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Barnes & Noble (NYSE:BKS)

Q1 2014 Earnings Call

August 20, 2013 10:00 am ET

Executives

Andy Milevoj - Vice President of Investor Relations

Michael P. Huseby - President and Chief Executive Officer of Nook Media Llc

Mitchell S. Klipper - Chief Executive Officer of Barnes & Noble Retail Group

Allen W. Lindstrom - Chief Financial Officer and Principal Accounting Officer

Analysts

Halley Goodman - Goldman Sachs Group Inc., Research Division

John Tinker - Maxim Group LLC, Research Division

Richard Shottenfeld

David Derman

Operator

Good day, and welcome to this Barnes & Noble First Quarter 2014 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn you over to the Vice President of Investor Relations, Mr. Andy Milevoj. Please go ahead, sir.

Andy Milevoj

Good morning, and thank you for joining us on Barnes & Noble's Fiscal 2014 First Quarter Earnings Conference Call. Joining us today are Michael Huseby, President of Barnes & Noble, Inc. and CEO of NOOK Media; Mitch Klipper, CEO of Retail; and Allen Lindstrom, CFO; as well as other members of our senior management team.

Before we begin, I would like to remind you that this call is covered by the Safe Harbor disclaimer contained in our press release and public documents and is the property of Barnes & Noble. It is not for rebroadcast or use by any other party without the prior written consent of Barnes & Noble.

During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call.

At this time, I'll turn the call over to Michael Huseby.

Michael P. Huseby

Thanks, Andy. Good morning, everyone. Let me start by giving you a brief overview of the quarter, then I'll discuss our operating focus going forward.

Taking a look at first quarter results, our Retail business performed in line with expectations. Retail sales declined 9.9% primarily as a result of difficult comparison to last year's strong first quarter sales. Sales at Barnes & Noble College increased during this non-rush quarter. NOOK sales continued to decline due primarily to lower device sales. In response to disappointing NOOK sales, we are closely working with our new NOOK leadership team to change the way we compete and manage our digital business, which I will discuss in a few minutes. Mitch Klipper will speak more about Retail's results, and Allen Lindstrom will provide a more comprehensive financial review.

I think it's important to note that despite the significant losses in the NOOK segment last year, Barnes & Noble's overall financial position remained solid. At the end of the first quarter, we had only $7.5 million drawn on our $1 billion bank credit facility. We also ended our quarter with a net cash position of $73 million.

Since our fiscal year 2013 earnings call in June, we have taken certain steps to better position the company for future growth and value creation. One fundamental and key move is the new leadership team at Barnes & Noble and NOOK Media. We now believe we have a strong management team and structure in place, emphasizing accountability for the success of our important lines of business and certain growth initiatives. I am working closely with Len, Mitch, Allen and Max Roberts, the CEO of our College business, and the rest of our leadership team on the challenges compared to the real opportunities we see in front of us.

As you may have seen this morning, Len Riggio filed a form 13-D/A with the SEC announcing that he no longer intends to put forward a proposal to purchase the Retail assets of the company. Len is very supportive of our vision for a more integrated business, and he plans to remain closely involved with the strategic oversight of the company.

We spent substantial time and resources last year preparing our individual businesses to operate independently in anticipation of the potential for their separation. Our focus going forward will be on providing customers with a more integrated Barnes & Noble and NOOK experience. And at the heart of his operating strategy is Barnes & Noble's unique competitive position with leading positions in Retail and higher education and a strong presence in digital content. Together, and with more aggressive leveraging of their complementary strengths, these assets give us a powerful offering that cannot be found or replicated anywhere in the marketplace today. For example, we have over 5 million Barnes & Noble members who regularly visit our physical and digital stores. We have a clear opportunity to better market and serve these members with promotional and other offers that combine both digital and physical elements.

As we focus on our operating strategy, I think it's important to remember that we've had remarkable success with our digital efforts while also acknowledging the competitive and other challenges we face. Almost 4 years ago, Barnes & Noble entered the digital arena and garnered what is now, according to data provided to us by the major publishers, an approximately 22% share of the U.S. eBook market. We have created a very solid NOOK brand and brought to market a family of award-winning devices that have sold approximately 10 million units. NOOK also attracted substantial technology and education investments from Microsoft and Pearson last year. We are working closely with these partners to bring new consumer and digital higher education-focused products to market. We believe these developing products have real potential to transform the way educational content is delivered and used.

Along with our accomplishments, we have faced an increasingly challenging competitive landscape, and, as it turned out, we were overly optimistic the past 2 holiday seasons forecasting demand for our NOOK devices, falling far short of our expectations. This reality prompted us to adjust our thinking and to make a commitment to compete differently and more effectively. This commitment begins with new leadership and a new strategic operating direction within the NOOK business. The new NOOK management team is working directly with me. We are laser focused on becoming more efficient and financially sound by managing both our operating expenses and inventory commitment levels while at the same time identifying and aggressively moving to drive revenue growth opportunities.

As mentioned, we have sold approximately 10 million NOOKs, and our content activation levels need to better leverage that accomplishment. Therefore, we are implementing programs to better serve our existing customer base and also aggressively exploring other target consumer markets with the potential to generate new revenue. We will report our progress on these initiatives at the appropriate time.

Let me give you some color on what we believe is strong potential marketing upside with our NOOK user base. When our NOOK users do purchase content, adoption is very strong, and they consistently buy, on average, 3 to 4 books a month. Through new programs targeting NOOK owners to be introduced this year, our plan is to significantly increase the number of NOOK owners who buy content and increase the average amount they spend. We will also plan to expand our successful existing value programs such as our big sales under $2.99 program and the NOOK Daily Find, which help customers find new books at great prices.

With respect to reporting our results going forward, we intend to be more transparent about our plans and financial results to enable our investors and others to better evaluate the effectiveness of our actions. One example of this is our effort to break out content and device revenue for the first time in this quarter's operating results.

Let me take a moment to clarify a point that is key to understanding our NOOK plans going forward. When we discussed our fiscal year 2013 results this past June, the company announced its plans to stay in the device business and continue to make black and white eReaders while exploring and transitioning to a partnership model for manufacturing colored tablets. Unfortunately, many people interpreted these comments incorrectly and concluded that we were getting out of the device business. I'd like to be very clear about this today. We want consumers to know that the company intends to continue to design and develop innovative NOOK black and white and color devices. At least one new NOOK device will be released for the coming holiday, and further products are in development. At the same time, we will continue to offer our award-winning line of NOOK products, including Simple Touch, Simple Touch with GlowLight, NOOK HD and NOOK HD+ at the best values in the marketplace today.

Consumers should also know that all of our best-in-class NOOK devices and accessories will continue to be backed by our world-class customer service in Barnes & Noble stores. We believe that by offering high-quality reading devices at lower costs, we will be able to drive higher volumes of devices and, therefore, higher content adoption and revenues. We believe devices that are built for readers and marketed as such will also have application in the education market where demand is exploding for such devices.

An example of our commitment to delivering innovative NOOK devices at attractive pricing is a new offer we announced just a few days ago. We are now offering our highly acclaimed, award-winning NOOK Simple Touch with GlowLight for just $99 at our retail stores and online. This device features Barnes & Noble's breakthrough lighting technology that shines uniformly across the display and adjusts with just a touch so customers can control the amount of light illuminating their device, whether in a dimly lit or dark room.

In addition to devices, we are reaffirming our commitment to delivering the best digital content, both domestically and internationally. The content catalogs we continue to build on are among the largest and best in the world and have been competitive differentiators for Barnes & Noble. While content revenue has declined due to lower-than-expected device sales, our top priority and our operating strategy is to increase all categories of our content revenue. As mentioned, we are working on innovative ways to sell content to our existing customers and are exploring new markets we can serve successfully.

One area where we have significant positive traction is NOOK Press, the self-publishing arm of the NOOK business. We are adding thousands of titles each week, and, in fact, the NOOK Press title count and sales increased more than 50% in fiscal year 2013. NOOK Press is a great example of how our understanding of the reading public has helped us design a unique and innovative product that speaks to both the writer and the reader, who are often the same customer. We add thousands of new titles each week from authors and publishers around the world, and our customers can expect our catalog and eBooks, periodicals and educational content to grow. We have approximately 6 million reading apps installed in the marketplace on third-party devices, and we consistently receive best-in-class ratings. We know our customers demand the best reading experience, and we will continue to innovate to provide this for them.

To further demonstrate our commitment to growing digital content for our NOOK customers, just yesterday, we launched a suite of free NOOK video apps for iOS, Android and Roku devices. Additionally, through specially designed apps that will ultimately appear in customers' lockers, NOOK Tablet and NOOK Color owners will now have access to NOOK Video. We continue to work closely with Microsoft to find ways to improve and leverage that partnership. Almost a year into our agreement, we see a number of opportunities to cooperatively adjust and expand the strategy and operations to compete more effectively on a joint basis. To achieve this, we are investing more in our Retail business, upgrading our website and investing in our eCommerce capabilities. Mitch will talk more about this in a few minutes.

Another area of investment for growth is Barnes & Noble College, a business that we believe has strong future. We remain committed to building and investing in our capabilities in digital education. Max Roberts and his team are doing a great job leading this business, and we see tremendous opportunity in this segment around digital and eCommerce tools and products. We are working closely with our primary partner, Pearson, to develop digital products and services that will be delivered in the near term to the higher education market. We view education as a strong, long-term growth business opportunity. At the end of the first quarter, College opened 50 new stores with annual sales of approximately $35 million, and this strong trend continues. College continues to maximize its marketing opportunities by providing strong retail presence, maximizing our digital solutions and rental opportunities to our campus partners.

In summary, the highlights of our current operating strategy are as follows: We'll continue to offer the best content for all of our customers across all platforms. We will provide a unique in-store experience that delights our customers and cannot be found anywhere else in the market. We will remain in the NOOK device business, producing devices that are focused on the best reading experience anywhere. We will continue to serve our College market successfully while leading the transition to more advanced digital solutions. And we will compete -- complete, rather, the upgrade of our website that is progressing well and improve our eCommerce capabilities and profitability profile.

Finally, a fundamental element of our plan is to manage costs prudently across all of our segments. We've already taken significant steps during the fourth quarter of 2013 and the first quarter of this year to reduce our cost structure in the NOOK segment, and we will continue our cost management efforts.

We believe that by implementing these planned actions, which are already under way, will stabilize our business, drive growth and create value. We're confident that by leveraging the strong assets across our businesses and working closely with our partners, we can do an even better job of delivering on the Barnes & Noble brand promise of providing our customers with the best content anywhere, any time and on any platform they choose.

Now let me turn the call over to Mitch.

Mitchell S. Klipper

Thanks, Mike, and good morning, everyone. Over the past 3 years, our bookstores have been, and continue to be, one of the greatest differentiators for NOOK in the marketplace. We have provided NOOK premier real estate within our bookstores and exposed the NOOK brand to millions of readers who walk through our doors every year. Our specially trained booksellers provide unparalleled pre- and post-sales support for NOOK devices bought at the Barnes & Noble or anywhere else. Regardless of the format, our bookstores will continue to be a destination for all readers, whether it's hardcover, paperback or digital.

As part of our commitment to be the primary resource for readers, we are continuing to invest in our business. We plan to launch a new eCommerce website next year. The new BN.com site will enhance our search and accuracy, provide faster shipping and yield some cost savings. We believe that the new BN.com site will allow us to be more competitive in the market marketplace and continue to be a terrific resource for our customers, whether they would like to buy books shipped to home or picked up in a store.

Now turning to our performance. Although Retail faced significant headwinds during the first quarter, we managed to produce an EBITDA of $65 million. Retail comp store sales declined 9.1% during the first quarter with core comps declining 7.2%. The stores faced significant headwinds, comping against the tremendously successful Hunger Games and Fifty Shades trilogies a year ago. Excluding the impact of these trilogies, core comp store sales decreased 2.9% for the quarter. We will continue to face the Fifty Shades comparison into the second quarter and then abate as you move into the second half of the year. In light of the sales decline, the booksellers in the field did an amazing job managing their expenses, and store productivity exceeded our expectations, enabling the Retail SG&A as a percentage of sales to be flat compared to a year ago. We remain focused on execution and managing expenses as we expect comp store sales to decline in the high single digits for the fiscal year.

During the quarter, we opened a new 28,000-foot Barnes & Noble bookstore in the Shops at River Crossings in Indianapolis. This new store features a large-scale Children's Department that's bigger than most typical bookstores and includes our Educational Toys & Games Department, which offers the smartest selection of curated educational toys and games at great values. Most importantly, the store will serve as a community center, hosting a number of community-oriented events throughout the year. Customers and developers alike appreciate Barnes & Noble's unmatched capability to create an inspirational community center to all the communities we serve.

As we look forward into the fall, we're excited about the number of titles that will be released by brand-name authors, including Doctor Sleep, which is Stephen King's sequel to the Shining; Sycamore Row, which is a prequel to John Grisham's first book, A Time to Kill. And additionally, other powerhouse names, including new Bill O'Reilly, Nicholas Sparks and Malcolm Gladwell, among others, will be releasing books ahead of the holiday selling season.

Beyond the fall, the stores are gearing up right now for the holiday season. Our booksellers are excited about the book lineup and the NOOK promotions we have planned. We got great merchandise in the gift areas and the Toys & Games Department, and we're ready to welcome all the customers coming through our doors this holiday.

With that, let me turn it over to Al Lindstrom.

Allen W. Lindstrom

Thank you, Mitch, and good morning, everyone. This morning, we released our fiscal 2014 first quarter results for the period ending July 27. Comparisons are to the prior year quarter unless otherwise noted.

Consolidated sales declined 8.5% to $1.3 billion for the quarter. As Mitch noted, Retail sales decreased 9.9% to $1 billion for the quarter. Retail sales declined primarily as a result of a 9.1% comparable bookstore sales decline, store closures and lower online sales. Core comparable bookstore sales, which excludes sales of NOOK products, decreased 7.2% for the quarter as comps were impacted by the Fifty Shades and Hunger Games trilogies a year ago. Excluding the impact of these trilogies, core comparable bookstore sales decreased 2.9% during the quarter.

First quarter College sales decreased -- first quarter College sales increased, pardon me, 2.4% to $226 million on an increased store count during this non-back-to-school rush quarter. On a comparable basis, College sales declined 1.2% during the quarter.

First quarter NOOK sales, which includes sales of devices, accessories and digital content, decreased 20.2% to $153 million. Device and accessory sales were $84 million for the quarter, declining 23.1% on lower unit selling volume. Digital content sales were $69 million for the quarter, declining 15.8% on lower device unit volumes and the comparisons to the Fifty Shades and Hunger Games trilogies a year ago. Excluding the impact of these 2 trilogies, digital content sales decreased 6.9% during the quarter. Please note we've added disclosure this quarter to break out digital content and device and accessory sales volumes.

For your reference, in fiscal 2013, the company generated $470 million of device and accessory revenues and $310 million of digital content revenues. Please remember the majority of NOOK's content sales are sold under the agency model, where revenues are reported based upon the commission received rather than the gross selling price.

Consolidated gross margins decreased 90 basis points during the quarter. Retail gross margin decreased 40 basis points on occupancy deleverage against the sales decline. Retail margins included a higher mix of higher-margin core products in the current year, offset by the strength of Fifty Shades margins in the prior year.

College's gross margin declined 90 basis points on sales deleverage during this non-rush quarter, driven by higher occupancy costs for new stores and contract renewals on existing stores. NOOK's gross margin declined from 23% last year to 18.1% this year, primarily resulting from heavier device promotions, increased royalty costs and sales mix.

As a percentage of sales, first quarter selling and administrative expenses increased 20 basis points over the prior year. Current year expenses included severance charges of $5.5 million, while last year's expenses included $7 million of reversals of incentive compensation accruals. Excluding these items, expenses declined 70 basis points, driven by lower NOOK advertising costs.

The company's first quarter EBITDA loss was $8.9 million as compared to positive EBITDA of $5.8 million a year ago as a result of the factors just discussed. Interest expense was $7.6 million for the quarter, a decline of $1.4 million from last year on lower average borrowings, slightly offset by interest related to the Microsoft commercial agreement financing transaction.

During the quarter, the company recorded $15.5 million of income tax expense as opposed to a benefit of $21.4 million in the prior year. Under ASC 740, income taxes significant to cumulative losses in recent years, the company recorded a valuation allowance this quarter primarily against newly generated deferred tax assets. As previously disclosed, the company evaluates its deferred tax assets on a quarterly basis.

The first -- the consolidated first quarter net loss was $87 million or $1.56 per share as compared to a loss of $39.8 million, or $0.76 per share a year ago. Excluding the tax matter previously noted, the first quarter loss would have been $0.86 per share.

Turning to the balance sheet. The company ended the quarter with $80 million of cash and $7.5 million of bank borrowings under its $1 billion credit facility. Quarter end bank borrowings declined $295.3 million as compared to a year ago. In fiscal 2013, despite the NOOK segment losses, the company was able to improve the strength of its balance sheet due to the cash flow generated by the Retail and College businesses as well as the funds received from strategic investments in NOOK Media.

Inventories decreased approximately $200 million as compared to a year ago, driven by lower Retail trade book inventory, reductions in College textbooks and the lower net realizable value of NOOK devices.

Consolidated capital expenditures for the first quarter were $28 million, comparable to the prior year quarter of $26 million.

In the first quarter, the company opened 1 new Retail bookstore and closed 2. College opened 15 new stores during the quarter and closed 9. For fiscal 2014, the company continues to expect Retail comparable bookstore sales to decline in the high single digits. College comparable store sales are expected to decline in the low single digits. The company also expects full year Retail core comparable bookstore sales to decline in the low to mid-single digits.

With that, we will open the call for questions. Operator, please provide the instructions for those interested in asking a question.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Matthew Fassler with Goldman Sachs.

Halley Goodman - Goldman Sachs Group Inc., Research Division

This is Halley Goodman on behalf of Matt Fassler. We are wondering what your plans are for international expansion. And if you don't expand in overseas markets, what are the main implications for the Microsoft-driven investment?

Michael P. Huseby

Right now, we have, as you probably know, an agreement with Microsoft that requires us to expand and provide digital content for them to present as a digital bookstore on their Win 8 application. And we currently have content for the first 10 countries that were obligated to deliver that content and app for, and we're continuing to grow the number of countries that we're accumulating content in. We're still building what we would call a scalable solution for Win 8 app in those markets and working with Microsoft to make sure that when that app's released and we go to market, ensures the best experience for Win 8 users. So the focus, to answer your question, is really on expanding internationally through the Microsoft and Win 8 relationships and platform. Now we do sell devices in the U.K. as well with a number of high-quality retailers, and we will be doing that for the foreseeable future. And right now, those are our international expansion plans.

Halley Goodman - Goldman Sachs Group Inc., Research Division

And just one more follow-up question. I was wondering if you could possibly provide the quarterly data for breakout for NOOK sales between content and devices and accessories.

Allen W. Lindstrom

Not at this time. We'll take them under consideration.

Operator

And we'll take our next question from John Tinker with Maxim.

John Tinker - Maxim Group LLC, Research Division

Could you just clarify a little in the sense of the attachment sales? I think you mentioned that you're talking about 3 to 4 books a month. Is that for everyone with a NOOK device? Or does that also include the 6 million apps you have on third-party devices? If you can just walk us through that a little, that would be terrific.

Michael P. Huseby

The 3 to 4 books per month is a reference that I tried to make clear, but it's a good question for those NOOK owners we have that are active in terms of their purchase of content. As I mentioned, we think we have a tremendous opportunity with those NOOK owners who are not as active or not active at all in terms of purchasing NOOK content, having sold approximately 10 million devices. That's not to say that all 10 million devices are being used. Some individual or some customers have bought devices, more than one device, and their lockers' concentrated in just one of those devices now. But we have tremendous upside to better understand, which we're in the process doing in a very detailed basis, who our customers are, how we segment them and then how we market them to increase our content sales.

John Tinker - Maxim Group LLC, Research Division

But is there a big difference between the active NOOK owner and a third-party device user?

Michael P. Huseby

A third-party device user?

John Tinker - Maxim Group LLC, Research Division

So if you have them -- the 6 million that are on third-party apps...

Michael P. Huseby

Right, right. Yes, in terms of their adoption rate, is that what you're asking?

John Tinker - Maxim Group LLC, Research Division

Yes.

Michael P. Huseby

Yes, I don't have that information at my fingertips. I think what we would find, though, is that the 6 million apps on the third-party devices, you're going to have the same type of a distribution where you have a percentage of those users of that app who are heavier users and probably mirror something close to the activity we see by NOOK owners who are active, and then you'll see some that are very infrequent. So that's something we need more information on. The majority of users do use a NOOK device, though.

Operator

And we'll take our next question from Rick Shottenfeld with Coyote Capital.

Richard Shottenfeld

I just -- I'm just a little confused in terms of what this sort of clarification of your strategy going forward means. I guess by my estimation, you -- we've lost almost $1.5 billion in the NOOK business since inception. And it's really masking the underlying value of the core bookstores. I mean, if you look at what Barron's [ph] at or you look at my own estimate, stock's trading at 60% discount to what the value of the bookstores alone are, in my opinion. And so my -- does this change back to sort of saying we're going to integrate these things mean that the significant cash that's being generated at the bookstores is no longer to be considered sequestered from the NOOK business? And -- or are you saying that within the context of what you gave us last quarter, which was a guidance of continued reduction in the burn rate at NOOK, and I think you gave some targets in the mid-200 kind of range for this year in terms of what the burn rate for the NOOK would be, should we expect that to not be the course that we go forward with? Or do you -- or are we going to continue to keep the cash in the bookstore business separate and -- because they are separate companies, and that the NOOK is going to be able to finance these plans that you've outlined independently? Because I'm just trying understand. It's been over a year since you guys have said that you want to do things to enhance shareholder value. It seems obvious that this NOOK business is dragging down the value of the bookstores, and I think shareholders would like to realize some of the value. I mean, it's a testament to the value of the bookstores that you were able to lose almost $1.5 billion and still have a strong balance sheet. But at some point, are shareholders going to get a relief from this NOOK business from the bookstores side and get an opportunity to realize some of that value?

Michael P. Huseby

Yes, Rick, I understand the question. The -- I'm not sure the $1.5 billion number is right. I think one of the things you have to keep in mind -- and I'm not going to argue that number today, but. . .

Richard Shottenfeld

It's an estimate. I'm not trying to say that's -- it's somewhere between $1 billion and $1.5 billion.

Michael P. Huseby

Yes. No, I understand, I understand. And all I was going to say is that one thing to keep in mind is that a portion of the loss that we took -- a fairly -- we took a very significant write-down of inventory in fiscal year '13, and we're selling that inventory, actually selling it according to our forecast right now in fiscal year '14. That's not the gist of your question, obviously, but I just wanted to make that clear. Obviously, the success of how that inventory gets converted to cash will primarily be seen at the holiday when majority of the inventory is sold, or is planned to be sold, and that's our expectation. In terms of the self-sufficiency of NOOK, we still believe that NOOK, with its current cash balance -- and the reason I mentioned the inventory is the cash that's being generated by that inventory sale. And NOOK Media also housing College, the cash flow generated by College -- we don't expect in the near term that Retail will be funding any of NOOK Media's needs. Now in terms of your comment about having given some guidance on the burn rate, I don't recall any giving specifics -- such specific guidance on the burn rate. So it's not that I'm refuting...

Richard Shottenfeld

I think that what you said, that you will get the burn rate down to about $55 million a quarter with further reductions anticipated going forward. So I think that was the way it was expressed in the prior conference call. Mr. Lynch is no longer with the company, but that's why I wanted to get clarification.

Michael P. Huseby

Yes, well, I don't remember that or have seen that. We'll take a look at it. But anyway, without arguing that assertion, the intent is for NOOK yet to continue to remain self-sufficient from a funding perspective and not to use Retail's cash to fund its needs.

Richard Shottenfeld

All right. And so you don't have any guidance right now in terms of where you think the NOOK burn would be this year or whether or not you see that declining or increasing from this quarter's run rate?

Michael P. Huseby

I don't have any specific guidance -- we're not putting out any specific guidance on NOOK. And we provided the outlook we're comfortable with. For the transition we're going through, as discussed, we're looking at some really significant opportunities from an operating perspective, and all that together led us to the conclusion that it doesn't really make sense at this time to put out specific guidance on NOOK. Having said that said, I'll reiterate that one thing that we're doing differently to what I would call compete and manage differently is, aside from just adjusting and managing operating costs, we're a lot more focused on any kind of a commitment to inventory levels. And that's what got us in the situation we were in last year after the holiday. We overestimated demand for the products that we've put out and, as a result of that, had to discount those products and we're selling them now. And we don't want to be in that position again. We want to bring good products and innovative products to market and to our customers, but we want to do it on a much more targeted, in-control basis. And eventually, we'll move to a strategy of lower-cost units or higher volumes to drive more content.

Richard Shottenfeld

And so we should still expect a partnership on the color device side in the future?

Michael P. Huseby

Yes, I think that's an important question to address because I want to acknowledge that in June, there was a pretty strong message sent to the market that we were shifting towards a -- more of a partnership model on the production of color devices. We partner now with large tech companies on our color devices, whether it's displays, chips. And I think the reason I bring that up is not that that's consistent with what we said in June, but there's opportunities to expand those existing relationships with the largest players that there are in this industry to de-risk the business plan, which is really the intent of what William's comments were in June, what all of our comments were in June. And one thing I would say, and I want to say this, is that the problem is not the devices. The devices that are hardware and software and other members of our NOOK team have produced over the last 4 years are great devices. And right now, they're in a market at a great value for the reasons we just discussed. But the device isn't the problem. The problem was the decisions that were made by management, quite frankly, in terms of demand forecast based on what was thought to be good information. And so, a wholesome kind of wholesale outsourcing of our color device business is neither an appropriate nor is it smart for the company. We have an outstanding group of people that are, quite frankly, a fairly small part of our operating expense burn that do a tremendous job, and they don't deserve to have their jobs outsourced to somebody else. And so that is -- we've found in our discussions with other companies, there's a tremendous value placed on that team in Palo Alto and what they can deliver. And if we want to be in the content business, we need to be in the device business. No matter how they're produced, we think our people can produce better devices than anyone else.

Richard Shottenfeld

And I'm sorry, but if I could ask one more my follow-up. I mean, the bookstores are going to generate somewhere around $300 million in cash this year, which is about 40% of your market cap right now. Is there any intent to return some of that cash to shareholders either through buybacks or dividends?

Michael P. Huseby

It's a very fair question. It's a matter for the board to consider. And I think that having just received the 13D this morning, which the board, I'm sure, will also consider the implications of that on a going forward strategy as it relates to shareholder value.

Richard Shottenfeld

All right. Can I ask one more, which is...

Michael P. Huseby

I'm not going to stop you.

Richard Shottenfeld

All right. With the -- Chairman Riggio's withdrawal of his intent to purchase the company, does that conclude your review of strategic alternatives? Or is that review ongoing?

Michael P. Huseby

First off, the review of strategic alternatives was undertaken by the board, and management helped with that review, obviously. What I would say is that there's -- we're always open to any alternative that contributes to shareholder value. But in terms of -- we never really announced any formal process per se, but I did mention that our focus really right now is on operating the businesses to drive maximum value, and each of those businesses and across all those businesses to get -- to give us the most options available going forward, to look at those options for strategic value. So nobody's closing their mind or their eyes to anything that comes up, but that's not going to be the current focus as it has been for the last 18 months.

Operator

And we'll take our next question from David Derman with Chesapeake Partners.

David Derman

I think the first thing I'd love to have you comment on is since you took over in your CEO seat not all that long ago, the business has continued to perform well. At the same time, based on where the stock is, it's not a reflection on you, it's off almost 30% over 6, 7 weeks. I'm curious how you, as management and in conversation with the board, assess the ongoing costs to keeping the business in its current structure with NOOK and Retail side by side.

Michael P. Huseby

When you say keeping the business, do you mean the collective business or the NOOK...

David Derman

Yes, I mean, you've talked about -- Mitch made the comment that it's been helpful to have NOOK to have Retail there as a partner.

Michael P. Huseby

Yes.

David Derman

So we can all tally the benefits. I'm talking about -- how do you measure and assess the cost of keeping things as they are? I mean, the -- you've heard from one of your large shareholders just before me that -- his perspective. We share that perspective. But how do you guys go measure that cost to keeping things as they are?

Michael P. Huseby

Yes, so I think that's a fair question. I think it's how do you measure the costs and how do you measure the benefit, right? So you mentioned that there's a benefit to NOOK to having Retail as a partner....

David Derman

I said -- to be real clear, I think you guys said that there's a benefit. So I've heard you tally that. I'm just curious how you tally the cost.

Michael P. Huseby

Well, we tally the costs and present it in our financial statements from a GAAP perspective. In terms of how you look at it from a plan perspective, I mean, you have to look at it a little differently, right? You have to look at it in terms of your liquidity position, your cash flow and your ability to grow the business into something that provides a return. So when you say tally the cost, I'm not quite sure what...

David Derman

I mean, simply, if ultimate value isn't measured in the P&L, but it's measured by market capitalization over the long term and enterprise value over the long term, how is that featuring into the strategic decision, which I think I'm hearing you guys say today, which is that you're committed to continuing with the current structure for some indeterminate time period?

Michael P. Huseby

Yes, well, I think that that's a result of an 18-month process state, where a lot of different strategic alternatives were looked at up to and including potential sale of each or any or all of the businesses in terms of any opportunities that may have been brought to us, okay? So in terms of -- what you're really asking is how do we think about driving shareholder value. Somebody's got their phone on.

Unknown Executive

I think you should mute it.

Michael P. Huseby

Yes, maybe it's you, Dave, if you can mute it. There's a bunch of noise in the background. I'm not sure who it is. But anyway, how do you look at it? I mean, right now, what we said is we're looking at it as the best way to give ourselves the option to look at other alternatives to drive shareholder value other than dividends, stock repurchases, those type of things from the free cash flow of the Retail business is to improve those businesses and show that there is a business model that works and to pursue some of these growth opportunities that we think are real, education, and some of this -- the areas within NOOK that -- NOOK Press and others that we think have some real potential. So to answer your question, yes, shareholder value is very important to us. Our interests are aligned. We're all shareholders. And when we tally it from the context of looking at how do we get there, we have short-term and then we have longer-term considerations, which is why I made the comment that we are obviously, as a company, open to any alternative that is presented to us by outsiders or anybody who has an idea of how we can do things better.

David Derman

Okay. And I apologize for the noise. There was some trading going on in the background here. I'll try to mute after I ask the questions. The last few questions are, with cooperation clearly being something that you've described between the businesses as being economically valuable, why are you, it seems like, not confident that if the businesses were separated, they wouldn't look at their own independent self-interest and say, well, it's clearly economically valuable for us to cooperate so we can achieve that value with the businesses being separate. It seems like you believe you need a benevolent parent up top pushing the units to cooperate. And that sort of begs the question for me as a shareholder of, is it really in the best interest of all the segments to be cooperating if they wouldn't get there independently? I'll mute myself now.

Michael P. Huseby

Okay, thanks. I don't think that's supported by the fact of what we did last year, quite frankly. I think that if you look at the evolution of what happened last year, the digital business in College were placed into NOOK Media, and there was a tremendous amount of work to actually separate those businesses in the context of their economic relationships with Retail. We disclosed that in detail. We filed the agreements to the extent that they were required to be filed, and most of them are, that -- that's where we were moving. And that's what we said. We're preparing those businesses for eventual separation if the opportunity was there in the market based on the value of the businesses, and we felt that, that would create more value to shareholders than keeping them together. We do have 2 outside investors who will raise $400 million and are continuing to get funding from one of those investors in NOOK Media. And so I guess to answer your question, timing is everything. And the performance of the business has an impact on the timing of when you separate a business, as you know. So nobody is locked off here on -- this is a permanent decision to keep all the businesses together. It's based on the facts and circumstances as we assess them and as the board assesses them at a given point in time about what's the best way to move forward to drive the most value. And separating the businesses also has to be done with an eye towards the capital structures. And nobody's given up on realizing, Dave, that these are separate businesses. Retail is a separate business from NOOK, for example, and College is now part of NOOK Media. And so potentially, it makes sense to have these business separate. Right now, it's not the right time to do it. We're very pleased with the determination that's been made. And as I said, if someone were to approach us with an idea or an offer that changes our mind, then we would be willing to listen to it.

David Derman

Got it. Look, I'll ask you a last question and maybe share a thought. But the -- as I hear you discuss the strategy, it sounds more, and I don't think this is your intention, reactive than proactive, namely to say -- you're saying, "If somebody presents something, we'll consider it." I don't believe that you discussed it, you and the board, for 18 months, have been looking for alternatives. Is that -- and that's the impression you mean to leave us with. I'm sure you will continue to proactively consider, without the receipt of alternatives being proposed, what makes sense for everybody as shareholders. But the last question I'm really curious, because I'm sure you gave a deep thought before you took on your new job is, you have a variety of different key shareholders here. Some of us are public and particularly long suffering on the public side, some of us. Others are more strategic. And others have different interests. I mean, clearly, Len made an offer for Retail here, a different interest to us at that point in time. Liberty has a structure, which gives them different protections and different options than public shareholders. So now that you're in the seat you're in, how are you navigating actively the conflicts you have between the different interests and structures of your different shareholders? And ultimately, at the end of the day, when they're -- when those 2 don't line up, who do you believe you represent?

Michael P. Huseby

I firstly represent all the shareholders.

David Derman

Yes, but, I mean, if they're the...

Michael P. Huseby

I've been through this a lot, Rick -- or Dave, I've been through this a lot in my career. I've been in control of [ph] companies, and I know where my fiduciary responsibilities lie. And they lie in representing the best interest of all shareholders, including you.

David Derman

Okay. Yes, very good. Look, I appreciate it. I mean, we see a tremendous amount of value. I appreciate that you guys are going to do everything you can to unlock it.

Operator

At this time, I'd like to turn the call back over to Mr. Milevoj for any additional or closing remarks.

Andy Milevoj

Great. This will conclude today's call. Thank you for joining us on the call, and we wish everyone a good day.

Operator

And this concludes today's conference. Thank you for your participation.

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