Barnes & Noble's (BKS) CEO Demos Parneros on Q1 2018 Results - Earnings Call Transcript

|
About: Barnes & Noble Inc (BKS)
by: SA Transcripts

Barnes & Noble, Inc. (NYSE:BKS) Q1 2018 Earnings Conference Call September 7, 2017 10:00 AM ET

Executives

Demos Parneros - CEO

Allen Lindstrom - CFO

Andy Milevoj - VP, IR

Analysts

Alex Fuhrman - Craig-Hallum

David Schick - Consumer Edge Research

Greg Pendy - Sidoti & Company

John Tinker - Gabelli & Company

Rory Wallace - Caption Partners

Operator

Good day, everyone, and welcome to the Barnes & Noble Fiscal 2018 First Quarter Earnings 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 Corporate Finance and Investor Relations, Mr. Andy Milevoj. Please go ahead.

Andy Milevoj

Good morning and thanks for joining us on our fiscal 2018 first quarter earnings conference call. With us today are Demos Parneros, Allen Lindstrom, and other members of our senior management team.

Before we begin, I'd 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 Demos.

Demos Parneros

Thanks, Andy, and good morning, everyone. Today, I’ll provide an overview of our first quarter results along with an update on our strategic initiatives. Our first quarter EBITDA improved over the prior year to 11.2 million as we’re able to offset comp store sales declines through expense reductions.

Although we’re not pleased with the sales trends, our first quarter performance came in line with our expectations. We’re particularly encouraged by the improvements we experienced in our book trends. Trade book categories, our biggest business, enjoyed its best quarterly sales performance in two years.

Juvenile book titles, our second biggest business, had its best quarter in 10 quarters, excluding last year’s Harry Potter release. Non-book categories, which lifted our overall comps in previous years, continued to struggle during the quarter. We are refreshing and streamlining our existing assortment for the upcoming holiday season while developing plans to introduce a pipeline of new products and categories and initiatives.

We also believe there’s significant opportunities to reinvent high potential existing business lines such as café, Sterling and our B2B program. We expect comp store sales remain challenged for the second quarter as we cycle against last year’s release of Harry Potter and the Cursed Child.

We are targeting improvement in the back half of the year as we continue to test and execute a number of initiatives, some of which I’ll discuss in just a minute. Additionally, we’re excited by a number of our new titles being released by best-selling authors throughout the fall, including Dan Brown’s Origin, John Green’s Turtles All the Way Down, Hillary Clinton’s What Happened and Ken Follett’s A Column of Fire.

Since the beginning of the fiscal year, our team has been focused on the following objectives. One, reinventing the customer value proposition; two, growing sales in our existing stores and developing new store prototypes; three, improving our ecommerce business; and fourth, implementing a company-wide simplification program.

This morning, I’d like to update you on some of those objectives. As we look to reinvent our customer value proposition and growth sales, we’re focused on a number of initiatives to increase the value customers derive from shopping at Barnes & Noble. Our value proposition is comprised of membership, convenience, digital offerings and most importantly our stores where customers come to browse, discover, and interact with 26,000 knowledgeable booksellers.

Pricing is a key consideration and over the past few months, we’ve launched a number of price tests tied to our membership program to see which authors resonate best with customers and increase the overall value of the program. Our goals are to increase enrollment, conversion and visit frequency.

Beyond pricing, we’re also focused on growing sales by improving the overall shopping, browsing and discovery experience for better visual merchandizing and signage as well as personalized recommendations. This includes testing changes to existing store layouts and remerchandising certain businesses. We believe there are significant opportunities to manage our inventory better, increasing trends and reduce unproductive merchandize.

As part of our efforts to better understand customers and develop a robust data analytics program, we’ve recently installed customer counters in all our stores and reintroduced mystery shops. We plan to enhance customer engagement and personalization through improved customer insights. And recently we’ve established an analytics team building the foundation for better analytic rigor.

Stores are an integral component of our value proposition and recently we made a few critical hires to oversee our store growth initiatives. Carl Hauch has joined as Vice President of Stores and will oversee the entire retail store organization and profitable growth of the business. Jim Lampassi has also joined the leadership team as Vice President of Real Estate Development and is responsible for developing and executing our real estate strategy. I’m excited to have Carl and Jim join our team.

In addition to the two new test stores we have in the pipeline, we are reviewing our entire portfolio in identifying opportunities to open new stores in new markets as well as opportunities to relocate stores as their leases expire instead of simply vacating markets. Our goal is to position the company for net store expansion.

Turning to our ecommerce business, online sales declined during the quarter as we cycled against last year’s eBook settlement and focused on improving margins and profitability through lower promotional activity. Our goals for this business are centered on improving performance and enhancements to our omni-channel capabilities.

Beginning in June, we launched a phased implementation of our Web site redesign which improves the shopping experience and provides a solid foundation for features to come. Some of the recent advancements include a new product page design which features a simpler layout and improved navigation to increase conversion and discovery.

To improve discovery, we launched an exciting new book graph feature. It combines our deep institutional knowledge by displaying a visually engaging relationship between books. It’s similar to engaging with a bookseller for a great recommendation.

As part of our omni-channel efforts, over the past year we’ve tested a ship-from-store program which benefits customers and the company by leveraging our existing store base. Through this initiative, our customers benefit from quicker delivery times and the ability to shop our vast bookstore inventory through BN.com.

The company benefits when we do shipping costs as we ship closer to the customer and improve inventory turns. This is an example of one of our tests which was recently rolled from a four-store test to 60 stores. We believe there are other opportunities to improve our omni efforts and plan to launch additional tests throughout the year.

In addition to identifying top line opportunities, we are examining other ways to reduce costs within the organization through efficiencies and simplification. As an example of this labor efficiency – our labor efficiency project was intended to eliminate non-productive spend while improving service and sales.

This includes our new prime-time program where booksellers focus exclusively on engaging with customers during peak hours as opposed to doing tests. We expect this initiative to increase conversion through higher customer engagement while decreasing costs by reducing non-productive tests.

As mentioned on our last call, our goal for this year is to maintain our current level of profitability while planting the seeds for future growth. The best way to achieve value for our shareholders is to grow our top and bottom lines. Everyone in our organization is all in and up to the task. The holiday season and planning for 2018 are on us. We are focused and ready to go.

Now, I’ll turn it over to Al who will review our financial results. Al?

Allen Lindstrom

Thank you, Demos. Today, I’ll provide an overview of our first quarter financial results which ended on July 29. Comparisons are to the prior year quarter unless otherwise noted.

Consolidated first quarter sales decreased 61 million or 6.6% to 853 million. Retail sales decreased 52 million or 5.9% to 830 million for the quarter. Comparable store sales decreased 4.9% on lower traffic with books declining 2.8% and non-book categories down 8.8%.

Online sales decreased 7 million during the quarter as lower promotional activity drove improved margins. NOOK sales decreased 28% on lower content volume as well as lower average device selling prices. Both digital content and online sales benefitted in the prior year from the eBook settlement.

Consolidated gross margins decreased 24 million primarily due to the lower sales volume. From a rate perspective, retail margins declined 50 basis points primarily on occupancy deleverage. The company cut its year-over-year expenses by 26 million during the quarter.

The reductions were due to the lower sales volume, targeted cost savings and comparisons to prior year nonrecurring charges. From a rate perspective, retail expenses slightly increased on sales deleverage while the consolidated rate declined 90 basis points on lower NOOK expenses.

First quarter EBITDA of 11.2 million increased 1.5 million as compared to the prior year as the sales decline was offset by lower costs. The consolidated first quarter net loss was 10.8 million or $0.15 a share as compared to a loss of 14.4 million or $0.20 a share in the prior year.

Turning to the balance sheet, the company ended the quarter with 84 million of borrowings under its $750 million credit facility as compared to 65 million a year ago. Over the past 12 months, the company has returned 57 million in cash to its shareholders through dividends and share repurchases and 151 million over the past two years.

Inventories remain well controlled despite the sales shortfall. Capital expenditures were 21 million for the quarter consistent with prior year levels. During the quarter, we did not open any stores while closing one.

Turning to full year guidance, we continue to expect comps to decline in the low single digits. We expect sales to remain challenged during the first half of the year, which includes comparisons to last year’s release of Harry Potter and the Cursed Child.

Our guidance includes sales improvements in the back half of the year as we target lifts from our strategic initiative and cycle against last year’s headwinds. We expect favorable book trends to continue and our focus on improving sales of our non-book categories.

Our fiscal '18 consolidated EBITDA forecast is 180 million as we expect to mitigate the sales decline through continued cost reductions. The company remains committed to rightsizing its cost structure, increasing productivity, streamlining for operations and eliminating non-productive spend.

Areas of opportunity include store labor efficiency, indirect procurement, inventory management, supply chain costs, back office operations and digital synergies. We are targeting 35 million of cost reductions in fiscal '18, excluding the impact of the prior year nonrecurring charges.

And 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]. We’ll have our first question from Alex Fuhrman, Craig-Hallum.

Alex Fuhrman

Great. Thank you very much for taking my question here. I wanted to ask about a couple of things, first and foremost the guidance for the year for same-store sales to be down in the low-single digits. Obviously you’ve been talking on the last conference call as well about the first half being weaker than the second half. What you saw in the first quarter of the year, was that consistent with what you were originally thinking and can you give us a little bit of color on what you see over the course of the year changing? I know you mentioned the comparisons in some of the releases of specific titles that came out last year. Is there anything on the horizon this year other than the comparisons that really give you that confidence that the trend will improve in the back half of the year?

Demos Parneros

I’m going to start it and Al if you want to chime in, please. So the way that we construct the year as discussed is for the first half to be weaker from a same-store sales standpoint as we saw top Q3 and Q4 last year and have begun to plant a lot of seeds throughout that time. So we felt it would be more prudent to plan the first half in a more conservative fashion and then have many of our tests and initiatives kick in for the second part of the year. We also have a big event in the second quarter which we’ve discussed. So that’s sort of our quick overview thinking. And in terms of specific initiatives for the second half, I’d say that we’ve got a long pipeline of ideas and tests in place to drive sales, traffic, margin to really improve the business overall that range from store experience, conversion tactics to looking at offers, our efficiency membership program, price perception overall on the initiatives that we’re doing with our two channels. So there’s quite a bit in the pipeline and we’re actually meeting on a very frequent basis weekly to determine which things are really rising on our lift and which ones that we ought to drop off so that we can put things in place for the second half.

Alex Fuhrman

That’s helpful.

Allen Lindstrom

Go ahead, Alex.

Alex Fuhrman

So I was just going to ask I guess in addition to that, it looks like Mary Amicucci is leaving at the end of the month, your Chief Merchandizing Officer. Can you give us a sense of how involved she was in all of these different merchandizing tests you’re doing? And at this point, are your plans for the holiday season pretty much set in stone or is that still maybe going to be influx a little bit depending on when and who enters that position?

Demos Parneros

Absolutely. Our entire team has been working on holiday for some time now. Mary obviously as the head of the merchant team, we’ve worked very closely together. As you know, holiday is almost upon us. So the work for holiday started a long time ago. Our team has been working on this. So we’re – I’d say we’re not quite fully baked but we’re just about there for holiday.

Alex Fuhrman

That’s great. Thanks. And then lastly you mentioned the goal of positioning the company to be ready for a return to net store growth. When would be the first year that maybe we could see the actual store count start to increase? Would that be next year or maybe more the April 2020 year? And can you give us a sense of how many more stores you think need to be closed before that corner is ready to be turned?

Demos Parneros

Sure. So as we mentioned earlier, we’re very excited to have Jim join the team as our Head of Real Estate and he has jumped in feet first and doing a deep dive into our entire portfolio as we were doing before he got here, but he’s another good set of eyes for us. And our objective is to get back to net positive by probably late next year. So it’s an aggressive plan and we’ll look at stores that need to close. We’re not afraid to close an underperforming store or two. I will tell you that our portfolio is pretty healthy right now since the team’s done a fantastic job of managing costs and expenses while sales have been down slightly over the last couple of years. But we’ve held the line pretty well. Obviously the priority is to get top line going. We’ve got well over 100 leases that are up for renewal over here for the next several years and we’re in a good position to make the right decisions on either renewing or relocating. In the past couple of years, we have closed some stores in markets we like very much. So we’ve got our eyes on those markets. There are also some very attractive targets where we don’t have stores. While that’s happening, we’ve been developing a smaller and newer very exciting store prototype that is almost ready but not quite there yet. So that’s some of our thinking. And our plans are to begin to replace very good stores and add opportunistically. So I’d say by middle to late next year we should be there.

Alex Fuhrman

Great. That’s very helpful. Thank you very much.

Demos Parneros

Thank you.

Operator

We’ll go next to David Schick, Consumer Edge Research.

David Schick

Hi. Good morning.

Demos Parneros

Good morning, David.

David Schick

Questions around membership. You said that – obviously you’ve been talking about changes coming. I think it would be helpful if you could just talk about how far reaching – I’m sure you want to stay away from specifics, but how far reaching are you thinking in terms of changing the way a membership program works for Barnes & Noble?

Demos Parneros

I’ll share with you what we know so far. Membership program is very important to us and the base of customers, the base of members, just incredibly loyal customers, they shop more frequently, they are much more engaged with the brand overall, they shop multiple channels. So obviously our objectives are to grow membership, have better attention, but we also need to keep the program interesting. So in terms of how far reaching, I’d say that at the moment we’re not very far reaching. We are more testing different value offers. We’re looking at different components from pricing, structures within the program. We’re taking a look at special timing for certain offers. So I’d say that we’re in the early stages of enhancing the program. I would not look at this as a total redesign of the program at this point. We like the program and customers like the program. So we don’t want to overtake her but we want to continue the loan and by doing more tests, I think – we’re actually learning quite a bit from the couple of months that we’ve been doing these tests. There’s also more to come on this one because it’s a high priority for us.

David Schick

Great. Second thing, could you talk about the vendor community? If you look back over the last decade plus, there are times when the publishers in particular sort of come in to try to I think really work together and drive the bookstore differentiation or experience or how the industry works, and then obviously industry trends change or whatever. Could you talk about how things are shifting with your vendors, with the publishers and how they’re thinking about the bookstore model?

Demos Parneros

My experience over the last couple of months as I’ve met with many of our top publishers – I obviously haven’t been to everyone yet, but I’ve had very productive meetings with our publishers who share similar goals to us. And they’re very focused on really providing the great experience in store. The teams I think partner very well together. We’ve actually established an even better cadence to meet frequently and to share successes and to challenge one another. So I think obviously having stores and product by using touch and feel and discovery have the highest importance to them and to us. So I’d say the relationships are productive, they’re good and we’re just looking for ways to make them even better. So I don’t see any sort of shift at this point. Obviously I don’t have a deep perspective on the past, but from my experience over the last six to nine months, I feel pretty encouraged.

David Schick

Okay, great. Thank you.

Demos Parneros

Thank you.

Operator

We’ll go next to Greg Pendy, Sidoti.

Greg Pendy

Hi, guys. Thanks for taking my call. You mentioned earlier just the significant flexibility that you guys have with a lot of your leases up for renew I think within a four-year window and also the possibility of relocating. I guess with traffic being pretty negative especially in malls, is that an opportunity that you guys are basically seeing to maybe find some nearby locations maybe at lower rent levels since the traffic might not be there?

Demos Parneros

Definitely, I think it is. It’s a little bit of a double-edge sword because we know traffic is challenged. Every retailer out there or almost every retailer out there spends much of their time talking about this. We feel like there are a lot of bright spots. Comp sales and books were while still negative, they were improved. So the trends are better. We’re not all the way there yet. I think you had said with overall mall traffic, although I think malls, especially the better malls, are really shifting and they’re changing the composition of what’s inside and the types of experiences and stores and restaurants and so forth that are in the malls. I think for us it really truly is a case-by-case decision. The nice thing for us is that we’ve got, as I mentioned before, about 130 per year over the next say three, four years. So we really have a chance to think about this and not feel rushed and really evaluate each market. And more importantly look at our portfolio for each market as opposed to just one store at a time. And then we can decide how to reposition stores within a market.

So it’s a great opportunity in a mall. We’re very interested in taking a look at that if the financials make sense and if we feel like we can deliver the sales. If not, we are also comfortable being nearby. I think the one thing for sure – that is for sure is that we want to slim down our square footage obviously. It gives us a chance to really freshen up the store and display some of our newer merchandizing techniques and visual merchandizing techniques that we’ve picked up from some of our new test stores and frankly cut off things that are not working. So I think we’ll brace for it. We’re very focused on this and we’ve got a good sort of cadence in place to get in front of this and be proactive and do a good job with it.

Greg Pendy

That’s helpful. Thank you.

Demos Parneros

Thank you.

Operator

We’ll go next to John Tinker, Gabelli.

John Tinker

Thank you. I noticed that Amazon’s announced they are opening a second store in Manhattan. How would you – that these are far smaller stores than yours and they’re heavily curated, how would you – have you noticed any changes in your business in the city as a result of an Amazon store in any other markets, or are they serving a different kind of audience? Thank you.

Demos Parneros

Thanks for your question. I think it’s a different kind of bookstore. Our stores are really much more about discovery and spending time walking through stores and examining different categories. I think their stores are much smaller and they have a different purpose. We’re focused on reinventing our new prototype store which will be bigger than those stores but smaller than our existing average store. But I’d say too soon to see any impact from the stores they’ve opened.

John Tinker

And how – I noticed you have a very good restaurant with waiter service up in I think Eastchester. How does that affect the economics of the store there? Does it drive greater traffic or do people buy more because they’ve had a couple of beers or some wine at lunch?

Demos Parneros

Well, if it was that easy we’d roll out the six packs I think. So we have – as you know, we’ve got three stores with restaurants currently opened, Eastchester being one. There is one more in the pipeline to open soon in Plano, Texas. I can’t say that we can conclude at this point that having a restaurant drives traffic or vice versa. I think for us it’s been a really interesting test. The feedback’s been good. We’ve learned a lot in terms of what sells and the traffic patterns. It’s new for us still. We were in the book business forever and in the restaurant business for just a short time. So we’re trying to learn as much as we can. I would say that nothing overly conclusive yet that we can run with, but the positive is that the feedback has been good.

John Tinker

Thank you.

Demos Parneros

Thank you.

Operator

[Operator Instructions]. We’ll go next to Rory Wallace, Caption Partners.

Rory Wallace

Hi. Thanks for taking my question. I was looking for clarification in terms of when you plan to return to net store growth. Is it the back half of next fiscal or next calendar year that you were targeting that?

Demos Parneros

We don’t have it so precisely done to be truthful. What I was referring to earlier was the next full fiscal year.

Rory Wallace

Okay.

Demos Parneros

So a year and a half from now. But we’re actively working on this right now. So whether we are within one or plus one or minus one is less important to us. What we are very focused on is to make solid decisions on each one of these, particularly given the fact that we have not really opened many stores recently and we’ve actually had net closing. So we’re excited about the smaller prototype idea and we’d be looking to push that.

Rory Wallace

Okay. And how should we expect – you have I guess the four pilots now and how should we expect that to sort of evolve as these renewals come up, would you be expecting to transition a large segment of the new store base to a smaller concept, or is it still too early to determine that?

Demos Parneros

Our goal is to look at each one and depending on the economics and the deal on the table make the call at that point. I think in general we could live with slightly less space but we have no problem with a bigger store if it’s a high-performance store and there’s good lease term left, that’s fine. It’s not easy to downsize stores and we have a great location and it’s a little bit bigger than we’d like, it’s okay to keep it. But I think we go through sort of a series of options with each one of the renewals which includes do we keep the store, do we want to relocate the store, do we want to reduce the store size? And of course we want to look at the economic picture for each option and then we want to get our latest thinking, our best, most productive prototype in front of the customer every chance we get. So I’d say it’s a little bit situational but I would say rule of thumb is if we can be a little smaller, we’ll do that. If there’s a zero opportunity, we’ll go with something smaller.

Rory Wallace

Okay. Thanks. And then on expenses, I noticed that the retail SG&A expenses were you’re down more year-over-year in Q3 and Q4 than they were in Q1. Were there any I guess just sort of normal annual escalators that caused SG&A to not be down as much in Q1 or how should we expect expenses to trend on the retail side?

Allen Lindstrom

Rory, it’s Al. So in Q3 and Q4 last year, remember Q3 obviously is holiday so it’s a little bit easier to flex and up and down your expenses at that point given the sales volumes. And then in Q4 we were comping against nonrecurring charges from the preceding year. So that’s why it was easier to have lower expenses in Q4 last year. And then in this quarter, you’ll obviously see comparisons to some charges we took last year plus some cost takeouts. And throughout the fiscal year you can expect improvements in every quarter. We’re not back loading those. We’re jumping on those and getting ahead of that now.

Rory Wallace

Okay, great. And lastly on capital allocation, I know you’re committed or I believe you’re committed to continue to pay the $0.15 dividend. But in terms of the buyback, you haven’t utilized it in some time and clearly there’s been shareholder activist that have put forward a certain view on the company. Maybe if you could comment, do you view I guess returning capital more aggressively as a potential path that you might take or what are your views on capital allocation?

Allen Lindstrom

So regarding the dividend, we’re executing to our program and as I said on the last call I expect to continue to pay the dividend as long as the free cash flow supports it. And that’s ultimately a Board decision, but that’s our approach. And regarding the buyback, we are focused right now at improving our comp sales trends and rationalizing our expenses. That’s really what our focus is right now.

Rory Wallace

Okay. Thank you.

Operator

We have no further phone questions in the queue at this time. I’ll turn the conference back to Mr. Milevoj for any additional or closing remarks.

Andy Milevoj

Great, thank you. And thank you all for joining us on today’s call and your interest in Barnes & Noble. Our second quarter earnings release will be released on or about November 30. We look forward to updating you then. Have a great day, everybody.

Operator

That does conclude today’s conference. Thank you for your participation. You may now disconnect.