Barnes & Noble Education, Inc. Q2 FY2023 earnings call

Management Statement and Operational Highlights

• The higher ed industry is evolving rapidly, and Barnes & Noble Education is adapting its offerings. The traditional à la carte course material model declined faster than anticipated, but FDC and general merchandise performed well.
• Implemented cost reduction initiatives to streamline operations and align capital allocation to high-return opportunities. Expect annual run rate savings of $30 million to $35 million, with $10 million to $15 million realized in fiscal 2023.
• Accelerating transition to FDC model with investments in sales, marketing, operational support, and technology. Aim to have the vast majority of institutional partners and their students implement FDC over the next two fiscal years.

Segment Performance

• Retail: Total retail revenue was $598.6 million, down 1.7% year-over-year. Gross comparable course material revenue, including product sales and rental income, was down 4.6%. First Day Complete (FDC) revenue grew 97% to $89.9 million in the second quarter, with 111 campus stores utilizing FDC for the fall term, representing approximately 545,000 undergraduate students. General merchandise sales were up 4.5% on a gross comparable basis, with logo and emblematic strong and supply products soft.
• Wholesale: Revenue declined 2.5% during the quarter while EBITDA increased by $0.4 million. Impacted by supply constraints, lower demand, and transition to digital course materials.
• DSS: Sales grew 2.3% to $8.5 million. Focus on maximizing profitability with more rigorous approach to marketing and content spend, and pricing strategies.

Guidance

• Now expects FY23 adjusted EBITDA of $20 million to $30 million, driven by the retail segment's growth from new FDC implementations, general merchandise growth, and new business wins.

Risks

• Ongoing negative enrollment trends in the higher ed space.
• Unprecedented increases in operating and financing costs.
• Traditional à la carte course material model declined faster than anticipated, with factors like faculty assigning fewer course materials and students not purchasing materials.
• Supply constraints impacting the wholesale segment.

Question and Answer

• Q: Can you talk about how you drive accelerated adoption of First Day Complete, pricing incentivization, and unit economics? A: Mike Huseby mentioned focusing on leading the industry to the FDC model as the best courseware delivery model, with John Schar noting significant scale in FDC implementation and investment in technology for a seamless experience. Unit economics were detailed in prior releases, and the focus is on accelerating adoption to benefit students and institutions.
• Q: How long will it take to realize the long-term cost savings, and how will savings be reinvested? A: Thomas Donohue stated the $10-15 million in FY23 is the remainder of the run rate, with full annualized savings of $30-35 million expected in FY24. Savings will be reinvested, primarily to support the conversion of schools to First Day Complete.