation and amortization 2.4% 2.7% 3.0% 3.2%

Operating income

7.6% 5.9% 3.0% 1.5%
Interest expense, net 0.2% 0.4% 0.3% 0.5%

Income before taxes

7.4% 5.6% 2.7% 1.1%
Income taxes 3.8% 2.4% 1.6% 1.3%

Net income (loss)

3.7% 3.2% 1.1% -0.2%
BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
January 31, 2015 January 25, 2014
ASSETS
Current assets:
Cash and cash equivalents $ 326,682 $ 489,583
Receivables, net 261,763 296,759
Merchandise inventories 1,493,438 1,441,889
Textbook rental inventories 77,989 74,774
Prepaid expenses and other current assets 61,858 61,285
Short-term deferred taxes 145,868 169,966
Total current assets 2,367,598 2,534,256
Property and equipment:
Land and land improvements 2,541 2,541
Buildings and leasehold improvements 1,217,692 1,239,446
Fixtures and equipment 2,021,054 1,925,899
3,241,287 3,167,886
Less accumulated depreciation and amortization 2,787,224 2,637,613
Net property and equipment 454,063 530,273
Goodwill 493,189 495,496
Intangible assets, net 517,050 532,761
Other noncurrent assets 44,343 48,391
Total assets $ 3,876,243 $ 4,141,177
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 1,080,114 $ 1,135,535
Accrued liabilities

563,984

629,145
Gift card liabilities 390,102 392,244
Short-term note payable 127,250
Total current liabilities

2,034,200

2,284,174
Long-term debt
Deferred taxes

214,297

256,235
Other long-term liabilities

217,193

331,305

Series J Preferred Stock

195,744 194,482
Preferred Member Interests in NOOK Media, LLC 382,954
Shareholders’ equity:
Common stock; $.001 par value; 300,000 shares
authorized; 97,485 and 93,335 shares issued, respectively 97 93
Additional paid-in capital 1,924,130 1,390,582
Accumulated other comprehensive loss (17,184) (16,692)
Retained earnings 381,190 385,685
Treasury stock, at cost, 34,580 and 34,295, respectively (1,073,424) (1,067,641)
Total Barnes & Noble, Inc. shareholders’ equity 1,214,809 692,027
Noncontrolling interest
Total shareholders’ equity 1,214,809 692,027
Commitments and contingencies
Total liabilities and shareholders’ equity $ 3,876,243 $ 4,141,177
BARNES & NOBLE, INC. AND SUBSIDIARIES
Segment Information
(In thousands)
(Unaudited)
13 weeks ended 13 weeks ended 39 weeks ended 39 weeks ended
January 31, 2015 January 25, 2014 January 31, 2015 January 25, 2014
Sales
Retail

$

1,395,917

1,410,308

$

3,238,883

3,339,533
College 521,019 486,221 1,498,389 1,449,776
NOOK 77,509 156,866 211,402 418,736
Elimination (33,294 ) (57,605 ) (63,256 ) (148,594 )
Total

$

1,961,151 1,995,790

$

4,885,418 5,059,451
Gross Profit
Retail

$

482,326

470,693

$

1,042,733

1,041,777
College 121,687 116,523 342,720 334,807
NOOK 24,024 16,225 85,164 57,000
Total

$

628,037 603,441

$

1,470,617 1,433,584
Selling and Administrative Expenses
Retail

$

283,735

271,079

$

752,653

740,827
College 93,578 81,274 266,536 234,336
NOOK 53,350 78,016 156,680 218,625
Total

$

430,663 430,369

$

1,175,869 1,193,788
EBITDA
Retail

$

198,591 199,614

$

290,080 300,950
College 28,109 35,249 76,184 100,471
NOOK (29,326 ) (61,791 ) (71,516 ) (161,625 )
Total

$

197,374 173,072

$

294,748 239,796
Net Income (Loss)
EBITDA

$

197,374 173,072

$

294,748 239,796
Depreciation and Amortization (47,853 ) (54,356 )

(147,585 ) (163,039 )
Interest Expense, net (3,552 ) (7,761 ) (14,774 ) (22,868 )
Income Taxes (73,801 ) (47,725 ) (76,372 ) (64,453 )
Total

$

72,168 63,230

$

56,017 (10,564 )
Percentage of sales:
Gross Margin
Retail 34.6 % 33.4 % 32.2 % 31.2 %
College 23.4 % 24.0 % 22.9 % 23.1 %
NOOK 54.3 % 16.3 % 57.5 % 21.1 %
Total 32.0 % 30.2 % 30.1 % 28.3 %
Selling and Administrative Expenses
Retail 20.3 % 19.2 % 23.2 % 22.2 %
College 18.0 % 16.7 % 17.8 % 16.2 %
NOOK 120.7 % 78.6 % 105.8 % 80.9 %
Total 22.0 % 21.6 % 24.1 % 23.6 %
BARNES & NOBLE, INC. AND SUBSIDIARIES
Earnings (Loss) Per Share
(In thousands, except per share data)
(Unaudited)
13 weeks ended 39 weeks ended
January 31, 2015 January 25, 2014 January 31, 2015 January 25, 2014
Numerator for basic income (loss) per share:
Net income (loss) $ 72,168 63,230 $ 56,017 (10,564)
Preferred stock dividends (3,942) (3,942) (11,825) (11,825)
Accretion of dividends on preferred stock (5,507) (316) (7,024) (947)
Less allocation of earnings and dividends to participating securities (3,380) (2,604) (2,171)
Net income (loss) available to common shareholders $ 59,339 56,368 $ 34,997 (23,336)
Numerator for diluted income (loss) per share:
Net income (loss) available to common shareholders $ 59,339 56,368 $ 34,997 (23,336)
Preferred stock dividends (a) 3,942 3,942
Accretion of dividends on preferred stock (a) 5,507 316
Allocation of earnings and dividends to participating securities 3,380 2,604 2,171
Less diluted allocation of earnings and dividends to participating securities (3,278) (2,338) (2,168)
Net income (loss) available to common shareholders $ 68,890 60,892 $ 35,000 (23,336)
Denominator for basic income (loss) per share:
Basic weighted average common shares 61,589 59,033 60,056 58,919
Denominator for diluted income (loss) per share:
Basic weighted average common shares 61,589 59,033 60,056 58,919
Preferred shares (a) 12,000 12,000
Average dilutive options 122 72
Diluted weighted average common shares 73,711 71,033 60,128 58,919
Income (loss) per common share:
Basic $ 0.96 0.95 $ 0.58 (0.40)
Diluted $ 0.93 0.86 $ 0.58 (0.40)
(a) Although the Company was in a net income position during the 39 weeks ended January 31, 2015, the dilutive effect of the Company’s convertible preferred shares were excluded from the calculation of income per share using the two-class method because the effect would be antidilutive.

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