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Executives

R. Todd Noden - Chief Financial Officer

Terrance G. Finley - Chief Executive Officer, President and President of American Internet Services Inc

Analysts

Harsha Gowda

Brad Hathaway

Books-A-Million (BAMM) Q1 2014 Earnings Call May 28, 2013 5:00 PM ET

Operator

Good afternoon, and welcome to the Books-A-Million quarterly conference call. This call is being recorded today, May 28. At this time, I'd like to turn the conference over to Mr. Todd Noden, Chief Financial Officer of Books-A-Million. Please go ahead, sir.

R. Todd Noden

Thank you. Good afternoon, everyone. With me today is Terry Finley, Chief Executive Officer and President of Books-A-Million Inc. We are pleased to host this conference call regarding the company's first quarter results, which were issued this afternoon.

Before I begin, I would like to remind everyone that management's comments in this conference call, which are not based on historical facts, are forward-looking statements. It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in periodic reports filed with the SEC.

Next, I will begin this afternoon with a discussion of our financial performance for the first quarter, then Terry will provide a discussion of our current business trends.

At quarter end, we were operating 253 total stores. During the quarter, we opened 3 superstores and 1 traditional store. We also closed 7 superstores and 1 traditional store. One closed store was in a trade area in which we no longer operate other locations. As a result, we reported discontinued operations for our first quarter of fiscal 2014 in prior year results. All amounts that I quote today will exclude discontinued operations except comparable store sales.

Net sales for the 13-week period ended May 4, 2013, decreased 7.4% to $104.5 million, compared with sales of $112.8 million in the year earlier period. Comparable store sales for the first quarter decreased 6.8%, compared with first quarter in the prior year. Comparable store sales, excluding eReader devices, decreased 5.8%.

Our gross margin, as a percent of sales after occupancy and warehouse operating expense, was 27.1% compared to 27.2% last year. This decrease is the result of lower occupancy and warehouse operating cost leverage, which was partially offset by higher merchandise margins.

Operating, selling and administrative expenses increased $300,000 during the first quarter compared to Q1 fiscal year 2013. This increase is primarily driven by non-cash adjustments for leasehold impairments and timing of corporate expenses. As a percentage of sales, operating, selling and administrative expenses for the first quarter were 27.9% versus 25.5% last year.

Depreciation and amortization expense increased $142,000 to $4.3 million from $4.1 million. Net interest expense was $464,000 in the quarter versus $438,000 in the prior-year quarter.

For the first quarter, our net loss from continuing operations was $3.7 million or $0.25 per diluted share, compared to a net loss of $1.9 million or $0.13 per diluted share in the first quarter of fiscal year 2013.

Now I'll provide you with some balance sheet highlights for the quarter. Note that the following figures are compared to balances at the end of fiscal year 2013: Inventory balance was $200.4 million versus $201.5 million at year-end; accounts receivable and related party receivables was $3 million compared to $3.4 million; our net property plant and equipment was $65.3 million compared to $65.3 million at year-end; our total debt was $57.9 million compared to $5.7 million at year-end; and our stockholders' equity was $112.3 million compared to $117.4 million at year-end. Year-to-date, our capital expenditures for fiscal year 2014 increased $500,000 to $7.7 million, versus $7.2 million in the prior year.

Now -- I will now turn the call over to Terry Finley for a general business updates.

Terrance G. Finley

Thank you, Todd, and thanks to everyone for participating today. Sales for the first half of the period ran slightly ahead of plan, but as expected, the inevitable headwinds from last year's extraordinary success of both Hunger Games and the Fifty Shades of Grey series, along with the Easter calendar shift, an unremarkable publishing schedule and a relatively quiet media environment contributed to softer traffic and a more difficult sales trend in April.

Departmental sales trends remain very similar to recent periods. Our general merchandise and gift areas continue to deliver nice year-over-year growth. Our café and medias areas compared favorably to last year. And our Book business was essentially on plan.

We continue to see the pace of digital sales growth slow, and as a result, our physical book business continues to grow a bit more stable. Book categories with the strongest performance, included graphic novels driven by the continued interest in the Walking Dead series, based on the hit AMC television series. Diet and Health, where several recently released titles, including Ian Smith's, Shred, fueled comparable sales growth. Biography, driven by the success of the Duck Commander family, the latest media driven property from the A&E television series, Duck Dynasty. And our Kids area, where sales continue to outperform the broader trend for books, with strong results across several categories, including baby books, kids' fiction, kids' education and kids' activity.

In Gibson general merchandise, our general merchandise sales continue to grow nicely in both absolute terms and as a percentage of our overall business. Categories with the most significant growth included; Apparel, where a wide assortment of T-shirts and Hats from licensed media driven pop culture properties, including Duck Commander, Dr. Who and the Big Bang Theory drove strong sales growth; novelty gifts, where those same media-related properties joined with strong nonbranded trend merchandise to drive positive results; toys, led by Lego and a host of strong licensed property like Star Wars, Angry Birds and Minecraft; and Inspirational Gifts, where solid results were delivered across nearly all segments of the category.

Now looking ahead to the second quarter, there's no doubt we're going to continue to face extraordinary headwinds in our core book business as we anniversary the phenomenal success of E L James' Fifty Shades of Grey. The publishing lineup continues to look fairly modest, with the notable exception of the May release of Dan Brown's new thriller, Inferno. Other highlights include new fiction from Khaled Hosseini, Dean Koontz, Glenn Beck and Stephen King, as well as new nonfiction offerings in Joseph Ellis, W.H.(sic) [H.W.] Brands, Chris Kyle and the legendary NBA coach, Phil Jackson. We expect that pop-culture trends that have been so successful the last few quarters will continue to drive sales, and as always, we will remain focused on providing our customers with the value and service they expect, while managing the fundamentals of inventory and expense control.

I will now be happy to answer any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] And we do have a question from Harsha Gowda from Blue Shore Capital.

Harsha Gowda

So a quick question for you, with the Borders stores that were acquired in 2011, have they hit the comp base for this last quarter?

R. Todd Noden

They have.

Harsha Gowda

Okay, so the comp store sales incorporate those new stores?

R. Todd Noden

Yes.

Harsha Gowda

Okay, so I was just wondering, because I would imagine that since those stores were brought out of liquidation, they would have been very easy comps. Was that the case or --

R. Todd Noden

I think these stores -- those stores tracked pretty much in line with the rest of the Superstore group.

Harsha Gowda

Considering -- I bring this question up, I think, every time we have a call, but considering the performance on a comp basis, I've also seen that there's a considerable amount of plans to expand. Why is it that we're pursuing this expansion strategy still, with the fact that comp store sales are declining at such a rate?

Terrance G. Finley

Well, I think, as -- I've been asked these questions and the way we've answered, and we firmly believe this, all of the real estate opportunities are local. And we look at the various geographies and if we see that there's a good need for the property and the product that we offer, then we look at those. We do extensive analysis and we make decisions on entering those markets. So we'll stand by that.

Harsha Gowda

Okay, so the expectation is, these stores will end up being profitable and the sales trend will turn. Is that the expectation, going forward to the rest of this year? Because we did have a profitable year last year, and I'm hoping that will be the case again this year.

R. Todd Noden

Well as you know, Harsha, we don't give forward guidance on what we see for the rest of the year. And again, we look at the profitability of those stores on an individual basis, and we're comfortable with the investments that we've made today.

Harsha Gowda

Okay, great. Then, can you give me an idea of what today's share count is, just to get an idea of how many shares have been repurchased?

R. Todd Noden

To date, we have repurchased about 800,000 shares.

Harsha Gowda

Okay, and the current share count?

R. Todd Noden

I don't have the current share count. It's just below -- it should be just below 15 million shares outstanding.

Harsha Gowda

Okay, great. That's very impressive. And finally --

R. Todd Noden

Harsha, we've repurchased 766,000 shares through the 20th of May.

Harsha Gowda

Okay, great, then we're below 15 million shares. Great. Now a quick question about -- Best Buy is up to, I'm sure you guys have seen, they've had to slash their entertainment offering: Books, video, music. From what I've heard from conference calls and my discussions with them, is that they're going to slash their store space by 50% or more. Considering that, that could be something very attractive for Books-A-Million, have you guys started thinking about how you can implement that?

R. Todd Noden

I'm sorry, Harsha, you broke up during the question. Could you ask that again?

Harsha Gowda

I'm sorry, and so, Best Buy is planning to cut their store space dedicated to entertainment sales by 50%. I know they have nearly $4 billion in entertainment sales, that includes books, music, video. So have you guys started to implement a strategy to get some of those sales? That even a little bit of that would make a huge difference, and I know that there's some overlap in store locations. Have you started thinking about that, because I believe this process will be complete by fall of this year, which could really position you guys well for the Christmas season.

Terrance G. Finley

Well I would just say, as you know, we have invested in broadening the offerings inside the box, including some of the categories that you're talking about. Obviously, books have a variety of different dynamics going on with them. I think it's important to note in this quarter that, whereas we've spent a long time over the last couple of years talking about the cannibalization of the book business by digital, this current experience is really a change in that, the challenges now are the old-fashioned kind. They're about comparisons to the prior year publishing schedule and so, we see less effects from that cannibalization. So as we meander through -- or not meander, as we have managed our way through the transition in the physical space in the stores, we've reallocated space for many new categories. You hear us talk a lot about the general merchandise categories, the media categories, electronics, accessories, et cetera, that do so, to light [ph] to the spot we're talking about. The size of that option, we will have to see if we move forward, but...

Harsha Gowda

Okay, great then, yes, I think it would be a great way to really bolster the company for the remainder of the year.

Operator

And our next question will come from Brad Hathaway with Far View Capital Management.

Brad Hathaway

I just had a couple of quick questions on a couple of details here. One, on the SG&A, I think you mentioned that there was some impairments to leases and some -- the timing of corporate expenses. I just thinking if you can provide a little more details to what actually happened in the quarter, and kind of just overall, order of magnitude, what the size of those impacts were?

R. Todd Noden

Sure. Every quarter, we evaluate every company's lease, and the financial performance -- or every store's lease and financial performance of those stores. And if they are not performing to cover the leasehold amounts, then we take an impairment. There was 1 store that we did recognize an impairment on. And then the other event that occurred was that we had some leasehold improvements related to one of the office buildings that we acquired in the quarter. And through that transaction, we had to write those leaseholds off, and -- which both of these are non-cash items that write those leaseholds off, because we put the building that we purchased on our books at fair value.

Brad Hathaway

Okay, and in terms of -- I mean in terms of size, I mean, are we talking hundreds of thousands of dollars here, or...?

R. Todd Noden

It was $250,000.

Brad Hathaway

Okay, great. And in terms of -- you also mentioned there was a timing issue with the corporate expense? Was that this -- the leasehold write-off, or was that something else?

R. Todd Noden

No, that related to corporate expense, and some of the overall expenditures that we're making, that we made last year versus this year. And it relates to salaries, other spending, those types of things.

Brad Hathaway

Okay, it was just something that, in prior years had been Q2 or Q3, and just happening in Q1 this time, or...?

R. Todd Noden

Yes, just basically, yes.

Brad Hathaway

Okay, and in terms of the capital expenditures, can you maybe talk a little bit about the breakout of that between some of these new stores, kind of maintaining the existing store base, improvements, et cetera?

R. Todd Noden

We actually don't go into that level of detail in the disclosures, so I can't comment specifically. But we do have -- obviously, we opened a number of stores in the quarter and so, that's what's driving the majority of that capital expense, but on a quarter-by-quarter basis, there are going to be maintenance items at the stores. And so it's that kind of a mixture that make up the numbers. But there wasn't anything -- you may be asking if there was anything out of the ordinary, and there really wasn't this quarter, except for the purchase of that building, which we have in the CapEx molds.

Brad Hathaway

How much was the purchase of the building, can you remind me, on that?

R. Todd Noden

We didn't break that out, specifically.

Brad Hathaway

You didn't break it out, okay. Okay, but -- so the bulk of it was due to the new stores and the purchase of the building now, if I'm thinking big picture?

R. Todd Noden

Correct.

Brad Hathaway

So I didn't hear you, but I'm not sure if you answered the right answer?

R. Todd Noden

I said, correct, that's that --

Brad Hathaway

Okay, great. And then going forward, when you look at the capital on the balance sheet, I mean, how do you balance -- obviously, you've been investing in new stores, at the same time, you've been investing in your stock. Can you walk us a little bit of how you balance those opportunities, and the potential returns from either activity?

R. Todd Noden

Well, those 2 activities happened at 2 different periods of time. We made an analysis in the -- after the second quarter last year, to evaluate what we thought was a good opportunity to repurchase the stock and that, that was the best -- one of the best opportunities to increase overall shareholder value. So we put in place a $5 million stock repurchase plan and set up a trading plan on that, which we've been executing against that trading plan. We're in the market where we're purchasing shares that are available to us, up to the limits that are allowed. So that's one thing. The second thing deals with individual store opportunities, and I'd -- when I had answered Harsha Gowda's question, with the real estate, there are all, all very local opportunities and we evaluate them on a case-by-case basis, and it makes -- we think it makes sense, and there's a -- we feel, a need in the market for our stores and what our stores offer, then we'll run the numbers and decide to make that capital investment. And as you know, with real estate, there's a lot of different components to those investments, and we factor those all in, in terms of funds from landlords, what our capital's going to be, that we have to put up our inventory cost, our operating cost, all of those things. We look at all of that.

Brad Hathaway

Okay, have you ever talked about a, kind of return threshold you would require for a new store, or how you'd think about that?

R. Todd Noden

We do think about that, and we include that in our analysis. But that's not something that I would comment on today.

Operator

And at this time, we have no further questions in the queue. And I'd like to turn the call back over to Mr. Noden for any additional or closing remarks.

R. Todd Noden

Thank you very much, and I would like to thank everyone for joining us today, and we look forward to talking to you next quarter.

Operator

That does conclude our conference today. Thank you for your participation. You may now disconnect.

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