Barnes & Noble Education: 3Q Results Show COVID Impact

Barnes & Noble Education reported their third quarter results on March 9th, showing a predictable decrease in revenues due to Covid.  Third quarter sales ($411MM) were off 18% versus 2020 which contributed to a year to date negative revenue ($1,211MM) variance of 24%.  EBITDA for the period showed a loss of $(48)MM versus $(1.7)MM in 2020. The year to date loss is $(87)MM versus income of $2.1 in 2020.  The company indicated they took a write down of $27MM for store fixtures.

It is worth noting that revenue results for 3Q 2020 were off 8% for the quarter and 6% year to date versus 2019 showing that the COVID impact has been significantly worse in recent periods.  In the 2019 3Q filing, revenues for the quarter were $550mm which indicates revenue has fallen $140mm over two years.  Year to date revenues in 2019 were $1.6B versus $1.2B in 2021.

(See Follett release below).

As this chart shows however, recent investors might be happy with share performance:

 

Additional details from their press release: 

Operational highlights for the third quarter 2021:

•Entered into a long-term strategic omnichannel merchandising partnership with FLC, forging an alliance with the two online and offline leaders in the licensed sports and emblematic merchandise category. Under the terms of the agreement, Fanatics and Lids together made a $15 million strategic equity investment in BNED

•BNC First Day® year-over-year revenue increased 107%, benefiting from the accelerated move to digital courseware.

•Reached agreements with 31 campus stores to date, which includes new business accounts, to support the BNC First Day® Complete program in Fall Term 2021, representing over 160,000 in total undergraduate enrollment; up from 12 campus stores and 43,000 in total undergraduate enrollment in Fall Term 2020.

•Continue to work with a significant number of additional campuses to secure agreements to launch First Day Complete for Fall Term 2021.

•Gained over 210,000 gross subscribers for the bartleby® suite of services year to date, with DSS revenue increasing 11.8% for the same period.

•Announced agreement with Wolfram|Alpha to develop a math solver as a new feature in the Company’s bartleby suite of solutions. Powered by Wolfram|Alpha’s best-in-class computation engine, the math solver will allow students to access an interactive digital calculator that provides real-time, step-by-step explanations for even the most advanced math problems.

•Continued to attract new clients and generate new business growth, signing over $84 million in net new business to date this fiscal year and expanding BNED’s footprint by 54 BNC institutions and 31 K-12 schools.

 

Related news from Higher Ed retailer Follett:  Web Sales Show Rapid Growth

ABA: Bookseller Video Montage: Dealing with COVID

 

 

 

Also an hour program from WGBH (Boston) about how independent bookstores are dealing with COVID-19

https://www.wgbh.org/news/local-news/2020/12/05/saving-bookstores-how-independent-shops-cope-against-covid-and-e-commerce-giants

MediaWeek (Vol 13, No 13): Bloomsbury, The Strand Bookstore, Ebooks & Libraries, Education & Academic Publishing

Roundup of publishing news from the past several months.

Harry Potter publisher says Covid has weaved magic over book sales (Guardian) 

“It is a complete surprise because we had as grim a beginning to the pandemic as everyone else in March when 100% of our customers shut down worldwide,” said Nigel Newton, the chief executive.

“And then we found that early on people showed short attention spans and were watching TV. But then reading reasserted its power and people found they could escape through books, and sales have been booming ever since.”

When New York’s Strand Bookstores asked for help, 25,000 online orders flooded in (WaPo) 

“How can I not love my book community for helping like this?” she said in a phone interview. “I really don’t think that we’re just a bookstore. I think we’re a place of discovery and a community center. When I ask for help and they respond this fast, it’s so heartwarming.”

She said in the interview that she hopes the store will survive through the end of the year, and then she’ll reevaluate its future.

Chinese censors target German publishers (DW)

As China tries to expand its influence abroad, it's going beyond politics and business to target literature and publishing. German publishers are among those that have been targeted by censors,

Publishers Worry as Ebooks Fly off Libraries' Virtual Shelves (Wired)

But the surging popularity of library ebooks also has heightened longstanding tensions between publishers, who fear that digital borrowing eats into their sales, and public librarians, who are trying to serve their communities during a once-in-a-generation crisis. Since 2011, the industry’s big-five publishers—Penguin Random House, Hachette Book Group, HarperCollins, Simon and Schuster, and Macmillan—have limited library lending of ebooks, either by time—two years, for example—or number of checkouts—most often, 26 or 52 times. Readers can browse, download, join waiting lists for, and return digital library books from the comfort of their home, and the books are automatically removed from their devices at the end of the lending period.

Skyhorse Publishing’s House of Horrors (Vanity Fair)

“I was thinking about what makes Skyhorse different from other companies,” says Lyons, during a wide-ranging interview this spring, “and it goes back to being open to publishing books that other people might not publish for a variety of reasons.” Those reasons might include a short turnaround time, or disinterest from other publishers. They also, one could argue, include dubious scientific claims that toggle between the merely controversial and the outright inaccurate. Skyhorse has made millions by differentiating itself from traditional publishers, releasing books on a rapid schedule and courting controversies along the national divide, from cancel culture to freedom of the press to hallmarks of the misinformation age. But accounts from former employees paint a picture of a company with internal demons too: reports of a toxic workplace, everyday misogyny, and the human costs of mismanagement in an industry always anxious about its margins.

Profile of Penguin Random House and CEO Madeline Macintosh: Best sellers sell because they are Best sellers (NYT)

To almost everyone’s surprise, the answer to those unnerving questions, at least for the moment, has been: Yes. After a steep drop at the start of the pandemic, book sales not only recovered but surged. Unit sales of print books are up nearly 6 percent over last year, according to NPD BookScan, and e-book and digital audiobook sales have risen by double digits. Reading, it turns out, is an ideal experience in quarantine.

“People were watching a lot of Netflix, but then they needed a break from Netflix,” Ms. McIntosh said. “A book is the most uniquely, beautifully designed product to have with you in lockdown.”

As the industry’s Goliath — as big as the four other biggest publishers combined, analysts say, with authors from Barack and Michelle Obama to Toni Morrison — Penguin Random House has fared better than some of its rivals. Of the 20 best-selling print books of 2020, eight (by far the largest share) are Penguin Random House titles, according to NPD BookScan. It has had 216 New York Times best sellers this year. Penguin Random House’s U.S. sales grew 5.2 percent in the first half of the year, helping to soften a global sales dip of around 1 percent, according to an earnings report from its parent, the German conglomerate Bertelsmann. Overall sales at several other major publishers — Simon & Schuster, HarperCollins and Houghton Mifflin Harcourt — all fell further, according to filings.

Corporate restructuring continues at Houghton Mifflin: Houghton Mifflin Harcourt cuts 525 jobs as COVID-19 accelerates online learning (Boston Globe)

Beyond workforce reductions, Houghton Mifflin Harcourt said it will also save on manufacturing costs by shifting the business from print to digital offerings. The company plans to “retire” older systems and print-centric processes. Lynch said the new structure creates a “more focused company with increased recurring digital subscription revenue that produces higher margins and free cash flow.”

Other education publishers, including Pearson, Cengage, and McGraw-Hill, have also been shifting more of their business from printed textbooks to software and digital tools. The process has taken several years but is likely to be sped up by the pandemic’s impact on schools.

Moody's downgrades HMH (Yahoo) 

In the UK a group is asking the government to look in to academic publishing and eBooks:  Open letter calls for ‘investigation of academic publishing industry’ (RI)

The letter states: ‘The Covid-19 pandemic – where students and researchers have not been able to physically visit libraries and access paper books – has brought the many market issues regarding ebooks sharply into focus, as ebooks have become our only purchase option. As lockdown began in March we observed students borrowing as much of the print material that they needed as possible, but as libraries shut academic librarians then did their best to source digital versions. 

‘Due to UK copyright law university libraries cannot simply purchase an ebook in the way an individual can – instead we are required to purchase a version licensed specifically for university use. Public policy to support education and research should support a healthy ebook market, but we in fact see the opposite.’

Large-scale study backs up other research showing relative declines in women's research productivity during COVID-19. Inside Higher Ed

A new study of enormous scale supports what numerous smaller studies have demonstrated throughout the pandemic: female academics are taking extended lockdowns on the chin, in terms of their comparative scholarly productivity.

Online Test Proctoring Claims to Prevent Cheating. But at What Cost? (Slate)

While some aspects of the pandemic-era classroom translate just fine to a digital format, exams have become more complicated. Typically, students take the SAT, the GRE, or any number of midterms or finals in classrooms with proctors standing in the front of the room. But with students at home, some instructors have turned to proctoring software to ensure students aren’t using unauthorized notes, textbooks, or other tools to aid their test taking.

Barnes & Noble Education Reports Full Year. Standstill Agreement with Key Investor

Two important news stories related to the performance and future of Barnes & Noble Education this week.

Firstly, the company reported their full year results and, no surprise, the business performance was much below 2019.  From their press release:

Financial results for the fourth quarter and fiscal year 2020:

• Consolidated fourth quarter sales of $256.9 million decreased 23.2% as compared to the prior year period; fiscal year 2020 consolidated sales of $1,851.1 million decreased 9.0% as compared to the prior year.
• Consolidated fourth quarter GAAP net loss was $(40.3) million, compared to a net loss of $(46.2) million in the prior year period. Consolidated fiscal year 2020 GAAP net loss was $(38.3) million, compared to a net loss of $(24.4) million in the prior year.
• Consolidated fourth quarter non-GAAP Adjusted EBITDA loss was $(20.7) million, compared to non-GAAP Adjusted EBITDA of $19.7 million in the prior year; fiscal year 2020 consolidated non-GAAP Adjusted EBITDA was $42.2 million, compared to non-GAAP Adjusted EBITDA of $104.9 million in the prior year.
• Consolidated fourth quarter non-GAAP Adjusted Earnings was $(28.1) million, compared to non-GAAP Adjusted Earnings of $0.5 million in the prior year period; fiscal year 2020 consolidated non-GAAP Adjusted Earnings was $(21.1) million, compared to non-GAAP Adjusted Earnings of $25.4 million in the prior year.

Operational highlights for the fiscal year 2020:

• Progressed on the execution of a number of strategic initiatives; all of which remained on target prior to the onset of the COVID-19 pandemic, which has accelerated the demand and need to scale such key initiatives.
• Continued to drive subscriptions for the Company’s bartleby® suite of solutions, gaining more than 170,000 subscribers in fiscal year 2020, representing over 200% growth over fiscal year 2019 new subscribers.
• Achieved a six-fold increase in fiscal year 2020 bartleby revenue versus prior year; bartleby peak Spring traffic increased over 10x year-over-year and almost 3x versus peak Fall traffic.
• Completed initial build of the Company’s next generation eCommerce platform; recently executed selective launch with expected further roll-out throughout fiscal year 2021 to grow increased high-margin general merchandise sales.
• Continued to grow the BNC First Day® inclusive access programs, with revenue increasing 91% year-over-year.
• Increased adoption of BNC First Day Complete, with eleven campus partners utilizing the complete access model in the upcoming Fall Term 2020, increasing from four in fiscal year 2020.
• Continued to win new business for both physical and virtual bookstores, including the University of Nevada, Reno, Western Kentucky University, Front Range Community College and The City Colleges of Chicago.
• Provided valuable solutions to schools to help mitigate the COVID-19 on-campus learning disruption utilizing BNED’s virtual store offerings and course material fulfillment capabilities, its BNC First Day offering, and its digital bartleby offerings to help students continue to perform while studying remotely.

COVID-19 impacts on bookstore sales were particularly acute in the final quarter with same store sales of $238.5 million for the quarter, declining $81.4 million, or 25.4%, as compared to the prior year period, with comparable store sales decreasing 34.7%. Retail non-GAAP Adjusted EBITDA was $(13.0) million for the quarter, compared to $29.1 million in the prior year period.

While the company is excited about their online subscription study tools and products, the revenue base is still low versus the overall company. 2020 full year DSS revenues of $24mm were 10% higher versus 2019 but saw a 21% increase in the 4th quarter which could bode well for future growth during the COVID period.  However, any suggestion this line item compensates for the decline in retail sales in the short to medium term would be misguided.

Later in the week, the company also announced they have reached a cooperation agreement with Outerbridge Investment LLC a key investor which will result in Outerbridge placing board members on the B&N Education board.  From the press release:

Pursuant to the cooperation agreement, Outerbridge will vote all of its shares in favor of all the persons nominated by the Board to serve as directors of the Company at the 2020 Annual Meeting, which will include Mr. Robinson. Additionally, pursuant to the agreement, the Company has agreed to nominate Zachary Levenick as a director candidate for election at the 2020 Annual Meeting. Outerbridge has also agreed to abide by certain customary standstill provisions. The full agreement between BNED and Outerbridge will be filed in a Form 8-K with the U.S. Securities and Exchange Commission.

“We have engaged in a constructive dialogue with BNED over the past year and are pleased to have reached this agreement in support of BNED’s future,” said Rory Wallace, Chief Investment Officer of Outerbridge. “With its unique set of offerings that serve digital, virtual and in-person education, and its highly differentiated retail business, BNED has a special opportunity not only to deliver value to its shareholders and to all stakeholders in the higher education system, but to help shape the future of the industry by stepping forward in this time of disruption. The Company has demonstrated its ability to manage expenses and liquidity while simultaneously growing bartleby^® and its inclusive access offerings, First Day^® and First Day Complete at an impressive, and accelerating, rate. We remain deeply committed to BNED, which we believe to be an investment opportunity with tremendous standalone and strategic value, and are excited to continue our engagement with management and the Board as we pursue our common goal of enhancing shareholder value.”

Morgan Stanley & Co. is acting as financial advisor to the Company and Gibson, Dunn & Crutcher LLP is acting as legal counsel to the Company. Olshan Frome Wolosky LLP is acting as legal counsel to Outerbridge.

Earlier in 2020, the company enacted a short term shareholder rights plan otherwise known as a poison pill defence to ward off unwanted suitors.  (Press Release)

BNED is trending higher over the past six months but remains significantly below its 52 week high.