Thomas Donohue – Vice President, Treasurer and Investor Relations Mike Huseby – Chairman and Chief Executive Officer Barry Brover – Chief Financial Officer Kanuj Malhotra – Vice President of Strategy and Development and Chief Operating Officer of Digital Education Patrick Maloney – Chief Operating Officer, Barnes & Noble Education and President of Barnes & Noble College.

Alex Fuhrman – Craig-Hallum Greg Pendy – Sidoti.

Good day, and welcome to the Barnes & Noble Education Third Quarter Earnings 2018 Conference Call. Today’s conference is being recorded. At this time, I would like to turn our conference over to Mr. Thomas Donohue. Please go ahead, sir..

Thank you. Good morning, and welcome to our third quarter 2018 earnings call.

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

Before we begin, I would remind you that the statements we will 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’ll 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 this time, I’ll turn the call over to Mike Huseby..

affordable and high-quality integrated educational services and content that will result in improved student and partner experiences and outcomes. Accomplishing this mission of ours will translate to value creation for BNED and all of our stakeholders.

As we head to our inclusive models that should have much higher Courseware sell-through for us, we expect to leverage that increased penetration across our various offerings for the benefit of our college partners, students, our publishing partners and BNED.

We expect to be able to maintain our central position in aggregating and distributing both physical and digital educational content, while we also develop and rollout exciting new services and solutions that will gain increased visibility in our upcoming fiscal year 2019.

We’re focused on executing our strategy for change, to drive results and build long-term value. We have significantly expanded our addressable market through accretive acquisitions, strategic partnerships and continued innovation.

Our goal remains to offer the most comprehensive suite of quality educational products and services to our existing and future customers. With that, I’ll turn it over to Barry for the financial review..

Thank you, Mike. Please note that the third quarter ended on January 27, 2018, and consisted of 13 weeks. All comparisons will be to the third quarter of fiscal 2017, which excludes MBS and Student Brands, both of which were acquired after last year’s third quarter.

Total sales for the quarter were $603.4 million, compared with $521.6 million from the prior year. This increase of $81.7 million or 15.7% was primarily driven by revenue of $138.9 million from the MBS segment, partially offset by an $15.2 million decrease at the BNC segment, and intercompany sales eliminations of $42 million.

I will explain the impact of the timing of the intercompany eliminations in just a few moments. The sales at BNC decreased as comparable store sales decline of $31.3 million exceeded the sales increase related to net new stores of $11.9 million and the increases of service revenue, which includes Student Brands revenue of $5.6 million.

Our service revenue includes high margin revenue from Student Brands, income from brand partnerships, along with Promoversity and LoudCloud. Each of these businesses allow us to derive new sources of revenue in and out of our footprints and further monetize our customer base.

Comparable store sales decreased by 6.2% as compared to a decrease of 5.3% in the prior year period.

Comparable store sales were impacted by the later school rushes, lower student enrollment, specifically in two-year community colleges, increased consumer purchases directly from the publishers and other online providers, and other more general negative retail trends.

The third quarter includes our spring back-to-school rush outs that are impacted by students purchasing textbooks later in the semester, extending the rush period past the end of the quarter and into February.

After factoring in the month of February that contributed to the Spring Rush, the comp sales decline to a fiscal year-to-date, including February was 4.2%.

Textbook sales for the third quarter declined 7.2% compared to a prior year period decline of 6.7%, impacted by the items previously mentioned and by lower average selling prices of course materials driven by lower publisher prices resulting from a shift to lower cost and more affordable solutions, including digital.

We saw large increases in the sale of digital textbooks and smaller decreases in the sale of new digital books, while sales and rental and used textbooks decreased. Sales for MBS in the third quarter were $138.9 million and in line with expectations.

The third quarter is the highest sales quarter for MBS Wholesale due to the spring back-to-school sales for the higher ed. Fiscal year-to-date sales at MBS were $413.6 million, compared with $438.4 million in the fiscal 2017 pro forma quarterly financials.

The $24.8 million decline is in wholesale and primarily the result of a lower supply of bulk purchases of new textbooks that we previously discussed.

Our rental income for the quarter was $62.5 million, a decrease of $2 million or 3.1% as a result of more affordable publisher solutions including digital, lower average selling prices and lower supply of used inventory in BNC stores as we continue to optimize the inventory between BNC and MBS.

Gross margins increased by 26.4% to $146.5 million or 24.3% of sales. The margin at BNC of 23.2% was 100 basis points higher than the previous period.

The increase was primarily the result of including the high-margin Student Brands service revenue, higher rental margin rates and lower contract costs associated, partially offset by an unfavorable sales mix including lower margin Courseware. The gross margin at MBS was 25.2% in the third quarter and is consistent with the rate in the second quarter.

Selling and administrative expenses increased by $14.9 million or 15.3% due to the $14.1 million of expenses at MBS, including $1.7 million of expense allocations from BNC to MBS. BNC’s selling and administrative expenses increased by $0.7 million or 0.7% to $97.8 million from $97.1 million.

The increase was primarily due to a $0.7 million increase in new store payroll and operating expenses net of closed stores and a $2.1 million increase in Student Brands expenses, and $0.9 million increase in corporate overhead, including digital expenses.

These were partially offset by a $1.3 million decrease in comp store payroll and operating expenses and $1.0 million of shared corporate overhead costs allocated to MBS. The intercompany elimination for sales and cost of sales are primarily related to the sales from MBS to BNC and wholesale commissions earned on textbook sold to MBS by BNC.

As expected, in the quarter, the gross profit elimination is smaller than the first quarter fiscal 2018, as BNC purchases are lower for the Spring Rush compared with the fall and BNC was able to sell through a portion of the inventory in the third quarter, with $5.8 million of adjusted EBITDA remaining to be sold in the fourth quarter by BNC.

In the third quarter, the company completed its annual good will impairment test required by GAAP and determined that the carrying amount of goodwill at BNC exceeded this estimated fair value due to the reduction in BNED’s market capitalization.

As a result, the company recorded a pretax, non-cash impairment charge of $313.1 million at BNC, or $302.9 million on a net tax basis.

The fiscal third quarter net loss of $283.2 million or $6.04 per diluted share compared with income of $3.8 million or $0.08 per diluted share in the prior year, due to the inclusion of the good will impairment charge in the current fiscal quarter.

Due to the acquisition of MBS and Student Brands and their results, our total adjusted EBITDA increased by $15.8 million or 84% to $34.6 million for the quarter. During the quarter, BNC contributed $19.6 million of adjusted EBITDA, while MBS contributed $20.8 million of adjusted EBITDA, and $5.8 million of the gross profit was eliminated.

Fiscal year-to-date BNC adjusted EBITDA was $54.3 million and increased by $1.6 million as the contribution of net new stores, the acquisition of MBS and the segment allocation – the acquisition of Student Brands and the segment allocations to MBS exceeded the impact of the comp store sales decline.

Fiscal year-to-date MBS adjusted EBITDA was $56 million and decreased $3.5 million as compared to the pro forma financials as the EBITDA impact of the lower sales and the segment allocations exceeded the favorable margin and expense savings.

The MBS adjusted EBITDA continues to exceed the amounts included in our financial models at the time of the acquisition. The effective tax rate for the fiscal third quarter was 5.1% compared with 16.8% in the prior year.

The effective tax rate for the 13 weeks ended January 27, 2018, is significantly lower as compared to the comparable prior year period due to the tax benefit of the U.S. tax reform, partially offset by permanent differences, which in this quarter, include the non-deductible portion of the goodwill impairment.

As a result of the Tax Reform Act, reducing the federal corporate tax rate from 35% to 21%, our net deferred and long-term liabilities were reduced by $21.1 million, which lowered the income tax expense in the quarter. In addition, the company’s effective tax rate for fiscal year 2019 will be approximately 28%.

Our cash balance at the end of the quarter was $22.4 million and we had $113 million of outstanding borrowings. The lower cash and higher borrowings compared with last year are the results of the MBS and Student Brands acquisitions, and we continue to expect the average debt to be approximately $150 million during fiscal year 2018.

At the end of the fiscal third quarter, inventory increased by $120.5 million compared to the same period in fiscal 2017, due to the inclusion of MBS, as BNC inventory decreased by $4.7 million as a result of continued improvements in purchasing and inventory management and BNC realizing the synergies related to inventory optimization by transferring underutilized inventory from BNC to MBS.

Accounts payable was $8.6 million higher, also reflecting the inclusion of MBS. Capital expenditures for the third quarter were $7.7 million compared with $9 million in the prior year, and $30.1 million on a fiscal year-to-date basis compared with $26.5 million in the prior year.

The fiscal year-to-date increase of $3.6 million was primarily due to an increase in construction costs related to the contracts signed in fiscal 2017, along with contracts renewed and, of course, the inclusion of MBS. Currently, our BNC store count is 782, having opened six new stores and closing one in the quarter.

We plan on opening another store in fiscal 2018 based upon the contracts signed to date, with an additional $2 million of annualized estimated sales, bringing the BNC 2018 total annualized new business sales to $63 million. Our MBS Direct store count is 698, having signed 19 and closed 33 contracts during the fiscal 2018 year-to-date.

Turning to our fiscal 2018 outlook. For fiscal 2018, we continue to expect sales at BNC to be relatively flat, while comparable store sales are now projected to decline in the mid-single-digit percentage point range year-over-year.

We continue to expect consolidated sales to be in the range of $2.25 billion to $2.35 billion before intercompany eliminations. We are raising our consolidated adjusted EBITDA guidance and now expect to achieve consolidated adjusted EBITDA of $115 million to $125 million, up from the previous range of $105 million to $120 million.

Capital expenditures are now projected to be approximately $45 million, down from the prior guidance of $50 million, an overall increase from fiscal year 2017 due to the new store growth. With that, we will open the call for questions. Operator, please provide the instructions for those interested in asking the question..

Thank you. [Operator Instructions] We’ll take our first question. Caller, please go ahead..

Great. Thanks for taking my question. This is Alex Fuhrman with Craig-Hallum. I wanted to ask about the gross margin. They’ve been coming up pretty nicely even despite negative same-store sales.

Can you give us a sense of how much of that is being driven by the Student Brands acquisition or products mix? And do you think it’s sustainable that you can continue to see gross margin or gross profit dollars for the BNC segment growing year-over-year over time, if we remain in an environment where same-store sales are negative?.

Thank you, Alex, this is Barry. The overall margin rate at BNC is up versus last year.

Large contributor of that is Student – the acquisition of Student Brands and the high margin products that they contribute to the company as well as all of our service revenue, which includes the partnership marketing, LoudCloud and Promoversity, which allow us to increase our revenue and has the high margin rates and we’re able to generate that business, both within our footprint and outside of our footprint, as we leverage all the relationships that we have across the entire company..

Alex, it’s Mike Huseby. I – the only thing I would to add to that is that we would expect to have probably more transparency in the next fiscal year about the various businesses, which I think you’d be able to see how margins are shaking out.

We don’t want – really want to speculate on what’s going to happen with the margin within BNC once you separate out – if we separate out Student Brands, for example, or – to the digital services. But as Barry said, there are other services like the co-branded partnerships and marketing partnerships, et cetera, that are bringing in higher revenue.

The other thing I think that’s important to realize based on what we said today is that, for example, First Day, to the extent that First Day increased penetration with digital Courseware, we expect much higher sell-through with First Day than we do with traditional physical book penetration.

So for example, if 100 students come in, and we don’t disclose penetration, let’s say, we only sell to 40 of them, with a 40% penetration, we would expect with – the First Day products, digital products to have penetrations over 90%.

So how those margins shake out in terms of the margin sharing with the publishers and how we cut our rental deals with the school – is it the same rent that we’re paying? Or is it – we don’t know the answers to all that yet, but we’re obviously going to do our best to drive margins higher through higher volumes in digital products as well as through negotiating and renegotiating the deals we have in place today..

Great, that’s really helpful. Thank you.

And then as you think about the Student Brands acquisition more broadly, can you give us a sense of how quickly that piece of the business is growing and how fast you would expect it to grow, ballpark in 2018? And are there any particular properties within that asset that you think are particularly exciting?.

Hey Alex, it’s Kanuj Malhotra. Our focus and priority for Student Brands – I mean, the business organically has had a nice growth trajectory for the last couple of years.

We’re not really disclosing what it is but one of our priorities post the acquisition has been to take it into both the BNC footprint as well as the MBS footprint, which includes textbooks.com. So we expect to see acceleration from that above and beyond what’s normal organic growth trend spends.

So we’re very excited about what that could be in the future..

Great, that’s very helpful. Thank you very much..

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

Hey, guys. It’s Greg Pendy at Sidoti. Thanks for taking my call. I just wanted to focus on the rental side. This is, I think, the second quarter where we’ve seen a bit of a slow down there.

Can you just tell of the puts and takes, kind of, of what’s driving rental to kind of be down? Is that people moving to digital? Is it the lower average selling prices? And how should we be thinking about that going forward?.

Hi, Greg, this is Patrick Maloney. It’s really a combination of what you just said. We have seen the average selling price move down this quarter, again, over the same period last year. So that’s driving it down. But it’s also the growth of the digital products, that students are starting to migrate there more often.

And we did see a significant uptick of our first-aid programs that we ran year-over-year. So all that together is a bit of an effect to the First Day inclusive model, that does eat in to the rental business because those are for sale and not for rental..

Got it, thanks. And can you just give us a sense – I think, on the last call you mentioned some of the schools on the – that had signed up for First Day.

But as we look out to 2018, do you think you’re just – are you getting deeper into those universities? Or do you think that there’s going to be some more universities that sign up for First Day?.

We’re seeing both at the same time, Greg. We’re seeing universities expand the number of courses. In fact, yesterday, we had a meeting at Wright State University that announced that they were expanding to us and adding more sections as well as growing the number of schools that are going to participate with First Time.

And this is an area where we are work in partnership with our publishing partners as they promote the program as well as ourselves. So it’s really a very good program and one that we are very optimistic about in the future..

And then just one – I guess, one follow-up.

Just within First Day, is that something you think that’s penetrating more into a network of schools that are more price sensitive, given the fact that it is kind of economical on a per student basis, maybe some of the state universities or is that kind of broad based?.

It’s rather broad based. We have private schools, they’re participating. But it’s not only the price savings, that can be a big piece of it but it also is proven to improve outcomes of students, and that’s the big driver of this.

Improving the outcomes of the students because they have the product, everybody has it, the First Day, as Mike said, it’s over an 80% or 90% participation rate in the program. And that’s a big driver of this. It’s all about improving the outcomes..

Yes, one other thing, Greg, is that – Greg, one other thing is that having an inclusive access model, and as Patrick said, having all the digital material available to First Day to everybody, from a publisher perspective, is a really good thing.

So the publishers, and we are very aligned on this, it doesn’t make any sense to try to counterfeit copy, unauthorized copies or share content as it’s done with physical, that’s pretty widely publicized in the last year. If you have it all in First Day, that’s included in your Courseware fee, in your tuition.

So that equates to higher sell-through but it also – it involves a lot more – or a sense, a lot more cooperation between us in the publishers and presenting something that’s lower cost but also doesn’t have the risk associated with – that most content does of having it duplicated on an unauthorized basis..

That’s helpful. Thanks a lot..

[Operator Instructions] It appears there are no further questions at this time. Mr. Donohue, I’d like to the conference back over to you for any additional or closing remarks..

Thank you all for joining us on today’s call. Please note that our next scheduled financial release will be our 2018 fiscal fourth quarter earnings on or about June 26. Have a great day. Thank you..

And this concludes today’s call. Thank you for your participation. You may now disconnect..