Barnes & Noble (NYSE: BKS) Q3 2019 Earnings Conference CallMarch 7, 2019 10:00 a.m. ET
Contents:
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- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the Barnes & Noble fiscal 2019 third-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 Investor Relations, Mr. Andy Milevoj.
Please go ahead.
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Andy Milevoj — Vice President of Investor Relations
Good morning and thanks for joining us on our fiscal 2019 third-quarter earnings conference call. With us today are Len Riggio, Tim Mantel, 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 Tim.
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Tim Mantel — Chief Merchandising Officer
Thanks, Andy. I’m pleased to kick off the call today to review the results of our third quarter and outline our merchandising priorities for the rest of the fiscal year. By aligning our merchandising, marketing, and store operations teams, and by working significantly farther out in our planning, Barnes & Noble delivered a 1.1% increase in quarterly comparative store sales, and we continued the sequential improvement in quarterly sales results we’ve delivered over the past four quarters. Our quarterly sales performance of positive 1.1% is the best we have delivered in the past three years.
The quarter began slowly in November, traffic and transactions were down significantly, and we did not see sufficient momentum from what was expected to be a blockbuster season of new publishing. This weakness was accompanied by slowness in our Cafe and in seasonal gift and other trend and Impulse categories. We reacted early to this season. By examining our marketing and event calendar and by adjusting pricing, promotions, and presentations, we were able to make adjustments that delivered a 4 percentage point comparative store sales increase from Black Friday through New Year’s Day.
Book sales have improved sequentially each quarter as we continue to enhance the in-store customers experience by opening up the sales floor, signing promotions and in-section displays with more clarity and by assisting and browsing with expanded shelf talkers and tools to improve book seller recommendations. We also placed great emphasis on books throughout all aspects of our marketing, including a significant increase in funding for holiday broadcast and digital marketing that celebrated our booksellers as they were seen helping customers find that perfect last-minute gift. Michelle Obama’s memoir, Becoming, stands out as our best-selling book this year. And although very widely distributed, our ability to get products quickly front printing to market was integral in delivering significant market share we had with this title.
With all of the energy behind the Obama book, Barnes & Noble leveraged sterling publishing to produce a commemorative photo picture book that we sold as a companion item. Developed internally, this was a margin-rich add-on sale for Barnes & Noble and customers loved the idea and the book, which was a complete sellout. In other categories, we saw significant strength in cookbooks, personal growth, science fiction, and fantasy and continued strength in current affairs. In kids, investments in changing out fixtures to create a license destination in an area we call the Porch proved successful.
The goal is to create more visibility for key initiatives while being more flexible to make change-outs as kids’ interest move from license to license. We credit this change with the success of Dr. Seuss and How the Grinch Stole Christmas, and strength in seasonal books and books for infants and toddlers. For young readers and adult fiction, results were best when aligning store events with daypart promotions to drive traffic.
From Saturday story time to kids’ book hangout and young adult moments, we’re building great events to make Barnes & Noble a destination for kids who love to read. Cyclical negative trends in movies, music, and newsstand continued. And although they create less a headwind on our comp store sales, we’re focused and continue to look at financially sound ways of repurposing this space. The goal is to update the assortment and esthetic to make the sales floor more productive and the store more comfortable for our customer.
To that end, just ahead of holiday season, we executed many remodels in 91 stores to condense and relocate movies and music out of the sales floor. In its place, we added a destination, educational toys and games assortment and a collectible shop, where media was once merchandised. The early read is encouraging, but any decision on further store changes will depend on sales margin and inventory results when looked at outside the holiday season. Educational toys and games performed well throughout the season and across categories with particularly strength from products anchored in literary properties like Harry Potter.
And although much work remains to elevate our gifts business, the early work in correcting prior year issues with inventory, assortment, and presentation resulted in our highest category comp sales this quarter. Our stores did a fantastic job this holiday, always passionate about customer service and their love of books, their job was made easier by what we call the holiday playbook. The playbook is a detailed, integrated, and sequential business plan based on our customers’ mindset throughout the holidays. Introduced at our national meeting in September, stores understood their holiday strategy and worked to prepare their store for the season.
As a result of upfront planning and early communication, stores successfully executed timely product transitions, accurate promotional setups, and created great visual displays. As the season played out, we were confident stores were executing consistently and on time, and we were able to leverage results to quickly pivot and make adjustments as the season progressed. Several of our key sales drivers emerged in-season and are already being used to impact current business and will be embedded in next year’s holiday playbook. The holiday playbook was instrumental in aligning the digital strategies with the store strategies.
And as each align with the holiday marketing campaign, our customers experienced One Barnes & Noble. With great alignment between our story and digital business, we were able to deliver a compelling unified message for our customers. This was further amplified with website improvements that were made to BN.com leading up to the holiday season and our expanded omni-channel offerings. Customers embraced our buy online, pickup-in-store service, which provides them with a great and convenient option to shop us.
As we approach the current quarter, we’re focused on continuing to build momentum. We’ll drive traffic with events specifically aimed at children and young readers. We’ll satisfy the collectibles customer with limited quantities and exclusive products tied to various license moments and comic con events. And we will encourage community with thousands of individual and local store events and by expanding our book club to a monthly event.
Our promotional moments will be more focused and targeted so that we will offer even better value, and we expect our seasonal and gift business to continue to improve with a better presence in store during key holiday moments. Good business comes from good partnerships. We saw this holiday that by aligning with publishers on product [Inaudible], we could expand the book properties our customers love, including more titles with exclusive content and expansion, and signed additions. The [Audio gap] for kids and an expansive presentation of gift books.
And by aligning on the publicity and marketing of author and book priorities, our marketing is more powerful, better targeted, and timed correctly. As I mentioned marketing, let me mention a couple of leadership changes. I’m happy to announce that Sam Bennett has recently joined the Barnes & Noble as vice president of Marketing. Sam will lead our companywide marketing efforts to clarify and reinforce our brand positioning while developing and executing long-term plans and campaigns to drive traffic and support all of our retail and digital business.
Sam brings 15 years of broad marketing experience in brand strategy having worked across agencies in retail, most recently at Best Buy. Moyo LaBode joined Barnes & Noble early in the quarter as vice president, general merchandise manager of Specialty Entertainment, which includes our toy gift and media categories. Moyo brings relevant retail experience in merchandising, inventory management, product development, and global sourcing. Most recently at Home Depot, Moyo’s career was built by over 20 years of experience at Target.
I’m also happy to announce the appointment of Sasha Quinton, who will be joining the team in a few weeks as vice president, general merchandise manager of Bookstore. Sasha is widely known in the publishing industry and has a proven record of driving sales, increasing market share, improving productivity, and operating efficiently across diverse distribution channels and by servicing significant retail partners. In this newly created position, Sasha will have full merchandising responsibilities for adult trade books, bargain books, and the newsstand businesses and will be the enterprise leader of our publisher relations initiatives. By focusing our entire organization on the customer throughout the holidays and by creating an environment in which stores and books sellers could focus on outstanding service, we built momentum into the business that we look to continue this year.
And now I’ll turn the call over to Al for our financial overview.
Allen Lindstrom — Chief Financial Officer
Good morning. Today, I will provide an overview of our third-quarter results, which ended on January 26th. Comparisons are to the prior year quarter, unless otherwise noted. Consolidated third-quarter sales were $1.2 billion, essentially flat with the prior year.
Comparable store sales increased 1.1%, our best performance in several years. Key contributors to our growth include our holiday marketing campaign, increased in-store promotional offers, a strong title lineup, and better omni-channel capabilities. A lot of the credit goes to our 23,000 booksellers and the great job they do for us every day. Non-books increased 4.9% this quarter, led by growth in gift and toys and games.
Books decreased 1.2% for the quarter. Trade paper, kids, and young adult book sales fell short of our expectations, and as Tim noted, we are addressing opportunities to improve trends in these categories. However, frontless hardcover books sales remained strong during the quarter. Michelle Obama’s Becoming was our biggest book of the year, posting the best sales of an adult book since Go Set a Watchman in the summer of 2015.
Consolidated gross margins declined $2.7 million or 20 basis points as increased store markdowns were partially mitigated by improved online margin. Selling and administrative expenses declined $1.8 million as we reinvested cost savings into our new ad campaign. As we’ve discussed, we remain committed to rightsizing our cost structure while reinvesting in our business to improve results. We have reduced expenses by $50 million this year alone and over $200 million over the past three years, excluding unusual or non-recurring items.
We will continue to be disciplined in controlling our costs, eyeing further opportunities in indirect procurement, corporate synergies, and supply chain efficiencies. Third-quarter results include asset impairment charges of $22.1 million and non-recurring professional fees of $5.1 million. The prior year quarter included asset impairment charges, primarily goodwill of $135.4 million and severance charges of $10.7 million. Excluding these charges third-quarter adjusted EBITDA was $133 million as compared to $139.5 million last year.
Adjusted EBITDA decreased $6.5 million due to the increased marketing and promotional spend previously noted. Third quarter net income was $66.9 million or $0.91 a share as compared to a net loss of $63.5 million or $0.87 a share in the prior year. Adjusted third-quarter EPS was $1.21 in the current year. Turning to the balance sheet, we ended the quarter with borrowings of $129 million under our $750 million credit facility.
Inventories increased $25 million or 2.6% over the prior year on a higher non-book position in support of sales growth. Through the third quarter of this fiscal year, we returned $33 million in dividends to our shareholders. Year-to-date capital expenditures were $80 million as compared to $70 million a year ago due to new stores and merchandising initiatives. We expect full-year capital expenditures of approximately $110 million to $120 million as the fourth quarter includes additional new store buildouts and existing store projects.
Looking ahead, we expect fiscal 2019 earnings to be in a range of $140 million to $155 million, excluding unusual or non-recurring items. This outlook includes the impact of lower-than-expected post holiday sales due in part to weather as well as incremental investments the company is making in its business. We’ve increased our marketing spend, are taking more aggressive markdowns to clear unproductive non-returnable merchandise in a proactive manner and are running additional promotions and in-store events to drive traffic. Results were also impacted by expanded buy online, pickup-in-store, and ship-from-store capabilities as well as enhancements to our website.
We remain confident that we are taking the right steps to drive improved financial performance and deliver value to our shareholders over the long term. And now, we will open the call for questions. Operator, please provide the instructions for those interested in asking a question.
Questions and Answers:
Operator
Thank you. [Operator instructions] Our first question comes from Alex Fuhrman with Craig-Hallum.
Alex Fuhrman — Craig-Hallum Capital Group — Analyst
Great. Thanks for taking my question. I wanted to ask about this holiday playbook that you were talking about. I mean, it certainly seems like you’ve had better sales performance during the quarter in terms of same-store sales than we’ve seen in quite some time.
So just wondering if there are any learnings from that exercise that you went through during the holiday quarter that, that you’re going to be applying to your merchandising and staffing needs for the rest of the year?
Tim Mantel — Chief Merchandising Officer
There were a lot of learnings that came from the development of the playbook, and I think the biggest takeaway is that when we aligned the energy from — when we take advantage of the energy that we have in our stores with a really specific plan on how to go to market, we can win. And so by working upfront to set a merchandising strategy that’s anchored in our customers’ mindset and then by marketing to those priorities and operating our stores to deliver against them, it all comes together quite well for us. And as we leverage the playbook this holiday, each week had a different — we had a reason to win each week, the customers’ mindset changes significantly in the early part of the holiday season, where there’s a lot of self-purchase and there is a lot of browse-and-discover. And that changes when we go into Black Friday, it changes on that Saturday, Cyber Monday on that week.
It’s a different customer mindset. The early gift-giving period and the late gift-giving period are very different from a customer mindset standpoint. And so by merchandising our stores to reflect that and by marketing and messaging our marketing in a way that our customer can relate to us was a success this Christmas. And to getting it to our stores early allowed them to come up with a local version of how they would they execute the overall strategy.
And so from that standpoint, based on consumer mindset, based on the change in business throughout the season, we were able to put together a plan that worked.
Alex Fuhrman — Craig-Hallum Capital Group — Analyst
OK. That’s helpful. Thank you. And then just thinking about SG&A, I mean you guys have managed take a lot of SG&A out of the business over the last two years, it sounds like now with a little bit of reinvesting in marketing, there’s probably a lot less to go.
But just wondering if there are continued opportunities to pull down SG&A now that you’re passed the holiday quarter where were saw all this marketing. Looking out in future years, do you feel like you’re kind of at a base line of SG&A that you’re comfortable with or do you think there are more opportunities for that to move lower?
Allen Lindstrom — Chief Financial Officer
Alex, I think there is a great deal of opportunity going forward, especially in the area of supply chain. You might not see that in the SG&A line but part of that goes into COGS, so I think there is a lot of opportunity to improve these numbers going forward.
Alex Fuhrman — Craig-Hallum Capital Group — Analyst
OK. That’s very helpful. Thank you.
Operator
Thank you. Our next question comes from John Tinker with Gabelli and Company.
John Tinker — Gabelli and Company — Analyst
Hi. Thank you. Could you just talk a little about the professional fees of $5 million? I assume paid to Evercore and bought, and where you stand on your strategic review which started about five months ago?
Allen Lindstrom — Chief Financial Officer
So the $5 million of professional fees relates to deal-related fees as well as non-recurring litigation. And regarding the strategic alternatives process, the process is ongoing and the company is supporting the special committee’s advisors.
John Tinker — Gabelli and Company — Analyst
And could you talk a little about your capital structure in that your debt is up quite a lot and you’re paying out $43 million a year in dividends and you’re going to negative cash flow this year at least sort of $20 million to $25 million, so why you’re continuing to pay this dividend?
Allen Lindstrom — Chief Financial Officer
So, the dividend is at the discretion of the board. We discussed it every quarter with them and review our cash flow projections accordingly, so that’s — I’ll leave it at that. In terms of our year-over-year debt, as you noted, we continue to invest in our business. We spent — we’ve taken our earnings and reinvested in capital and returning money to shareholders.
So, I will point out that we have $129 million of debt at the end of the quarter. It’s $40 million lower than it was at the beginning of the year and we have a $750 million credit facility.
John Tinker — Gabelli and Company — Analyst
Yes, but year over year, which is the right comp because you’re coming out through — coming off your high-EBITDA quarter, is your debt up to — is up to a $113 million from $48 million, so —
Allen Lindstrom — Chief Financial Officer
Which is why we’re focused on our top line and getting our results heading in the right direction.
John Tinker — Gabelli and Company — Analyst
There are now, I think, about 19 Amazon stores, bricks-and-mortar, beginning to pop up [Inaudible] just bearing. Have you found when they moved in, it’s affected local sales?
Allen Lindstrom — Chief Financial Officer
It has an impact on our stores. It depends, obviously, how far away they are from our stores but it’s a completely different experience for our customers. So there is obviously an impact to those stores, but it’s not been a material impact to date.
John Tinker — Gabelli and Company — Analyst
Well, your stock — so you took another series of write-offs impairments of $22 million, as you sort of look at your balance sheet, how would you — what kind of future impairments do you think you might see or is your balance sheet becoming a little more accurate?
Allen Lindstrom — Chief Financial Officer
I’m not aware of any impairments or future impairments where we would have recorded them at this point. So I’m not really sure I’m understanding your question.
John Tinker — Gabelli and Company — Analyst
Basically you’re trading for less than book value, which would imply it would to be smarter just to close your business because you can make more money, but that assumes your books are accurate.
Allen Lindstrom — Chief Financial Officer
I can assure you our books are accurate. So we certainly look at our impairments all the time and we have to look at them every quarter and we record impairments when there are indicators that indicate we need to book them. We think our balance sheet is strong.
John Tinker — Gabelli and Company — Analyst
Thanks.
Operator
Thank you. Our next question comes from David Novak with Consumer Edge Research.
David Novak — Consumer Edge Research — Analyst
Thank you and good morning. What was overall e-commerce growth during the quarter? And you mentioned a better online margins, what was the driver of that? And then I have a follow up.
Allen Lindstrom — Chief Financial Officer
Online sales were down about 2% during the quarter. It’s a market improvement over the trend that was running at. We were able to improve the site experience. That decline of 2% is reflective of our buy online, pickup-in-store initiatives, where the sales are pushed through the stores as well as the pressure on the text book business.
So those had not — excluding those items, we were positive in our e-commerce results for the quarter.
David Novak — Consumer Edge Research — Analyst
Thank you. And how do you feel about pricing right now? I know you have some pricing initiatives versus — between the e-commerce channel and stores. But how do you feel about just pricing both between the two channels but also between the competitive environment and what you’re offering? Thanks.
Tim Mantel — Chief Merchandising Officer
We go to market in highly competitive way. As books are released, they’re released at a discount in our store. Our members benefit even more from that. As books become best sellers, we get very aggressive on pricing.
Our promotional business is robust and the productivity in our promotional space is robust as well. So from a promotional standpoint, we feel like we go to market in a competitive way and are constantly looking at the competitiveness and the difference between our online prices and those in the external marketplace, and we calibrate to that on a daily basis and are always looking for better ways to drive value for our customer.
David Novak — Consumer Edge Research — Analyst
Understood. Thanks.
Operator
Thank you. Our next question comes from Ryan Vaughan with Needham.
Ryan Vaughan — Needham and Company — Analyst
All right. Thanks for taking my question. Just a question on the capital expenditures that you said $110 million to $120 million. Can you just comment on the new stores, the merchandising initiatives, and just what kind of return on investment you’re getting with your higher capex?
Allen Lindstrom — Chief Financial Officer
So the capex is reflective, as you said, of the new stores and merchandising initiatives, to your point. We’ve opened four new stores this year. We have a couple more coming in the fourth quarter. Early reads on those that we’ve opened this year are good.
The sales are trending at pro forma. And on the merchandising initiatives, Tim talked about the kind of things we did for the toys and games, resets that we did in the store this holiday — prior this holiday to try to drive more sales during holiday.
Ryan Vaughan — Needham and Company — Analyst
Just a follow-up on the 91 stores, I think you said you’re repositioning your media. Do you expect to roll that out to — I missed the follow-up to that, do you expect to roll that out to more of your 600 stores?
Tim Mantel — Chief Merchandising Officer
So, we acted quite quickly and late in the year to take advantage of the market opportunity that presented in toys. And so the mini remodels that we did in the 91 stores, we really completed those but not in some cases until November. So the results are not mature and the marketing was not targeted like it will be going forward. And in toys, it is really critical that you look at the performance of the business all year along to make sure that you’re able to keep the space productive for more than eight weeks.
And so as a great gift destination, Barnes & Noble, we believe we’ve got upside during the course of the year but we need more time to play that out. Again, the stores are only a couple of months old. We’ve got good results for Christmas but we want to keep evaluating it to determine whether the capital associated with tearing up the movies and music books is best allocated toward toys and collectibles. So excited that we’ve got a 91 store pilot out there, and we’ll be analyzing it throughout the year to determine whether we’ll deploy more capital to do more.
Ryan Vaughan — Needham and Company — Analyst
Great. And just one last one, you had mentioned that you saw some weakness after the holiday. Was that weakness — are you saying that’s through January 26 or is that through where we sit here today in early March or just any sort of update on trends of the business, just given what we’ve seen so far? In November, we started out weak, then really strong. Black Friday, the New year, it seems like it slowed down again.
Just any sort of update on the trends while we sit here today would be fantastic.
Allen Lindstrom — Chief Financial Officer
We were up until about mid January. The results are down since mid-January, slightly negative. And as we did note weather is a part of that, but it is down in the low single digits.
Ryan Vaughan — Needham and Company — Analyst
Thank you.
Operator
Thank you. [Operator instructions]
Tim Mantel — Chief Merchandising Officer
OK.
Allen Lindstrom — Chief Financial Officer
OK. Operator, if there is no one else in the queue just let us know.
Operator
There are no additional questions at this time.
Andy Milevoj — Vice President of Investor Relations
Great. We just want to thank everybody for your interest in Barnes & Noble and for joining today’s call. Our year-end earnings release will be released on or about June 20th. Wishing everyone a great day.
Thank you.
Operator
[Operator signoff]
Duration: 29 minutes
Call Participants:
Andy Milevoj — Vice President of Investor Relations
Tim Mantel — Chief Merchandising Officer
Allen Lindstrom — Chief Financial Officer
Alex Fuhrman — Craig-Hallum Capital Group — Analyst
John Tinker — Gabelli and Company — Analyst
David Novak — Consumer Edge Research — Analyst
Ryan Vaughan — Needham and Company — Analyst
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