Barnes & Noble, Inc. (NYSE:BKS) Q2 2017 Earnings Conference Call November 22, 2016 10:00 AM ET
Andy Milevoj - VP, Investor Relations
Allen Lindstrom – Chief Financial Officer
Len Riggio – Founder, Executive Chairman & CEO
Mary Amicucci – Chief Merchandising Officer
Demos Parneros – Chief Operating Officer
Alex Fuhrman – Craig-Hallum Capital Group
David Schick – Consumer Edge Research
Greg Pendy – Sidoti
Daniel Freedman – ILS
Good day and welcome to the Barnes & Noble Second Quarter 2017 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Andy Milevoj. Please go ahead, sir.
Good morning and thanks for joining us on our fiscal 2017 second quarter earnings conference call. With us today are Len Riggio, Allen Lindstrom, and other members of our senior management team. Before we begin, I would like to remind you that this call is covered by the Safe Harbor disclaimer contained in our press release and public documents and is the property of Barnes & Noble. It is not for rebroadcast or use by any other party without the prior written consent of Barnes & Noble.
During this call, we will issue 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.
And now, I’ll turn the call over to Allen.
Good morning, today I’ll provide an overview of our second quarter financial results. Comparisons are to the prior year quarter unless otherwise noted. During the quarter, total sales decreased $36 million or 4% to $859 million. Retail sales decreased $30 million or 3.5% to $831 million, primarily due to lower comparable store sales and store closures. Comps declined 3.2% for the quarter as continued lower traffic trends were partially offset by the release of Harry Potter and the Cursed Child. In addition, comps are being pressured by comparisons to the strengths of coloring books last year.
During the quarter, we added inventory and payroll hours back into our stores and conversion rates improved. We plan to strategically add store payroll hours during the all-important holiday season. Online sales increased 12.5% during the second quarter. We continue to invest in [SCO] [ph] to drive traffic and recently refreshed our site to enhance the customer experience heading into the holiday season.
NOOK sales decreased $8 million or 19% to $35 million for the quarter on lower content and device volumes. Recently, we’ve launched a new 7-inch NOOK tablet that provides great value for our customers at just $49.
During the quarter, consolidated gross margins decreased $14 million, primarily on the lower sales volume. From a rate perspective, retail margins declined 70 basis points, primarily on higher promotional activity. Consolidated selling and administrative expenses decreased $36 million to $255 million during the second quarter. NOOK expenses decreased $19 million or 49% on continued cost rationalization efforts and lower variable costs on the sales decline.
Retail expenses declined $17 million or 100 basis points. The prior year quarter included a $10.5 million separation-related severance charge. In Q2 this year, the company recorded a $4.8 million severance charge in connection with its recent CEO departure. This charge was partially offset by the reversal of $1.9 million of previously expensed equity awards, resulting in a net P&L charge of $2.9 million during the quarter.
Excluding both years’ severance charges, as a percent of sales, retail expenses were essentially flat with the prior year as cost reductions offset sales deleverage. Total second quarter EBITDA improved to $21 million over the prior year, primarily due to the NOOK cost rationalization. Retail EBITDA slightly improved as the sales decline was mitigated by lower severance charges.
The consolidated second quarter net loss was $20.4 million or $0.29 a share as compared to a loss from continuing operations of $27.2 million or $0.36 a share in the prior year. The company ended the quarter with $191 million of outstanding borrowings under its credit facility, consistent with prior year levels and reflective of the seasonal working capital requirements of the business.
During the quarter, the company returned $21 million in cash to its shareholders, including $11 million of dividends and $10 million through share repurchases. The company acquired approximately 878,000 shares at an average price of $11.44 under its program during the quarter. Since July of 2015, the company has returned $115 million in cash to its shareholders through share repurchases and dividends. Capital expenditures were $52 million on a year-to-date basis, consistent with prior year levels.
Now let’s turn to the fiscal 2017 outlook. We continue to expect our full-year comps to decline in the low single digits, which is largely dependent on the results from the upcoming holiday season. We also continue to expect full-year consolidated EBITDA to be within a range of $200 million to $250 million as expense reductions offset lower than expected sales.
Through the first half of the year, our internal EBITDA targets are on plan. Retail EBITDA is expected to fall within a range of $240 million to $280 million, excluding the impact of any charges related to its cost reduction initiatives, as well as costs associated with the recent CEO departure.
Despite softer than expected sales, we’ve been able to hold our retail EBITDA guidance due to cost reductions. While we continued to reduce costs where prudent, our EBITDA guidance is dependent upon achieving our comp sales guidance. NOOK EBITDA losses are expected to decline to a range of $30 million to $40 million, inclusive of transitional costs.
And now I will turn the call over to Len
Thanks, Allen. Good morning. As Allen said, our comparable sales have declined 3.2% in the quarter. We are not happy about it. It is certainly not where we wanted or expected to be. It’s obvious I think to all that this year’s election had an effect on most retailers, but we don’t know at this moment where the new norm is, and we won’t know until well into the holiday season.
On the plus side, I must say that in looking at the numbers more granularly, we have noticed that the comparable sales declines during the TV viewing hours, which is where we think people, were all preoccupied watching the election coverage, and we’re talking about over a six to eight week period of time. But we got hit during the television viewing hours, and we were normal or even better than normal elsewhere during the day. And the same pattern held for the weekends where during the week of – we had pressure on our sales, and then on the weekends, sales would be normal-ish.
So we are thinking we are going to come out of this. We think we will be back on track before the holidays and through the holidays, and we will let you know obviously right after the holidays how we fared.
As Al said, we are continuing to tighten down on all controllable expense categories, those to meet our cash – our year-end cash flow forecasts. As you know, I am serving – now serving as CEO of the company, and for the record, I’m enjoying every aspect of being in the seat. I am energized, and as always, I see more opportunities than challenges.
Now that we are in the final stages of rationalizing NOOK, the company can better focus on its core retail business and forge a path to growing our comparable store sales and hopefully our store population as well. Obviously we’ve been making some changes in the management and particularly organizational structure.
And at the same time, I must tell you that the professionals who manage this company are excellent in every respect. I really enjoy working with them; dedicated and highly competent professionals. And our field organization, which includes our great store managers, as well as many thousands of local booksellers, I think is the best our industry has ever known.
Let me also note that today we opened our new prototype store in – let’s call it a test store as opposed to a prototype. It’s in Eastchester, New York, near Scarsdale, for those of you who don’t know the area. Welcome you to go up and visit it. We think it’s going to be a homerun. The customers and the community are really, really excited to have us. We are testing a new concept with a more extended food offering and, as you know, a wine bar, which we think is appropriate to our business. It’s a smaller format store than we’ve had before. So we are testing less square footage to see how we fare.
So you should go up and look at that store if you are interested. We have a couple of more of our new stores opening in the next – before the end of the year. A total of four test stores will have been opened by the spring of next year, and we will have a lot more to report.
One other thing I wanted to mention is we launched a $49 NOOK device, and we are selling out. The great thing about it is that the device will obviously feed our content business and with virtually zero risk. We have no technology exposure. We have no capital investment in it. We are working with technology partners. So as they are manufacturing devices to our specs we – well, we hope to be sold out for the holidays, and it’s kind of looking that way now. So that’s another part of the many – another component of the many initiatives we spoke about earlier in the year.
And then lastly, let me offer a big shout out for Demos Parneros, who began yesterday, as our Chief Operating Officer. Demos is a lifelong retailer. He comes to us with an amazing track record of achievement, and equally important, he’s been widely praised by people who work for him, with him, and those to whom he reported. Demos is here this morning. You can ask him a question if you like. He just made a face. Thank you, all.
I will turn it back over to Andy.
Okay. Great. With that, operator, we are ready to take questions. Please introduce the information to ask a question. Thank you.
Certainly. [Operator Instructions] We’ll take our first question from Alex Fuhrman of Craig-Hallum Capital Group. Please go ahead.
Great. Thank you for taking my question. I guess my biggest question here would be on the guidance. Particularly the same-store sales guidance for the full-year would imply that the third and the fourth quarter are pretty significantly better than what we saw in the first half of the year. We would love to just get a little bit more color on what is driving that. Are there any major traffic driving events such as new book launches that you are anticipating for the back half of the year, or is this potentially driven by some of your non-book categories and what you have planned for the holiday season? Would be curious to hear a little bit more about your expectations for the next two quarters, thanks.
Well, the comparable store line is obviously driven by traffic, and traffic is helped by hot books or bestsellers. So we always have the effect of especially a mega book like Harry Potter. So you get more traffic. However, you don’t take the money to the bank in terms of the sales increases because we work at razor thin margins on the bestsellers.
On balance, we like the idea of the big book and – because it helps drive us, but we need to get more than just the increase in sales that the big book provides so we have to have attached rates to that. We’re not having a spectacular season. I think – Mary Amicucci is here. I think we are kind of average this season. I mean, there are no blockbusters on the –
No. No blockbusters to speak of, other than the big book event, which was Harry Potter and the Cursed Child.
Yes, so I would say that this is an average of – average season that we’re looking at –
Publishing season. We are not looking at it as a bullish season for bestsellers. There were a couple of sleepers that are out there.
They will turn up, but we don’t have anything major. I think you have guidance – Al, have we given guidance on comparable sales for the balance of the year?
We gave it for the full-year, which is on the low single digits. But to Alex’s point, if you take the year-to-date trends and you say you’re going to finish in the low single digit that implies you’re going to get a little bit better in the back half of the year.
Alex, also remember that we had challenges earlier in the year on payroll and inventory which we have injected back into our stores, and then obviously the traffic trends that Len talked about.
But the attach rate also went up as soon as we –
The conversion rate went up for the second quarter.
Great. That’s definitely helpful. Thanks. And then would love just to hear your thoughts on the loyalty program. I know that’s something that was talked about at the Analyst Day earlier that year. Are you seeing the signups that you had hoped to see in getting more people onto your loyalty program, and what is your outlook there for the holiday season?
Yes, well, one of the first things that I reversed was the bank credit card. I had told the previous CEO not to go there – the bank card. We have been there before. It just made the cash register transaction just so much more complicated. I mean the customer comes they pay, and they don’t want to be hassled or harassed. And you say that would you like to buy a membership card, or would you like to buy a bank membership card? You know like what’s the difference and then you have to engage the customer and the people online waiting to check out.
So it was a complex sell. And what happened is our membership card sales basically tanked when we were trying to sell the bank card, and the bank card sales weren’t spectacular in any case. So we got rid of the bank card, and our sales are and the membership card are now tracking as against the traffic we now have. We think we’re going to get better, and we are working on – as we speak, we are working on, let’s say, updating our offering to our customers with respect to our membership card.
As you know, we were I think the first retailer to actually have a paid membership card. Amazon actually followed us after we began. We do not have a typical rewards program. Rewards program is a free card to everyone. It’s basically a bunch of coupons and Internet or digital offers. So the membership program is important to us, and it really does drive loyalty, and it affects our bottom line in many, many respects.
Great. That’s helpful. Thank you very much.
We will take our next question from David Schick of Consumer Edge Research. Your line is open.
Hi, good morning. Thanks for taking the question. My question – I will take advantage of the offer. My question is for Demos. Could you talk about what you see when you walk a Barnes & Noble store from a merchandising operation? Just any of your initial thoughts in joining in the Barnes & Noble customer experience would be helpful. Thank you.
Good morning, and thanks for the early touch on the ball there to get right into the game. I’m super excited to be part of the team here, first and foremost, and one of the things that attracted me to the opportunity was the brand – the amazing respected company, and for years, I’ve been a customer.
So while I don’t have sort of a fully vetted point of view on that, I know as a customer I enjoy shopping the stores, shopping the site, and just been listening to the team here this morning, you hear things like new store concepts, different sizes, updating memberships. It’s exciting to be part of a group that is digging and learning and interested in continuing to evolve forward. So, hope to develop a more informed point of view, but initially, I think there’s a lot of excitement, and I’m thrilled to be here. Thanks.
We will take our next question from Greg Pendy of Sidoti. Please go ahead.
Hey guys, thanks for taking my call. Can you just give me a little bit of color, I guess, on the NOOK losses because they seem to come in pretty much improvement, and you point to cost rationalization efforts, but you are maintaining your NOOK EBITDA losses in the range of $30 million to $40 million. So how should we be thinking about that in the second half? Were there some one-time benefits in this quarter specifically, or is it just going to continue to improve, and should we extrapolate this as sort of a run rate? Thanks.
Hi, it’s Al. So, as you think about NOOK guidance for the year, just remember the business is seasonal, and in the third quarter, we do have devices that we sell which are not the same margin rate that you have in other quarters with a heavier mix of content sales. So that puts pressure on third quarter numbers as you roll the devices out, and then, also, you put some promotions behind that in terms of marketing to sell those devices as well.
So, as you look at the balance of the year, there’s no, as you called it, one-time things in the quarter, but I can tell you that there is seasonality impacting the numbers for the fiscal year.
Okay. All right. That’s very helpful. Thanks a lot.
[Operator Instructions] We will take our next question from Daniel Freedman of ILS. Please go ahead.
Hi, thanks for taking my call. I’ve two quick questions. If I look at the 10-Q quickly and it said that there was a settlement impact that – I’m sorry, a favorable channel partner settlement that benefited NOOK cost of sales, was that in the prior quarter or this quarter because that is just for the 26 weeks?
That was the 26 weeks. That was in the prior quarter.
Okay. And then the other question I had was how to think about inventory going forward. So it seemed like it had stepped down a bit, but that was really driven by NOOK inventory. So, if you look at retail inventory, it seemed to be flattish relative to the comfortable sales declining. So how should we think about that going forward, assuming that you meet your guidance for sales?
Well, if you remember back at year-end and the end of Q1, we said that we thought we had cut inventory a little too deep in returns in the fourth quarter. So we stocked back up during the second quarter. And you are right, we did cut our NOOK inventories, given the sales volume and we did increase our retail inventory to go after what we think is going to be improved traffic trends in the back half of the year.
Okay. Thank you.
There are no further questions at this time. I will turn the call back over to Mr. Andy Milevoj. Please go ahead, sir.
Great. Thank you for joining us on today’s call and for your interest in Barnes & Noble. Our next release will be our fiscal 2017 holiday sales release on or about January 5. And, with that, we will wish everyone a happy holiday season. Thank you.
That concludes today’s conference. Thank you for your participation. You may now disconnect.
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: firstname.lastname@example.org. Thank you!