Books-A-Million Management Discusses Q3 2014 Results - Earnings Call Transcript

| About: Books-A-Million, Inc. (BAMM)

Books-A-Million (NASDAQ:BAMM)

Q3 2014 Earnings Call

November 26, 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

Harsha Gowda

Operator

Good afternoon, everyone, and welcome to the Books-A-Million quarterly conference call. This conference is being recorded today, November 26. 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

Good afternoon, everyone. With me today is Terry Finley, Chief Executive Officer and President of Books-A-Million, Inc., and we are pleased to host this conference call regarding the company's third 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 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 third quarter, and then Terry will provide a discussion of our current business trends.

At quarter end, we are operating 256 total stores. During the quarter, we opened 2 superstores and closed 1 superstore. This year, we have closed 3 stores in trade areas in which we no longer operate other locations. As a result, we reported discontinued operations for our third quarter and year-to-date fiscal 2014 and prior year results. All amounts that I quote today will exclude discontinued operations, except comparable store sales.

Revenue for the 13-week period ended November 2, 2013 decreased 3.5% to $100.4 million compared with sales of $104 million in the year earlier period. Comparable store sales for the third quarter decreased 8.5% compared with third quarter in the prior year. Gross margin as a percent of sales after occupancy cost and warehouse operating expense during the third quarter was 26.2% compared to 26.4% last year. This decrease was due to mix of sales and higher occupancy cost as a percent of sales.

Operating, selling and administrative expenses increased $1 million during the third quarter compared to Q3 of fiscal year 2013. This increase is due -- is primarily due to the consolidation of the Yogurt Mountain operations, which had operating expenses of approximately $900,000 during the quarter, which were not present in the prior year. As a percent of revenue, operating, selling and administrative expenses for the third quarter were 28.5% versus 26.6% last year.

Depreciation and amortization expense increased $651,000 to $4.8 million in the third quarter from $4.1 million in the prior-year quarter. This increase was primarily driven by the expansion of the company's real estate operations and the resulting depreciation of those assets, as well as the consolidation of Yogurt Mountain, which had a depreciation expense in the third quarter of approximately $300,000.

Net interest expense was $620,000 for the quarter versus $440,000 in the prior-year quarter with the increase due to incurring additional indebtedness during the second quarter of the current year.

For the third quarter, our net loss from continuing operations, net of non-controlling interest, was $6.9 million or $0.47 per diluted share compared with a net loss from continuing operations of $2.7 million or $0.18 per diluted share in the third quarter of fiscal 2013.

Now I'll provide you with some balance sheet amounts for the quarter, and the following figures are compared to balances at the end of fiscal year 2013. Our inventory for the quarter was $232.3 million compared with the beginning of the year $201.5 million. Accounts receivable and related party receivables was $5 million compared with $3.4 million.

Net property, plant and equipment was $78.1 million compared to $65.3 million at the beginning of the year. Total debt this year, which excludes related party note payable, was $84.2 million and compared to $5.7 million in the -- at the beginning of the period.

Our stockholder equity, net of non-controlling interest, was $96.5 million compared to $116.5 million at the beginning of the year. Year-to-date capital expenditures for fiscal year 2014 increased $8.7 million to $23.1 million versus $14.4 million in the prior year. Of this increase, $8.4 million and $3.2 million relate to the development of current -- of commercial real estate in fiscal year '14 and fiscal year '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. Our third quarter results represent an improvement over the very difficult comparisons in the first half of the year. We saw our comparable store sales improved throughout the period, and we were encouraged by the early performance of the book and merchandise lineup, as we prepare for the holiday season.

While the sales trends remain very challenging in the first 2 months of the period, we saw a significant improvement in October that was broadly based across most areas of our business. Our new and expanded businesses in the gift and general merchandise area, media and electronic accessory departments continue to deliver solid growth and our cafés compared favorably as well. In addition, our book, general merchandise, greeting card and media departments all met or exceeded plan.

While some member -- measure of this improved performance was certainly due to the declining impact of last year's Fifty Shades phenomenon, that impact remained material. But strong interest in a lineup of new titles in our core business helped drive the improved comparisons.

As has been a trend all year, the most difficult comparisons came from our NOOK, magazine and bargain departments. The impact of industry-wide changes in the eReader and magazine businesses will remain difficult. However, we have seen improvements in the performance of the bargain book area, and we expect those results to continue to improve.

Excluding the obvious impact of Fifty Shades and our core Book business continued to stabilize in concert with the slowing growth of the digital sales channel, and we did see a handful of categories improve year-over-year. The most material of which were biography and diet and health. Growth in the diet and health category was driven by strong interest in multiple weight loss titles, while biography continued to be positively impacted by the success of titles related to A&E's hit cable program, Duck Dynasty. And while our kid and teen categories contracted slightly year-over-year, this large area of our business significantly outperformed the broader book trend and did exceed budget.

A wide range of new titles from what is arguably one of the stronger publishing schedules seen in recent years began hitting stores late in the period.

In the general merchandise area, we continue to see 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 the Duck Commander and Dr. Who and gaming properties like Minecraft. 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 collectible toys from a host of licensed properties delivered strong results.

As we prepare for the fourth quarter, we still face a material challenge from last year's Fifty Shades success and a retail calendar with 1 fewer week between Thanksgiving and Christmas. The strength of the publishing lineup is impressive, and we're encouraged that it's resonating with our customers. Some great commercial and literary fiction to fascinating and timely non-fiction offerings, it's one of the better collections of new titles to come along in recent seasons, and we expect that the pop culture trends that we've been so successful with over the last several quarters will continue to drive sales across many important areas of our business. We remain focused on the fundamentals of inventory and expense control. And as always, we remain dedicated to providing the value and service our customers have come to expect.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Harsha Gowda with BlueShore.

Harsha Gowda

So I have a few questions for you. Number one, just some clarification on your -- I guess, your rough guidance that you just gave about what you've seen in the final weeks of last quarter and how things are developing. Just to clarify, are you saying that the sales trends is actually positive, or it's just a slower decline? Which -- if you can clarify?

Terrance G. Finley

Well, as you know, Harsha, we don't give guidance. What we're saying is that, during the quarter that we're reporting on, the sales improved each month during the quarter.

Harsha Gowda

Okay, okay. You can understand my confusion, right, with that statement, but I'll leave it at that. Okay. I mean, when you say improved -- okay, that's fine. Now with the -- just if you can -- the inventory number was at $232 million. Is that correct? Is that what you just said?

R. Todd Noden

Yes, $232.3 million.

Harsha Gowda

Why that's -- it's a pretty large jump, especially historically. What is it that caused that big jump? Or the reasons for that, please?

R. Todd Noden

Well, we do have new stores that we're operating, and that is the majority of that inventory build that we've got there.

Harsha Gowda

Okay. And I guess that inventory explains the bigger jump in debt also, right?

R. Todd Noden

Well, remember, the biggest increase in debt is going to come from the additional debt that we took on in the second quarter that related to the real estate expansion. So that's going to be the lion's share of that increase in debt.

Harsha Gowda

And since the end of the second quarter, it is -- from the numbers that you mentioned in the call just now, has the real estate segment increased by about $10 million in size? Is that how I should read it? Or $11 million?

R. Todd Noden

Well, which -- are you talking about capital?

Harsha Gowda

Yes, the capital that's been put in to it, yes.

R. Todd Noden

Right. So for the year, I think that's a good number to work with or it's close to that.

Harsha Gowda

Okay. So as of the end of the second quarter, I calculated roughly that the company has about $40 million in real estate asset value. How has that number changed? And is that number accurate?

R. Todd Noden

Let me confirm that number.

Harsha Gowda

Sure.

R. Todd Noden

Okay.

Harsha Gowda

All right. We can talk about it later. And final question for you. Now I can see that the moves away from -- or at least diversification of the business into real estate and other assets continues, which is good. I'm just a little concerned when I see that sales are not really -- not stabilizing as much as we'd want, at least, up to this point and I know the unfavorable comparison with Fifty Shades last year is going to be -- is going to decrease going forward. But the pickup in expenses -- are you seeing the plan maybe next year to maybe shrink the store count and focus a little bit more on, I guess, cost control, put more money into the real estate side?

R. Todd Noden

Well, can -- I'm sorry, Harsha. Can you just rephrase that a little bit? Just make it a little more clear. I want to make sure I answer the right question.

Harsha Gowda

Sure. Well, it's a few parts there. The big issue is that we see sales continue down, and I understand that money is going into these real estate projects that are going to take some time to show up on the bottom line because a lot of them are development projects. But I wanted to know if -- are you looking to possibly accelerate maybe the downsizing of the bookstore business? Or are you still focusing on a cash flow metric for the stores? And as long as they are cash flow positive, you're going to keep them going. Is that still the strategy?

R. Todd Noden

That is still the strategy. So like I've said in this -- on previous calls, we evaluate that cash flow performance of those stores, and we also look and have various new opportunities and we'll evaluate those. And based on their cash flow performance and their return on investment, we'll make a decision that we feel is in the best interest of the shareholders.

Operator

And, Mr. Noden, we have no further questions in our queue at this time. I'll turn the call back over to you for any closing remarks.

R. Todd Noden

Okay. Thank you, everyone, and thank you, again, for joining us. And we look forward to speaking with you next quarter.

Operator

That does conclude our conference call. Everyone, we do thank you for your participation.

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