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 . 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 1,429 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 and accelerate such capabilities through our recent merchandising partnership withFanatics Retail Group Fulfillment, LLC, Inc. ("Fanatics") andFanatics Lids College, Inc. ("FLC") (collectively referred to herein as the "FLC Partnership "), increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect general merchandise sales to increase over the long term, as our product assortments continue to emphasize and reflect changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, which we expect to be further enhanced and accelerated through theFLC Partnership . Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our logo and emblematic general merchandise business. We believe the Barnes & Noble brand (licensed from our former parent) along with our subsidiary brands, BNC and MBS, are synonymous with innovation in bookselling and campus retailing, 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 to our relationship with 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 1, 2021 . Wolfram|Alpha Agreement During the first quarter of Fiscal 2022, we launched Math Solver, a new bartleby® product feature that is powered by Wolfram|Alpha best-in-class computation engine. Math Solver allows students to access an interactive digital calculator that provides real-time, step-by-step explanations for even the most advanced math problems in subjects such as Algebra, Pre-Calc, Calculus. Partnership with Fanatics and FLC InDecember 2020 , we entered into theFLC Partnership . Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our general merchandise business. Fanatics' cutting-edge e-commerce and technology expertise offers our campus stores expanded product selection, a world-class online and mobile experience, and a progressive direct-to-consumer platform. Coupled with FLC, the leading standalone brick and mortar retailer focused exclusively on licensed fan and alumni products, our campus stores have improved access to trend and sales performance data on licensees, product styles, and design treatments. We maintain our relationships with campus partners and remain responsible for staffing and managing the day-to-day operations of our campus bookstores. We also work closely with our campus partners to ensure that each campus store maintains unique aspects of in-store merchandising, including localized product assortments and specific styles and designs that reflect each campus's brand. We leverage Fanatics' e-commerce technology and expertise for the operational management of the emblematic merchandise and gift sections of our campus store websites. FLC manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores. 20 -------------------------------------------------------------------------------- Table of Contents InDecember 2020 ,Fanatics, Inc. andLids Holdings, Inc. jointly made a strategic equity investment in BNED. OnApril 4, 2021 , as contemplated by theFLC Partnership's merchandising agreement, we sold our logo and emblematic general merchandise inventory to FLC, which was finalized during the first quarter of Fiscal 2022. As contemplated by theFLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products during the first quarter of Fiscal 2022. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis in the prior year. For additional information, see Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories. COVID-19 Business Impact Our business experienced an unprecedented and significant negative 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 2020 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. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most schools expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities and events, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine when our operations can begin returning to normal levels of business. 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 on our results of operations, financial condition and cash flows from operations. For additional information, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year endedMay 1, 2021 . 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 1, 2021 . Retail Segment The Retail Segment operates 1,429 college, university, and K-12 school bookstores, comprised of 784 physical bookstores and 645 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 independently or along with our merchant partners, 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 3,200 physical bookstores (including our Retail Segment's 784 physical bookstores) and sources and distributes new and used textbooks to our 645 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. 21 -------------------------------------------------------------------------------- Table of Contents 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 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 impact of 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 the COVID-19 Pandemic: 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, including the ability to gain adequate herd-immunity levels through vaccine programs and their resilience to future virus variants. 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 virus and ensure the safety of their students. Although many academic institutions have reopened, they are considering alternatives to traditional in-person instruction, including online learning and significantly reduced classroom sizes. Additionally, while many 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. •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. 22 -------------------------------------------------------------------------------- Table of Contents •Increasing Costs Associated with Defending Against Security Breaches and Other Data Loss, Including Cyber-Attacks. We are increasingly dependent upon information technology systems, infrastructure and data. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. We continue to invest in data protection and information technology to prevent or minimize these risks and, to date, we have not experienced any material service interruptions and are not aware of any material breaches. •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. Recently, the impact of fewer students on campus due to COVID-19 has significantly impacted our on-campus buyback programs which supplies Wholesale's used textbook inventory for future selling periods. 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. •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 1, 2021 . 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"). The results of operations reflected in our consolidated financial statements are presented on a consolidated basis. All material intercompany accounts and transactions have been eliminated in consolidation. 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. 23 -------------------------------------------------------------------------------- Table of Contents 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. Results of Operations - Summary 13 weeks ended July 31, August 1, Dollars in thousands 2021 2020 Sales: Product sales and other$ 227,770 $ 193,210 Rental income 13,024 10,804 Total sales$ 240,794 $ 204,014 Net loss$ (44,346) $ (46,652)
Adjusted Earnings (non-GAAP) (a)
Adjusted EBITDA (non-GAAP) (a) Retail$ (19,622) $ (40,640) Wholesale 6,414 12,966 DSS 1,692 1,664 Corporate Services (7,444) (5,244) Elimination (5,537) (6,763)
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
July 31, August 1,
2021 2020
Sales:
Product sales and other 94.6 % 94.7 %
Rental income 5.4 5.3
Total sales 100.0 100.0
Cost of sales:
Product and other cost of sales (a) 76.5 85.8
Rental cost of sales (a) 50.7 68.4
Total cost of sales 75.1 84.9
Gross margin 24.9 15.1
Selling and administrative expenses 35.8 34.3
Depreciation and amortization expense 5.2 6.9
Restructuring and other charges 1.1 2.8
Operating loss (17.2) % (28.9) %
(a)Represents the percentage these costs bear to the related sales, instead of total sales.
24
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Table of Contents
Results of Operations - 13 weeks ended July 31, 2021 compared with the 13 weeks
ended August 1, 2020 13 weeks ended,
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 197,445 $ 44,484 $ 8,303 $ - $ (22,462) $ 227,770
Rental income 13,024 - - - - 13,024
Total sales 210,469 44,484 8,303 - (22,462) 240,794
Cost of sales:
Product and other cost of sales 155,722 34,079 1,273 - (16,913) 174,161
Rental cost of sales 6,604 - - - - 6,604
Total cost of sales 162,326 34,079 1,273 - (16,913) 180,765
Gross profit 48,143 10,405 7,030 - (5,549) 60,029
Selling and administrative expenses 68,365 3,991 6,447 7,444 (12) 86,235
Depreciation and amortization expense 9,407 1,300 1,899 18 - 12,624
Sub-Total: $ (29,629) $ 5,114 $ (1,316) $ (7,462) $ (5,537) (38,830)
Restructuring and other charges 2,623
Operating loss $ (41,453)
13 weeks ended, August 1, 2020
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 147,972 $ 80,294 $ 5,872 $ - $ (40,928) $ 193,210
Rental income 10,804 - - - - 10,804
Total sales 158,776 80,294 5,872 - (40,928) 204,014
Cost of sales:
Product and other cost of sales 135,254 63,537 1,126 - (34,152) 165,765
Rental cost of sales 7,387 - - - - 7,387
Total cost of sales 142,641 63,537 1,126 - (34,152) 173,152
Gross profit 16,135 16,757 4,746 - (6,776) 30,862
Selling and administrative expenses 56,985 3,791 4,036 5,244 (13) 70,043
Depreciation and amortization expense 10,570 1,295 2,165 33 - 14,063
Sub-Total: $ (51,420) $ 11,671 $ (1,455) $ (5,277) $ (6,763) (53,244)
Restructuring and other charges 5,671
Operating loss $ (58,915)
Sales
The following table summarizes our sales for the 13 weeks ended July 31, 2021
and August 1, 2020 :
13 weeks ended
Dollars in thousands July 31, 2021 August 1, 2020 %
Product sales and other $ 227,770 $ 193,210 17.9%
Rental income 13,024 10,804 20.5%
Total Sales $ 240,794 $ 204,014 18.0%
25-------------------------------------------------------------------------------- Table of Contents Sales increased by$36.8 million , or 18.0%, to$240.8 million during the 13 weeks endedJuly 31, 2021 from$204.0 million during the 13 weeks endedAugust 1, 2020 . The sales increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. The first quarter is typically a low revenue quarter, consisting primarily of summer courses. The components of the variances for the 13 week periods are reflected in the table below. Sales variances 13 weeks ended Dollars in millions July 31, 2021 August 1, 2020 Retail Sales New stores $ 10.3 $ 7.9 Closed stores (4.5) (5.1) Comparable stores (a) 44.6 (106.6) Textbook rental deferral 0.2 (6.4) Service revenue (b) 2.3 (4.7) Other (c) (1.2) (1.0) Retail sales subtotal: $ 51.7$ (115.9) Wholesale Sales$ (35.8) $ 8.0 DSS Sales $ 2.4 $ 0.5 Eliminations (d) $ 18.5 $ (8.2) Total sales variance: $ 36.8$ (115.6) (a) EffectiveApril 2021 , as contemplated by theFLC Partnership's merchandising agreement, logo and emblematic general merchandise sales were fulfilled by FLC. During the first quarter of Fiscal 2022, as contemplated by theFLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis in the prior year period. For Comparable Store Sales details, see below. (b) Service revenue includes brand partnerships, shipping and handling, 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 increased by$51.7 million , or 32.6%, to$210.5 million during the 13 weeks endedJuly 31, 2021 from$158.8 million during the 13 weeks endedAugust 1, 2020 . Retail added 53 new stores and closed 41 stores (not including temporary store closings due to COVID-19) during the 13 weeks endedJuly 31, 2021 , ending the period with a total of 1,429 stores. 13 weeks ended July 31, 2021 August 1, 2020 Number of Stores: Physical Virtual Physical Virtual Number of stores at beginning of period 769 648 772 647 Opened 30 23 24 40 Closed 15 26 24 17 Number of stores at end of period 784 645 772 670 Product and other sales for Retail for the 13 weeks endedJuly 31, 2021 increased by$49.5 million , or 33.5% to$197.5 million from$148.0 million during the 13 weeks endedAugust 1, 2020 . The sales increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. 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 the COVID-19 pandemic in the prior year, as well as the impact of fewer students returning to campus, as many schools 26 -------------------------------------------------------------------------------- Table of Contents 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 general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. First Day (our inclusive access program), digital and eTextbook revenue increased, due to a shift to lower cost options and more affordable solutions, including digital offerings. First Day sales increased approximately 200% compared to the prior year period. To supplement the Total Sales table presented above in accordance with generally accepted accounting principles ("GAAP"), the Company uses the non-GAAP financial measure of Retail Gross Comparable Store Sales.Retail Gross Comparable Store Sales (non-GAAP) includes sales from physical and virtual stores that have been open for an entire fiscal year period and does not include sales from closed stores for all periods presented. As contemplated by theFLC Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo and emblematic general merchandise sales to FLC and Fanatics. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the prior year period. For Retail Gross Comparable Store Sales (non-GAAP), sales for logo and emblematic general merchandise fulfilled by FLC, Fanatics and digital agency sales are included on a gross basis. We believe the current Retail Gross Comparable Store Sales (non-GAAP) calculation method reflects the manner in which management views comparable sales, as well as the seasonal nature of our business. Retail Gross Comparable Store Sales (non-GAAP) variances for Retail by category for the 13 week periods are as follows: Retail Gross Comparable Store Sales (non-GAAP) variances 13 weeks ended Dollars in millions July 31, 2021 August 1, 2020 Textbooks (Course Materials)$ 23.1 21.9 %$ (11.3) (10.1) % General Merchandise 48.6 118.4 % (87.6) (68.3) % Trade Books 1.9 151.1 % (7.7) (85.2) % Total Retail Gross Comparable Store Sales (non-GAAP)$ 73.6 49.8 %$ (106.6) (42.8) % Rental income for Retail for the 13 weeks endedJuly 31, 2021 increased by$2.2 million , or 20.5% to$13.0 million from$10.8 million during the 13 weeks endedAugust 1, 2020 . Rental income is impacted by comparable store sales, new store openings and store closings. The increase in rental income is primarily due to increased rental activity due to the temporary store closings due COVID-19 pandemic in the prior year discussed above. Wholesale Wholesale sales decreased by$35.8 million , or 44.6% to$44.5 million during the 13 weeks endedJuly 31, 2021 from$80.3 million during the 13 weeks endedAugust 1, 2020 . The decrease is primarily due to decreased gross sales impacted by the COVID-19 pandemic, a decrease in customer demand resulting from a shift in buying patterns from physical textbooks to digital products, and lower demand from other third-party clients, partially offset by a lower returns and allowances. During the prior year period, 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, whereas the sales shifted back to the physical bookstores in the current period. DSS DSS total sales increased by$2.4 million , or 41.4% to$8.3 million during the 13 weeks endedJuly 31, 2021 from$5.9 million during the 13 weeks endedAugust 1, 2020 . Sales increased primarily due to an increase in subscription sales. Cost of Sales and Gross Margin Our cost of sales decreased as a percentage of sales to 75.1% during the 13 weeks endedJuly 31, 2021 compared to 84.9% during the 13 weeks endedAugust 1, 2020 . Our gross margin increased by$29.2 million , or 94.5%, to$60.0 million , or 24.9% of sales, during the 13 weeks endedJuly 31, 2021 from$30.9 million , or 15.1% of sales during the 13 weeks endedAugust 1, 2020 . During the 13 weeks endedJuly 31, 2021 , we recognized a merchandise inventory loss of$0.4 million in cost of goods sold in the Retail Segment discussed below. Excluding the merchandise inventory loss, cost of goods sold and gross margin was 74.9% and 25.1%, respectively, of sales during the 13 weeks endedJuly 31, 2021 compared to 84.9% and 15.1%, respectively, of sales during the 13 weeks endedAugust 1, 2020 . For additional information, see Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories. 27 -------------------------------------------------------------------------------- Table of Contents Retail The following table summarizes the Retail cost of sales for the 13 weeks endedJuly 31, 2021 andAugust 1, 2020 : 13 weeks ended % of % of Dollars in thousands July 31, 2021 Related Sales August 1, 2020 Related Sales Product and other cost of sales$ 155,722 78.9%$ 135,254 91.4% Rental cost of sales 6,604 50.7% 7,387 68.4% Total Cost of Sales$ 162,326 77.1%$ 142,641 89.8%
The following table summarizes the Retail gross margin for the 13 weeks ended
13 weeks ended
% of August 1, % of
Dollars in thousands July 31, 2021 Related Sales 2020 Related Sales
Product and other gross margin $ 41,723 21.1% $ 12,718 8.6%
Rental gross margin 6,420 49.3% 3,417 31.6%
Gross Margin $ 48,143 22.9% $ 16,135 10.2%
For the 13 weeks ended July 31, 2021 , the Retail gross margin as a percentage of
sales increased as discussed below:
•Product and other gross margin increased (1,250 basis points), driven primarily
by higher margin rates (1,215 basis points) due to lower inventory reserves and
lower markdowns and a favorable sales mix (160 basis points) due to higher
general merchandise sales, partially offset by higher contract costs as a
percentage of sales related to our college and university contracts (90 basis
points) resulting from contract renewals and new store contracts, and an
inventory merchandise loss of $0.4 million (30 basis points) related to the
final sale of our logo and emblematic general merchandise inventory below cost
to FLC.
•Rental gross margin increased (1,765 basis points), driven primarily by lower
contract costs as a percentage of sales related to our college and university
contracts (1,215 basis points) and higher rental margin rates (690 basis
points), partially offset by an unfavorable rental mix (140 basis points).
Wholesale
The cost of sales and gross margin for Wholesale were $34.1 million , or 76.6% of
sales, and $10.4 million , or 23.4% of sales, respectively, during the 13 weeks
ended July 31, 2021 . The cost of sales and gross margin for Wholesale was $63.5
million or 79.1% of sales and $16.8 million or 20.9% of sales, respectively,
during the 13 weeks ended August 1, 2020 .
The gross margin rate increased during the 13 weeks ended July 31, 2021
primarily due to lower markdowns and a favorable sales mix, partially offset by
the unfavorable impact of returns and allowances.
DSS
The gross margin for the DSS segment was $7.0 million , or 84.7% of sales, during
the 13 weeks ended July 31, 2021 and $4.7 million , or 80.8% of sales, during the
13 weeks ended August 1, 2020 . The high gross margins are driven primarily by
high margin subscription service revenue earned.
Intercompany Eliminations
During the 13 weeks ended July 31, 2021 and August 1, 2020 , our sales
eliminations were $(22.5) million and $(40.9) 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 July 31, 2021 and August 1, 2020 , the cost of sales
eliminations were $(16.9) million and $(34.2) 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.
28
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During the 13 weeks ended July 31, 2021 and August 1, 2020 , the gross margin
eliminations were $(5.5) million and $(6.8) 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
% of August 1, % of
Dollars in thousands July 31, 2021 Sales 2020 Sales
Total Selling and Administrative Expenses $ 86,235 35.8% $ 70,043 34.3%
During the 13 weeks ended July 31, 2021 , selling and administrative expenses
increased by $16.2 million , or 23.1%, to $86.2 million from $70.0 million during
the 13 weeks ended August 1, 2020 . The variances by segment are as follows:
Retail
During the 13 weeks ended July 31, 2021 , Retail selling and administrative
expenses increased by $11.4 million , or 20.0%, to $68.4 million from $57.0
million during the 13 weeks ended August 1, 2020 . This increase was primarily
due to a $12.1 million increase in stores payroll and operating expenses
including comparable stores, virtual stores and new/closed stores payroll and
operating expenses, partially offset by a $0.8 million decrease in corporate
payroll, infrastructure and product development costs. The payroll increase is
primarily related to the impact from re-opening stores that had temporarily
closed due to the COVID-19 pandemic in the prior year.
Wholesale
Wholesale selling and administrative expenses increased by $0.2 million , or
5.3%, to $4.0 million from $3.8 million during the 13 weeks ended August 1,
2020 . The increase in selling and administrative expenses was primarily driven
by higher compensation-related expense and higher operating expenses.
DSS
During the 13 weeks ended July 31, 2021 , DSS selling and administrative expenses
increased by $2.4 million , or 59.7%, to $6.4 million from $4.0 million during
the 13 weeks ended August 1, 2020 . The increase in costs was primarily driven by
higher operating costs invested in the business to continue to increase sales.
Corporate Services
During the 13 weeks ended July 31, 2021 , Corporate Services' selling and
administrative expenses increased by $2.2 million , or 42.0%, to $7.4 million
from $5.2 million during the 13 weeks ended August 1, 2020 . The increase was
primarily due to higher compensation-related expense and higher operating
expenses.
Depreciation and Amortization Expense
13 weeks ended
% of August 1, % of
Dollars in thousands July 31, 2021 Sales 2020 Sales
Total Depreciation and Amortization Expense
5.2%$ 14,063 6.9% Depreciation and amortization expense decreased by$1.4 million , or 10.2%, to$12.6 million during the 13 weeks endedJuly 31, 2021 from$14.1 million during the 13 weeks endedAugust 1, 2020 . The decrease was primarily attributable to lower depreciable assets and intangibles due to the store impairment loss recognized during the third quarter of Fiscal 2021. Restructuring and other charges During the 13 weeks endedJuly 31, 2021 , we recognized restructuring and other charges totaling$2.6 million comprised primarily of$1.5 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($2.4 million is included in accrued liabilities in the consolidated balance sheet as ofJuly 31, 2021 ),$1.0 million for professional service costs related to restructuring, process improvements, costs related to development and integration associated with theFLC Partnership , and shareholder activist activities, and$0.1 million related to liabilities for a facility closure. During the 13 endedAugust 1, 2020 , we recognized restructuring and other charges totaling$5.7 million comprised of$3.4 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($10.6 million is included in accrued liabilities in the consolidated balance sheet as ofAugust 1, 2020 ), and$2.1 million for professional service costs related to restructuring, process improvements, and shareholder activities, and$0.2 million related to liability for a facility closure. 29 --------------------------------------------------------------------------------
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Operating Loss
13 weeks ended
% of % of
Dollars in thousands July 31, 2021 Sales August 1, 2020 Sales
Total Operating Loss $ (41,453) (17.2)% $ (58,915) (28.9)%
Our operating loss was $(41.5) million during the 13 weeks ended July 31, 2021 ,
compared to an operating loss of $(58.9) million during the 13 weeks ended
August 1, 2020 . The decrease in operating loss is due to the matters discussed
above. For the 13 weeks ended July 31, 2021 , excluding the $0.4 million of
merchandise inventory loss and the $2.6 million of restructuring and other
charges, discussed above, operating loss was $(38.4) million (or (15.9)% of
sales). For the 13 weeks ended August 1, 2020 , excluding the $5.7 million of
restructuring and other charges, discussed above, operating loss was $(53.2)
million (or (26.1)% of sales).
Interest Expense, Net
13 weeks ended
Dollars in thousands
Net interest expense decreased by$0.2 million , or 6.0%, to$2.5 million during the 13 weeks endedJuly 31, 2021 from$2.7 million during the 13 weeks endedAugust 1, 2020 . The decrease was primarily due to lower borrowings compared to the prior year. Income Tax Expense (Benefit) 13 weeks ended Dollars in thousands July 31, 2021 Effective Rate August 1, 2020 Effective Rate Income Tax Expense (Benefit) $ 399 (0.9)%$ (14,916) 24.2% We recorded an income tax expense of$0.4 million on a pre-tax loss of$(43.9) million during the 13 weeks endedJuly 31, 2021 , which represented an effective income tax rate of (0.9)% and we recorded an income tax benefit of$(14.9) million on a pre-tax loss of$(61.6) million during the 13 weeks endedAugust 1, 2020 , which represented an effective income tax rate of 24.2%. The effective tax rate for the 13 weeks endedJuly 31, 2021 is lower as compared to the comparable prior year due to the assessment of the realization of deferred tax assets. Net Loss 13 weeks ended
Dollars in thousands
$ (44,346) $ (46,652) As a result of the factors discussed above, net loss was$(44.3) million during the 13 weeks endedJuly 31, 2021 , compared with net loss of$(46.7) million during the 13 weeks endedAugust 1, 2020 . Adjusted Earnings (non-GAAP) is$(40.0) million during the 13 weeks endedJuly 31, 2021 , compared with$(41.7) million during the 13 weeks endedAugust 1, 2020 . See Adjusted Earnings (non-GAAP) discussion below. Use of Non-GAAP Measures - Adjusted Earnings, Adjusted EBITDA and Free Cash Flow To supplement our results prepared in accordance with generally accepted accounting principles ("GAAP"), we use the measure of Adjusted Earnings, Adjusted EBITDA, and Free Cash Flow, which are non-GAAP financial measures underSecurities and Exchange Commission (the "SEC") regulations. We define Adjusted Earnings as net income adjusted for certain reconciling 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. We define Free Cash Flow as Adjusted EBITDA less capital expenditures, cash interest and cash taxes. To properly and prudently evaluate our business, we encourage you to review our condensed consolidated financial statements included elsewhere in this Form 10-K, 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 30 -------------------------------------------------------------------------------- Table of Contents 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. We believe that Free Cash Flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements and assists investors in their understanding of our operating profitability and liquidity as we manage the business to maximize margin and cash flow. Adjusted Earnings (non-GAAP) 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Net loss$ (44,346) $ (46,652) Reconciling items, after-tax (below) 4,332
4,936
Adjusted Earnings (non-GAAP)$ (40,014) $
(41,716)
Reconciling items, pre-tax
Merchandise inventory loss (a) $ 434 $
-
Content amortization (non-cash) 1,275
1,164
Restructuring and other charges (a) 2,623
5,671
Reconciling items, pre-tax 4,332
6,835
Less: Pro forma income tax impact (a)(b) - 1,899 Reconciling items, after-tax$ 4,332 $ 4,936 (a) See Management Discussion and Analysis and Results of Operations discussion above. (b) Represents the income tax effects of the non-GAAP items. Adjusted EBITDA (non-GAAP) 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Net loss$ (44,346) $ (46,652) Add: Depreciation and amortization expense 12,624 14,063 Interest expense, net 2,494 2,653 Income tax expense (benefit) 399
(14,916)
Merchandise inventory loss (a) 434 - Content amortization (non-cash) 1,275 1,164 Restructuring and other charges (a) 2,623 5,671
Adjusted EBITDA (non-GAAP) (a)
(a) See Management Discussion and Analysis and Results of Operations discussion above.
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The following is Adjusted EBITDA by segment for the 13 weeks ended July 31, 2021
and August 1, 2020 .
Adjusted EBITDA - by Segment
13 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 210,469 $ 44,484 $ 8,303 $ - $ (22,462) $ 240,794
Cost of sales (a) 161,726 34,079 164 - (16,913) 179,056
Gross profit 48,743 10,405 8,139 - (5,549) $ 61,738
Selling and administrative
expenses 68,365 3,991 6,447 7,444 (12) 86,235
Adjusted EBITDA (non-GAAP) $ (19,622) $ 6,414 $ 1,692 $ (7,444) $ (5,537) $ (24,497)
Adjusted EBITDA - by Segment
13 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 158,776 $ 80,294 $ 5,872 $ - $ (40,928) $ 204,014
Cost of sales (a) 142,431 63,537 172 - (34,152) 171,988
Gross profit 16,345 16,757 5,700 - (6,776) 32,026
Selling and administrative
expenses 56,985 3,791 4,036 5,244 (13) 70,043
Adjusted EBITDA (non-GAAP) $ (40,640) $ 12,966 $ 1,664 $ (5,244) $ (6,763) $ (38,017)
(a) For the 13 weeks ended July 31, 2021 , gross margin excludes $0.2 million and
$1.1 million of amortization expense (non-cash) related to content development
costs in the Retail Segment and DSS Segment, respectively. For the 13 weeks
ended July 31, 2021 , gross margin also excludes a merchandise inventory loss of
$0.4 million in the Retail Segment.
For the 13 weeks ended August 1, 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.
(b) See Management Discussion and Analysis and Results of Operations discussion
above.
Free Cash Flow (non-GAAP)
13 weeks ended
Dollars in thousands July 31, 2021 August 1, 2020
Adjusted EBITDA (non-GAAP) $ (24,497) $ (38,017)
Less:
Capital expenditures (a) 11,370 7,055
Cash interest 1,682 1,960
Cash taxes 254 5,937
Free Cash Flow (non-GAAP) $ (37,803) $ (52,969)
(a) Purchases of property and equipment are also referred to as capital
expenditures. Our investing activities consist principally of capital
expenditures for contractual capital investments associated with renewing
existing contracts, new store construction, digital initiatives and enhancements
to internal systems and our website. The following table provides the components
of total purchases of property and equipment:
Capital Expenditures 13 weeks ended
Dollars in thousands July 31, 2021 August 1, 2020
Physical store capital expenditures
3,624 2,325
Content development costs 2,847 1,076
Other 1,006 517
Total Capital Expenditures $ 11,370 $ 7,055
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Table of Contents 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 ofJuly 31, 2021 , we had$203.7 million outstanding borrowings under the Credit Agreement. See Financing Arrangements discussion below. COVID-19 Business Impact Our business experienced an unprecedented and significant negative 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 2020 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. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most schools currently expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities and events, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine when our operations can begin returning to normal levels of business. 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 on our results of operations, financial condition and cash flows from operations. For additional information, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year endedMay 1, 2021 . 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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