Books-A-Million's CEO Discusses F4Q 2014 Results - Earnings Call Transcript

Mar.20.14 | About: Books-A-Million, Inc. (BAMM)

Books-A-Million, Inc. (NASDAQ:BAMM)

F4Q 2014 Results Earnings Conference Call

March 20, 2014 05:00 PM ET

Executives

Todd Noden - Chief Financial Officer

Terry Finley - CEO and President

Analysts

Harsha Gowda - BlueShore Capital

Operator

Good afternoon. And welcome to today’s Books-A-Million Quarterly Conference Call. This call is being recorded, Thursday, March 20th. At this time, it’s my pleasure to turn the conference over to Mr. Todd Noden, Chief Financial Officer of Books-A-Million. Please go ahead.

Todd Noden

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

At quarter-end, we are operating 261 total stores. During the quarter, we opened two superstores, five traditional stores and closed two superstores. This year, we have closed four stores in trade areas in which we no longer operate other locations. As a result, we reported discontinued operations for our fourth 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 February 01, 2014 decreased 3.7% to $157.9 million compared with sales of $163.9 million in the year earlier period. Note that the year earlier period was 14-week period. Comparable store sales for the fourth quarter, which included comparable 13-week period decreased 1.8% compared with the fourth quarter in the prior year. Comparable store sales excluding the sales of eReader devices declined 0.6%.

Gross margin as a percent of sales after occupancy cost and warehouse operating expense during the fourth quarter was 32.2% compared to 32.8% last year. This decrease was due to the mix of sales offset by favorable shrink adjustments.

Operating, selling and administrative expenses decreased $2.1 million during the fourth quarter compared to last year. This decrease is primarily due to the additional week in last year's fourth quarter period and planned reductions in labor and other selling costs. These reductions were offset by $1.2 million additional operating expense as a result of the consolidation of Yogurt Mountain financial results. As a percentage of revenue, operating, selling and administrative expenses for the fourth quarter were 20.6% versus 21.2% last year.

Depreciation and amortization expense increased $445,000 to $4.9 million in the fourth quarter and $4.4 million in the prior year quarter. The 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 depreciation expense in the fourth quarter of approximately $400,000.

Net interest expense was $567,000 for the quarter versus $400,000 in the prior year quarter, with the increase due to incurring additional indebtedness during the second quarter of the current year.

For the fourth quarter, our net income from continuing operations net of non-controlling interest was $11.7 million or $0.70 per diluted share compared with net income from continuing operations of $8.1 million or $0.52 per diluted share in the fourth quarter of fiscal 2013.

Now, I will provide you with some balance sheet amounts for the quarter. The following figures are compared to balances at the end of fiscal year 2013. Inventory was $199.6 million compared to $201.5 million. Accounts receivable and related party receivables was $3.7 million versus $3.4 million at the beginning of the year.

Net PP&E was $77.4 million compared with $65.3 million at the beginning of the year and this increase reflects the acquisition and development of real rental property of $8.4 million. Total debt was $36 million compared with $5.7 million at the beginning of the year. And this increase from beginning of the year reflects financing on commercial real estate, financing for equity method investments and lower accounts payables leverage.

Stockholders’ equity net of non-controlling interest was $108.5 million compared with $116.5 million at the beginning of the year. And this decrease reflects our net loss for the year of $8 million which includes a non-cash expense of $5.3 million to adjust the company’s income tax provision and year-to-date repurchase of BAMM shares on the open market of $975,000.

Year-to-date capital expenditures for fiscal year 2014 increased $8.4 million to $27.5 million, primarily due to the acquisition of commercial real estate. Net cash used in investing activities increased $9.4 million to $28.5 million. In addition to the increased capital expenditures discussed earlier, this increase also includes the acquisition of a minority interest investment.

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

Terry Finley

Thanks Todd and thanks everybody for participating today. We were pleased with our fourth quarter sales results which represented a nice improvement over the very difficult comparisons earlier in the year. We saw our core book business improve significantly while our new and expanded businesses in the general merchandise area continued to deliver solid year-over-year growth and our team execute our plan admirably despite the challenges presented by inclement weather in both December and January.

Departmental trends mirrored those we’ve begun to see late in the prior quarter including a strengthening marketplace for physical book, continued growth in our gift and general merchandise offerings, and improved sales trends in our bargain book area. We also saw an improvement in the performance of our greeting card business driven by strong sales on seasonal holiday merchandise. As has been the trend all year, the most difficult comparisons came from our NOOK and magazine department where the impact of industry wide changes in those businesses remains challenging.

In our core book business, we reaped the benefits from what was arguably one of the strongest publishing schedules seen in recent years from great commercial fiction to thought provoking non-fiction; it was a lineup that included something for everyone. On the adult side, bestselling titles included Charles Krauthammer’s Things That Matter; Bill O'Reilly’s Killing Jesus; and new fiction from John Grisham, Nicholas Sparks and Stephen King.

By far and away the largest gains were delivered by the teen category where sales were driven by several titles including Veronica Roth’s Divergent Trilogy. Sales from the entire series accelerated during the period in anticipation of the March movie release for the first book in the Trilogy.

Movie Buzz also helped drive widespread interest in several titles by John Green including The Fault in Our Stars which comes to the big screen this June. We also saw a nice growth in our kids’ area which has outperformed the broader book trend all year.

We’re pleased our core book business continued to stabilize across a broader group of categories and the improved book sales trend is in keeping with industry reports that eBook growth has significantly slowed.

In our general merchandise area we continued to see nice year-over-year growth in our gift department where our expanded offerings of toys, games, puzzles and novelty items clearly resonated with our customers.

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 Doctor Who and Duck Commander and online gaming properties like Minecraft.

Categories with the strongest performance included apparel, where a wide assortment of T-shirts, hats and accessories for both licensed and non-licensed properties drove strong sales growth. Novelty gifts where those same licenses combined with non-branded trend merchandise drive positive results and toys where a Lego and a wide variety of educational toys and games from a host of license properties delivered strong sales.

As we look ahead, while winter weather continued to impact sales in February, we’re cautiously optimistic the improved sales trend in the book store will continue. And while the publishing schedule is relatively modest, we still have a solid lineup of books to work with and a strikingly book rich media environment with several film and television tie-ins to help drive sales.

We also expect the pop culture trends that have been so successful for us over the last several quarters will continue to drive sales across many important areas of our business.

I’ll now be happy to take any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll take our first question from Harsha Gowda with BlueShore Capital.

Harsha Gowda - BlueShore Capital

Hello, gentlemen. How are you?

Todd Noden

Hi Harsha.

Terry Finley

Hi Harsha. We’re well.

Harsha Gowda - BlueShore Capital

Great. I’m very pleased to see the great performance. I think your strategy is working excellently and I’m very happy to see that especially with the core bookstore sales excluding the eReader business, I mean that’s fantastic performance. In light of that, can you give me an idea please of this year, what do you expect; are we going to see more of an impact from the real estate segment?

Todd Noden

Well, from the standpoint of real estate, you know that we made another acquisition mid-year that was announced in our Q and that’s under development. And so, it’s going to take a while to develop that property. There is some rental there and the original investment in Florence, Alabama is fully rented. So, I think it will continue to increase, but there is going to be some additional capital expenditure that’s required to get the property up and running.

Harsha Gowda - BlueShore Capital

And are you seeing the type of returns that you had targeted when you went up into this segment?

Todd Noden

The performance is in line with our expectation.

Harsha Gowda - BlueShore Capital

Okay, great.

Todd Noden

From the standpoint…

Harsha Gowda - BlueShore Capital

I was recently reading about how you I guess sold one of your Yogurt Mountain franchises to a franchisee -- one of your stores to a franchisee. Is that the strategy going forward with the non-Books-A-million link to Yogurt Mountain?

Todd Noden

I wouldn’t say that that’s a defined strategy for that whole segment, but we did have an opportunity on some of the stores, where it made sense to exit that property from an ownership standpoint, but we maintained them as franchises. And so, we’re looking to continue to generate revenue from that relationship.

Harsha Gowda - BlueShore Capital

Great, that’s great to hear. I wanted to get an idea of what is the strategy or let’s call it I guess the end game going forward, because you have been moving into non-book categories and I’d love to hear if you have a target for what type of percentage you’re aiming for. But then now, we’re also seeing stabilization of actual physical book sales not only from you, but also from Barnes & Noble, they said the same thing and also the general decline in the eReaders. What is the strategy going forward? How do you see the business evolving into the medium-term and also long-term?

Terry Finley

This is Terry. I think clearly the book business is stabilized and we’re delighted that we sort of found that level that looks like it is going to be as part of our mix. And we can begin to build the business plan around that sort of new reality and that new level set.

Increasingly, we are driven as you can tell from my remarks, we’re in the entertainment business and we are selling products across the broad group of categories, but mostly driven by book properties. So, whether it’s Lego, with a Lego movie or whether it’s -- and all the books and other products that we’re associated with that or Minecraft or any of these brands that we talk about, the store increasingly revolves around those brands. And that experience and our unique ability to bring those brands together across a broad group of categories, it really is what differentiates a Books-A-Million experience today from other retailers who’d maybe in the same segments that we’re in and other competitors. So, that’s our focus.

The industry has been through tremendous change over the last several years. We are at the beginning of a new beginning, is the way it feels. And we think we’re well positioned with the investments we’ve made with the positioning in the non-book businesses that we entered. And now we hope to just move forward into that new world.

Harsha Gowda - BlueShore Capital

Okay, great. And my last question for you, the performance is fantastic. And I wanted to ask you, what do you think the reason for -- considering how most retailers, even non-book retailers had a very, very challenging season, and your results would be favorable compared to these other industries and in light of also the difficult winter weather, what reasoning would you say that performance came out so strong especially when you take out the eReader business, of course other than your execution?

Terry Finley

Right. You did such a great job. I think we were blessed with the fantastic lineup of books and fantastic lineup of media. We had a consumer ready to spend. And we frankly were against very difficult prior years. It hasn’t exactly been an easy run. So this we felt we had planned for and we felt like we would have a chance to really bring home the holiday. And obviously we were positioned to do that and we were able to execute and bring home the holiday in an excellent way.

Harsha Gowda - BlueShore Capital

Fantastic. Thank you. It’s great news. Thank you.

Todd Noden

Thanks Harsha.

Operator

And at this time, we have no further questions.

Todd Noden

Terry?

Terry Finley

Thanks everyone.

Operator

This does conclude today’s conference. Thank you for your participation.

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