Barnes & Noble Education Inc. (
(Source: Seeking Alpha)
BNED Q2 Earnings Recap
Barnes & Noble Education reported its fiscal 2021 Q2 earnings on December 8th with GAAP EPS of $0.15 representing a net income of $7.5 million. Revenue of $596 million was down -23% year-over-year, but $73 million ahead of the consensus estimate. Efforts to control costs with a focus on efficiency helped support cash flow. Positive adjusted EBITDA of $24.5 million, reversed a loss of -$38.0 million in Q1. Shares rallied on the report.
(Source: Company IR)
Keep in mind that this quarter is traditionally the most important for the company given the seasonality of the business during the back-to-school shopping period. Year to date earnings are still negative and highlight the ongoing challenges. Management explains that with fewer students returning to campus due to the pandemic, this not only limited the sales of textbooks but related college supplies at the retail locations which are a high-margin segment. The gross margin at 19.4%, declined from 24.2% in the period last year.
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The core retail business dragged the results with revenues declining 22.3% y/y total. Within that figure by product category, comparable store textbooks sales declined 19% y/y while general merchandise fared worse, down 52% y/y. Through the first 26 weeks of the fiscal year, total comparable-store sales are down 32% from 2019.
(Source: Company IR)
The reality is that the structural headwinds facing Barnes & Noble Education Inc have been part of the broader “retail apocalypse” theme from the past several years that started before the pandemic. Simply, students and consumers have been utilizing more e-commerce alternatives for general merchandise while seeking other options for course materials. Even in Q2 last year, total comparable-store sales in the retail were down 5.9% y/y. The company has seen negative year-over-year declines in revenue for the past three years.
Momentum in Digital Solutions
The company’s response to the changing business dynamics has been to invest in more digital solutions and online educational services. The Digital Student Solutions “DSS” segment, which includes the ‘Student Brands LLC’ subsidiary, offers subscription-based writing services, textbook solutions systems, and tutoring services through the ‘Bartleby’ brand.
The still relatively small DSS segment posted revenue at $5.9 million for the quarter, up 14% y/y as a strong point for the company. Segment adjusted EBITDA was positive at $1.7 million in Q2, up from $1.0 million last year reflecting the sales growth and lower expenses. Management highlighted the positive trends for DSS including strong subscriber growth for Bartleby. From the conference call:
The demand for bartleby’s homework health solutions has recently exploded. October 2020 was our highest traffic month ever with approximately 4 million unique visitors in the month up 378% versus last year and up almost 80% versus spring peak traffic.
We are focused on scaling this business in a quality manner that will lead to sustainable subscriber growth. Bartleby’s potential to add significant shareholder value to BNED is truly exciting. The rapid emergence and persistence of online and blended learning format only strengthens the need for this digital solution. This past quarter we saw continued demand for our bartleby products from a student’s reserve. Bartleby gross subscribers grew to over 120,000 with revenue increasing 53%.
While management is not offering official earnings guidance, there is an expectation that the COVID impacts should last through the new year given ongoing infections pressuring the upcoming academic spring semester sales environment. Looking ahead, the company intends to roll out a “next-generation e-commerce” platform that will help integrate the business and drive merchandise sales.
The company ended the quarter with $7.4 million in cash and equivalents against $100 million in long-term financial debt. For context, the company was able to generate $14.1 million in positive free cash flow during the last quarter which supports the financial profile. A financial current ratio of 1.2x suggests the overall liquidity position is stable.
According to consensus estimates, BNED is on track to reach $1.44 billion in revenue this year representing a 22% y/y decline. For fiscal 2022, growth is forecast to rebound 23% to $1.8 billion. The thinking here is that the looming COVID-19 vaccine should help to effectively end the pandemic allowing for a more normal school year of on-campus activities by the end of 2021.
(Source: Seeking Alpha)
Analysis and Forward-Looking Commentary
Regardless of how the post-COVID world will look, we are confident that education and higher learning will still be valued, requiring the necessary course materials and textbooks. The challenge is that the business has always been about more than just textbooks considering the contribution of general merchandise sold at the retail stores which represented nearly one-third of total retail sales this past quarter. These items recognized as high margin include dorm room accessories, school logo apparel, and even snack food.
The trends from recent years suggest Barnes & Noble Education has had a hard time competing with e-commerce giants like Amazon.com Corp (AMZN) where students likely find more value for some of the same goods. It’s unclear how much traction the company’s upcoming new e-commerce initiation will receive, and if it’s too-little-too-late.
The setup here is that the stock has already rallied over 230% from its lows earlier this year with the market looking ahead towards 2021 and 2022. With a valuation of just $180 million, or approximately $280 million in enterprise value, shares remain deeply discounted trading at a P/S multiple of just 0.13x based on full-year consensus revenues. The level suggests that while the company may have avoided a worst-case scenario this year, there is still a deep skepticism regarding the long-term outlook.
The other dynamic at play here is the evolving landscape of the textbooks industry and how students buy and share what often becomes a commodity. Over the past decade, several startups leveraging mobile app technology and social media have introduced services for students to trade, share, and rent course materials with other users. Examples include ‘Locolist’, ‘PackBack’, and Chegg Inc (CHGG) which aim to capture some of Barnes & Noble’s market share. Notably, Chegg as a publicly-traded company reported revenue growth of 64% y/y in the last quarter, largely benefiting from the current environment.
The silver lining for Barnes & Noble comes back to its Digital Student Solutions segment and specifically the Bartleby subscription service. With DSS revenues of $24.8 million and a positive adjusted EBITDA of $4.5 million over the past year, a case can be made that DSS alone justifies a large portion of the valuation for BNED. Comments from management saying Bartleby subscribers reached 120,000 with revenues climbing 53% y/y in the last quarter would make for an interesting growth-stock in itself. The question becomes if the positive momentum here is enough to balance the structural weakness of the core retail business.
BNED Q2 results helped turn the corner of a difficult year with an improving outlook even as significant challenges remain. An overall stable balance sheet supports a view that the company will survive the pandemic and still benefits from its market leadership position. The most positive development is the building momentum from its Digital Student Solutions segment including the homework help and study aide subscription service.
We are bullish and see value in what can be a turnaround story in 2021 and rate shares of BNED as a buy with a price target for the year ahead at $5.00. To the upside, the ability to stabilize revenues and generate positive earnings can be a bullish catalyst for the stock.
We sense the market will give BNED some time to deliver the results of its various strategic initiatives which will be key for its long-term outlook. The risk here is that the recovery underwhelms driving renewed bearish sentiment in the stock. Larger financial losses could raise questions regarding the viability of the business model. Tactically, we are buyers of the stock under $3.50 and expect continued volatility given the speculative nature of the stock.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BNED over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.