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Barnes & Noble, Inc. (NYSE:BKS)

Q4 2014 Earnings Conference Call

June 25, 2014 10:00 AM ET

Executives

Andy Milevoj - VP of IR

Michael Huseby - CEO

Mitch Klipper - CEO, Retail Group

Max Roberts - CEO, College

Al Lindstrom - CFO

Analysts

David Strasser - Janney Capital Markets

John Tinker - Maxim Group

Rory Wallace - DHC Partners

Rick Schottenfeld - Schottenfeld Group

Robert Pickels - Manning & Napier

Operator

Good day, and welcome to the Barnes & Noble Fourth Quarter Fiscal 2014 Earnings Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Vice President of Investor Relations, Mr. Andy Milevoj. Please go ahead, sir.

Andy Milevoj

Good morning, and welcome to Barnes & Noble's fiscal 2014 year-end earnings conference call. Joining us today are Michael Huseby, CEO of Barnes & Noble, Inc.; Mitch Klipper, CEO of Retail; Max Roberts, CEO of College; 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 a rebroadcast or used 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 Huseby

Thanks, Andy and good morning, everyone. First, a brief overview of today’s announcement that the Company’s Board of Directors has authorized management to separate Barnes & Noble’s Retail and NOOK Media businesses into two separate public companies. In fiscal 2014, we took action to strengthen each of our businesses including the ongoing rationalization of the NOOK business, growing the College business through new contract acquisitions and increased offerings to students and faculty and initiatives to improve Retail’s sales trends and its profitability. These actions are reflected in our fiscal 2014 results and have put the Company in a better position to take the steps necessary to accomplish a separation of NOOK Media and Barnes & Noble Retail.

We believe our businesses will have the best chance of optimizing shareholder value if they are capitalized and operated separately. The Company’s objective is to take the steps necessary to complete the separation by the end of the first quarter up to the next calendar year. We fully expect that our Retail and NOOK Media businesses will continue to have long-term and successful business relationships with each other after the separation. We do not plan to provide any additional details on the proposed separation until we believe it is appropriate to do so.

Now, I would like to take a look at our fiscal 2014 performance.

In fiscal 2014, the Company made significant progress in achieving its strategic initiatives while improving the Company’s financial performance and generating consolidated EBITDA of $251 million, the highest level in four years. All three business segments contributed to this performance. Retail and College delivered solid EBITDA while NOOK significantly reduced year-over-year losses. As Mitch will discuss in further detail, our bookstores benefited from the strong title lineup during the second half of the year. And just as importantly our merchants and booksellers made the discoverability of these titles easier for our customers. We believe we have the opportunity to further improve trends going forward through additional merchandising initiatives.

College had another solid year in fiscal 2014. Revenues declined slightly while EBITDA increased 2.8% to $115 million which is inclusive of a $22 million investment in Yuzu, our new digital education platform that we soft launched this spring. We remain excited about the significant opportunities at College. One of the greatest opportunities ahead of us continues to be the acquisition of new school contracts. Last year we opened 30 new schools and see a strong pipeline ahead of us for fiscal 2015. Clients are attracted to College as comprehensive offering for faculty and students and we continue to enhance that offering.

In fiscal 2014, we increased the number of new and used titles available for rent which helped grow the rental business 61%. Rentals provide a significant cost savings to students while also providing higher textbook margins. Schools are also attracted to the connection that B&N College cultivates with students. College’s overall marketing strategies are designed to build relationships with students. These dynamic digital marketing strategies both through email and social media, are fully customized to the individual school brand, focused on customer acquisition, engagement and driving traffic and sales both in the store and online.

These campaigns support the lifecycle of students from freshmen through alumni and drive awareness and loyalty for the school. As we continued to expand our offerings, I am proud of the accomplishments of our college management team especially with respect to the hard work and innovation that has gone into the design and soft launch this spring of Yuzu, our new digital education platform. Yuzu combines a next-generation reading note taking experience in a simple app, providing students with rich content through an online store. We are currently in the testing and content ingestion phase before more fully rolling out Yuzu later this summer, ahead of the back-to-school rush season. We will continue to develop Yuzu into a comprehensive educational ecosystem to meet the needs of student, faculty, institutions and publishers.

NOOK made significant strides in executing on its operational and financial plans in fiscal 2014, including selling through its device inventory, reducing expenses and exploring opportunities to grow content sales which led to an EBITDA loss reduction of $263 million. NOOK continues to provide high quality reading experiences to existing and new customers while also fulfilling our partnership obligations for international expansion of Microsoft’s Win 8 catalogue and store.

On June 6th, we made two announcements that furthered our progress to rationalize costs and positioned NOOK for future success. First we announced that we partnered with Samsung to create customized tablets that combined Samsung’s leading tablet technology with NOOK’s award winning reading experience. We’re excited about this partnership which brings our stores and customers great new products and demonstrates our commitment to NOOK customers as well as growing our digital content business. Partnering with Samsung on co-branded tablets will enable the Company to reduce its exposure to a substantial cost structure and other financial commitments that accompany ownership of the hardware production aspects of the NOOK tablet business. This collaboration will allow NOOK to focus on its proven expertise in acquiring and delivering the best digital reading experience in the marketplace to customers, with our objective to grow NOOK content sales.

Second we announced that we entered into an assignment of lease for our 2,008 square foot Palo Alto campus, and are relocating employees the new state-of-the-art facilities totaling 88,000 square feet. NOOK employees are moving this week to a new facility in Santa Clara, California while Barnes & Noble College’s digital education employees will relocate to a facility in Mountain View, California. This action will result in a net reduction of annual occupancy expenses of approximately $10 million and reduce the Company’s future lease commitments by approximately $102 million. Al will further discuss the financial impact of this action but it’s important to note that this move is another significant step in our ongoing efforts to both rationalize and better equip the NOOK business to achieve success while positioning a digital education team and platform for future growth.

These relocations result in work environments and related cost structure impacts that are better aligned with our business objectives and our employee’s expressed needs. As a result of these and other rationalization actions we have taken in 2014, we expect to continue to decrease EBITDA losses in the NOOK segment in 2015. To conclude we’re pleased with the significant progress we’ve made in 2014 in each of our business segments and also we believe we’re now in a position to focus on the steps necessary to separate Retail from NOOK Media into two separate public companies.

With that I’ll turn the call over to Mitch for a review of Retail’s performance.

Mitch Klipper

Thanks Mike and good morning everyone. Let me begin by saying we’re happy with and encouraged by the improving core business trends that we experienced during the second half of the fiscal year that enabled us to produce annual EBITDA of 354 million. Retail sales performed in line with our expectations with comparable store sales declining 4.1% for the year and core comparable store sales which excludes sale of NOOK products declining 1.9%.

As we indicated in our last earnings call, fourth quarter results were impacted by the severe weather throughout the United States during the month of February. To give you a sense of the magnitude that this had in our results excluding the month of February our fourth quarter comp store sales declined 2.7% with core comparable store sales declining only 0.5%, in line with the trends we experienced during the third quarter. Weather aside we continue to experience many of the same drivers that influenced the third quarter results in the fourth quarter, most notably we continue to be supported by the depth and breadth of new title selection and our merchandising efforts continue to make the discoverability of this extensive selection easy for our customers.

In Q4 top selling titles spanned across the adult, young adult, fiction and non-fiction categories. Top selling young adult titles included hit media properties, such as John Green’s The Fault in Our Stars and Veronica Roth’s Allegiant. Top selling fiction books included Donna Tartt’s Goldfinch and Sue Monk Kidd’s Invention of Wings. Non-fiction sales were bolstered by Todd Burpo’s Heaven is for Real, David Perlmutter’s Grain Brain, Robert Gates’s Duty and Michael Lewis’ Flash Boys.

We’re happy with the results of our toys and games and gift departments which continued their outperformance. We view toys and games 15.1% for the quarter and 11.7% for the year growing revenue and gaining share in an industry that itself is not growing. Our focus is to create a unique carrier department with a bias towards educational toys and games and specialty, hobbies and collectibles. This is clearly resonating with our customers as they choose Barnes & Noble as their destination for these products. We believe that we are just scratching the surface with the specialties, hobbies and collectibles that have further room to grow this business, which include high-end collectibles such as Lego Architecture, Metal Earth, DC and Marvel.

Beyond growing skews we’re also using this department as an opportunity to further foster the strong relationship we have with our customers. Our toys and game departments host free hands-on learning events that feature the toys and games we carry and our events tied to the recent LEGO Movie drove over 70,000 children to our store. As we lookout to 2015, we’re encouraged by the summer title lineup which includes blockbusters such as Hillary Clinton’s Hard Choices and Diana Gabaldon’s Written In My Own Heart’s Blood. We have plenty of bestselling authors including J.K. Rolling’s The Silkworm released on the Robert Galbraith’s Pseudonym and James Patterson’s Invisible. And for teens and kids, we have Veronica Rhodes’ Four and Rick Riordan’s Greek Gods. Beyond the title lineup, our booksellers are excited about our recently announced partnership with Samsung to bring co-branded NOOK devices to our stores in August.

We expect these new devices that combine Samsung’s leading tablet technology without our world-class digital bookstore to drive traffic to our stores. Our bookstores and 14,000 booksellers provide us with unrivaled opportunity to reach and educate customers interested in eBooks. We will support the new Samsung Galaxy Tab 4 NOOK with premier real estate within the store that will put the new devices front and center. Our booksellers are ready to educate customers about these new devices and we will continue to provide unparalleled NOOK sales support to the over 10 million NOOKs previously sold. We remain true to our efforts to be the destination for all readers regardless of format whether it’s hardcover, paperback, audio or digital.

We also plan to launch our new bn.com e-Commerce Web site this summer, which will enhance search and accuracy, provide better shipping and yield cost savings. We believe the new Web site will allow us to be most competitive in the marketplace and continue to be a terrific resource for our customers, whether they like the book shipped to their home or picked up in the stores. Before I turnover to Al, I want to take this opportunity to thank all of our booksellers for their tremendous efforts over the past year to reverse the quarterly core sales trend. They did an amazing job managing expenses and store productivity and as a result of their efforts retail generated EBITDA of 354 million for the year.

And now, I’ll turn it over to Al for the financial review.

Al Lindstrom

Thanks, Mitch. This morning, we released our fourth quarter and full year results for fiscal 2014 which ended on May 3, 2014. Please note that the Company’s fiscal 2014 fourth quarter and full year periods consisted of 14 weeks and 53 weeks respectively as compared to 13 weeks and 52 weeks last year. Comparable sales data exclude the impact of the additional week.

Consolidated sales were 1.3 billion for the quarter and 6.4 billion for the full year. Retail sales increased 0.8% to 956 million for the quarter. The inclusion of the additional week contributed 57 million in additional retail sales this year. Comparable bookstore sales declined 4.1% for the quarter. Retail core comparable stores sales which exclude sales of NOOK products decreased 1.9% for the quarter. As Mitch indicated in excluding February, fourth quarter core comps declined 0.5% in line with previously reported third quarter results. On a full year basis retail sales declined 6% to 4.3 billion. Comparable bookstore sales declined 5.8% while core comparable store sales decreased 3.1% both in line with company guidance, excluding prior year comparisons to the Fifty Shades and Hunger Games trilogies, full year core comps declined 1.7%.

Sales of NOOK products at B&N retail stores declined this year on lower device unit volume and lower average selling prices. Retail sales for both the fourth quarter and full year were also impacted by store closures and lower online sales. Fourth quarter College sales increased 18.2% to $298 million, driven by increased comparable store sales, a higher recognition of previously deferred rentals and new store growth. The inclusion of the additional week also contributed 15 million in additional college sales this year. College’s fourth quarter comp sales increased 2.6% benefiting from the timing of the spring back-to-school rush season, which extended into the fourth quarter.

On a full year basis, college sales declined 0.9% to 1.7 billion. Comparable store sales declined 2.7% in line with Company guidance on lower textbook volume and a higher mix of lower priced used textbook rentals. The comp decline was partially mitigated by an increased store count. NOOK sales which include sales of devices, digital content, and accessories were 87 million for the quarter and 506 million for the full year decreasing 22.3% and 35.2% respectively. The inclusion of the additional week contributed 9 million in additional NOOK sales this year. Device and accessory sales were 25 million for the quarter and 260 million for the full year declining 30.1% and 44.8% respectively on lower unit selling volume and lower average selling prices.

Digital content sales were 62 million for the quarter and 246 million for the full year declining 18.7% and 20.6% respectively due primarily to lower device sales volumes. Consolidated gross margin rates significantly improved during both the fourth quarter and full year largely driven by prior year NOOK inventory charges. Fourth quarter retail margins improved 340 basis points on a higher mix of higher margin core products, increased vendor allowances and lower markdowns. On a full year basis, retail margins increased 50 basis points on sales mix, increased allowances and favorable vendor settlements partially offset by expense deleverage on the sales decline. Fourth quarter College margins grew 420 basis points on sales mix, expense leverage and the recognition of previously deferred textbook rental revenues. On a full year basis, college margins improved 200 basis points on a higher mix of higher margin textbook rentals and general merchandise sales as well as a favorable LIFO adjustment.

Fourth quarter and full year NOOK margin improvements were largely driven by prior year inventory charges of 133 million and 222 million respectively, consolidated selling and administrative expenses increased 240 basis points for the fourth quarter and 70 basis points for the full year. Retail expenses increased 350 basis points during the quarter primarily on expense deleverage and comparisons to prior year legal insurance recoveries. For the full year, retail expenses increased 50 basis points primarily on deleveraging against the sales decline. College expenses increased 100 basis points for the quarter and 180 basis points for the full year including investments in Yuzu, our digital education platform. The Company invested 24 million in Yuzu in fiscal ’14 including 22 million of expenses as compared to 7 million of expenses in the prior year.

Fourth quarter NOOK expenses included a $28.4 million asset impairment charge, resulting from the relocation of the Palo Alto facility. The prior year quarter included 20.3 million of impairment charges primarily goodwill. Excluding both year’s impairment charges, fourth quarter and full year NOOK expenses de-levered as a percent of sales given the revenue decline. As a result of the factors just discussed, the Company improved EBITDA to $251 million in fiscal 2014. Retail grew 354 million despite the sales decline which also included the benefit of the additional week. College contributed 115 million in EBITDA for the year, net of increased Yuzu investments. NOOK cut its EBITDA losses by 55% despite a 35% decline in top-line revenues on comparisons to prior year inventory charges and cost rationalization efforts.

In the fourth quarter the company recorded a 12.5 million tax benefit driven primarily by the utilization of previously reserved deferred tax assets. Tax expense for the full year was 52 million, driven largely by partnership, tax allocations and previously recorded valuation allowances. Consolidated fourth quarter net losses were 36.7 million or $0.72 a share as compared to the prior year net loss of 114.8 million or $2.04 per share. Fiscal 2014 consolidated net losses were 47.3 million or a $1.12 per share as compared to 157.8 million or $3.02 per share in the prior year. Turning to the balance sheet, the Company ended the year with 340 million of cash, comprised of a 187 million at B&N retail and 153 million at NOOK Media.

The Company also ended the year with no borrowings under its billion dollar credit facility as compared to borrowings of 77 million a year ago. Inventories declined 176 million or approximately 12%, driven primarily by the sale-through of NOOK devices as well as lower retail trade book inventory. Consolidated capital expenditures for fiscal 2014 were a 135 million as compared to a 156 million in the prior year. In fiscal 2014, we opened three retail bookstores and closed 17, ending the year with 661 retail stores. College opened 30 new stores and closed 16 this year, ending with 700 locations. The total count of 1,361 stores ended flat for last year.

Looking ahead to fiscal 2015, we expect both retail comparable bookstore sales and core comps to decline in the low single-digits. College comparable store sales are also expected to decline in the low single-digits. The Company expects to continue to reduce EBITDA losses in the NOOK segment. We expect capital expenditures of approximately $140 million in fiscal ’15 which, includes 65 million at Retail primarily for existing stores, approximately 50 million to College largely for new and existing stores and approximately 25 million at NOOK to support digital initiatives. We do not plan to open any retail bookstores in fiscal ’15 while closing approximately 20 stores.

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 David Strasser of Janney Capital Markets.

David Strasser - Janney Capital Markets

Thank you very much. Just a quick question did you mention the EBITDA what the impact of the 53rd week was to that EBITDA number if you did I missed it?

Michael Huseby

No we didn’t mention the EBITDA we mentioned the sales difference.

David Strasser - Janney Capital Markets

Alright, is there -- and can you give the EBITDA is it -- just if it’s possible if you have it?

Michael Huseby

We haven’t broken the -- yes we broke out the sales numbers we didn’t break out the EBITDA components.

David Strasser - Janney Capital Markets

Okay, fair enough I understood I just want to make sure I didn’t miss it. So when you kind of look at the Samsung deal are we going to -- can that expand much bigger I mean it’s pretty interesting it seems like there is a lot of costs that are going to come on to your system as a result of that. When you kind of look at it on the revenue side, is there a big opportunity there beyond this first product or few products?

Michael Huseby

David, we announced the Samsung deal June 6th we’re focused on making sure that the initial product and relationship we have with Samsung which is tablet we have disclosed and described is successfully launched in our stores and we have a successful holiday with it and it’s a big step for NOOK and shifting the strategy for our tablets away from internally at least primarily internally produced tablets and the cost structure that goes with that. Whether we do other devices with them or others will depend upon what happens in the future and where we decide to go we don’t have anything to announce on that at this time but we’re very proud and excited about the relationship with Samsung to world class device and consumer electronics manufacturer so we’ll take it one step at a time and see how this goes.

David Strasser - Janney Capital Markets

And I will ask as you have seen the Infinite Wisdom and the Justice Department what’s been the result of sort of their brilliant decision on agency pricing. Have you had an opportunity to be able to -- have you had an opportunity to -- have you been able to, do you think you’ve been able to capture some business as sort of this conflict between Amazon and Hachette has sort of made the news it has been out there as there been opportunities -- have you been able to quantify that or see a benefit from that?

Mitch Klipper

Yes, hi this is Mitch. We clearly see an uptick in our sales with those books from Hachette but we’re not going to break it out.

David Strasser - Janney Capital Markets

Is there a way -- and you are able to -- do you think you’re able to capture those customer back, either back to you or as an opportunity to continue to keep them going forward?

Mitch Klipper

We believe so I mean they rolled every day at the cash register and they’ve rolling in that field.

David Strasser - Janney Capital Markets

Fair enough. Anyway, thanks a lot. I guess I had a bunch of questions about the merger but I know you’re not going to answer them, so I’ll pass.

Michael Huseby

Yes, just to be clear…

David Strasser - Janney Capital Markets

Or this separation…

Michael Huseby

It’s not a merger it’s a proposed separation…

David Strasser - Janney Capital Markets

I meant separate I meant the other opposite, I’m sorry.

Michael Huseby

Thanks David.

Operator

And we’ll take our next question from John Tinker of Maxim.

John Tinker - Maxim Group

Hi. Congratulations on a good quarter.

Michael Huseby

Thank you.

John Tinker - Maxim Group

Could you just -- you've broken out on the NOOK side the device and the e-content sales and for the year the device was 260 and the e-content was 246 about half and half but for the quarter device dropped to 25 e-content down to 62 and for week 14 it was 1 and 8. So is that just seasonality here or are the device sales really dropping until the Samsung product comes out or is e-content picking up on a relative basis?

Michael Huseby

Well, on the hardware side John I think it’s a combination of both of the things that you sighted obviously we sell the lion’s share of the devices in peaks around the holiday season and it’s a combination of that that’s seasonality as you pointed out and also the fact that in anticipation of launching the new Samsung device in August we don’t have -- we’re working down our inventory and sun-setting our other tablet products that are currently in the stores although they’re still available good products and we still have customers buying them and we’ll stand behind those products the HD Plus and HD they are excellent products. We are sun-setting those and not promoting them the way we did in the past.

John Tinker - Maxim Group

So in terms of write-offs I know you went through so are there anymore one off write-offs coming in the NOOK or are they are all taken into account in Q4?

Michael Huseby

Well, any so called write-offs as you’re calling them we would have assessed in connection with our 2014 year-end work and have reflected in these results I don’t want to speculate about what’s going to happen in the future with there anything significant that we were looking at we’d obviously have to disclose it for example in the third quarter we talked about the fact that we anticipated some impairment on our Palo Alto facility which we have now recorded. So, if there anything significant that we knew about we would be required to disclose that and we’re not aware of anything at this time.

John Tinker - Maxim Group

And the any -- I think you reported last year you had sold 10 million NOOK units. Any suggestion as to the run rate right now?

Michael Huseby

Yes. We don’t talk about run rates on units. We’re going to -- we’re excited about Samsung and launching it in August and believe that that will not only get traction on NOOK device sales which drive locker -- as we call it, content locker starts but also drive traffic to the stores in association with the Samsung and Barnes & Noble brands.

Al Lindstrom

And just remember, the 10 million we said last year was lifetime to-date.

Michael Huseby

Yes. It wasn’t an annual number, just to clarify that?

John Tinker - Maxim Group

Right. Right. Now that would have been an interesting number. So yes, final question; Yuzu, could just talk about that a little more in terms of what the total expense might come in at? And at what point do you begin to see revenues coming in on for the service?

Michael Huseby

I’ll let Max Roberts, our CEO of College handle that one.

Max Roberts

We believe that the increase costs of Yuzu will $5 million to $10 million next year. The revenues are, as the digital is adopted by the faculty and over the next few years we’ll start seeing more digital content. Today we will be launching Yuzu on 700 locations on our website it will be integrated into our schools.

Al Lindstrom

And just to add -- the $5 million to $10 million that Max mentioned is greater [indiscernible] investments.

Michael Huseby

Incremental to 2014 investment and 2015, right.

John Tinker - Maxim Group

And will that than complete it?

Michael Huseby

You never complete when you have a software product that you are continuing to develop and refine in response to market demands and changes; as you learn more about what customers want, and how to better serve your customers. So we won’t complete it. We’re trying to give you some insight into 2015, not beyond that.

Operator

And we’ll take our next question from Rory Wallace of DHC Partners.

Rory Wallace - DHC Partners

Congrats on a results and also the announcement. I wanted to follow-up on John’s question about the digital content sales in the 13th week. And if I’m doing my math right you’re on an $8 million run rate in that week, which would be off the $100 million on a quarterly run rate. And that seems like you’ll be the highest….

Michael Huseby

Hello?

Operator

Rory has disconnected. We’ll take our next question from Rick Schottenfeld of Schottenfeld Group.

Rick Schottenfeld - Schottenfeld Group

First of all, I want to thank you for taking the steps -- you and the board for taking these steps. I know I and a lot of shareholders have been calling for them for a long time and I know that lot of work went into getting yourselves in a position to do so. In terms of NOOK, you’re probably not going to answer this one but can you give us a guide for what you think NOOK run rate losses are going forward with the steps you’ve taken?

Michael Huseby

No, Rick. We actually provided the outlook we’re uncomfortable providing at this time.

Rick Schottenfeld - Schottenfeld Group

Okay. In terms of Yuzu can you talk about the market opportunity? Should I view that opportunity as the 600 to 700 locations that -- the universities that you have relationships with now or should I look at that as a broader opportunity in sort of municipalities and primary education. How big do you think Yuzu opportunity is and can you sort of define your go to market strategy there with the product?

Michael Huseby

Our go to market strategy will be on the national website that students in any university and higher Ed -- or any higher Ed institution can purchase digital content on Yuzu. It will be featured on our 700 stores website that they need digital content and the adoptions of their course materials. They’ll be able to provide it. We believe that we’re positioning the Company to have a digital platform that serves all of education as the conversion to digital occurs.

Rick Schottenfeld - Schottenfeld Group

Okay. And one last -- and how big do you think that opportunity is, in total?

Michael Huseby

We wouldn’t -- we're not disclosing that volume opportunities at this point in time.

Rick Schottenfeld - Schottenfeld Group

Okay. And last question is, the galaxy for NOOK Tab, is it going to be significantly different than a standard Galaxy 4 Tab or how is that product going to look and what is Barnes & Noble going to contribute to that product?

Michael Huseby

That’s a great question. It’s a co-branded customized tablet for us, Rick that we’ll have in the store on our website and possibly with third party channel retailers. That’s something we’re discussing right now. And we’ll probably do, but we don’t have that big jet with Samsung. The look of it will be a co-branded look in the store on the box. When you turn on the home screen, the first thing that you’ll see is there’s a NOOK predominance on the home page together with icons that will link you to the NOOK Store and the NOOK Experience. So it’s built for our customers who want to access a NOOK reading and shopping experience as soon as they turn on the device. The hardware itself will be branded as Samsung, the box, but the actual packaging it comes in, the content will all be developed by NOOK in conjunction with Samsung and customized.

Rick Schottenfeld - Schottenfeld Group

And do you see this relationship with Samsung as being exclusive, or as you take a sort of hardware agnostic view and focus on content, could you see some relationships without hardware companies in the future?

Michael Huseby

Yes. There is no exclusivity with Samsung. We have made a substantial commitment to them and they have made a substantial commitment to us. As we disclosed before, on June 6th, I think it was where we had committed to purchase 1 million devices, a combination of 7 inch and 10 inch device over the next say 15 months from the date of launch beginning in August. So there is no exclusivity. But right now we are very happy to be partnering with Samsung for what we believe will fulfill our tablet needs. And if they don’t, then that’s a good thing for us but we can explore either furthering our relationship with Samsung or with other hardware providers.

Operator

(Operator Instructions). We will take our next question from Rory Wallace of DHC Partners.

Rory Wallace - DHC Partners

Sorry about last time. Where I was going with my question was, you are at about a 100 million run rate in that 13th week and I know its one week. But has there been any recovery in the digital content business which for a while was popping kind of down with the hardware business and now seems to have decoupled from that as John Tinker pointed out.

Michael Huseby

First off, I wouldn’t say it is decoupled. I think that we have always said that the sale of digital content under our NOOK brand is most efficiently achieved by having a relationship with the NOOK device and so as I said before, we are optimistic and looking forward to getting the Samsung device in our stores and online, and in our customers hands, as we believe that especially the way the software is designed and the homepage featuring NOOK, as it’s opened will help drive additional locker content starts. So it’s dangerous to take one month. And especially when the business is as seasonal it is relative to when hardware is purchased and trying to do a run rate off of it; we don’t think that way. We obviously look at run rates and our objective is to reverse the decline in content revenue, not just by selling devices but by -- what we have talked about before, which is pivoting the NOOK business away from hardware centric to a content services company, which allows us to distribute content across other technology platforms as well.

Rory Wallace - DHC Partners

And in terms of -- you mentioned that there is going to be clear uptick in sales from the Amazon Hachette dispute. And has there been any -- are you seeing more benefit on e-books versus physical or is it pretty much the same?

Michael Huseby

We are not going to break that out. Rory. I think getting into that level of granularity isn’t advisable from our perspective. I would say that as mid-stat, you know we are seeing an uptick. We are not – I’ve said this before, we are supporting Hachette, which we consider to be a good strong publishing partner and the authors that work from them. Our main interest is making sure that the customers who want those books are getting them, and getting them as quickly as they can. So we are trying to help Hachette fulfill that objective, whether it’s an e-book or physical book. You can go on to our website at bn.com and see what we’re doing with e-books for Hachette. You can go on our stores and see what we’re doing with physical books with Hachette and you can compare them to other purveyors of reading material.

Rory Wallace - DHC Partners

Okay, and then on the retail SG&A, I noticed it was up 20% year-over-year after kind of being flat to down for the last few quarters. Is there any reason why there seems to have been such a dramatic year-over-year step up? I know that extra week probably added a few percent, right. It seems a little high?

Michael Huseby

Yes. It was the extra week. In the prior year we had some legal insurance recoveries as well in the fourth quarter. And also we delevered a little bit on the weather we encountered on the store payroll. We are going to find out 10-K in a couple of days, and you’ll be able to see more details in the MD&A section.

Rory Wallace - DHC Partners

And then the College gross margins are much higher and I understand that’s the deferred revenue flowing through. Is that a sustainable trend and what should we think about in terms of what the target model looks like? Maybe it’s easier if more fully deployed.

Michael Huseby

We’re not really going to discuss the sustainability of the margins. We believe we have the mix of rental that’s appropriate to support our profitability and support the investment in Yuzu over the next few years. We have a very strong penetration. We will continue that penetration. And we believe we offer the students the best selection, local pickup, convenience and the best payment form. So we believe that the profitability of college will support the use of investment and what you’ve seen in the past.

Rory Wallace - DHC Partners

Okay and I’ll just ask one more -- on the Samsung deal, are you -- any point can you give a little more clarity on the cost structure between NOOK hardware and digital content in terms of the margin profiles, so that we can kind of ascertain how much of a benefit this may be to the model?

Michael Huseby

I don’t think -- we’re not breaking out margins. We’ve broken out some information on sales and other information around hardware and content as you’re calling it. But we’re not getting into margins. That’s not wise for us to do from a competitive perspective.

Operator

And we’ll take our next question from Robert Pickels of Manning & Napier.

Robert Pickels - Manning & Napier

I would echo previous comments on the efforts that you’ve made to get to this decision and I guess my first question is just on the structure of this particular deal. And unlike the previous questioner, I’m going to ask the question on the chance you might answer it. But why -- you seem to have two businesses that are very similar, the College business and the Retail business, and then a product kind of business which is sort of in a very early stage informative. So why did you choose to put NOOK together with the college businesses as opposed to putting the college business with the retail business?

Michael Huseby

Well that choice was initially made in October, actually in April 2012 and then was memorialized in this document and in October 2012 that we signed with Microsoft. You may be familiar with it, and then later with Pearson where we have an entity called NOOK Media. Right now under the structure we currently have, we have a partnership with Microsoft and Pearson in NOOK Media and have ownership by them in that entity and that’s one of the main reasons that you’ll see the proposed separation being structured the way it is. How it ends up in final format will unfold, we’re not going to say anything else about it at this point in time. But as you said you can ask the question, we’re not going to answer it. We will answer why the entities are together. That’s historically known I think, and the reason that was done originally was because of the fact that the College business was headed towards digital transition and there was a strong interest in that business by both Microsoft and Pearson and we partnered very well with them over the course of the last year and a half, two years since we’ve that partnership in effect and we’ll see what happens with the final separation. When it’s baked and we believe it’s the right time we’ll disclose the details.

Robert Pickels - Manning & Napier

I think when that was announced though the content trends were much different than they are today. Why do you think the content is declining -- the content sort of trends are declining so early -- what would appear to be a very early stage of the business’ life cycle.

Michael Huseby

Are you speaking about NOOK?

Robert Pickels - Manning & Napier

Yes.

Michael Huseby

No, I think we’ve talked about that as that, our device sales were markedly higher in prior years than they were. The competition that’s come in the device market in the form of the iPad Mini and holiday of 2012 and the inventory that we had to sell, if you are familiar with the history of the Company over the last 18 months, that we haven’t sold as many devices, therefore our locker starts are down, that’s affected our content revenue. We’re changed our strategy to work NOOK into more of a content services company, so that we can develop it essentially into a software representing the content catalogue that we have and spread that over different platforms as opposed to burdening NOOK with investment in hardware and inventory and that type of thing.

Robert Pickels - Manning & Napier

I understand that but it even seems like the sale of these readers broadly, not just NOOK is really the growth of that business is declining quickly and I guess -- I wonder if -- is it possible that trend toward e-readers was a fad of some kind and that people are -- maybe they have tried the readers and now they want to go back buying the real books or is there anything to that possible risk?

Michael Huseby

It’s always possible that they’re going back to the physical, but we see them going back and forth to digital, then they go back to physical and people -- again their wallets and they want to read digitally, they want to read physical books, they want to read -- listen to audio books. It’s settling in. So it’s not finalized yet where this thing is going to land.

Robert Pickels - Manning & Napier

But it seems like the structure of this deal you are sort of making a bet?

Mitch Klipper

No structure that up [ph] and as Mike said we’re going to take it down the path and when we’re ready to disclose the details we’ll do so.

Operator

It appears there are no further questions at this time. Mr. Milevoj, I would like to turn the conference back to you for any additional or closing remarks.

Andy Milevoj

Great thank you and thank you all for joining us on today’s call. Please note that our next scheduled financial release will be our first quarter earnings release on or about September 4, 2014. Have a great day everyone.

Operator

This concludes today’s conference. Thank you for your participation.

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