Thomas Donohue - VP of Investor Relations Max Roberts - CEO Patrick Maloney - COO, Barnes & Noble Education and President, Barnes & Noble College Barry Brover - CFO Kanuj Malhotra - COO, Digital, and Chief Strategy Officer.

Alex Fuhrman - Craig-Hallum Capital Group Ian Whittaker - Liberum Capital Greg Pendy - Sidoti & Company, LLC Nick Dempsey - Barclays Capital Sami Kassab - Exane BNP Paribas.

Good day and welcome to the Barnes & Noble Education First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would now like to turn the conference over to Mr. Thomas Donohue. Please go ahead, sir..

Good morning and thank you. And welcome to our first quarter 2017 earnings call.

Joining us today are Max Roberts, CEO; Patrick Maloney, Chief Operating Officer, Barnes & Noble Education and President of Barnes & Noble College; Barry Brover, CFO; Kanuj Malhotra, Chief Operating Officer of Digital Education, as well as other members of our senior management team.

Before we begin, I'd remind you that the statements we make on today’s call are covered by our Safe Harbor disclaimer contained in our press release and public documents.

The contents of this call are the property of Barnes & Noble Education and are not for rebroadcast or use by any other party without prior written consent of Barnes & Noble Education. During this call, we will be making forward-looking statements with predictions, projections, and other statements about future events.

These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The Company disclaims any obligation to update any forward-looking statements that may be made or discussed during this call.

At the time, I'll turn the call over to Max Roberts..

Thanks, Tom, and good morning, everyone. As we've reported this morning, sales for the first quarter increased 0.1% to $239.2 million. First quarter 2017 comparable store sales declined $6.2 million or 2.8%, driven primarily by textbook sales. These sales results reflect a typical seasonality of textbook sales, which are lower in the summer semesters.

Comp store sales were lower due to decreased summer enrollments and the number of class offerings. Furthermore and consistent with last year, sales were lower at community colleges, declining approximately 5.4% in the quarter. Sales at community colleges represent approximately 21% of total sales for the quarter.

To help offset these trends, we continue to expand our general merchandise selection, which accounts for approximately 50% of total sales for the quarter, highlighting the importance of graduation orientation and non-traditional campus events such as sports camps.

General merchandise sales in Q1 increased by $1.6 million, primarily due to stronger emblematic apparel and graduation product sales. Our growing general merchandise sales have helped to mitigate the impact of the seasonality and decline in our textbook business.

We continue to adjust our general merchandise assortment, improve our school branded e-commerce sites as well as increase our presence at sporting events and other events to meet the ever changing needs of our customers.

In addition, our recent acquisition of Promoversity helps us to expand our general merchandise offerings and better serve our clients. Schools today expect and require complete solutions that empower students and faculty to drive success in and outside of the classroom.

To meet these expectations, we continue to enhance and grow our digital content and services in an efficient, low-cost manner that complement our printed textbook and rental business. Our pipeline for new business and our wins during the quarter were very strong.

We opened 33 new stores, including Coastal Carolina University, the University of California at Irvine, Colorado College and Youngstown State University. Our store teams successfully transitioned these wins within the quarter. These new stores represent approximately 250,000 additional students and faculty.

We also closed 14 stores, bringing our total store count to 770. We recently announced two very important partnerships for our digital platform. First, we've entered into a partnership with Instructure, a leading educational technology company, to share course and usage data within our analytics platform.

We believe this will empower our school partners to improve student outcomes and retention. The second partnership is with OpenStax. OpenStax is a not-for-profit Company that makes college content more accessible for students.

We believe we can leverage the OpenStax’s content through our LoudCloud digital analytics platform to make content more cost-effective and outcome-driven for schools and students. In conjunction with our school partners, we are launching several courseware pilot programs this fall.

Our courseware content will be presented digitally on our LoudCloud platform and used in class by professors and students. We are also continuing to manage our cost structure carefully. As Barry will cover in more detail, we have reduced expenses for both digital, comparable store payroll and operating expenses.

This reduction in selling and administrative costs is a direct result of the initiatives that we began last year. Looking ahead, we are continuing to focus on providing an unmatched retail and digital learning experience and deepening our partnerships on campus.

We are well positioned to provide economic benefits to schools through a complete solution of affordable, accessible textbooks and course materials, including digital content.

We continue to pursue strategic relationships with companies that either enhance our educational services, our distribution platform or create compelling content offering for our clients along with a financial return for our shareholders.

We are very excited to have our students and faculty returning for the fall semester and we look forward to meeting their needs in the fall rush period through our competitive price matching program as well as our array of publisher hosted content in our stores and on our website.

Our student book sellers are welcoming new customers and communicating our message of affordability and that the campus bookstore is a complete support system. Our social hub events calendar has kicked off with our new student VIP shopping events with close to 400 campuses participating.

As the fall collegiate calendar begins, our schools are prepared for game day initiatives, homecoming, alumni and parent weekends. With that, I will turn it over to Barry for our financial review..

Thank you, Max. Please note that the first quarter ended on July 30, 2016, consisted of 13 weeks and is presented on a standalone basis. All comparisons will be to the first quarter of fiscal 2016, which is presented on a carve out basis, unless otherwise noted, as BNED was still part of Barnes & Noble, Inc. for the first quarter of fiscal 2016.

I want to point out that we changed our calculation of comparable store sales to be consistent with how management views and manages the business as opposed to how our former parent, Barnes & Noble, Inc. defined comparable store sales.

Effective with the first quarter of fiscal 2017, comparable store sales will include sales from stores that have been opened for an entire fiscal year as determined at the beginning of the fiscal year, adjusted for stores that closed during the fiscal year. In addition, digital agency sales will be presented on a gross basis.

The difference in the calculation is not material and results in a 10 to 30 basis point difference for historical year-to-date periods. Total sales for the quarter were $239.2 million compared with $239 million over the prior year.

The increase of $0.2 million or 0.1% was primarily driven by an increase in sales from new stores of $8.5 million, partially offset by a decrease in sales from closed stores of $1.8 million, along with a comparable store sales decrease of 2.8% or $6.2 million for the quarter.

The comparable decrease is primarily attributable to textbook sales, which were down 6.8%; partially offset by an increase in general merchandise sales. As Max said, the first quarter typically has the lowest revenue of any of our quarters due to the seasonality of the business.

For the quarter, our comparable-store general merchandise sales increased over the prior year period by $1.6 million or 1.6%, driven by strong emblematic apparel and graduation product sales. For the quarter, our general merchandise sales were $115 million, which includes the new stores opened.

Our rental income for the quarter was $21.5 million, an increase of $1.2 million or 6%, demonstrating that textbook rentals continue to be student's first choice. Gross margins decreased by $4.1 million or 8% to $47.4 million.

The margin decrease was primarily the result of lower used textbook margin rates due to increased markdowns in a non-rush low sales volume quarter and increased cost related to our college contracts due to contract renewals and new stores.

Selling and administrative expenses decreased $1.2 million or 1.4% to $85.5 million, a 60 basis point decrease as a percentage of sales.

This decrease was primarily due to lower digital expenses of $3.1 million and lower comparable store payroll and operating expenses of $2.5 million, which was partially offset by higher payroll and operating expenses related to net new stores of $2.5 million and $1.5 million of costs incurred for business development as we continue to pursue strategic opportunities to grow the business.

Our continued focus on expense management resulted in lower selling and administrative expenses even with higher sales and new stores opened.

During the quarter, we recorded restructuring cost of $1.8 million from the reduction in staff and closing of our offices in Mountain View, California and Redmond, Washington as we completed the transition to VitalSource.

The fiscal first quarter net loss was $27.9 million or $0.60 per share compared to a net loss of $26.9 million or $0.65 per share in the prior year. As a result of these factors, our adjusted EBITDA loss increased by $1.4 million to $36.5 million for the quarter compared to a loss of $35.1 million in the prior year.

The loss is consistent with the seasonality of the business with the first quarter sales being the lowest and new stores incurring the higher startup costs without the benefit of the rush revenue. As a part of the Company's share repurchase program, we repurchased 676,048 shares in the first quarter or approximately $6.6 million.

Since inception of the program in December 2015, we have purchased 2.4 million shares for $23.2 million. The effective tax rate for the fiscal first quarter was 47.8% compared with 44.2% in the prior year. The tax rate for the quarter is impacted by certain non-deductible expenses.

The balance sheet remains strong with $9 million of cash and $25 million of seasonal debt outstanding at the end of the quarter. This seasonal debt peaked in July and was repaid in mid-August. We expect to have no borrowings outstanding through our rush season. As we build inventory for the January rush, we expect to borrow in December.

As you know, our business is subject to seasonal fluctuations and this is reflected in the quarterly balance sheet.

At the end of the fiscal first quarter, inventory and payables were below last year as we put greater emphasis on improved purchasing, which will result in lowering our textbook returns post-rush in order to improve our efficiencies without impacting sales.

Inventory and payables are both typically at a peak for the year as we are building inventory for the fall rush period. Cash flow from operations was negative $25.2 million. Last year, we benefited from cash funding from our former parent prior to the spin.

Adjusting for this benefit, net-net cash flow from operations was relatively flat to the prior year. CapEx for the first quarter was $6.2 million compared with $11.8 million in the prior year. The decrease of $5.6 million was primarily due to delayed timing of store renovations related to both new store contracts and renewals of existing.

Currently, our store count is 770, opening 33 new stores and closing 14 in the quarter. We will be opening another two stores in fiscal 2017 based upon the new contract signed to date. Turning to our fiscal 2017 outlook.

We continue to expect total sales to increase by 2% to 4%, while we expect comparable store sales to be approximately flat to 2% lower than the prior year. We expect adjusted EBITDA to increase by approximately 12% and capital expenditures to be approximately $15 million. With that, we will open the call for questions.

Operator, please provide the instruction for those interested in asking a question..

Absolutely thank you. [Operator Instructions] And we'll now take our first question. Caller, please go ahead..

Great. Thanks for taking my question. This is Alex Fuhrman at Craig-Hallum. Just wanted to ask, it sounds like obviously the same-store sales for this quarter, I mean, it's seasonally weak quarter anyway, but I wondered to what extent summer enrollments were down versus prior years.

And then clearly, that would not have been factored into anything that you just reported, but at this point, I would imagine there's pretty good visibility into the enrollment level at your school for the fall semester.

How do those look compared to last year's fall? And I guess, in particular, the community colleges, it seems like enrollment has really been the primary headwind for you over there.

How did that start to look now for the fall semester in your schools?.

Thanks, Alex. This is Max. First of all, the way colleges and universities manage the summer classes is by the number of class offerings they have and that's how they can effectively cost manage their expenditures. We know for a fact that there were lower class offerings.

As to enrollment, we have no insight into the schools at this point in time of enrollment. That typically occurs after the fall period. However, our new business wins are $110 million. We seamlessly transitioned 65 stores in the past year. Going into this fall rush, we're affirming our guidance.

We feel comfortable with where we're at right now and we attribute basically the decrease in comp sales to the community colleges continuing that we have forecasted and said what happened previously and lower class offerings..

Great. That's helpful, Max. And then also, I wanted to ask about it seems like there's really a potential here to layer in more acquisitions, perhaps horizontally to really increase what you can be selling in terms of services to the universities and leveraging your partnerships there.

How is the integration of LoudCloud been going? Has that been well received by the schools that you have partnerships with that had not previously done business with LoudCloud? Are there other conversations ongoing? And is that something that would move the needle conceivably this year or next year? Or do they really need to be combined with perhaps two or three more acquisitions to really start gaining momentum?.

Before I talk about LoudCloud, it's a good observation about our horizontal acquisitions. Promoversity was a great example of that, providing services and additional merchandise to our schools on a general merchandise standpoint. As far as LoudCloud, we are very pleased.

As we said, we are integrating course materials in, actually have classes up and running with faculty now and students, it's been well received by our own schools and the LoudCloud team under Kanuj has been out, really marketing new schools also and we are very happy with the context we have and the integration.

And I might also add, we are very happy with the transition of Yuzu to VitalSource and the results that we are seeing and the implementation by VitalSource was spectacular. We feel like we'll benefit from that..

Great. Thanks very much, Max, and congratulations on all the new contracts you guys have won this year..

The organization is really excited and the field has done just an incredible job..

And moving on, we will now take our next question. Please go ahead..

Yes. Hi, there. It's Nick Dempsey from Barclays. I've got two questions for you, please.

When you are planning for the rush period and going around buying your textbooks in June, July and August, were you working with the assumption across the board for college enrollments would be down overall? Or in a sensitive region as last year kind of 1% to 2% or what assumptions were you working within? And second question, I'm interested in what you said about returns.

So last year, we saw very heavy level of returns in September, October.

Was I right in understanding that what you were saying there about inventory efficiency suggest that you would expect your returns to be much lower this year than last year?.

We are expecting our returns to be lower. We always forecast the business based on our sales and the external forecast that we get for comp sales. Last year, we were transitioning in a system and that caused a little bit of a higher inventory levels.

We worked with publishers this year, and we believe that at the end of the day, our returns will be lower to publishers and managing the inventories much more sharply than we have in the past..

Great.

And just in terms of the enrollments, what are the assumptions you're making?.

We have continued to believe that the community college is consistent with what the publishers have said, will continue to decrease. We make no forecast or any public disclosure as to enrollments as to what we see at this point in time..

Okay. That’s helpful. Thank you..

And we'll now take our next question. Caller your line is open. Please go ahead..

Thanks. It’s Ian Whittaker from Liberum. I just had one question actually. I just wanted to – maybe I misinterpreted sort of one of your comments. I think you said you have a partnership with OpenStax that you were launching and you were partnering schools in order to push that.

I mean, there could be a sort of line of thought amongst the publishers that OpenStax will be a threat to their traditional business.

And it might seem that you as a key distributor for their product, is actually teaming up with such a partner, I mean, what are your views on that?.

We are partnering with OpenStax where our schools request to have the content and it's driven based on the school demands. And it's in conjunction with traditional text, and we see – we believe that there is a long tail on textbooks.

But we believe we also have to offer digital services for analytics integrated in with both publisher content and OpenStax content. And it's really an analytics play and retention and outcome play as opposed to a content play..

And what would you – go ahead..

Just to echo what Max was saying, it's really about the platform services and the resident data analytics to help schools that have already made the decision to use OER. So it's really in that context and that vein to provide them a digital solution that make sure that the analytics are provided are generating the right learning outcome..

And when you said and since you only do this when schools actually requested, I guess the question there would be sort of all what sort of uptick are you seeing in schools actually requesting those services? How do you know it's an acceleration in demand? Is it sort of keeping quite steady growth? I mean how does things look?.

First of all, we're not disclosing the different nature of digital sales that we have. Our first and foremost, most powerful digital product is publisher on platform content along with eTextbooks and we remain very focused with our publisher partners.

There are certain areas that are requesting that have OER the analytics impact and we're providing them services that's why we bought LoudCloud..

Okay. Thank you very much..

And then we'll move on to our next question. Caller, please go ahead..

Hi. It’s Greg Pendy at Sidoti. Thanks for taking my call. I was just wondering, I guess, just two small questions.

One is – and I appreciate you guys breaking out of the community college comp, how much is rental income possibly weighing or is it just too early to tell? Will that be something that will weigh on the comps? I fully get the margins there are good.

And then, I guess, just one other follow-up, was just wondering, with community college enrollments down, are you seeing any – you don't have much for-profit exposure and I would assume enrollments there are declining. Has anyone in the for-profit colleges has been migrating to the community colleges? Thank you..

Patrick, you want to....

We have very few for-profit schools that we serve, Greg. And as far as the rental, it's really too early in the game to see where it's going to come out. Barry gave an update on where rental was for the first quarter, but we're not going to comment on where we are right now. We're not at the height of that rush season right now..

Okay.

But you do not anticipate potentially, I guess, some of the for-profit students, some of those schools in some cases going away with those people potentially?.

Potentially, they could, but we don't see any of our for-profits really suffering with enrollments at this point in time. We have a handful, I won't quote of any maybe two or three that we serve. So we're really not in that area of our education..

And the migration of students going from a for-profit to a community college, it's typically last minute enrollment, so we'll see those trends as they unfold in the semester, if they exist. In addition to that, those students are typically very dependent upon financial aid and them obtaining financial aid.

But we certainly are aware of the problems that for-profit schools have had and as Patrick alluded to or talked about, we have very little exposure to for-profit..

Yes. And we're not – and where we do see the migration, Greg, it's out of community colleges; it's typically within the state where the state four-year schools are attracting the community college students and the pricing between the state schools and community college schools continues to narrow.

You have the opportunity as a sophomore to move over to the state university system. But we've seen a number of state's students made that choice..

And community colleges – recent enrollment is so difficult in community colleges. They have the ability to add adjunct and flex classes at the last minute. Sometimes, they have classes in the first week of back-to-school.

So we're really not in a position to say where the students came from or whether there is going to be an increase or decrease in enrollment..

Thank you. That’s very helpful..

[Operator Instructions] And we'll take our next question. Caller, please go ahead..

Good morning, everyone. It’s Sami Kassab at Exane. You kindly disclosed, or interesting you disclosed the rental income as a percentage of sales, 9% in the quarter.

Could you also quantify the share rentals in terms of volumes out of all your transaction in terms of textbooks, new textbooks, used textbooks, rentals or in terms of volume, what's the share of rentals, please?.

I don't think we previously disclosed that. You can see, looking at the historical information that on an annual basis, our rentals has been 12.5% to 13% of our total sales..

That's in terms of sales indeed, but in terms of volumes, would you say they're around 30% of all transactions in rentals or is it more?.

We haven't disclosed that. Obviously, a rental is a lower-priced option, so it would be higher than the 12%, but we do not disclose those..

Okay. It is 12% of all sales..

Yes..

Understood. Thank you..

[Operator Instructions] And we'll take our next question. Caller, please go ahead..

Thank you. It's just a follow-up [indiscernible]. Can I just sort of quantify something, I think, you said just on the question from Sami and apologies if sort of maybe disclosed in your presentation. I think you just said that sort of rentals are 12%, 13% of sales.

So is that total sales or is it just the textbooks? Because I know in your statement you talk about general merchandise..

It's both. Its total, I'm sorry. We didn't make that clear. It's our total sales of revenue..

Okay.

So the 25% of your textbook sales?.

Yes, if you do the math and back off the general merchandise, that will be correct..

Okay. Thanks very much..

[Operator Instructions] We do have one question. Please go ahead caller..

Yes. Thank you for taking my follow-up questions. It’s Sami again at Exane. Can you discuss whether you've changed anything in your textbook inventory management policy? I mean you talked about transitioning systems last year, but we hear from publishers late ordering.

Are you indeed considering ordering books later in the semester or any particular change in the way you're managing the inventory of textbooks you have, please? Thank you..

I'll let Patrick talk to the process..

No, we order based upon our needs. We get enrollment feeds from the school on a daily basis from all the schools that we serve at [indiscernible]. And we order according to our needs, our projected needs to make sure that we have enough books to meet the needs of all the students. That's our core mission of our business.

As far as the reduction in the inventory, it really centered on – over the last two years, we've upgraded all of our stores to our new platform and there was a learning curve there over the last two-year period that resulted in some over ordering at the store level. Again, our books are all ordered at the store level by our store managers.

And because of that learning curve on our new system, there was some over ordering that we corrected this year. So that also resulted in lower inventories. But it wasn't because we anticipated lower enrollments. We order to the enrollment as it comes in on a daily and weekly basis, the information, we adjust our orders accordingly..

Thank you. End of Q&A.

And we have no further questions at this time. I'd like to turn the conference back over to Mr. Thomas Donohue for any addition or closing remarks..

Thank you, Allen and thank you everybody for joining today's call. Our next scheduled financial release, which will be our second quarter earnings, will be on or about December 6. We look forward to talking to you then. Thank you..

That does conclude today's conference. We thank you all for your participation. You may now disconnect..