BARNES & NOBLE EDUCATION, INC. Unless the context otherwise indicates, references to "we," "us," "our" and "the Company" refer toBarnes & Noble Education, Inc. or "BNED", aDelaware corporation. References to "Barnes & Noble College " or "BNC" refer to our subsidiaryBarnes & Noble College Booksellers, LLC . References to "MBS" refer to our subsidiaryMBS Textbook Exchange, LLC . References to "Student Brands" refer to our subsidiaryStudent Brands, LLC . Overview Description of BusinessBarnes & Noble Education, Inc. ("BNED") is one of the largest contract operators of physical and virtual bookstores for college and university campuses and K-12 institutions acrossthe United States . We are also one of the largest textbook wholesalers, inventory management hardware and software providers, and a leading provider of digital education solutions. We operate 1,439 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content and tools within a dynamic omnichannel retail environment. Additionally, we offer direct-to-student products and services to help students study more effectively and improve academic performance. The strengths of our business include our ability to compete by developing new products and solutions to meet market needs, our large operating footprint with direct access to students and faculty, our well-established, deep relationships with academic partners and stable, long-term contracts and our well-recognized brands. We expect to continue to introduce scalable and advanced digital solutions focused largely on the student, expand our e-commerce capabilities, increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect general merchandise sales to continue to increase over the long term, as our product assortments continue to emphasize and reflect the changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, as we improve our e-commerce capabilities through investments we are making in new systems, processes and people. We believe the BNC and MBS brands are synonymous with innovation in bookselling and campus retail, and are widely recognized and respected brands inthe United States . Our large college footprint, reputation, and credibility in the marketplace not only support our marketing efforts to universities, students, and faculty, but are also important for leading publishers who rely on us as one of their primary distribution channels, and for being a trusted source for students in our direct-to-student digital solutions business. For additional information related to our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year endedMay 2, 2020 . InAugust 2020 , we expanded our existing strategic partnership with VitalSource® to provide students with increased access to additional learning opportunities through a unique bundle of its bartleby homework help services, bartleby learn™ and bartleby write™. TheVitalSource direct-to-student channel will now offer students unique access to the bartleby study bundle™ with the purchase of a qualifyingVitalSource eBook. In Fiscal 2020, we retainedMorgan Stanley & Co. LLC to serve as a financial advisor in connection with our review of strategic opportunities. The review was designed to accelerate the execution of customer-focused strategic initiatives and enhance value for our shareholders, including, but not limited to, continued execution of our current business plan, new partnerships, joint ventures and other potential opportunities. OnAugust 24, 2020 , we announced that we had concluded our review of strategic opportunities. After extensive evaluation and deliberation, and in consultation with its financial and legal advisors, the Board unanimously determined that the continued execution of the Company's current business plan is the best path forward for the Company and its shareholders. COVID-19 Business Impact Our business experienced an unprecedented and significant impact as a result of COVID-19 related campus store closures. Beginning inMarch 2020 , colleges and universities nationwide began to close their campuses in light of safety concerns and as a result of local and state issued stay-at-home orders. By mid-March, during our fiscal fourth quarter, we closed the majority of our physical campus stores to protect the health and safety of our customers and employees. While our campus stores were closed, we continued to serve institutions and students through our campus websites, providing free shipping on all orders and an expanded digital content offering to provide immediate access to course materials to students at our campuses that closed due to COVID-19. We developed and implemented plans to safely reopen our campus stores based on national, state and local guidelines, as well as the campus policies set by the school administration. Colleges and universities inthe United States continue to adjust their plans for each academic term, with some implementing shortened semesters or choosing to remain fully virtual in order to best protect students and faculty. As many schools adjusted their learning model and curtailed on-campus activities in response to the pandemic, our flexible offerings ensured that students were 23 -------------------------------------------------------------------------------- Table of Contents equipped with their course materials regardless of whether schools resumed classes on campus, remotely or via a hybrid learning model. Our fiscal 2021 second quarter results were significantly impacted by the ongoing COVID-19 pandemic, as many schools continued to adjust their learning model and on-campus activities in response to the pandemic. Fewer students returned to campus this fall, as many schools implemented a remote learning model and curtailed on-campus classes and activities. While many big athletic conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company's high-margin general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. The COVID-19 impact on higher education remains a fluid situation, and we are committed to supporting our campus partners through our flexible offerings and our ability to quickly pivot to ensure uninterrupted service as institutions manage the safety of their campuses. There is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact to our results of operations, financial condition and cash flows from operations. Segments We have three reportable segments: Retail, Wholesale and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, continue to be presented as "Corporate Services". We identify our segments in accordance with the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance. The following summarizes the three segments. For additional information about each segment's operations, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year endedMay 2, 2020 . Retail Segment The Retail Segment operates 1,439 college, university, and K-12 school bookstores, comprised of 768 physical bookstores and 671 virtual bookstores. Our bookstores typically operate under agreements with the college, university, or K-12 schools to be the official bookstore and the exclusive seller of course materials and supplies, including physical and digital products. The majority of the physical campus bookstores have school-branded e-commerce sites which we operate and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. The Retail Segment also offers inclusive access programs, in which course materials are offered at a reduced price through a fee charged by the institution or included in tuition, and delivered to students on or before the first day of class. Additionally, the Retail Segment offers a suite of digital content and services to colleges and universities, including a variety of open educational resource-based courseware. Wholesale Segment The Wholesale Segment is comprised of our wholesale textbook business and is one of the largest textbook wholesalers in the country. The Wholesale Segment centrally sources, sells, and distributes new and used textbooks to approximately 3,400 physical bookstores (including our Retail Segment's 768 physical bookstores) and sources and distributes new and used textbooks to our 671 virtual bookstores. Additionally, the Wholesale Segment sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 400 college bookstores. DSS Segment The Digital Student Solutions ("DSS") Segment includes direct-to-student products and services to assist students to study more effectively and improve academic performance. The DSS Segment is comprised of the operations ofStudent Brands, LLC , a leading direct-to-student subscription-based writing services business, and bartleby®, a direct-to-student subscription-based offering providing textbook solutions, expert questions and answers, writing and tutoring. Corporate Services represents unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources. Seasonality Our business is highly seasonal. Our quarterly results also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. For our retail operations, sales are generally highest in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials, and lowest in the first and fourth fiscal quarters. Sales attributable to 24 -------------------------------------------------------------------------------- Table of Contents our wholesale business are generally highest in our first, second and third quarter, as it sells textbooks and other course materials for retail distribution. For our DSS segment, or direct-to-student business, sales and operating profit are realized relatively consistently throughout the year. Trends, Competition and Other Business Conditions Affecting Our Business The market for educational materials is undergoing unprecedented change. As tuition and other costs rise, colleges and universities face increasing pressure to attract and retain students and provide them with innovative, affordable educational content and tools that support their educational development. Current trends, competition and other factors affecting our business include: •Overall Economic Environment, College Enrollment and Consumer Spending Patterns. Our business is affected by the COVID-19 pandemic, the overall economic environment, funding levels at colleges and universities, by changes in enrollments at colleges and universities, and spending on course materials and general merchandise. •Impact of COVID-19: The COVID-19 pandemic has materially and adversely impacted certain segments of theU.S. economy, with legislative and regulatory responses including unprecedented monetary and fiscal policy actions across all sectors, and there is significant uncertainty as to timing of stabilization and recovery. Many colleges and K-12 schools have been required to cease in-person classes in an attempt to limit the spread of the COVID-19 pandemic and ensure the safety of their students. Although many institutions have reopened, academic institutions are considering alternatives to traditional in-person instruction, including on-line learning and significantly reduced classroom size. •Economic Environment: Retail general merchandise sales are subject to short-term fluctuations driven by the broader retail environment. •Enrollment Trends: The growth of our business depends on our ability to attract new customers and to increase the level of engagement by our current student customers. We continue to see downward enrollment trends and shrinking resources from state and federal government for colleges and universities. Enrollment trends, specifically at community colleges, generally correlate with changes in the economy and unemployment factors, e.g. low unemployment tends to lead to low enrollment and higher unemployment rates tend to lead to higher enrollment trends, as students generally enroll to obtain skills that are in demand in the workforce. Enrollment trends have been negatively impacted overall by COVID-19 concerns at physical campuses. A significant reduction inU.S. economic activity and increased unemployment could lead to decreased enrollment and consumer spending. Additionally, enrollment trends are impacted by the dip inthe United States birth rate resulting in fewer students at the traditional 18-24 year-old college age. Online degree program enrollments continue to grow, even in the face of declining overall higher education enrollment. •Increased Use of Online and Digital Platforms as Companions or Alternatives to Printed Course Materials. Students and faculty can now choose from a wider variety of educational content and tools than ever before, delivered across both print and digital platforms. •Distribution Network Evolving. The way course materials are distributed and consumed is changing significantly, a trend that is expected to continue. The market for course materials, including textbooks and supplemental materials, is intensely competitive and subject to rapid change. •Disintermediation. We are experiencing growing competition from alternative media and alternative sources of textbooks and other course materials. In addition to the official physical or virtual campus bookstore, course materials are also sold through off-campus bookstores, e-commerce outlets, digital platform companies, publishers, including Cengage, Pearson and McGraw Hill, bypassing the bookstore distribution channel by selling or renting directly to students and educational institutions, and student-to-student transactions over the Internet. •Supply Chain and Inventory. Since the demand for used textbooks has historically been greater than the available supply, our financial results are highly dependent upon Wholesale's ability to build its textbook inventory from suppliers in advance of the selling season. Some textbook publishers have begun to supply textbooks pursuant to consignment or rental programs which could impact used textbook supplies in the future. Additionally, Wholesale is a national distributor for rental textbooks offered throughMcGraw-Hill Education's and Pearson Education's consignment rental program, both of which are relatively nascent. •Price Competition. In addition to the competition in the services we provide to our customers, our textbook and other course materials business faces significant price competition. Students purchase textbooks and other course materials from multiple providers, are highly price sensitive, and can easily shift spending from one provider or format to another. 25 -------------------------------------------------------------------------------- Table of Contents •A Large Number of Traditional Campus Bookstores Have Yet to be Outsourced. •Outsourcing Trends. We continue to see the trend towards outsourcing in the campus bookstore market and also continue to see a variety of business models being pursued for the provision of course materials (such as inclusive access programs and publisher subscription models) and general merchandise. •New and Existing Bookstore Contracts. We expect awards of new accounts resulting in new physical and virtual store openings will continue to be an important driver of future growth in our business. We also expect that certain less profitable or essential bookstores we operate may close. Such stores could be included in contracts for stores we operate that may be deemed non-essential; and such stores could be operated by others or independently by schools. The scope of any such store closures remains uncertain, although we are not aware, at this time, of any significant volume of stores which we operate that are likely to close or have informed us of upcoming closures. For additional discussion of our trends and other factors affecting our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year endedMay 2, 2020 . Elements of Results of Operations Our condensed consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted inthe United States ("GAAP"). Our sales are primarily derived from the sale of course materials, which include new, used and digital textbooks, and at college and university bookstores which we operate, we sell high margin general merchandise, including emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. Our rental income is primarily derived from the rental of physical textbooks. We also derive revenue from other sources, such as sales of inventory management, hardware and point-of-sale software, direct-to-student subscription-based services, and other services. Our cost of sales primarily includes costs such as merchandise costs, textbook rental amortization, content development cost amortization, warehouse costs related to inventory management and order fulfillment, insurance, certain payroll costs, and management service agreement costs, including rent expense, related to our college and university contracts and other facility related expenses. Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include long-term incentive plan compensation expense and general office expenses, such as merchandising, procurement, field support, finance and accounting, and operating costs related to our direct-to-student subscription-based services business. Shared-service costs such as human resources, legal, treasury, information technology, and various other corporate level expenses and other governance functions, are not allocated to any specific reporting segment and are recorded in Corporate Services as discussed in the Overview - Segments discussion above. 26 -------------------------------------------------------------------------------- Table of Contents Results of Operations - Summary 13 weeks ended 26 weeks ended October 31, October 26, October 31, October 26, Dollars in thousands 2020 2019 2020 2019 Sales: Product sales and other$ 551,832 $ 718,543 $ 745,042 $ 1,020,770 Rental income 43,653 53,685 54,457 71,115 Total sales$ 595,485 $ 772,228 $ 799,499 $ 1,091,885 Net income (loss)$ 7,515 $ 35,931 $ (39,137) $ 3,776
Adjusted Earnings (non-GAAP) (a)
Adjusted EBITDA (non-GAAP) (a) Retail$ 18,324 $ 62,572 $ (22,316) $ 41,080 Wholesale 6,568 7,942 19,534 18,101 DSS 689 314 2,353 1,342 Corporate Services (5,501) (5,668) (10,745) (10,675) Elimination 4,455 9,384 (2,308) (427)
Total Adjusted EBITDA (non-GAAP)
(a)Adjusted Earnings and Adjusted EBITDA are non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.
The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales:
13 weeks ended 26 weeks ended
October 31, October 26, October 31, October 26,
2020 2019 2020 2019
Sales:
Product sales and other 92.7 % 93.0 % 93.2 % 93.5 %
Rental income 7.3 7.0 6.8 6.5
Total sales 100.0 100.0 100.0 100.0
Cost of sales:
Product and other cost of sales (a) 82.0 77.0 83.0 77.5
Rental cost of sales (a) 63.5 60.0 64.5 58.9
Total cost of sales 80.6 75.8 81.7 76.3
Gross margin 19.4 24.2 18.3 23.7
Selling and administrative expenses 15.4 14.7 20.3 19.3
Depreciation and amortization expense 2.2 2.0 3.4 2.9
Impairment loss (non-cash) - - - -
Restructuring and other charges 0.6 0.2 1.1 0.3
Operating income (loss) 1.2 % 7.3 % (6.5) % 1.2 %
(a)Represents the percentage these costs bear to the related sales, instead of total sales.
27
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Results of Operations - 13 and 26 weeks ended October 31, 2020 compared with the
13 and 26 weeks ended October 26, 2019 13 weeks ended,
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 532,861 $ 36,387 $ 5,947 $ - $ (23,363) $ 551,832
Rental income 43,653 - - - - 43,653
Total sales 576,514 36,387 5,947 - (23,363) 595,485
Cost of sales:
Product and other cost of sales 453,277 25,673 1,285 - (27,760) 452,475
Rental cost of sales 27,725 - - - - 27,725
Total cost of sales 481,002 25,673 1,285 - (27,760) 480,200
Gross profit 95,512 10,714 4,662 - 4,397 115,285
Selling and administrative expenses 77,380 4,146 5,003 5,501 (58) 91,972
Depreciation and amortization expense 9,985 1,322 1,855 31 - 13,193
Sub-Total: $ 8,147 $ 5,246 $ (2,196) $ (5,532) $ 4,455 10,120
Restructuring and other charges 3,387
Operating income $ 6,733
13 weeks ended, October 26, 2019
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 688,084 $ 40,210 $ 5,215 $ - $ (14,966) $ 718,543
Rental income 53,685 - - - - 53,685
Total sales 741,769 40,210 5,215 - (14,966) 772,228
Cost of sales:
Product and other cost of sales 548,621 27,675 1,074 - (24,300) 553,070
Rental cost of sales 32,208 - - - - 32,208
Total cost of sales 580,829 27,675 1,074 - (24,300) 585,278
Gross profit 160,940 12,535 4,141 - 9,334 186,950
Selling and administrative expenses 98,578 4,593 4,615 5,668 (50) 113,404
Depreciation and amortization expense 11,696 1,483 2,335 32 - 15,546
Sub-Total: $ 50,666 $ 6,459 $ (2,809) $ (5,700) $ 9,384 58,000
Restructuring and other charges 1,569
Operating income $ 56,431
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26 weeks ended, October 31, 2020
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 680,833 $ 116,681 $ 11,819 $ - $ (64,291) $ 745,042
Rental income 54,457 - - - - 54,457
Total sales 735,290 116,681 11,819 - (64,291) 799,499
Cost of sales:
Product and other cost of sales 588,531 89,210 2,411 - (61,912) 618,240
Rental cost of sales 35,112 - - - - 35,112
Total cost of sales 623,643 89,210 2,411 - (61,912) 653,352
Gross profit 111,647 27,471 9,408 - (2,379) 146,147
Selling and administrative expenses 134,365 7,937 9,039 10,745 (71) 162,015
Depreciation and amortization expense 20,555 2,617 4,020 64 - 27,256
Sub-Total: $ (43,273) $ 16,917 $ (3,651) $ (10,809) $ (2,308) (43,124)
Restructuring and other charges 9,058
Operating loss $ (52,182)
26 weeks ended, October 26, 2019
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 945,310 $ 112,519 $ 10,589 $ - $ (47,648) $ 1,020,770
Rental income 71,115 - - - - 71,115
Total sales 1,016,425 112,519 10,589 - (47,648) 1,091,885
Cost of sales:
Product and other cost of sales 751,469 85,066 2,034 - (47,168) 791,401
Rental cost of sales 41,877 - - - - 41,877
Total cost of sales 793,346 85,066 2,034 - (47,168) 833,278
Gross profit 223,079 27,453 8,555 - (480) 258,607
Selling and administrative expenses 182,393 9,352 8,728 10,675 (53) 211,095
Depreciation and amortization expense 23,673 3,048 4,639 65 - 31,425
Sub-Total: $ 17,013 $ 15,053 $ (4,812) $ (10,740) $ (427) 16,087
Impairment loss (non-cash) 433
Restructuring and other charges 3,035
Operating income $ 12,619
Sales
The following table summarizes our sales for the 13 and 26 weeks ended
13 weeks ended 26 weeks ended
October 31, October 26, October 31,
Dollars in thousands 2020 2019 % 2020 October 26, 2019 %
Product sales and other $ 551,832 $ 718,543 (23.2)% $ 745,042 $ 1,020,770 (27.0)%
Rental income 43,653 53,685 (18.7)% 54,457 71,115 (23.4)%
Total Sales $ 595,485 $ 772,228 (22.9)% $ 799,499 $ 1,091,885 (26.8)%
Sales decreased by
29
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Sales decreased by $292.4 million , or 26.8%, to $799.5 million during the 26
weeks ended October 31, 2020 from $1,091.9 million during the 26 weeks ended
October 26, 2019 .
The sales decrease is primarily related to the impact from temporary store
closings related to COVID-19, as well as lower in store foot traffic, lower
enrollments and fewer on-campus events due to COVID-19.
The components of the variances for the 13 and 16 week periods are reflected in
the table below.
Sales variances 13 weeks ended 26 weeks ended
Dollars in millions October 31, 2020 October 26, 2019 October 31, 2020 October 26, 2019
Retail Sales
New stores $ 27.6 $ 39.3 $ 35.4 $ 46.7
Closed stores (16.4) (24.5) (21.9) (32.9)
Comparable stores (a) (196.5) (45.5) (302.7) (52.3)
Textbook rental deferral 16.4 1.5 10.1 2.3
Service revenue (b) 1.0 (2.0) (3.7) (2.5)
Other (c) 2.7 (10.9) 1.7 (15.9)
Retail sales subtotal: $ (165.2) $ (42.1) $ (281.1) $ (54.6)
Wholesale Sales $ (3.8) $ (0.6) $ 4.2 $ (18.3)
DSS Sales $ 0.7 $ 0.3 $ 1.2 $ -
Eliminations (d) $ (8.4) $ (0.1) $ (16.7) $ 12.5
Total sales variance: $ (176.7) $ (42.5) $ (292.4) $ (60.4)
(a) Comparable store sales includes sales from physical stores that have been
open for an entire fiscal year period and virtual store sales for the period,
does not include sales from closed stores for all periods presented, and digital
agency sales are included on a gross basis.
(b) Service revenue includes Promoversity, brand partnerships, shipping and
handling, digital content, software, services, and revenue from other programs.
(c) Other includes inventory liquidation sales to third parties, marketplace
sales and certain accounting adjusting items related to return reserves, and
other deferred items.
(d) Eliminates Wholesale sales and service fees to Retail and Retail
commissions earned from Wholesale. See discussion of intercompany activities and
eliminations below.
Retail
Retail sales decreased by $165.2 million , or 22.3%, to $576.5 million during the
13 weeks ended October 31, 2020 from $741.8 million during the 13 weeks ended
October 26, 2019 . Retail sales decreased by $281.1 million , or 27.7%, to $735.3
million during the 26 weeks ended October 31, 2020 from $1,016.4 million during
the 26 weeks ended October 26, 2019 . Retail added 80 new stores and closed 60
stores (not including temporary store closings due to COVID-19) during the 26
weeks ended October 31, 2020 , ending the period with a total of 1,439 stores.
13 weeks ended 26 weeks ended
October 31, 2020 October 26, 2019 October 31, 2020 October 26, 2019
Number of Stores: Physical Virtual Physical Virtual Physical Virtual Physical Virtual
Number of stores at
beginning of period 772 670 777 714 772 647 772 676
Opened 5 11 2 9 29 51 40 55
Closed 9 10 7 59 33 27 40 67
Number of stores at end of
period 768 671 772 664 768 671 772 664
30-------------------------------------------------------------------------------- Table of Contents Product and other sales for Retail for the 13 weeks endedOctober 31, 2020 decreased by$155.2 million , or 22.6% to$532.9 million from$688.1 million during the 13 weeks endedOctober 26, 2019 . Product and other sales for Retail for the 26 weeks endedOctober 31, 2020 decreased by$264.5 million , or 28.0% to$680.8 million from$945.3 million during the 26 weeks endedOctober 26, 2019 . Product and other sales are impacted by comparable store sales (as noted in the chart below), new store openings and store closings, as well as the impact from the COVID-19 pandemic. Sales were impacted by the temporary store closings due to COVID-19 earlier in the fiscal year, as well as the impact of fewer students returning to campus this fall, as many schools implemented a remote learning model and curtailed on-campus classes and activities. While many big-conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company's high-margin general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. Textbook (Course Materials) revenue for Retail decreased primarily due to lower new and used textbook and other course materials sales, while First Day (our inclusive access program), digital and eTextbook revenue increased. General merchandise sales for Retail decreased primarily due to lower emblematic apparel sales (as many athletic events were canceled due to COVID-19), lower supply product sales and lower graduation product sales (primarily due to COVID-19 related campus closures). We have made continued progress in the development of our next generation e-commerce platform, which launched in Fiscal 2021 to deliver increased high-margin general merchandise sales. Rental income for Retail for the 13 weeks endedOctober 31, 2020 decreased by$10.0 million , or 18.7% to$43.7 million from$53.7 million during the 13 weeks endedOctober 26, 2019 . Rental income for Retail for the 26 weeks endedOctober 31, 2020 decreased by$16.7 million , or 23.4% to$54.5 million from$71.1 million during the 26 weeks endedOctober 26, 2019 . Rental income is impacted by comparable store sales, new store openings and store closings. The decrease in rental income is primarily due to decreased rental activity due to the COVID-19 pandemic as discussed above and the impact of increased digital offerings. Comparable store sales for Retail decreased for the 13 and 26 week sales period. Comparable store sales were impacted primarily by COVID-19 related campus temporary store closures, lower enrollment and on-campus events (all discussed above), a shift to lower cost options and more affordable solutions, including digital offerings, increased consumer purchases directly from publishers and other online providers, lower general merchandise sales (including graduation products and logo products for athletic events). These decreases were partially offset by increased First Day, digital and eTextbook revenue. Comparable store sales variances for Retail by category for the 13 and 26 week periods are as follows: Comparable Store Sales variances - Retail 13 weeks ended 26 weeks ended Dollars in millions October 31, 2020 October 26, 2019 October 31, 2020 October 26, 2019 Textbooks (Course Materials)$ (101.6) (19.0) %$ (43.9) (7.7) %$ (112.5) (17.5) %$ (55.4) (8.0) % General Merchandise (97.2) (52.0) % (0.2) (10.0) % (184.8) (58.6) % 5.7 1.9 % Trade Books (6.3) (62.3) % (1.4) (12.1) % (14.0) (73.2) % (2.6) (11.9) %Total Comparable Store Sales$ (205.1) (28.1) %$ (45.5) (5.9) %$ (311.3) (31.8) %$ (52.3) (5.1) % Wholesale Wholesale sales decreased by$3.8 million , or 9.5% to$36.4 million during the 13 weeks endedOctober 31, 2020 from$40.2 million during the 13 weeks endedOctober 26, 2019 . The decrease is primarily due to decreased gross sales, partially offset by a lower returns and allowances, both impacted by the COVID-19 pandemic. Wholesale sales increased by$4.2 million , or 3.7% to$116.7 million during the 26 weeks endedOctober 31, 2020 from$112.5 million during the 26 weeks endedOctober 26, 2019 . The increase is primarily due to lower returns and allowances as a result of customer sales mix. During the 26 months endedOctober 31, 2020 , the Wholesale operations assumed direct-to-student fulfillment of course material orders for the Retail Segment campus bookstores that were not fully operational due to COVID-19 campus store closures. DSS DSS total sales increased by$0.7 million , or 14.0% to$5.9 million during the 13 weeks endedOctober 31, 2020 from$5.2 million during the 13 weeks endedOctober 26, 2019 . DSS total sales increased by$1.2 million , or 11.6% to$11.8 million during the 26 weeks endedOctober 31, 2020 from$10.6 million during the 26 weeks endedOctober 26, 2019 . Sales increased primarily due to an increase in bartleby subscription sales. Cost of Sales and Gross Margin Our cost of sales increased as a percentage of sales to 80.6% during the 13 weeks endedOctober 31, 2020 compared to 75.8% during the 13 weeks endedOctober 26, 2019 . Our gross margin decreased by$71.7 million , or 38.3%, to$115.3 million , or 19.4% of sales, during the 13 weeks endedOctober 31, 2020 from$187.0 million , or 24.2% of sales during the 13 weeks endedOctober 26, 2019 . 31 -------------------------------------------------------------------------------- Table of Contents Our cost of sales increased as a percentage of sales to 81.7% during the 26 weeks endedOctober 31, 2020 compared to 76.3% during the 26 weeks endedOctober 26, 2019 . Our gross margin decreased by$112.5 million , or 43.5%, to$146.1 million , or 18.3% of sales, during the 26 weeks endedOctober 31, 2020 from$258.6 million , or 23.7% of sales during the 26 weeks endedOctober 26, 2019 . Retail The following table summarizes the Retail cost of sales for the 13 and 26 weeks endedOctober 31, 2020 andOctober 26, 2019 : 13 weeks ended 26 weeks ended October 31, % of October 26, % of October 31, % of October 26, % of Dollars in thousands 2020 Related Sales 2019 Related Sales 2020 Related Sales 2019 Related Sales Product and other cost of sales$ 453,277 85.1%$ 548,621 79.7%$ 588,531 86.4%$ 751,469 79.5% Rental cost of sales 27,725 63.5% 32,208 60.0% 35,112 64.5% 41,877 58.9% Total Cost of Sales$ 481,002 83.4%$ 580,829 78.3%$ 623,643 84.8%$ 793,346 78.1%
The following table summarizes the Retail gross margin for the 13 and 26 weeks
ended
13 weeks ended 26 weeks ended
October 31, % of October 26, % of October 31, % of October 26, % of
Dollars in thousands 2020 Related Sales 2019 Related Sales 2020 Related Sales 2019 Related Sales
Product and other gross margin $ 79,584 14.9% $ 139,463 20.3% $ 92,302 13.6% $ 193,841 20.5%
Rental gross margin 15,928 36.5% 21,477 40.0% 19,345 35.5% 29,238 41.1%
Gross Margin $ 95,512 16.6% $ 160,940 21.7% $ 111,647 15.2% $ 223,079 21.9%
For the 13 weeks ended October 31, 2020 , the Retail gross margin as a percentage
of sales decreased as discussed below:
•Product and other gross margin decreased (535 basis points), driven primarily
by an unfavorable sales mix (355 basis points) due to lower high-margin general
merchandise sales of approximately $98.1 million and the shift to lower margin
digital courseware, and lower margin rates (220 basis points) due to higher
markdowns, partially offset by lower contract costs as a percentage of sales
related to our college and university contracts (40 basis points) resulting from
contract renewals and new store contracts.
•Rental gross margin decreased (355 basis points), driven primarily by higher
contract costs as a percentage of sales related to our college and university
contracts (450 basis points), partially offset by higher rental margin rates (95
basis points).
For the 26 weeks ended October 31, 2020 , the Retail gross margin as a percentage
of sales decreased as discussed below:
•Product and other gross margin decreased (695 basis points), driven primarily
by an unfavorable sales mix (485 basis points) due to lower high-margin general
merchandise sales of approximately $187.9 million and the shift to lower margin
digital courseware, and lower margin rates (295 basis points) due to higher
markdowns, partially offset by lower contract costs as a percentage of sales
related to our college and university contracts (85 basis points) resulting from
contract renewals and new store contracts.
•Rental gross margin decreased (560 basis points), driven primarily by higher
contract costs as a percentage of sales related to our college and university
contracts (575 basis points) and unfavorable rental mix (75 basis points),
partially offset by higher rental margin rates (90 basis points).
Wholesale
The cost of sales and gross margin for Wholesale were $25.7 million , or 70.6% of
sales, and $10.7 million , or 29.4% of sales, respectively, during the 13 weeks
ended October 31, 2020 . The cost of sales and gross margin for Wholesale was
$27.7 million or 68.8% of sales and $12.5 million or 31.2% of sales,
respectively, during the 13 weeks ended October 26, 2019 .
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The cost of sales and gross margin for Wholesale were $89.2 million , or 76.5% of
sales, and $27.5 million , or 23.5% of sales, respectively, during the 26 weeks
ended October 31, 2020 . The cost of sales and gross margin for Wholesale was
$85.1 million or 75.6% of sales and $27.5 million or 24.4% of sales,
respectively, during the 26 weeks ended October 26, 2019 .
The gross margin rate decreased during the 13 weeks ended October 31, 2020
primarily due to an unfavorable sales mix, partially offset by the favorable
impact of returns and allowances and lower markdowns. The gross margin rate
decreased during the 26 weeks ended October 31, 2020 primarily due an
unfavorable sales mix and inventory markdowns, partially offset by the favorable
impact of returns and allowances.
DSS
The gross margin for the DSS segment was $4.7 million , or 78.4% of sales, during
the 13 weeks ended October 31, 2020 and $4.1 million , or 79.4% of sales, during
the 13 weeks ended October 26, 2019 . The gross margin for the DSS segment was
$9.4 million , or 79.6% of sales, during the 26 weeks ended October 31, 2020 and
$8.6 million , or 80.8% of sales, during the 26 weeks ended October 26, 2019 . The
high gross margins are driven primarily by high margin subscription service
revenue earned. The decrease in gross margin for the 13 and 26 weeks ended
October 31, 2020 is primarily due to increased amortization of content
development costs for bartleby textbook solutions of $0.2 million and $0.5
million , respectively.
Intercompany Eliminations
During the 13 weeks ended October 31, 2020 and October 26, 2019 , our sales
eliminations were $(23.4) million and $(15.0) million , respectively. During the
26 weeks ended October 31, 2020 and October 26, 2019 , our sales eliminations
were $(64.3) million and $(47.6) million , respectively. These sales eliminations
represent the elimination of Wholesale sales and fulfillment service fees to
Retail and the elimination of Retail commissions earned from Wholesale.
During the 13 weeks ended October 31, 2020 and October 26, 2019 , the cost of
sales eliminations were $(27.8) million and $(24.3) million , respectively.
During the 26 weeks ended October 31, 2020 and October 26, 2019 , the cost of
sales eliminations were $(61.9) million and $(47.2) million , respectively. These
cost of sales eliminations represent (i) the recognition of intercompany profit
for Retail inventory that was purchased from Wholesale in a prior period that
was subsequently sold to external customers during the current period and the
elimination of Wholesale service fees charged for fulfillment of inventory for
virtual store sales, net of (ii) the elimination of intercompany profit for
Wholesale inventory purchases by Retail that remain in ending inventory at the
end of the current period.
During the 13 weeks ended October 31, 2020 and October 26, 2019 , the gross
margin eliminations were $4.4 million and $9.3 million , respectively. During the
26 weeks ended October 31, 2020 and October 26, 2019 , the gross margin
eliminations were $(2.4) million and $(0.5) million , respectively. The gross
margin eliminations reflect the net impact of the sales eliminations and cost of
sales eliminations during the above mentioned reporting periods.
Selling and Administrative Expenses
13 weeks ended 26 weeks ended
October 31, % of October 26, % of October 31, % of October 26, % of
Dollars in thousands 2020 Sales 2019 Sales 2020 Sales 2019 Sales
Total Selling and
Administrative Expenses $ 91,972 15.4% $ 113,404 14.7% $ 162,015 20.3% $ 211,095 19.3%
During the 13 weeks ended October 31, 2020 , selling and administrative expenses
decreased by $21.4 million , or 18.9%, to $92.0 million from $113.4 million
during the 13 weeks ended October 26, 2019 . During the 26 weeks ended
October 31, 2020 , selling and administrative expenses decreased by $49.1
million , or 23.3%, to $162.0 million from $211.1 million during the 26 weeks
ended October 26, 2019 .
The variances by segment are as follows:
Retail
During the 13 weeks ended October 31, 2020 , Retail selling and administrative
expenses decreased by $21.2 million , or 21.5%, to $77.4 million from $98.6
million during the 13 weeks ended October 26, 2019 . This decrease was primarily
due to a $17.5 million decrease in stores payroll and operating expenses,
including comparable stores, primarily due to furloughed store employees, lower
virtual stores and new/closed stores payroll and operating expenses, and a
decrease of $3.7 million in corporate payroll, infrastructure costs, product
development costs and digital operations costs.
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During the 26 weeks ended October 31, 2020 , Retail selling and administrative
expenses decreased by $48.0 million , or 26.3%, to $134.4 million from $182.4
million during the 26 weeks ended October 26, 2019 . This decrease was primarily
due to a $40.4 million decrease in stores payroll and operating expenses,
including comparable stores, primarily due to furloughed store employees, lower
virtual stores and new/closed stores payroll and operating expenses, and a
decrease of $7.7 million in corporate payroll, infrastructure costs, product
development costs and digital operations costs.
Wholesale
During the 13 weeks ended October 31, 2020 , Wholesale selling and administrative
expenses decreased by $0.5 million or 9.7% to $4.1 million from $4.6 million
during the 13 weeks ended October 26, 2019 . During the 26 weeks ended
October 31, 2020 , Wholesale selling and administrative expenses decreased by
$1.4 million or 15.1% to $7.9 million from $9.4 million during the 26 weeks
ended October 26 , 2019.The decrease in selling and administrative expenses was
primarily driven by lower payroll and operating costs.
DSS
During the 13 weeks ended October 31, 2020 , DSS selling and administrative
expenses increased by $0.4 million or 8.4% to $5.0 million from $4.6 million
during the 13 weeks ended October 26, 2019 . During the 26 weeks ended
October 31, 2020 , DSS selling and administrative expenses increased by $0.3
million or 3.6% to $9.0 million from $8.7 million during the 26 weeks ended
October 26, 2019 . The increase in costs was primarily driven by higher
professional services and advertising costs.
Corporate Services
During the 13 weeks ended October 31, 2020 , Corporate Services' selling and
administrative expenses decreased by $0.2 million or 2.9% to $5.5 million from
$5.7 million during the 13 weeks ended October 26, 2019 . During the 26 weeks
ended October 31, 2020 , Corporate Services' selling and administrative expenses
increased by $0.1 million or 0.7% to $10.8 million from $10.7 million during the
26 weeks ended October 26, 2019 . The increase was primarily due to higher
compensation-related expense, partially offset by lower operating expenses.
Depreciation and Amortization Expense
13 weeks ended 26 weeks ended
October 31, % of October 26, % of October 31, % of October 26, % of
Dollars in thousands 2020 Sales 2019 Sales 2020 Sales 2019 Sales
Total Depreciation and
Amortization Expense $ 13,193 2.2% $ 15,546 2.0% $ 27,256 3.4% $ 31,425 2.9%
Depreciation and amortization expense decreased by $2.4 million , or 15.1%, to
$13.2 million during the 13 weeks ended October 31, 2020 from $15.5 million
during the 13 weeks ended October 26, 2019 . Depreciation and amortization
expense decreased by $4.2 million , or 13.3%, to $27.3 million during the 26
weeks ended October 31, 2020 from $31.4 million during the 26 weeks ended
October 26 , 2019.The decrease was primarily attributable to lower depreciation
related to closed stores and lower capital expenditures.
Impairment loss (non-cash)
We review our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with ASC 360-10, Accounting for the Impairment or
Disposal of Long-Lived Assets. During the 26 weeks ended October 26, 2019 , we
recognized an impairment loss (non-cash) of $0.4 million in the Retail segment
related to net capitalized development costs for a project which are not
recoverable.
Restructuring and other charges
During the 13 and 26 weeks ended October 31, 2020 , we recognized restructuring
and other charges totaling $3.4 million and $9.1 million , respectively,
comprised primarily of $1.1 million and $4.5 million , respectively, for
severance and other employee termination and benefit costs associated with
elimination of various positions as part of cost reduction objectives, $2.3
million and $4.6 million , respectively, for professional service costs related
to restructuring, process improvements, shareholder activist activities, and
costs related to liabilities for a facility closure.
During the 13 and 26 weeks ended October 26, 2019 , we recognized restructuring
and other charges totaling $1.6 million and $3.0 million , respectively,
comprised primarily of $0.1 million and $0.8 million , respectively, for
severance and other employee termination and benefit costs associated with
several management changes and the elimination of various positions as part of
cost reduction objectives, and $1.5 million and $2.2 million , respectively,
related to professional service costs related to restructuring, process
improvements, shareholder activist activities, and costs related to liabilities
for a facility closure.
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Operating Income (Loss)
13 weeks ended 26 weeks ended
October 31, % of October 26, % of October 31, % of October 26, % of
Dollars in thousands 2020 Sales 2019 Sales 2020 Sales 2019 Sales
Total Operating Income
(Loss) $ 6,733 1.2% $ 56,431 7.3% $ (52,182) (6.5)% $ 12,619 1.2%
Our operating income was $6.7 million during the 13 weeks ended October 31,
2020 , compared to an operating income of $56.4 million during the 13 weeks ended
October 26, 2019 . The decrease in operating income is due to the matters
discussed above. For the 13 weeks ended October 31, 2020 , excluding the $3.4
million of restructuring and other charges, discussed above, operating income
was $10.1 million (or 1.7%). For the 13 weeks ended October 26, 2019 , excluding
the $1.6 million of restructuring and other charges, discussed above, operating
income was $58.0 million (or 7.5% of sales).
Our operating loss was $(52.2) million during the 26 weeks ended October 31,
2020 , compared to an operating income of $12.6 million during the 26 weeks ended
October 26, 2019 . The decrease in operating income is due to the matters
discussed above. For the 26 weeks ended October 31, 2020 , excluding the $9.1
million of restructuring and other charges, discussed above, operating loss was
$(43.1) million (or 5.4%). For the 26 weeks ended October 26, 2019 , excluding
the $3.0 million of restructuring and other charges and impairment loss
(non-cash) of $0.4 million , discussed above, operating income was $16.1 million
(or 1.5% of sales).
Interest Expense, Net
13 weeks ended 26 weeks ended
Dollars in thousands October 31, 2020 October 26, 2019 October 31, 2020 October 26, 2019
Interest Expense, Net $ 912 $ 1,446 $ 3,565 $ 3,978
Net interest expense decreased by $0.5 million , or 36.9%, to $0.9 million during
the 13 weeks ended October 31, 2020 from $1.4 million during the 13 weeks ended
October 26, 2019 . Net interest expense decreased by $0.4 million , or 10.4%, to
$3.6 million during the 26 weeks ended October 31, 2020 from $4.0 million during
the 26 weeks ended October 26, 2019 . The decrease was primarily due to lower
interest rates and lower net borrowings compared to the prior year.
Income Tax (Benefit) Expense
13 weeks ended 26 weeks ended
October 31, October 26, October 31, October 26,
Dollars in thousands 2020 Effective Rate 2019 Effective Rate 2020 Effective Rate 2019 Effective Rate
Income Tax (Benefit)
Expense $ (1,694) (29.1)% $ 19,054 34.7% $ (16,610) 29.8% $ 4,865 56.3%
We recorded an income tax benefit of $(1.7) million on pre-tax income of $5.8
million of during the 13 weeks ended October 31, 2020 , which represented an
effective income tax rate of (29.1)% and we recorded income tax expense of $19.1
million on a pre-tax income of $55.0 million during the 13 weeks ended
October 26, 2019 , which represented an effective income tax rate of 34.7%.
We recorded an income tax benefit of $(16.6) million on a pre-tax loss of
$(55.7) million of during the 26 weeks ended October 31, 2020 , which represented
an effective income tax rate of 29.8% and we recorded income tax expense of $4.9
million on pre-tax income of $8.6 million during the 26 weeks ended October 26,
2019 , which represented an effective income tax rate of 56.3%.
The effective tax rate for the 13 and 26 weeks ended October 31, 2020 is lower
as compared to the comparable prior year due to permanent differences and the
impact of benefits available to the Company as a result of the CARES Act in the
current year.
Net Income (Loss)
13 weeks ended 26 weeks ended
October 31,
Dollars in thousands October 31, 2020 October 26, 2019 2020 October 26, 2019
Net income (loss) $ 7,515 $ 35,931 $ (39,137) $ 3,776
As a result of the factors discussed above, net income was $7.5 million during
the 13 weeks ended October 31, 2020 , compared with net income of $35.9 million
during the 13 weeks ended October 26, 2019 and net loss was $(39.1) million
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during the 26 weeks ended October 31, 2020 , compared with net income of $3.8
million during the 26 weeks ended October 26, 2019 .
Adjusted Earnings (non-GAAP) is $11.1 million during the 13 weeks ended
October 31, 2020 , compared with $37.8 million during the 13 weeks ended
October 26, 2019 and Adjusted Earnings (non-GAAP) is $(30.6) million during the
26 weeks ended October 31, 2020 , compared with $7.8 million during the 26 weeks
ended October 26, 2019 . See Adjusted Earnings (non-GAAP) discussion below.
Use of Non-GAAP Measures - Adjusted Earnings and Adjusted EBITDA
To supplement our results prepared in accordance with GAAP, we use the measure
of Adjusted Earnings and Adjusted EBITDA, which are non-GAAP financial measures
under Securities and Exchange Commission (the "SEC") regulations. We define
Adjusted Earnings as net income as adjusted for items that are subtracted from
or added to net income. We define Adjusted EBITDA as net income plus
(1) depreciation and amortization; (2) interest expense and (3) income taxes,
(4) as adjusted for items that are subtracted from or added to net income.
To properly and prudently evaluate our business, we encourage you to review our
consolidated financial statements included elsewhere in the Form 10-K for the
year ended May 2, 2020 , the reconciliation of Adjusted Earnings to net income
and the reconciliation of Adjusted EBITDA to net income, the most directly
comparable financial measure presented in accordance with GAAP, set forth in the
tables below. All of the items included in the reconciliations below are either
(i) non-cash items or (ii) items that management does not consider in assessing
our on-going operating performance.
These non-GAAP financial measures are not intended as substitutes for and should
not be considered superior to measures of financial performance prepared in
accordance with GAAP. In addition, our use of these non-GAAP financial measures
may be different from similarly named measures used by other companies, limiting
their usefulness for comparison purposes.
We review these non-GAAP financial measures as internal measures to evaluate our
performance and manage our operations. We believe that these measures are useful
performance measures which are used by us to facilitate a comparison of our
on-going operating performance on a consistent basis from period-to-period. We
believe that these non-GAAP financial measures provide for a more complete
understanding of factors and trends affecting our business than measures under
GAAP can provide alone, as they exclude certain items that do not reflect the
ordinary earnings of our operations. Our Board of Directors and management also
use Adjusted EBITDA as one of the primary methods for planning and forecasting
overall expected performance, for evaluating on a quarterly and annual basis
actual results against such expectations, and as a measure for performance
incentive plans. We believe that the inclusion of Adjusted Earnings and Adjusted
EBITDA results provides investors useful and important information regarding our
operating results.
Adjusted Earnings (non-GAAP)
13 weeks ended 26 weeks ended
October 31,
2020 2019 2020 2019
Net income (loss) $ 7,515 $ 35,931 $ (39,137) $ 3,776
Reconciling items, after-tax (below) 3,560 1,903 8,496 3,983
Adjusted Earnings (non-GAAP) $ 11,075 $
37,834
Reconciling items, pre-tax Impairment loss (non-cash) (a) $ - $
- $ -
Content amortization (non-cash) 1,222 998 2,386 1,909 Restructuring and other charges (a) 3,387 1,569 9,058 3,035 Reconciling items, pre-tax 4,609 2,567 11,444 5,377 Less: Pro forma income tax impact (b) 1,049 664 2,948 1,394 Reconciling items, after-tax$ 3,560 $ 1,903 $ 8,496 $ 3,983
(a) See Management Discussion and Analysis and Results of Operations discussion above. (b) Represents the income tax effects of the non-GAAP items.
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Adjusted EBITDA (non-GAAP)
13 weeks ended 26 weeks ended
October 31 ,
2020 2019 2020 2019
Net income (loss) $ 7,515 $ 35,931 $ (39,137) $ 3,776
Add:
Depreciation and amortization expense 13,193 15,546 27,256 31,425
Content amortization (non-cash) 1,222 998 2,386 1,909
Interest expense, net 912 1,446 3,565 3,978
Income tax (benefit) expense (1,694) 19,054 (16,610) 4,865
Impairment loss (non-cash) (a) - - - 433
Restructuring and other charges (a) 3,387 1,569 9,058 3,035
Adjusted EBITDA (non-GAAP) (a) $ 24,535 $
74,544
(a) See Management Discussion and Analysis and Results of Operations discussion above. The following is Adjusted EBITDA by segment for the 13 and 26 weeks endedOctober 31, 2020 andOctober 26, 2019 . Adjusted EBITDA - by Segment
13 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 576,514 $ 36,387 $ 5,947 $ - $ (23,363) $ 595,485
Cost of sales (a) 480,810 25,673 255 - (27,760) 478,978
Gross profit 95,704 10,714 5,692 - 4,397 116,507
Selling and administrative
expenses 77,380 4,146 5,003 5,501 (58) 91,972
Adjusted EBITDA (non-GAAP) $ 18,324 $ 6,568 $ 689 $ (5,501) $ 4,455 $ 24,535
Adjusted EBITDA - by Segment
13 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 741,769 $ 40,210 $ 5,215 $ - $ (14,966) $ 772,228
Cost of sales (a) 580,619 27,675 286 - (24,300) 584,280
Gross profit 161,150 12,535 4,929 - 9,334 187,948
Selling and administrative
expenses 98,578 4,593 4,615 5,668 (50) 113,404
Adjusted EBITDA (non-GAAP) $ 62,572 $ 7,942 $ 314 $ (5,668) $ 9,384 $ 74,544
Adjusted EBITDA - by Segment
26 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 735,290 $ 116,681 $ 11,819 $ - $ (64,291) $ 799,499
Cost of sales (a) 623,241 89,210 427 - (61,912) 650,966
Gross profit 112,049 27,471 11,392 - (2,379) 148,533
Selling and administrative
expenses 134,365 7,937 9,039 10,745 (71) 162,015
Adjusted EBITDA (non-GAAP) $ (22,316) $ 19,534 $ 2,353 $ (10,745) $ (2,308) $ (13,482)
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26 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 1,016,425 $ 112,519 $ 10,589 $ - $ (47,648) $ 1,091,885
Cost of sales (a) 792,952 85,066 519 - (47,168) 831,369
Gross profit 223,473 27,453 10,070 - (480) 260,516
Selling and administrative
expenses 182,393 9,352 8,728 10,675 (53) 211,095
Adjusted EBITDA (non-GAAP)
(a) For the 13 weeks endedOctober 31, 2020 , gross margin excludes$0.2 million and$1.0 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. For the 26 weeks endedOctober 31, 2020 , gross margin excludes$0.4 million and$2.0 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. For the 13 weeks endedOctober 26, 2019 , gross margin excludes$0.2 million and$0.8 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. For the 26 weeks endedOctober 26, 2019 , gross margin excludes$0.4 million and$1.5 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. (b) See Management Discussion and Analysis and Results of Operations discussion above. Liquidity and Capital Resources Our primary sources of cash are net cash flows from operating activities, funds available under our credit agreement and short-term vendor financing. As ofOctober 31, 2020 , we had$99.5 million outstanding borrowings under the Credit Agreement. See Financing Arrangements discussion below. Our business experienced an unprecedented and significant impact as a result of COVID-19 related campus store closures. Beginning inMarch 2020 , colleges and universities nationwide began to close their campuses in light of safety concerns and as a result of local and state issued stay-at-home orders. By mid-March, during our fiscal fourth quarter, we closed the majority of our physical campus stores to protect the health and safety of our customers and employees. While our campus stores were closed, we continued to serve institutions and students through our campus websites, providing free shipping on all orders and an expanded digital content offering to provide immediate access to course materials to students at our campuses that closed due to COVID-19. We developed and implemented plans to safely reopen our campus stores based on national, state and local guidelines, as well as the campus policies set by the school administration. Colleges and universities inthe United States continue to adjust their plans for each academic term, with some implementing shortened semesters or choosing to remain fully virtual in order to best protect students and faculty. As many schools adjusted their learning model and curtailed on-campus activities in response to the pandemic, our flexible offerings ensured that students were equipped with their course materials regardless of whether schools resumed classes on campus, remotely or via a hybrid learning model. Our fiscal 2021 second quarter results were significantly impacted by the ongoing COVID-19 pandemic, as many schools continued to adjust their learning model and on-campus activities in response to the pandemic. Fewer students returned to campus this fall, as many schools implemented a remote learning model and curtailed on-campus classes and activities. While many big athletic conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company's high-margin general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. The COVID-19 impact on higher education remains a fluid situation, and we are committed to supporting our campus partners through our flexible offerings and our ability to quickly pivot to ensure uninterrupted service as institutions manage the safety of their campuses. We have implemented a significant cost reduction program designed to streamline our operations, maximize productivity and drive profitability. Certain elements of this plan were implemented in late Fiscal 2020, while other actions are planned for Fiscal 2021. We anticipate meaningful annualized cost savings from this program, the majority of which is expected to be realized beginning in Fiscal 2021. The first half of Fiscal 2021 was significantly impacted by COVID-19 related campus store closures, as well as lower enrollments due to COVID-19 and fewer on campus events. We cannot accurately predict the 38
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Table of Contents duration or extent of the impact of COVID-19 on enrollments, university budgets, athletics and other areas that directly affect our business operations. There is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact to our results of operations, financial condition and cash flows from operations. We believe that our future cash from operations, access to borrowings under the Credit Facility, FILO Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our future capital requirements will depend on many factors, including, but not limited to, the economy and the outlook for and pace of sustainable growth in our markets, the levels at which we maintain inventory, the number and timing of new store openings, and any potential acquisitions of other brands or companies including digital properties. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private financing of debt or equity. Our access to, and the availability of, financing in the future will be impacted by many factors, including the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms.
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