BARNES & NOBLE EDUCA

BNED
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BARNES & NOBLE EDUCATION : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

06/30/2021 | 04:39pm


Unless the context otherwise indicates, references to "we," "us," "our" and "the
Company" refer to Barnes & Noble Education, Inc. or "BNED", a Delaware
corporation. References to "Barnes & Noble College" or "BNC" refer to our
subsidiary Barnes & Noble College Booksellers, LLC. References to "MBS" refer to
our subsidiary MBS Textbook Exchange, LLC. References to "Student Brands" refer
to our subsidiary Student Brands, LLC.
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest
to the last day of April. "Fiscal 2021" means the 52 weeks ended May 1, 2021,
"Fiscal 2020" means the 53 weeks ended May 2, 2020, and "Fiscal 2019" means the
52 weeks ended April 27,2019.
Overview
Description of business
Barnes & 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 across the 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 1,417 physical, virtual, and
custom bookstores and serve more than 6 million students, delivering essential
educational content and tools within a dynamic omni channel 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 Fanatics 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 our
partnership with Fanatics Retail Group Fulfillment, LLC, Inc. and Fanatics Lids
College, Inc.
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
in the 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 a discussion of our business, see Part I - Item 1. Business.
Partnership with Fanatics and FLC
In December 2020, we entered into a new merchandising partnership with Fanatics
Retail Group Fulfillment, LLC, Inc.
("Fanatics") and Fanatics Lids College, Inc.
("FLC"). 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.
In December 2020, Fanatics, Inc. and Lids Holdings, Inc. jointly made a
strategic equity investment in BNED. On April 4, 2021, as contemplated under the
merchandising partnership agreement, FLC purchased our logo and emblematic
general merchandise inventory. As the logo and emblematic general merchandise
sales are fulfilled by FLC and Fanatics, we recognize
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commission revenue earned for these sales on a net basis. For additional
information, see Part II - Item 8. Financial Statements and Supplementary Data -
Note 2. Summary of Significant Accounting Policies and Note 6. Equity and
Earnings Per Share.
COVID-19 Business Impact
Our business experienced an unprecedented and significant impact as a result of
COVID-19 related campus store closures. Beginning in March 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.
Our Fiscal 2021 results have been significantly impacted by the ongoing COVID-19
pandemic, as many schools adjusted their learning model and on-campus activities
in response to the pandemic. Fewer students returned to campus, as many schools
implemented a remote learning model and curtailed on-campus classes and
activities. 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 general merchandise business. Additionally, sales
were impacted by overall enrollment declines in higher education. See Part II -
Item 8. Financial Statements and Supplementary Data - Note 2. Summary of
Significant Accounting Policies - Other Long-Lived Assets related to the
impairment loss (non-cash) recognized during Fiscal 2021.
To mitigate the impact of the business disruption, we have taken steps to
significantly reduce costs, including periodically furloughing the majority of
our Retail workforce during non-rush seasonal sales periods. 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 occurred in Fiscal
2021. We have achieved meaningful annualized cost savings from this program.
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 COVID-19 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, 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.
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". The following discussion provides information regarding the three
segments.
Retail Segment
The Retail Segment operates 1,417 college, university, and K-12 school
bookstores, comprised of 769 physical bookstores and 648 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 3,300 physical bookstores (including our Retail Segment's 769
physical bookstores) and sources and distributes new and used textbooks to our
648 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.
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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 of Student
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 and Other Factors Affecting Our Business
For a discussion of our trends and other factors affecting our business, see
Part I - Item 1. Business.
Results of Operations
Elements of Results of Operations
Our consolidated financial statements reflect our consolidated financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the 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.
Basis of Consolidation
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.

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Results of Operations - Summary
Our Fiscal 2021 results have been 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. See "Overview" for more information. A
detailed discussion of Fiscal 2019 items and year-over-year comparisons between
Fiscal 2020 and Fiscal 2019 can be found in Part II Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended May 2, 2020 filed with the SEC on
July 14, 2020.
52 weeks ended 53 weeks ended 52 weeks ended
Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019
Sales: (a)
Product sales and other $ 1,299,740 $ 1,671,200 $ 1,838,760
Rental income 134,150 179,863 195,883
Total sales $ 1,433,890 $ 1,851,063 $ 2,034,643

Net loss $ (131,787) $ (38,250) $ (24,374)

Adjusted Earnings (non-GAAP) (b) $ (89,033) $


(21,126) $ 25,412




Adjusted EBITDA (non-GAAP) (b)
Retail $ (66,827) $ 36,227 $ 89,094
Wholesale 18,598 21,567 35,018
DSS 4,491 3,409 6,169
Corporate Services (22,079) (19,403) (24,873)
Eliminations 192 359 (466)
Total Adjusted EBITDA (non-GAAP) $ (65,625) $


42,159 $ 104,942






(a)In Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented and
significant impact as a result of the COVID-19 pandemic. The impact of which
affects the comparability of our results of operations and cash flows.
(b)Adjusted Earnings and Adjusted EBITDA are a 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:



52 weeks ended 53 weeks ended 52 weeks ended
May 1, 2021 May 2, 2020 April 27, 2019
Sales:
Product sales and other 90.6 % 90.3 % 90.4 %
Rental income 9.4 9.7 9.6
Total sales 100.0 100.0 100.0
Cost of sales:
Product and other cost of sales (a) 84.2 78.0 75.9
Rental cost of sales (a) 65.0 58.3 57.0
Total cost of sales 82.4 76.1 74.1
Gross margin 17.6 23.9 25.9
Selling and administrative expenses 23.6 21.9 20.8
Depreciation and amortization expense 3.7 3.3 3.2
Impairment loss (non-cash) 1.9 - 2.8
Restructuring and other charges 0.7 1.0 0.4

Operating loss (12.3) % (2.3) % (1.4) %



(a) Represents the percentage these costs bear to the related sales, instead of
total sales.



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Results of Operations - 52 weeks ended May 1, 2021 compared with the 53 weeks
ended May 2, 2020


52 weeks ended, May 1, 2021 (a)



Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations (b) Total
Sales:
Product sales and other $ 1,196,320 $ 165,825 $ 27,374 $ - $ (89,779) $ 1,299,740
Rental income 134,150 - - - - 134,150
Total sales 1,330,470 165,825 27,374 - (89,779) 1,433,890
Cost of sales:
Product and other cost of sales 1,047,613 131,142 5,056 - (89,822) 1,093,989
Rental cost of sales 87,240 - - - - 87,240
Total cost of sales 1,134,853 131,142 5,056 - (89,822) 1,181,229
Gross profit 195,617 34,683 22,318 - 43 252,661
Selling and administrative
expenses 278,149 16,085 22,116 22,079 (149) 338,280
Depreciation and amortization
expense 39,634 5,461 7,763 109 - 52,967
Sub-Total: $ (122,166) $ 13,137 $ (7,561) $ (22,188) $ 192 (138,586)
Impairment loss (non-cash) 27,630
Restructuring and other charges 9,960
Operating loss $ (176,176)




53 weeks ended, May 2, 2020 (a)



Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations (b) Total
Sales:
Product sales and other $ 1,533,029 $ 198,353 $ 23,661 $ - $ (83,843) 1,671,200
Rental income 179,863 - - - - 179,863
Total sales 1,712,892 198,353 23,661 - (83,843) 1,851,063
Cost of sales:
Product and other cost of sales 1,224,798 158,548 4,348 - (83,992) 1,303,702
Rental cost of sales 104,812 - - - - 104,812
Total cost of sales 1,329,610 158,548 4,348 - (83,992) 1,408,514
Gross profit 383,282 39,805 19,313 - 149 442,549
Selling and administrative
expenses 347,869 18,238 19,172 19,403 (210) 404,472
Depreciation and amortization
expense 47,099 5,963 8,670 128 - 61,860
Sub-Total: $ (11,686) $ 15,604 $ (8,529) $ (19,531) $ 359 (23,783)
Impairment loss (non-cash) 433
Restructuring and other charges 18,567
Operating loss $ (42,783)


(a) In Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented
and significant impact as a result of the COVID-19 pandemic. The impact of which
affects the comparability of our results of operations and cash flows.
(b) For additional information related to the intercompany activities and
eliminations, see Part II - Item 8. Financial Statements and Supplementary Data
- Note 5. Segment Reporting.
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Sales
The following table summarizes our sales:
52 weeks ended 53 weeks ended
Dollars in thousands May 1, 2021 May 2, 2020 %
Product sales and other 1,299,740 1,671,200 (22.2)%
Rental income 134,150 179,863 (25.4)%
Total Sales $ 1,433,890 $ 1,851,063 (22.5)%


Our total sales decreased by $417.2 million, or 22.5%, to $1,433.9 million
during the 52 weeks ended May 1, 2021 from $1,851.1 million during the 53 weeks
ended May 2, 2020. The sales decrease is primarily related to the impact of the
additional week for Fiscal 2020, the impact from temporary store closings
related to COVID-19 earlier in the fiscal year, as well as lower in store foot
traffic, lower enrollments and fewer on-campus events due to COVID-19. The
components of the variances are reflected in the table below.
Sales variances 52 weeks ended
May 1,
Dollars in millions 2021
Retail Sales
New stores $ 64.2
Closed stores (35.4)
Comparable stores (a) (409.2)
Textbook rental deferral (3.3)
Service revenue (b) (0.7)
Other (c) 2.0
Retail Sales subtotal: $ (382.4)
Wholesale Sales $ (32.5)
DSS Sales $ 3.7
Eliminations (d) $ (6.0)
Total sales variance $ (417.2)



(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. Sales for
logo and emblematic general merchandise fulfilled by FLC inventory and digital
agency sales are included on a gross basis.
(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 total sales decreased by $382.4 million, or 22.3%, to $1,330.5 million
during the 52 weeks ended May 1, 2021 from $1,712.9 million during the 53 weeks
ended May 2, 2020. Retail added 98 new stores and closed 100 stores (not
including temporary store closings due to COVID-19) during the 52 weeks ended
May 1, 2021, ending the period with a total of 1,417 stores.
Fiscal 2021 Fiscal 2020
Physical Virtual Physical Virtual
Number of stores at beginning of period 772 647 772 676
Opened 40 58 50 71
Closed 43 57 50 100
Number of stores at end of period 769 648 772 647


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Product and other sales for Retail decreased by $336.7 million, or 22.0%, to
$1,196.3 million during the 52 weeks ended May 1, 2021 from $1,533.0 million
during the 53 weeks ended May 2, 2020. 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, 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.
Effective April 4, 2021, as per the FLC merchandising partnership agreement,
logo and emblematic general merchandise sales were fulfilled by FLC and we
recognized commission revenue earned for these sales on a net basis.
Additionally, 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 decreased by $45.7 million, or 25.4%, to $134.2 million
during the 52 weeks ended May 1, 2021 from $179.9 million during the 53 weeks
ended May 2, 2020. 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 52 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 52 week period is as follows:
Comparable Store Sales variances for Retail (a) 52 weeks ended
Dollars in millions May 1, 2021
Textbooks (Course Materials) $ (158.4) (15.2) %
General Merchandise (235.3) (45.9) %
Trade Books (20.9) (64.3) %
Total Comparable Store Sales $ (414.6) (26.1) %


(a) Comparable sales data exclude the impact of the additional week for Fiscal
2020. 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. Sales for
logo and emblematic general merchandise fulfilled by FLC inventory and digital
agency sales are included on a gross basis. We believe the current comparable
store sales calculation method reflects the manner in which management views
comparable sales, as well as the seasonal nature of our business.
Wholesale
Wholesale sales decreased by $32.5 million, or 16.4%, to $165.8 million during
the 52 weeks ended May 1, 2021 from $198.3 million during the 53 weeks ended May
2, 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.
DSS
DSS total sales increased by $3.7 million, or 15.7%, to $27.4 million during the
52 weeks ended May 1, 2021 from $23.7 million during the 53 weeks ended May 2,
2020
, primarily due to higher bartleby subscription sales, which were partially
offset by lower Student Brands sales.
Cost of Sales and Gross Margin
Our cost of sales increased as a percentage of sales to 82.4% during the 52
weeks ended May 1, 2021 compared to 76.1% during the 53 weeks ended May 2, 2020.
Our gross margin decreased by $189.9 million, or 42.9%, to $252.7 million, or
17.6% of sales, during the 52 weeks ended May 1, 2021 from $442.5 million, or
23.9% of sales, during the 53 weeks ended May 2, 2020.
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During the 52 weeks ended May 1, 2021, we recognized a merchandise inventory
loss and write-off of $15.0 million in cost of goods sold in the Retail Segment
discussed below. Excluding the merchandise inventory loss and write-off, cost of
goods sold and gross margin was 81.3% and 18.7%, respectively, of sales during
the 52 weeks ended May 1, 2021 compared to 76.1% and 23.9%, respectively, of
sales during the 53 weeks ended May 2, 2020. For additional information, see
Part II - Item 8. Financial Statements and Supplementary Data - Note 1.
Organization and Note 2. Summary of Significant Accounting Policies -
Merchandise Inventories.
Retail
The following table summarizes the Retail cost of sales:
52 weeks ended 53 weeks ended
May 1, % of May 2, % of
Dollars in thousands 2021 Related Sales 2020 Related Sales
Product and other cost of sales $ 1,047,612 87.6% $ 1,224,798 79.9%
Rental cost of sales 87,240 65.0% 104,812 58.3%
Total Cost of Sales $ 1,134,852 85.3% $ 1,329,610 77.6%



The following table summarizes the Retail gross margin:



52 weeks ended 53 weeks ended
May 1, % of May 2, % of
Dollars in thousands 2021 Related Sales 2020 Related Sales
Product and other gross margin $ 148,708 12.4% $ 308,231 20.1%
Rental gross margin 46,910 35.0% 75,051 41.7%
Gross Margin $ 195,618 14.7% $ 383,282 22.4%


For the 52 weeks ended May 1, 2021, the Retail gross margin as a percentage of
sales decreased as discussed below:
•Product and other gross margin decreased (770 basis points), driven primarily
by lower margin rates (435 basis points) due to higher markdowns, an unfavorable
sales mix (370 basis points) due to lower high-margin general merchandise sales
of approximately $231.2 million and the shift to lower margin digital
courseware, and a merchandise inventory loss and write-off (100 basis points) of
$15.0 million, comprised of a loss of $10.3 million related to the sale of our
logo and emblematic general merchandise inventory below cost to FLC and an
inventory write-off of $4.7 million related to our initiative to exit certain
product offerings and streamline/rationalize our overall non-logo general
merchandise product assortment resulting from the centralization of our
merchandising decision-making during the year, partially offset by higher
contract costs as a percentage of sales related to our college and university
contracts (130 basis points) resulting from contract renewals and new store
contracts.
•Rental gross margin decreased (670 basis points), driven primarily by higher
contract costs as a percentage of sales related to our college and university
contracts (620 basis points) and unfavorable rental mix (80 basis points),
partially offset by higher rental margin rates (30 basis points).
Wholesale
The cost of sales and gross margin for Wholesale were $131.1 million, or 79.1%
of sales, and $34.7 million, or 20.9% of sales, respectively, during the 52
weeks ended May 1, 2021. The cost of sales and gross margin for Wholesale were
$158.5 million, or 79.9% of sales, and $39.8 million, or 20.1% of sales,
respectively, during the 53 weeks ended May 2, 2020. The gross margin increased
to 20.9% during the 52 weeks ended May 1, 2021 from 20.1% during the 53 weeks
ended May 2, 2020. The increase was primarily due to the favorable impact of
returns and allowances and lower markdowns, partially offset by an unfavorable
sales mix.
DSS
Gross margin for the DSS segment was $22.3 million, or 81.5% of sales, during
the 52 weeks ended May 1, 2021 and $19.3 million, or 81.6% of sales, during the
53 weeks ended May 2, 2020. The increase in gross margin was primarily due to
higher bartleby subscription sales.
Intercompany Eliminations
During the 52 weeks ended May 1, 2021 and 53 weeks ended May 2, 2020, sales
eliminations were $89.8 million and $83.9 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.
39
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Index to Form 10-K Index to FS
During the 52 weeks ended May 1, 2021 and 53 weeks ended May 2, 2020, the cost
of sales eliminations were $89.8 million and $84.0 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.
The $0.1 million of gross margin elimination reflects the net impact of the
sales eliminations and cost of sales eliminations during both the 52 weeks ended
May 1, 2021 and 53 weeks ended May 2, 2020, 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
52 weeks ended 53 weeks ended
May 1, % of May 2, % of
Dollars in thousands 2021 Sales 2020 Sales
Selling and Administrative Expenses $ 338,280 23.6% $ 404,472


21.9%





During the 52 weeks ended May 1, 2021, selling and administrative expenses
decreased by $66.2 million, or 16.4%, to $338.3 million from $404.5 million
during the 53 weeks ended May 2, 2020. The variances by segment are as follows:
Retail
For Retail, selling and administrative expenses decreased by $69.7 million, or
20.0%, to $278.2 million during the 52 weeks ended May 1, 2021 from $347.9
million
during the 53 weeks ended May 2, 2020. This decrease was primarily due
to a $59.3 million decrease in stores payroll and operating expenses, including
comparable stores, primarily due to temporary furloughed store employees, lower
virtual stores and new/closed stores payroll and operating expenses, and a
decrease of $10.4 million in corporate payroll, infrastructure costs, product
development costs and digital operations costs.
Wholesale
For Wholesale, selling and administrative expenses decreased by $2.1 million, or
11.8%, to $16.1 million during the 52 weeks ended May 1, 2021 from $18.2 million
during the 53 weeks ended May 2, 2020. The decrease in selling and
administrative expenses was primarily driven by lower payroll and operating
costs.
DSS
For DSS, selling and administrative expenses increased by $2.9 million to $22.1
million
during the 52 weeks ended May 1, 2021 from $19.2 million during the 53
weeks ended May 2, 2020. The increase in costs was primarily driven by an
increase in payroll costs, higher professional services and advertising costs.
Corporate Services
Corporate Services' selling and administrative expenses increased by $2.7
million
, or 13.8%, to $22.1 million during the 52 weeks ended May 1, 2021 from
$19.4 million during the 53 weeks ended May 2, 2020. The increase was primarily
due to higher compensation-related expenses and higher operating expenses.
Depreciation and Amortization Expense
52 weeks ended 53 weeks ended
May 1, % of May 2, % of
Dollars in thousands 2021 Sales 2020 Sales
Depreciation and Amortization Expense $ 52,967 3.7% $ 61,860 3.3%


Depreciation and amortization expense decreased by $8.9 million, or 14.4%, to
$53.0 million during the 52 weeks ended May 1, 2021 from $61.9 million during
the 53 weeks ended May 2, 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. See impairment loss discuss below.
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. For information, see Part II - Item 8. Financial
Statements and Supplementary Data - Note 2. Summary of Significant Accounting
Policies and Note 7. Fair Value Measurements.
40
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Index to Form 10-K Index to FS
During the 52 weeks ended May 1, 2021, we evaluated certain of our store-level
long-lived assets in the Retail segment for impairment. Based on the results of
the impairment tests, we recognized an impairment loss (non-cash) of $27.6
million
, $20.5 million after-tax, comprised of $5.1 million, $13.3 million, $6.3
million
and $2.9 million of property and equipment, operating lease right-of-use
assets, amortizable intangibles, and other noncurrent assets, respectively.
During the 53 weeks ended May 2, 2020, 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 52 weeks ended May 1, 2021, we recognized restructuring and other
charges totaling $10.0 million, comprised primarily of $5.9 million for
severance and other employee termination and benefit costs associated with
elimination of various positions as part of cost reduction objectives, $5.2
million
for professional service costs related to restructuring, process
improvements, the financial advisor strategic review process, costs related to
development and integration associated with Fanatics and FLC partnership
agreements and shareholder activist activities, and $0.5 million related to
liabilities for a facility closure, partially offset by a $1.6 million in an
actuarial gain related to a frozen retirement benefit plan (non-cash).
During the 53 weeks ended May 2, 2020, we recognized restructuring and other
charges totaling $18.6 million comprised primarily of $12.7 million for
severance and other employee termination and benefit costs associated with
several management changes, the elimination of various positions as part of cost
reduction objectives, and professional service costs for process improvements,
$2.8 million for professional service costs for shareholder activist activities,
$2.7 million in an actuarial loss related to a frozen retirement benefit plan
(non-cash), and $0.6 million for a store level asset impairment charge, offset
by $0.2 million related to reduction of liabilities for a facility closure.
Operating Loss
52 weeks ended 53 weeks ended
May 1, % of May 2, % of
Dollars in thousands 2021 Sales 2020 Sales
Operating Loss $



(176,176) (12.3)% $ (42,783) (2.3)%





Our operating loss was $(176.2) million during the 53 weeks ended May 1, 2021
compared to operating loss of $(42.8) million during the 53 weeks ended May 2,
2020
. This operating loss increase was due to the matters discussed above.
For the 52 weeks ended May 1, 2021, excluding the $15.0 million of merchandise
inventory loss and write-off, $10.0 million of restructuring and other charges
and the $27.6 million impairment loss (non-cash), all discussed above, operating
loss was $(123.6) million (or (8.6)% of sales).
For the 53 weeks ended May 2, 2020, excluding the $18.6 million of restructuring
and other charges and the $0.4 million impairment loss, all discussed above,
operating loss was $(23.8) million (or (1.3)% of sales).
Interest Expense, Net
52 weeks ended 53 weeks ended
Dollars in thousands May 1, 2021 May 2, 2020
Interest Expense, Net $ 8,087 $ 7,445


Net interest expense increased by $0.6 million to $8.1 million during the 52
weeks ended May 1, 2021 from $7.4 million during the 53 weeks ended May 2, 2020
primarily due to higher average borrowings.
Income Tax Benefit
52 weeks ended 53 weeks ended
May 1, May 2,
Dollars in thousands 2021 Effective Rate 2020 Effective Rate
Income Tax Benefit $ (52,476) 28.5% $ (11,978) 23.8%


We recorded an income tax benefit of $(52.5) million on a pre-tax loss of
$(184.3) million during the 52 weeks ended May 1, 2021, which represented an
effective income tax rate of 28.5% and an income tax benefit of $(12.0) million
on a pre-tax loss of $(50.2) million during the 53 weeks ended May 2, 2020,
which represented an effective income tax rate of 23.8%.
The effective tax rate for the 52 weeks ended May 1, 2021 is higher as compared
to the comparable prior year period due to various permanent differences and the
impact of the CARES Act.
41
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Index to Form 10-K Index to FS
Impact of U.S. Tax Reform
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act
reduces the U.S. federal corporate income tax rate from 35% to 21% and requires
companies to pay a one-time transition tax on earnings of certain foreign
subsidiaries that were previously tax deferred, among other provisions. In
accordance with SAB 118, "Income Tax Accounting Implications of the Tax Cuts and
Jobs Act" (SAB 118), we completed our accounting for the tax effects of the
enactment of the Act within the provisional period as of April 27, 2019. We
recorded measurement period adjustments during Fiscal 2019 to reduce our net
deferred tax liability by $3.9 million, which primarily relates to the
acceleration of certain deductions as permitted by the U.S. tax code. The most
significant impact of the legislation for the Company was a $20.4 million
reduction of the value of our net deferred (which represents future tax
liabilities) and long-term tax liabilities as a result of lowering the U.S.
corporate income tax rate from 35% to 21%, which was recorded in Fiscal 2018. We
also recorded a liability associated with the one-time transition tax. This
amount is not material.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (The
"CARES Act") was enacted. We have analyzed the provisions, which provide for a
technical correction to allow for full expensing of qualified leasehold
improvements, modifications to charitable contribution and net operating loss
limitations ("NOLs"), modifications to the deductibility of business interest
expense, as well as Alternative Minimum Tax ("AMT") credit acceleration. The
most significant impact of the legislation for the Company was an income tax
benefit of $7.2 million for the carryback of NOLs to higher tax rate years,
recorded in Fiscal 2021. As of May 1, 2021, we recognized a current income tax
receivable for NOL carrybacks of $30.5 million in prepaid and other current
assets on the consolidated balance sheet.
Net Loss
52 weeks ended 53 weeks ended
Dollars in thousands May 1, 2021 May 2, 2020
Net Loss $ (131,787) $ (38,250)


As a result of the factors discussed above, we reported a net loss of $(131.8)
million
during the 52 weeks ended May 1, 2021, compared with a net loss of
$(38.3) million during the 53 weeks ended May 2, 2020. Adjusted Earnings
(non-GAAP) is $(89.0) million during the 52 weeks ended May 1, 2021, compared
with $(21.1) million during the 53 weeks ended May 2, 2020. See Adjusted
Earnings (non-GAAP) discussion below.
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 under
Securities 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
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 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.
42
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Index to Form 10-K Index to FS
Adjusted Earnings (non-GAAP)
52 weeks ended 53 weeks ended 52 weeks ended
Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019
Net loss (a) $


(131,787) $ (38,250) $ (24,374)
Reconciling items, after-tax (below)


42,754 17,124 49,786
Adjusted Earnings (non-GAAP) $


(89,033) $ (21,126) $ 25,412




Reconciling items, pre-tax
Impairment loss (non-cash) (b) $ 27,630 $ 433 $ 57,748
Merchandise inventory loss and write-off (c) 14,960 - -
Content amortization (non-cash) (d) 5,034 4,082 1,096
Restructuring and other charges (e) 9,960 18,567 7,233
Transaction costs (f) - - 654
Reconciling items, pre-tax 57,584 23,082 66,731
Less: Pro forma income tax impact (g) 14,830 5,958 16,945
Reconciling items, after-tax $


42,754 $ 17,124 $ 49,786





Adjusted EBITDA (non-GAAP)
52 weeks ended 53 weeks ended 52 weeks ended
Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019
Net loss (a) $ (131,787) $ (38,250) $ (24,374)
Add:
Depreciation and amortization expense 52,967 61,860 65,865
Interest expense, net 8,087 7,445 9,780
Income tax benefit (52,476) (11,978) (13,060)
Impairment loss (non-cash) (b) 27,630 433 57,748
Merchandise inventory loss and write-off (c) 14,960 - -
Content amortization (non-cash) (d) 5,034 4,082 1,096
Restructuring and other charges (e) 9,960 18,567 7,233
Transaction costs (f) - - 654
Adjusted EBITDA (non-GAAP) $ (65,625) $ 42,159 $ 104,942


(a) In Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented
and significant impact as a result of the COVID-19 pandemic. The impact of which
affects the comparability of our results of operations and cash flows.
(b) See Management Discussion and Analysis - Results of Operations - Impairment
Loss discussion above.
(c) See Management Discussion and Analysis - Results of Operations - Cost of
Sales and Margin discussion above.
(d) Earnings are adjusted for amortization expense (non-cash) related to
content development costs which are included in cost of goods sold.
(e) See Management Discussion and Analysis - Restructuring and Other Charges
discussion above.
(f) Transaction costs are costs incurred for business development and
acquisitions.
(g) Represents the income tax effects of the non-GAAP items.

The following is Adjusted EBITDA by segment for Fiscal 2021, Fiscal 2020, and
Fiscal 2019.
Adjusted EBITDA - by Segment


52 weeks ended May 1, 2021 (a)



Corporate Total
Dollars in thousands Retail Wholesale DSS Services Eliminations Fiscal 2021
Sales $ 1,330,470 $ 165,825 $ 27,374 $ - $ (89,779) $ 1,433,890
Cost of sales (b) (1,119,148) (131,142) (767) - 89,822 (1,161,235)
Gross profit 211,322 34,683 26,607 - 43 272,655
Selling and administrative
expenses 278,149 16,085 22,116 22,079 (149) 338,280
Adjusted EBITDA (non-GAAP) $ (66,827) $ 18,598 $ 4,491 $ (22,079) $ 192 $ (65,625)


43



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Index to Form 10-K Index to FS
Adjusted EBITDA - by Segment


53 weeks ended May 2, 2020 (a)



Corporate Total
Dollars in thousands Retail Wholesale DSS Services Eliminations Fiscal 2020
Sales $ 1,712,892 $ 198,353 $ 23,661 $ - $ (83,843) $ 1,851,063
Cost of sales (c) (1,328,100%) (158,548) (1,080) - 83,992 (1,404,432)
Gross profit 384,096 39,805 22,581 - 149 446,631
Selling and administrative
expenses 347,869 18,238 19,172 19,403 (210) 404,472
Adjusted EBITDA (non-GAAP) $ 36,227 $ 21,567 $ 3,409 $ (19,403) $ 359 $ 42,159


Adjusted EBITDA - by Segment



52 weeks ended April 27, 2019



Corporate Total
Dollars in thousands Retail Wholesale DSS Services Eliminations Fiscal 2019
Sales $ 1,889,008 $ 223,374 $ 21,339 $ - $ (99,078) $ 2,034,643
Cost of sales (d) (1,436,684) (167,033) (666) - 98,562 (1,505,821)
Gross profit 452,324 56,341 20,673 - (516) 528,822
Selling and administrative
expenses 363,230 21,323 14,504 24,873 (50) 423,880


Adjusted EBITDA (non-GAAP) $ 89,094 $ 35,018 $ 6,169 $ (24,873) $ (466) $ 104,942





(a) In Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented
and significant impact as a result of the COVID-19 pandemic. The impact of which
affects the comparability of our results of operations and cash flows.
(b) For the 52 weeks ended May 1, 2021, gross margin excludes $0.7 million and
$4.3 million of amortization expense (non-cash) related to content development
costs in the Retail Segment and DSS Segment, respectively. For the 52 weeks
ended May 1, 2021, gross margin also excludes a merchandise inventory loss and
write-off of $15.0 million in the Retail Segment. See Management Discussion and
Analysis - Results of Operations - Cost of Sales and Margin discussion above.
(c) For the 53 weeks ended May 2, 2020, gross margin excludes $0.8 million and
$3.7 million of amortization expense (non-cash) related to content development
costs in the Retail Segment and DSS Segment, respectively.
(d) For the 52 weeks ended April 27, 2019, gross margin excludes $0.5 million
and $0.6 million of amortization expense (non-cash) related to content
development costs in the Retail Segment and DSS Segment, respectively.
Free Cash Flow (non-GAAP)
52 weeks ended 53 weeks ended 52 weeks ended
Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019
Adjusted EBITDA (non-GAAP) $ (65,625) $ 42,159 $ 104,942
Less:
Capital expenditures (a) 37,223 36,192 46,420
Cash interest 6,778 6,100% 8,589
Cash taxes 6,008 (4,141) 10,277
Free Cash Flow (non-GAAP) $ (115,634) $ 3,312 $ 39,656


(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
52 weeks ended 53 weeks ended 52 weeks ended
Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019
Physical store capital expenditures $ 10,382 $ 13,926 $ 19,362
Product and system development 11,747 15,710 13,581
Content development costs 8,741 4,335 11,509
Other 6,353 2,221 1,968
Total Capital Expenditures $ 37,223 $ 36,192 $ 46,420


44



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Index to Form 10-K Index to FS
Liquidity and Capital Resources
Our primary sources of cash are net cash flows from operating activities, funds
available under a credit agreement and short-term vendor financing. As of May 1,
2021
, we had $177.6 million of borrowings outstanding under the Credit
Agreement. See Financing Arrangements discussion below.
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.
COVID-19 Business Impact
Our Fiscal 2021 results have been significantly impacted by the ongoing COVID-19
pandemic, as many schools adjusted their learning model and on-campus activities
in response to the pandemic. Fewer students returned to campus, as many schools
implemented a remote learning model and curtailed on-campus classes and
activities. 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 general merchandise business. Additionally, sales
were impacted by overall enrollment declines in higher education. See Part II -
Item 8. Financial Statements and Supplementary Data - Note 2. Summary of
Significant Accounting Policies - Other Long-Lived Assets related to the
impairment loss (non-cash) recognized during Fiscal 2021.
To mitigate the impact of the business disruption, we have taken steps to
significantly reduce costs, including periodically furloughing the majority of
our Retail workforce during non-rush seasonal sales periods. 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 occurred in Fiscal
2021. We have achieved meaningful annualized cost savings from this program.
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 COVID-19 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, 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.
Sale of Treasury Shares and Merchandise Inventory
In December 2020, we entered into a new merchandising partnership with Fanatics
and FLC which included a strategic equity investment in the Company. Fanatics,
Inc.
and Lids Holdings, Inc. jointly purchased an aggregate 2,307,692 of our
common shares (issued from treasury shares) for $15.0 million, representing a
share price of $6.50 per share. The premium price paid above the fair market
value of our common stock at closing was approximately $4.1 million and was
recognized as a contract liability ($0.2 million in accrued liabilities and $3.9
million
in other long-term liabilities on our consolidated balance sheet) which
is expected to be earned over the term of the merchandising contracts for
Fanatics and FLC.
On April 4, 2021, as contemplated by the merchandising partnership agreement, we
closed on the sale of our logo and emblematic general merchandise inventory to
FLC and received proceeds of $41.8 million, and recognized a merchandise
inventory loss on the sale of $10.3 million in cost of goods sold during the 52
weeks ended May 1, 2021 in the statement of operations for the Retail Segment.
The final inventory purchase price will be determined during the first quarter
of Fiscal 2022.
For additional information regarding the merchandising partnership, see Part II
- Item 8. Financial Statements and Supplementary Data - Note 1. Organization -
Partnership with Fanatics and FLC, Note 2. Summary of Significant Accounting
Policies - Merchandise Inventories, and Note 6. Equity and Earnings Per Share -
Sale of Treasury Shares.
45
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Index to Form 10-K Index to FS
Sources and Uses of Cash Flow
Our Fiscal 2021 results have been 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. See "Overview" for more information. A
detailed year-over-year comparisons between Fiscal 2020 and Fiscal 2019 can be
found in Part II Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity in our Annual Report on Form
10-K for the year ended May 2, 2020 filed with the SEC on July 14, 2020.
Dollars in thousands Fiscal 2021 Fiscal 2020 Fiscal 2019
Cash, cash equivalents, and restricted cash at
beginning of period $ 9,008 $ 14,768 $ 16,869
Net cash flows provided by (used in) operating
activities 32,882 (8,676) 121,791
Net cash flows used in investing activities (36,875) (37,019) (55,620)
Net cash flows provided by (used in) financing
activities 11,799 39,935 (68,272)


Cash, cash equivalents, and restricted cash at end of
period


$ 16,814


$ 9,008 $ 14,768





Cash Flow from Operating Activities
Our business is highly seasonal. For our retail operations, cash flows from
operating activities are typically a source of cash in the second and third
fiscal quarters, when students generally purchase and rent textbooks and other
course materials for the upcoming semesters based on the typical academic
semester. For our wholesale operations, cash flows from operating activities are
typically a source of cash in the second and fourth fiscal quarters, as payments
are received from the summer and winter selling season when textbooks and other
course materials are sold for retail distribution. For both retail and
wholesale, cash flows from operating activities are typically a use of cash in
the fourth fiscal quarter, when sales volumes are materially lower than the
other quarters. For our DSS segment, cash flows are not seasonal as cash flows
from operating activities are typically consistent throughout the year. Our
quarterly cash flows 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.
Cash flows provided by operating activities during Fiscal 2021 were $32.9
million
compared to cash flow used in operating activities of $(8.7) million
during Fiscal 2020. This increase in cash provided by operating activities of
$41.6 million was primarily due to proceeds from the sale of logo merchandise
inventory to FLC of $41.8 million, partially offset by lower net income, an
increase in other long-term liabilities due to sale of treasury shares at a
premium (discussed above), and changes in working capital. As discussed above,
our operations were highly impacted by the COVID-19 pandemic in Fiscal 2021.
Cash Flow from Investing Activities
Cash flows used in investing activities during Fiscal 2021 were $(36.9) million
compared to $(37.0) million during Fiscal 2020. Cash used in investing
activities is primarily for capital expenditures and contractual capital
investments associated with content development, digital initiatives,
enhancements to internal systems and websites, renewing existing contracts and
new store construction and lower payments to acquire businesses and the change
in other noncurrent assets for contractual obligations. Capital expenditures
totaled $37.2 million and $36.2 million during Fiscal 2021 and Fiscal 2020,
respectively.
Cash Flow from Financing Activities
Cash flows provided by financing activities during Fiscal 2021 were $11.8
million
compared to $39.9 million during Fiscal 2020. This net change of $28.1
million
is primarily due to higher net borrowings under the credit agreement and
the sale of treasury shares of $10.9 million (discussed above), partially offset
by the payment of deferred financing costs of $1.1 million.
Financing Arrangements
We have a credit agreement (the "Credit Agreement"), amended March 31, 2021 and
March 1, 2019, under which the lenders committed to provide us with a five-year
asset-backed revolving credit facility in an aggregate committed principal
amount of $400 million (the "Credit Facility"). We have the option to request an
increase in commitments under the Credit Facility of up to $100 million, subject
to certain restrictions. Proceeds from the Credit Facility are used for general
corporate purposes, including seasonal working capital needs. The agreement
includes an incremental first in, last out seasonal loan facility (the "FILO
Facility") for a $100 million incremental facility maintaining the maximum
availability under the Credit Agreement at $500 million. On March 31, 2021, we
were granted a waiver to the availability test condition to the current draw
under the FILO Facility.
During the 52 weeks ended May 1, 2021, we borrowed $719.7 million and repaid
$722.6 million under the Credit Agreement, with $177.6 million of outstanding
borrowings as of May 1, 2021. During the 53 weeks ended May 2, 2020, we
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borrowed $600.9 million and repaid $559.7 million under the Credit Agreement,
with $174.7 million of outstanding borrowings as of May 2, 2020. During 52 weeks
ended April 27, 2019, we borrowed $521.2 million and repaid $584.1 million under
the Credit Agreement, and had outstanding borrowings of $33.5 million and $100.0
million
under the Credit Facility and FILO Facility, respectively, as of April
27, 2019
. As of both May 1, 2021 and May 2, 2020, we have issued $4.8 million in
letters of credit under the Credit Facility.
During the 52 weeks ended May 1, 2021, we incurred debt issuance costs totaling
$1.1 million related to the March 31, 2021 Credit Facility amendment. The debt
issuance costs have been deferred and are presented as prepaid and other current
assets and other noncurrent assets in the consolidated balance sheets, and
subsequently amortized ratably over the term of the credit agreement.
The Credit Facility is secured by substantially all of the inventory, accounts
receivable and related assets of the borrowers under the Credit Facility. This
is considered an all asset lien (inclusive of proceeds from tax refunds payable
to the Company and a pledge of equity from subsidiaries, exclusive of real
estate).
Interest under the Credit Facility accrues, at our election, at a LIBOR or
alternate base rate, plus, in each case, an applicable interest rate margin,
which is determined by reference to the level of excess availability under the
Credit Facility. Loans will initially bear interest at LIBOR plus 2.00% per
annum, in the case of LIBOR borrowings, or at the alternate base rate plus 1.00%
per annum, in the alternative, and thereafter the interest rate will fluctuate
between LIBOR plus 2.00% per annum and LIBOR plus 1.50% per annum (or between
the alternate base rate plus 1.000% per annum and the alternate base rate plus
0.50% per annum), based upon the excess availability under the Credit Facility
at such time.
Loans under the FILO Facility will bear interest at a rate equal to the LIBOR
rate, plus 3.750%. In connection with the waiver, the applicable margin for
credit extensions made under the FILO Facility after March 31, 2021 through the
end of 2021 was increased by 0.50% (to 3.75% per annum for LIBO rate loans and
2.75% for base rate loans). The FILO Facility will be available solely during
the draw period each year, from April 1 through July 31. We are required to
borrow 100% of the aggregate commitments under the FILO Facility on April 1 of
each year, and the loans must be repaid in full (including interest and fees) on
July 31 of each year. The commitments under the FILO Facility will decrease from
$50.0 million to $25.0 million on August 1, 2021. We will pay a commitment fee
of 0.375% on the daily unused portion of the FILO Facility.
The Credit Facility contains customary negative covenants, which limit the
Company's ability to incur additional indebtedness, create liens, make
investments, make restricted payments or specified payments and merge or acquire
assets, among other things. In addition, if excess availability under the Credit
Facility were to fall below certain specified levels, certain additional
covenants (including fixed charge coverage ratio requirements and a minimum
excess availability of the greater of 10% of the Loan Cap and $25.0 million when
the FILO is funded) would be triggered, and the lenders would have the right to
assume dominion and control over the Company's cash. The Credit Facility
includes an anti-cash hoarding provision, which limits maximum excess cash
allowed to $50.0 million when the FILO is funded.
The Credit Facility contains customary events of default, including payment
defaults, material breaches of representations and warranties, covenant
defaults, default on other material indebtedness, customary ERISA events of
default, bankruptcy and insolvency, material judgments, invalidity of liens on
collateral, change of control or cessation of business. The Credit Facility also
contains customary affirmative covenants and representations and warranties. We
are in compliance with all covenants, representations and warranties under the
Credit Facility as of May 1, 2021.
Income Tax Implications on Liquidity
As of May 1, 2021, other long-term liabilities includes $25.3 million related to
the long-term tax payable associated with the LIFO reserve. The LIFO reserve is
impacted by changes in the consumer price index ("CPI") and is dependent on the
inventory levels at the end of our tax year (on or about January 31st) which is
in the middle of our second largest selling cycle. At the end of the most recent
tax year, inventory levels declined as compared to the prior year resulting in
approximately $0.7 million of the LIFO reserve becoming currently payable. Given
recent trends relating to the pricing and rental of textbooks, management
believes that an additional portion of the remaining long-term tax payable
associated with the LIFO reserve could be payable within the next twelve months.
We are unable to predict future trends for CPI and inventory levels, therefore
it is difficult to project with reasonable certainty how much of this liability
will become payable within the next twelve months.
Share Repurchases
On December 14, 2015, our Board of Directors authorized a stock repurchase
program of up to $50 million, in the aggregate, of our outstanding common stock.
The stock repurchase program is carried out at the direction of management
(which may include a plan under Rule 10b5-1 of the Securities Exchange Act of
1934). The stock repurchase program may be suspended, terminated, or modified at
any time. Any repurchased shares will be held as treasury stock and will be
available for general corporate purposes. During Fiscal 2021, Fiscal 2020, and
Fiscal 2019, we did not purchase shares under the stock repurchase program. As
of May 1, 2021, approximately $26.7 million remains available under the stock
repurchase program.
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During Fiscal 2021, Fiscal 2020, and Fiscal 2019, we also repurchased 414,174
shares, 374,733 shares, and 351,043 shares of our common stock, respectively, in
connection with employee tax withholding obligations for vested stock awards.
Contractual Obligations
The following table sets forth our contractual obligations as of May 1, 2021 (in
millions):
Payments Due by Period
Less Than 1-3 3-5 More Than
Total 1 Year Years Years 5 Years
Credit Facility (a) $ 127.6 $ 127.6 $ - $ - $ -
FILO Facility (a) 75.0 50.0 25.0 - -
Lease obligations (excluding imputed
interest) (b) 320.8 99.7 89.1 61.8 70.2
Purchase obligations (c) 26.3 14.8 11.0 0.5 -
Other long-term liabilities reflected
on the balance sheet under GAAP (d)
(e) - - - - -
Total $ 549.7 $ 292.1 $ 125.1 $ 62.3 $ 70.2



(a)As of May 1, 2021, we had a total of $177.6 million of outstanding borrowings
under the Credit Facility and FILO Facility. See Financing Arrangements
discussion above for information about future borrowings and payments under the
FILO Credit Facility.
(b)Our contracts for physical bookstores with colleges and universities are
typically five years with renewal options, but can range from one to 15 years,
and are typically cancelable by either party without penalty with 90 to 120
days' notice. Annual projections are based on current minimum guarantee amounts.
In approximately 50% of our contracts with colleges and universities that
include minimum guarantees, the minimum guaranteed amounts adjust annually to
equal less than the prior year's commission earned. Excludes obligations under
store leases for property insurance and real estate taxes, which totaled
approximately 2.7% of the minimum rent payments under those leases.
(c)Includes information technology contracts.
(d)Other long-term liabilities excludes $25.3 million of tax liabilities related
to the long-term tax payable associated with the LIFO reserve for which we
cannot make a reasonably reliable estimate of the amount and period of payment.
See Income Tax Implications on Liquidity discussed above.
(e) Other long-term liabilities excludes expected payments related to employee
benefit plans. See Part II - Item 8. Financial Statements and Supplementary
Data - Note 12. Employee Benefit Plans.
Certain Relationships and Related Party Transactions
See Part II - Item 8. Financial Statements and Supplementary Data - Note 11.
Related Party Transactions.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in accordance with GAAP, we
are required to use judgment in making estimates and assumptions that affect the
amounts reported in our consolidated financial statements and related notes. In
preparing these financial statements, management has made its best estimates and
judgments with respect to certain amounts included in the financial statements,
giving due consideration to materiality. We do not believe there is a great
likelihood that materially different amounts would be reported related to the
accounting policies described below. However, application of these accounting
policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
Revenue Recognition and Deferred Revenue
Product sales and rentals
The majority of our revenue is derived from the sale of products through our
bookstore locations, including virtual bookstores, and our bookstore affiliated
e-commerce websites, and contains a single performance obligation. Revenue from
sales of our products is recognized at the point in time when control of the
products is transferred to our customers in an amount that reflects the
consideration we expect to be entitled to in exchange for the products. For
additional information, see Part II - Item 8. Financial Statements and
Supplementary Data - Note 4. Revenue.
Retail product revenue is recognized when the customer takes physical possession
of our products, which occurs either at the point of sale for products purchased
at physical locations or upon receipt of our products by our customers for
products ordered through our websites and virtual bookstores. Wholesale product
revenue is recognized upon shipment of physical textbooks at which point title
passes and risk of loss is transferred to the customer. Additional revenue is
recognized for shipping charges billed to customers and shipping costs are
accounted for as fulfillment costs within cost of goods sold.
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Revenue from the rental of physical textbooks, which contains a single
performance obligation, is deferred and recognized over the rental period based
on the passage of time commencing at the point of sale, when control of the
product transfers to the customer. Rental periods are typically for a single
semester and are always less than one year in duration. We offer a buyout option
to allow the purchase of a rented physical textbook at the end of the rental
period if the customer desires to do so. We record the buyout purchase when the
customer exercises and pays the buyout option price which is determined at the
time of the buyout. In these instances, we accelerate any remaining deferred
rental revenue at the point of sale.
Revenue from the rental of digital textbooks, which contains a single
performance obligation, is recognized at the point of sale. A software feature
is embedded within the content of our digital textbooks, such that upon
expiration of the rental term the customer is no longer able to access the
content. While the digital rental allows the customer to access digital content
for a fixed period of time, once the digital content is delivered to the
customer, our performance obligation is complete.
We estimate returns based on an analysis of historical experience. A provision
for anticipated merchandise returns is provided through a reduction of sales and
cost of goods sold in the period that the related sales are recorded.
For sales and rentals involving third-party products, we evaluate whether we are
acting as a principal or an agent. Our determination is based on our evaluation
of whether we control the specified goods or services prior to transferring them
to the customer. There are significant judgments involved in determining whether
we control the specified goods or services prior to transferring them to the
customer including whether we have the ability to direct the use of the good or
service and obtain substantially all of the remaining benefits from the good or
service. For those transactions where we are the principal, we record revenue on
a gross basis, and for those transactions where we are an agent to a
third-party, we record revenue on a net basis.
We do not have gift card or customer loyalty programs. We do not treat any
promotional offers as expenses. Sales tax collected from our customers is
excluded from reported revenues. Our payment terms are generally 30 days and do
not extend beyond one year.
Service and other revenue
Service and other revenue is primarily derived from DSS segment
subscription-based service revenues and partnership marketing services which
includes promotional activities and advertisements within our physical
bookstores and web properties performed on behalf of third-party customers.
Subscription-based revenue, which contains a single performance obligation, is
deferred and recognized based on the passage of time over the subscription
period commencing at the point of sale, when control of the service transfers to
the customer. The majority of subscriptions sold are one month in duration.
Partnership marketing agreements often include multiple performance obligations
which are individually negotiated with our customers. For these arrangements
that contain distinct performance obligations, we allocate the transaction price
based on the relative standalone selling price method by comparing the
standalone selling price ("SSP") of each distinct performance obligation to the
total value of the contract. The revenue is recognized as each performance
obligation is satisfied, typically at a point in time for partnership marketing
service and overtime for advertising efforts as measured based upon the passage
of time for contracts that are based on a stated period of time or the number of
impressions delivered for contracts with a fixed number of impressions.
Merchandise Inventories
Merchandise inventories, which consist of finished goods, are stated at the
lower of cost or market. Market value of our inventory, which is all purchased
finished goods, is determined based on its estimated net realizable value, which
is generally the selling price less normally predictable costs of disposal and
transportation.
Cost is determined primarily by the retail inventory method for our Retail
Segment and last-in first out, or "LIFO", method for our Wholesale Segment. Our
textbook inventories, for Retail and Wholesale, and trade book inventories are
valued using the LIFO method and the related reserve was not material to the
recorded amount of our inventories. There were no LIFO adjustments in Fiscal
2021, Fiscal 2020, and Fiscal 2019.
Reserves for non-returnable inventory are based on our history of liquidating
non-returnable inventory. Reserve calculations are sensitive to certain
significant assumptions, including markdowns, sales below cost, inventory aging
and expected demand. We do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or assumptions used to
calculate the non-returnable inventory reserve. However, if assumptions based on
our history of liquidating non-returnable inventory are incorrect, we may be
exposed to losses or gains that could be material. A 10% change in actual
non-returnable inventory would have affected pre-tax earnings by approximately
$6.0 million in Fiscal 2021.
For our physical bookstores, we also estimate and accrue shortage for the period
between the last physical count of inventory and the balance sheet date.
Shortage rates are estimated and accrued based on historical rates and can be
affected by changes in merchandise mix and changes in actual shortage trends. We
do not believe there is a reasonable likelihood that there will be a material
change in the future estimates or assumptions used to calculate shortage rates.
However, if our estimates
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regarding shortage rates are incorrect, we may be exposed to losses or gains
that could be material. A 10 basis point change in actual shortage rates would
have affected pre-tax earnings by approximately $0.2 million in Fiscal 2021.
Textbook Rental Inventories
Physical textbooks out on rent are categorized as textbook rental inventories.
At the time a rental transaction is consummated, the book is removed from
merchandise inventories and moved to textbook rental inventories at cost. The
cost of the book is amortized down to its estimated residual value over the
rental period. The related amortization expense is included in cost of goods
sold. At the end of the rental period, upon return, the book is removed from
textbook rental inventories and recorded in merchandise inventories at its
amortized cost. We do not believe there is a reasonable likelihood that there
will be a material change in the future estimates or assumptions used to
calculate rental cost of goods sold. However, if our estimates regarding
residual value are incorrect, we may be exposed to losses or gains that could be
material. A 1% change in rental cost of goods sold would have affected pre-tax
earnings by approximately $0.4 million in Fiscal 2021.
Long-Term Incentive Compensation
The assumptions used in calculating the fair value of long-term incentive
compensation payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management's
judgment. See Part II - Item 8. Financial Statements and Supplementary Data -
Note 13. Long-Term Incentive Compensation Expense for a further discussion of
our stock-based incentive plan.
We are required to estimate the expected forfeiture rate, and only recognize
expense for those shares expected to vest. If their actual forfeiture rate is
materially different from their estimate, our long-term incentive compensation
expense could be significantly different from what we recorded in the current
period. For stock options granted with an "at market" exercise price, we
determined the grant fair value using the Black-Scholes model and for stock
options granted with "a premium" exercise price, we determined the grant date
fair value using the Monte Carlo simulation model. The fair value models for
stock options use assumptions that include the risk-free interest rate, expected
volatility, expected dividend yield and expected term of the options.
Phantom shares will be settled in cash based on the fair market value of a share
of common stock at each vesting date in an amount not to exceed a specific price
per share. The fair value of the phantom shares was determined using the closing
stock price on the date of the award less the fair value of the call option
which was estimated using the Black-Scholes model. The fair value of the
liability for the cash-settled phantom share unit awards will be remeasured at
the end of each reporting period through settlement to reflect current risk-free
rate and volatility assumptions.
We do not believe there is a reasonable likelihood that there will be a material
change in the future estimates or assumptions used to determine long-term
incentive compensation expense. If actual results are not consistent with the
assumptions used, the long-term incentive compensation expense reported in our
financial statements may not be representative of the actual economic cost of
the long-term incentive compensation. A 10% change in our long-term incentive
compensation expense would have affected pre-tax earnings by approximately $0.9
million
in Fiscal 2021.
Evaluation of Other Long-Lived Assets Impairment
As of May 1, 2021, our other long-lived assets include property and equipment,
operating lease right-of-use assets, amortizable intangibles, and other
noncurrent assets of $89.2 million, $240.5 million, $150.9 million, and $29.1
million
, respectively, on our consolidated balance sheet.
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 and consider market participants in accordance with Accounting
Standards Codification ("ASC") 360-10, Accounting for the Impairment or Disposal
of Long-Lived Assets. We evaluate the long-lived assets of the reporting units
for impairment at the lowest asset group level for which individual cash flows
can be identified. When evaluating long-lived assets for potential impairment,
we first compared the carrying amount of the asset group to the estimated future
undiscounted cash flows. The impairment loss calculation compares the carrying
amount of the assets to the fair value based on estimated discounted future cash
flows. If required, an impairment loss is recorded for that portion of the
asset's carrying value in excess of fair value.
Fiscal 2021 results have been significantly impacted by the ongoing COVID-19
pandemic, as many schools adjusted their learning models and on-campus
activities. Many of the trends observed during the Fall semester continued into
the Spring semester, as fewer students have returned to campus for the Spring
semester, many colleges and universities continued with remote learning models
and on-campus classes and activities have been further curtailed, including many
athletic conferences that have been either eliminated or severely restricted.
These combined events impacted the Company's course materials and general
merchandise business. During the third quarter of Fiscal 2021, we evaluated
certain of our store-level long-lived assets in the Retail segment for
impairment. Based on the results of the impairment tests, we recognized an
impairment loss (non-cash) of $27.6 million, $20.5 million after-tax, comprised
of $5.1 million, $13.3 million, $6.3 million and $2.9 million of property and
equipment, operating lease right-of-use assets, amortizable intangibles, and
other noncurrent assets, respectively,
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on the consolidated statement of operations. The fair value of the impaired
long-lived assets were determined using an income approach (Level 3 input),
using the Company's best estimates of the amount and timing of future discounted
cash flows, based on historical experience, market conditions, current trends
and performance expectations. For additional information, see Part II - Item 8.
Financial Statements and Supplementary Data - Note 7. Fair Value Measurements.
In the first quarter of Fiscal 2020, we recorded 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. During the fourth quarter of
Fiscal 2020, in conjunction with COVID-19 related campus store closures, we
evaluated certain of our long-lived assets associated with our Retail and
Wholesale segments for impairment. Based on the results of the tests, for the
Retail segment, we recognized an impairment loss of $0.6 million related to
store-level assets in restructuring and other charges. These long-lived assets
were not recoverable and had a de minimis fair value, as determined using an
income approach (Level 3 input), resulting in a non-cash impairment charge for
the full carrying value of those long-lived assets.
During the fourth quarter of Fiscal 2019, in conjunction with the change to
reporting segments and the interim goodwill impairment test noted below, as well
as operational changes in certain long-lived asset groups, we evaluated certain
of our long-lived assets for impairment and recognized an impairment loss of
$8.4 million, comprised of $8.1 million of intangible assets, primarily acquired
technology, and $0.3 million of property and equipment related to our LoudCloud
and Promoversity operations. These long-lived assets were not recoverable and
had a de minimis fair value, as determined using the relief-from-royalty and
income approaches (Level 3 input), resulting in a non-cash impairment charge for
the full carrying value of those long-lived assets.
The impairment analysis process requires significant estimation to determine
recoverability of each asset group and to determine the fair value of asset
groups that were not recoverable, as well as the fair values of certain
operating right-of-use assets included within the asset groups that were not
recoverable. The significant assumptions used included annual revenue growth
rates, gross margin rates and the estimated relationship of selling and
administrative costs to revenue used to estimate the projected cash-flow
directly related to the future operation of the stores as well as the weighted
average cost of capital used to calculate the fair value. Significant
assumptions used to determine the fair values of certain operating right-of-use
assets included the current market rent and discount rate. These assumptions are
subjective in nature and are affected by expectations about future market or
economic conditions (including the effects of the global pandemic).
We do not believe there is a reasonable likelihood that there will be a material
change in the estimates or assumptions used to calculate long-lived asset
impairment losses. However, if actual results are not consistent with estimates
and assumptions used in estimating future cash flows and asset fair values, we
may be exposed to losses that could be material. A 10% decrease in our estimated
discounted cash flows would not have materially affected the results of our
operations in Fiscal 2021.
Evaluation of Goodwill Impairment
The costs in excess of net assets of businesses acquired are carried as goodwill
in the accompanying consolidated balance sheets. In accordance with ASC 350-10,
Intangibles - Goodwill and Other, we complete our annual goodwill impairment
test as of the first day of the third quarter of each fiscal year, or whenever
events or changes in circumstances indicate that the carrying amount of the
reporting unit exceeds its fair value. As of both May 1, 2021 and May 2, 2020,
we had $0, $0 and $4,700 million of goodwill on our consolidated balance sheets
related to our Retail, Wholesale, and DSS reporting units, respectively.
During the third quarter of both Fiscal 2021 and Fiscal 2020, we completed our
annual goodwill impairment test and concluded that the fair value of the DSS
reporting unit was determined to exceed the carrying value of the reporting
unit; therefore, no goodwill impairment was recognized.
During the third quarter of Fiscal 2019, we completed our annual goodwill
impairment test and concluded that the fair value of the MBS and DSS reporting
units, as they existed at that time, each exceeded their respective carrying
values and no goodwill impairment was recognized. In the fourth quarter of
Fiscal 2019, due to the change in our reporting units identified as a result of
the change in our reportable segments, we recognized a total goodwill impairment
(non-cash impairment loss) of $49.3 million associated with the MBS reporting
unit (as it existed at that date) and allocated $20.5 million of goodwill to the
Retail Segment and $28.7 million of goodwill to the Wholesale Segment.
Application of the goodwill impairment test requires judgment, including: the
identification of reporting units; assignment of assets and liabilities to
reporting units; assignment of goodwill to reporting units; and the
determination of the fair value of each reporting unit. In performing the
valuation, we used cash flows that reflected management's forecasts and discount
rates that included risk adjustments consistent with the current market
conditions.
We estimated the fair value of our reporting units using a weighting of fair
values derived from the income approach and the market approach for our annual
impairment testing and using the income approach for our interim impairment
test. Under the income approach, we calculate the fair value of the reporting
unit based on the present value of estimated future cash flows. Inherent in our
preparation of cash flow projections are assumptions and estimates derived from
a review of our operating results, business plans, expected growth rates, cost
of capital and tax rates. We also make certain forecasts about future
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economic conditions, interest rates, market data, and other observable trends,
such as comparable store sales trends, recent changes in publisher
relationships, and development of innovative digital products and services in
the rapidly changing education landscape. The discount rate used is based on the
weighted-average cost of capital adjusted for the relevant risk associated with
business-specific characteristics and the uncertainty related to the business's
ability to execute on the projected cash flows. Under the market approach, we
estimate the fair value based on market multiples of cash flows and earnings
derived from comparable publicly-traded companies with similar operating and
investment characteristics as the reporting unit and considering a reasonable
control premium.
Many of the factors used in assessing fair value are outside the control of
management, and these assumptions and estimates may change in future periods.
Changes in assumptions or estimates could materially affect the estimate of the
fair value, and therefore could affect the likelihood and amount of potential
impairment. The following assumptions are significant to our evaluation process:
Business Projections- We make assumptions about the level of revenues, gross
profit, operating expenses, as well as capital expenditures and net working
capital requirements. These assumptions drive our planning assumptions and
represent key inputs for developing our cash flow projections. These projections
are developed using our internal business plans over a five-year planning period
that are updated at least annually;
Long-term Growth Rates- We also utilize an assumed long-term growth rate
representing the expected rate at which our cash flow stream is projected to
grow. These rates are used to calculate the terminal value and are added to the
cash flows projected during our five-year planning period; and
Discount Rates- The estimated future cash flows are then discounted at a rate
that is consistent with a weighted-average cost of capital that is likely to be
expected by market participants. The weighted-average cost of capital is an
estimate of the overall after-tax rate of return required by equity and debt
holders of a business enterprise.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences
between the carrying amounts of assets and liabilities and their tax basis and
are stated at enacted tax rates expected to be in effect when taxes are actually
paid or recovered. FASB guidance on accounting for income taxes requires that
deferred tax assets be evaluated for future realization and reduced by a
valuation allowance to the extent we believe a portion will not be realized. We
consider many factors when assessing the likelihood of future realization of our
deferred tax assets, including our recent earnings experience and expectations
of future taxable income by taxing jurisdiction, the carryforward periods
available to us for tax reporting purposes and other relevant factors. The
actual realization of deferred tax assets may differ significantly from the
amounts we have recorded.
During the ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. Accounting
for income taxes requires a two-step approach to recognizing and measuring
uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if available evidence indicates it is more likely
than not that the tax position will be fully sustained upon review by taxing
authorities, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount with a
greater than 50 percent likelihood of being realized upon ultimate settlement.
For tax positions that are 50 percent or less likely of being sustained upon
audit, we do not recognize any portion of that benefit in the financial
statements. We consider many factors when evaluating and estimating our tax
positions and tax benefits, which may require periodic adjustments and which may
not accurately anticipate actual outcomes. Our actual results could differ
materially from our current estimates.
Recent Accounting Pronouncements
See Item 8. Financial Statements and Supplementary Data - Note 3. Recent
Accounting Pronouncements for information related to new accounting
pronouncements.

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