Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Books-A-Million (NASDAQ:BAMM)

Q2 2014 Earnings Call

August 27, 2013 5:00 pm ET

Executives

R. Todd Noden - Chief Financial Officer

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

Analysts

Brad Hathaway

Harsha Gowda

Operator

Good day, and welcome to the Books-A-Million Quarterly Conference Call. This call is being recorded today, August 27. At this time, I would like to turn the conference over to Mr. Todd Noden, Chief Financial Officer of Books-A-Million. Please go ahead, sir.

R. Todd Noden

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

Before we begin, I would like to remind everyone that management's comments in this conference call, which are not based on historical fact, 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 second quarter, and then Terry will provide a discussion of our current business trends. At quarter end, we are operating 255 total stores, and during the quarter, we opened 4 superstores and closed 2 superstores. This year, we have closed 3 stores in trade areas in which we no longer operate other locations. And as a result, we reported discontinued operations for our second quarter and year-to-date fiscal 2014 and prior year results. All amounts that I quote today will exclude discontinued operations, except for comparable store sales.

Additionally, on July 19, we increased our ownership of Yogurt Mountain Holding to 50%, and through this transaction, obtained control of the company. As such, we have consolidated the results of Yogurt Mountain and are reflecting the other 50% ownership as a noncontrolling interest. The amounts I quote today will reflect this consolidation.

Net sales for the 13-week -- or 13 period ended -- 13-week period ended August 3, 2013, decreased 8.6% to $109.2 million compared with sales of $119.5 million in the year-earlier period. Comparable store sales for the second quarter decreased 12% compared with second quarter in the prior year. Comparable store sales excluding the sales of eReader devices and the impact of the Fifty Shades of Grey and Hunger Games Trilogies decreased 3.8%. Gross margin as a percent of sales after occupancy cost and warehouse operating expense was 28.4% compared to 28% last year. This increase was due to a more favorable mix of retail sales.

Operating, selling and administrative expenses decreased $1.1 million during the second quarter compared to the second quarter of fiscal year 2013. This decrease is primarily driven by lower retail and corporate payroll, as well as lower corporate administrative expenses. As a percentage of sales, operating, selling and administrative expenses for the second quarter were 26.8% versus 25.4% last year.

Depreciation and amortization expense increased $343,000 to $4.4 million in the second quarter from $4.1 million in the prior year quarter. Net interest expense was $430,000 for the quarter versus $452,000 in the prior year quarter.

For the second quarter, our net loss from continuing operations, net of controlling interest, was $9.1 million or $0.61 per diluted share, compared with a net loss of $0.9 million or $0.06 per diluted share in the second quarter of fiscal 2013. The loss for the second quarter includes $7.3 million or $0.50 per diluted share noncash charge that include the valuation allowance against certain deferred tax assets and the reversal of current year tax expense benefits. Excluding this noncash charge, the loss for the 13-week period would have been $0.11 per diluted share versus $0.06 last year.

Now I'll provide you with some balance sheet amounts for the quarter. The following figures are compared to the balances at the end of year, fiscal year 2013. Inventory was at $202.8 million compared to $201.5 million at the end of last year. Accounts receivable and related party receivables was $3.3 million versus $3.4 million at the end of last year. Net PP&E was $77.6 million compared to $65.3 million at the end of last year, and this increase reflects the acquisition of and development of real commercial property in the amount of approximately $8 million. Total debt was $65.2 million compared to $5.7 million at the end of last year, and this increase from the beginning of the year reflects a seasonal increase in our revolver debt, as well as the additional long-term financing on real commercial property. Stockholders' equity, net of controlling interest, was $103.1 million compared to $116.5 million last year.

Year-to-date capital expenditures for fiscal year '14 increased $10 million to $20.7 million versus $10.7 million in prior year. Of this increase, $8 million and $3.2 million relate to the development of commercial real estate in fiscal years '14 and '13, respectively.

I'll now turn the call over to Terry Finley for a general business update.

Terrance G. Finley

Thank you, Todd, and thanks for everyone participating on the call today. As we expected, the extraordinary headwinds from last year's unprecedented success with both The Hunger Games and Fifty Shades of Grey series made for difficult comparisons this period. Additionally, there was little in what was an unremarkable publishing schedule and a very quiet media environment to help offset the impact of that success in our core Book business. However, our new businesses continued to perform nicely during the period, growing in both absolute terms and as a percentage of our total business.

In the core Book business, excluding the obvious impact of Fifty Shades and Hunger Games, our business stabilized in step with the slowing growth rate of the digital sales channel, and we did see a handful of categories improve year-over-year, including diet and health, where several recently released titles fueled comparable sales growth; graphic novels, which continue to benefit from the ongoing interest in The Walking Dead series based on the hit AMC television series; and in our Kids' area, which continued to outperform the broader sales trend in books with solid results across several categories, including baby books, educational workbooks, kids' activity books and kids' series. We continue to experiment, expand and innovate in the kids' space, and we believe we will be well positioned for the second half of the year.

In the general merchandise area, we continue to have nice year-over-year growth in our Gift, Media and Electronic Accessories businesses. As has been the case for several quarters, much of the success in these new or expanded businesses was generated by the strength of several media-related pop-culture licenses, including Duck Commander, Doctor Who, The Big Bang Theory, Star Wars and gaming properties like Minecraft and Portal 2. Categories with the strongest performance included apparel, where a wide assortment of t-shirts and hats from those licensed properties drove strong sales growth; novelty gifts, where those same licenses combined with non-branded trend merchandise to drive positive results; and toys, where Lego and a host of strong license properties like Star Wars, Minecraft, Portal and Pacific Rim delivered strong results. Electronic Accessories is a growing business driven by license products, proprietary phone and tablet accessories and trend products in the Electronic Accessories space.

Looking forward to the third quarter. The publishing lineup is rather exciting, with great new commercial fiction from the likes of Nicholas Sparks, Stephen King, Sue Grafton and James Patterson, as well as new nonfiction from Malcolm Gladwell, Mark Levin, Bill Bryson, Billy Graham and importantly, for us, Uncle Si from Duck Commander. And we expect a very strong response to Bill O'Reilly's Killing Jesus.

We also expect that the pop culture trends that have been so successful in the last few quarters will continue to drive sales in the coming months. And as always, we remain focused on providing the value and service our customers expect, while managing the fundamentals of inventory and expense control.

We'll now be happy to answer any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question, from Brad Hathaway with Far View Capital Management.

Brad Hathaway

So kind of a broad question for you. So on several past calls, management talked about making decisions to invest in new stores locally and making each investment kind of on a case-by-case basis, depending on the potential returns. And over the last 3.5 years, the company spent roughly $80 million on CapEx. But in the last 2.5 -- 2-plus years, the company has generated negative same-store sales in 9 of 10 quarters, underperformed its remaining public sector peer and the book retail industry at large and generated a cumulative loss of almost $10 million before tax. So I guess my question is, at what point do you acknowledge that the strategy is not working, and think about materially strengthening the store base and really changing tack here?

R. Todd Noden

Well, Brad, thanks for your question. And I think the things that we've said in the past about evaluating real estate and what we're doing with the business continues to stand. Each quarter, we look at the performance of the store portfolio, we evaluate the profitability of each of those stores and where we are given the specific lease terms that we're under, and we make the economic decision that's in the best interest of the company and the shareholders. Obviously, those groups are paramount. As far as the recent new stores that we've evaluated, it -- similarly, we look at the businesses that we are focused in and concentrating on, and they continue to make economic sense. That's really my answer with respect to the retail operations and the real estate investments that we've made there.

Brad Hathaway

Okay, understood. I mean, I guess, though, is there a way you can help me understand why everything that looks good on a micro level has not translated into any kind of success overall when I'm looking at the numbers on a consolidated level?

R. Todd Noden

Well, when you look at those numbers, and I'll ask you to repeat them so that I know the exact numbers that you're talking about, are you talking about the net income of the company? Or are you talking about cash?

Brad Hathaway

I was looking at the -- I was talking about the -- well, right now, I was talking about the profit -- just using the profit before tax to take away the movement of the tax assets and whatnot. But also, if you look at free cash flow given the amount of CapEx spend, they still look [ph] the same.

R. Todd Noden

Well, I think -- what's also in that, in those numbers, if you look over 3 years, is the time period when Borders went bankrupt, that was a specific shock, I'll call it a extraneous event in the market that impacted us, as well as Barnes & Noble. And I don't think that comparison is indicative of the overall trend that we see in the industry.

Brad Hathaway

Okay. But even more recently, I mean, 4 of your last 5 quarters have had negative same-store sales comps, generally worse than Barnes & Noble and generally worse than the kind of book retail industry at large. So I guess what I'm trying to understand is, I understand it's a tough industry. I knew that. I've known that all along. And I understand that there are sometimes attractive projects to invest in, but what I don't understand is why all these kind of different factors are combining to such a consistently negative result?

Terrance G. Finley

We've obviously been through an extremely volatile period, and the individual quarters in question each have their own flavor, if you will. Our investment thesis has been prudent and consistent over time. The -- we went through the Borders shock, we went through the digital shock and most recently, we've gone through something much more traditional, which is a tough comparison period in the core business based on an extraordinary event. Each of those things was different. They led to, unfortunately, tough results. But we're still committed to the direction we're taking, and we think the cause of the results is a little more nuanced than might appear just with the raw number.

Brad Hathaway

Okay. So then maybe going in another direction. What would have to happen for you to make a decision to radically change course? Is there a scenario that you could foresee that would -- yes, go ahead.

R. Todd Noden

No, go ahead.

Brad Hathaway

I was going to say, is there a scenario you could foresee either in terms of the industry or company specific that would lead you to say, you know what, this is -- we need to radically rethink this business?

Terrance G. Finley

I guess you'd have to define radical. We're rethinking it every day, both in terms of diversification inside the retail store and in terms of diversification of our business, more broadly. So -- and we have -- we believe we have a prudent strategy.

Brad Hathaway

Okay. I mean, I would define radical as materially slashing CapEx, possibly shrinking the store base wherever the leases allow it and running the business to generate as much free cash flow as possible. That's I guess the way I would think about radical.

R. Todd Noden

And I don't think that, that definition is really too far off the regular economic decisions that we're making each quarter as we evaluate the store performance and where other opportunities are for the business.

Operator

And we'll go next to Harsha Gowda with BlueShore Capital.

Harsha Gowda

So I have a couple of questions for you. Number one, just doing the math and piecing together data points that I'm reading about and what you've said, it sounds to me that there's roughly $20 million of real property on the balance sheet now. Is that correct? That is still cost...

R. Todd Noden

That's an approximate number, yes. You're in the ballpark.

Harsha Gowda

Okay. I'd love if you guys could maybe put it out there a little bit clearer in your -- either in your quarterlies or your annual, just so that's shown a little bit more clearly. So that's number one. The second question...

R. Todd Noden

Harsha, let me let you -- let me just take it item by item. We'll have a disclosure in this Q of the real estate segment. We'll break out that information.

Harsha Gowda

Okay. And actually, that's a great segue to my next question. Just in line with the other analyst's points, it sounds to me that the stores are being run -- and I've been following the company now a few years. So the stores are being run to generate cash, and that cash is being -- or I should say, the bookselling business is being run to generate cash, and that cash is being utilized in many different ventures. One, the real estate, which it looks like some sizable investments have been made, and looking at the reports on those investments, they look to be very rational and good-quality real estate investments; two, in Yogurt Mountain, which seems to be performing; and three, into more innovative real -- retail projects, such as 2nd & Charles, the Kids-A-Million and even the concept stores where a greater amount of square footage is moving away from books into many other projects or many other types of inventory. So that's great and I'm supportive of that strategy. I think that's a great way to adapt to a declining industry and position the company for, I guess, new challenges and new opportunities. But it would be great if you guys could just talk about that and also just reaffirm that, that's the move. Because when I look at the numbers, as the other analyst mentioned, there is a decline in sales, there's a decline in income. But it is a cash-flow-positive company. There's a lot of cash being generated even I'm assuming in this last quarter. So if you could just speak about that and just that whole philosophy.

R. Todd Noden

Well, I think actually, Harsha, you summed it up pretty well. Those are the focuses that we have on the business. Each of those are -- we see as unique opportunities for Books-A-Million to leverage some existing positions that we had, in the case of Yogurt Mountain, in the case of the retail business, some of the investments that we've made in the core business around Kids-A-Million, we -- and it's very, very preliminary, but we see the positive results from that. In the case of 2nd & Charles, I think we're learning a lot, and we -- it's very early in that concept to make a full evaluation. But what we've seen to date has been favorable, and we're going to continue on those paths. And as far as the commercial real estate, we finished our development in Florence. And based on the relationships that we build and the opportunities -- had some other opportunities to acquire some additional real estate in Alabama in a similar concept in Gardendale, and we're going to go ahead and pursue that as well. So when I say that we look at each of these economically and they are unique situations, we truthfully do that, and we're excited about what we see.

Harsha Gowda

Okay, great. Then so I think the only 2 points I would make about that: one, are the banks supportive of this? They seem to be allowing the company not only to make these far-flung investments, but also to repurchase shares. Do you -- are you confident that, considering how the Book business is declining, that you have a lot of support from the creditors?

R. Todd Noden

We have a very strong relationship with our syndicate. And in the second quarter, we renegotiated our revolver. We are very happy with all the banks that participate. It's led by B of A. And I feel that they are supportive of the direction, they understand the direction and they support what we're doing.

Harsha Gowda

Okay, that's great. And so, as a shareholder, I'm very supportive of a move to diversify away from books and selling books as that business is declining. And I like the idea of the, I guess, the mini Berkshire Hathaway model that you're following. My only concern would be that the -- are you really reading the decline well, and are you making sure that something doesn't hit from the side that we don't expect that takes things off course and makes decisions much more, I guess, forced versus voluntary?

R. Todd Noden

Well, the one thing I would say, and it's a diversification but it's not an exit, books are very core to what we do, the relationships that we have, and so it's still a big part of what defines where we are. So let's not take that concept too far.

Terrance G. Finley

And I would point out, the dynamics in the business, although obviously, it's been a tough quarter for booksellers or traditional brick-and-mortar booksellers given the tough comparisons, the complexion of the business is actually significantly more stable than it has been for a while, in that we are not seeing -- we're seeing a decline in that digital impact, and that's broadly felt and we are seeing a stabilization pretty broadly in the book categories in the core business. So yes, I agree with Todd.

Harsha Gowda

Okay, great. And also the whole Espresso Machine move, I think that's a great move and I think that could be something very interesting going forward.

Terrance G. Finley

Thank you, Harsha.

R. Todd Noden

Thanks, Harsha.

Operator

And that concludes our question-and-answer session. I'd like to turn things back over to Mr. Noden for closing remarks.

R. Todd Noden

Thank you. Thank you for everyone on the call. We appreciate you are participating. That's all.

Operator

Thank you, everyone. That does conclude today's conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Books-A-Million Management Discusses Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts