UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended April 28, 2018
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-12302
Barnes & Noble, Inc.
(Exact name of registrant as specified in its Charter)
| Delaware | 06-1196501 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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| 122 Fifth Avenue, New York, NY | 10011 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (212) 633-3300
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class |
Name of Exchange on which registered |
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Common Stock, $0.001 par value per share |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ | Smaller reporting company ☐ | |||||||
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(Do not check if a
smaller reporting company) |
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| Emerging growth company ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $428,729,814 based upon the closing market price of $7.25 per share of Common Stock on the New York Stock Exchange as of October 28, 2017.
As of May 31, 2018, 72,793,646 shares of Common Stock, par value $0.001 per share, were outstanding, which number includes 140,840 shares of unvested restricted stock that have voting rights and are held by members of the Board of Directors and the Company’s employees.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III.
Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended April 28, 2018 are incorporated by reference into Parts II and IV.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information relating to Barnes & Noble that are based on the beliefs of the management of Barnes & Noble as well as assumptions made by and information currently available to the management of Barnes & Noble. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to Barnes & Noble or the management of Barnes & Noble, identify forward-looking statements.
Such statements reflect the current views of Barnes & Noble with respect to future events, the outcome of which is subject to certain risks, including, among others, the general economic environment and consumer spending patterns, decreased consumer demand for Barnes & Noble’s products, low growth or declining sales and net income due to various factors, including store closings, higher-than-anticipated or increasing costs, including with respect to store closings, relocation, occupancy (including in connection with lease renewals) and labor costs, the effects of competition, the risk of insufficient access to financing to implement future business initiatives, risks associated with data privacy and information security, risks associated with Barnes & Noble’s supply chain, including possible delays and disruptions and increases in shipping rates, various risks associated with the digital business, including the possible loss of customers, declines in digital content sales, risks and costs associated with ongoing efforts to rationalize the digital business, risks associated with the eCommerce business, including the possible loss of eCommerce customers and declines in eCommerce sales, the risk that financial and operational forecasts and projections are not achieved, the performance of Barnes & Noble’s initiatives including but not limited to new store concepts and eCommerce initiatives, unanticipated adverse litigation results or effects, potential infringement of Barnes & Noble’s intellectual property by third parties or by Barnes & Noble of the intellectual property of third parties, and other factors, including those factors discussed in detail in Item 1A, “Risk Factors,” and in Barnes & Noble’s other filings made hereafter from time to time with the Securities and Exchange Commission (SEC).
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to Barnes & Noble or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Barnes & Noble undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Form 10-K.
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| ITEM 1. BUSINESS |
General
Barnes & Noble, Inc. (Barnes & Noble or the Company), one of the nation’s largest booksellers, 1 provides customers a unique experience across its multi-channel distribution platform. As of April 28, 2018, the Company operates 630 bookstores in 50 states, maintains an eCommerce site, develops digital reading products and operates NOOK, one of the largest digital bookstores. Barnes & Noble is utilizing the strength of its retail footprint in combination with its online and digital businesses to provide an omni-channel experience for its customers, fulfilling its commitment to offer customers any book, anytime, anywhere and in any format.
Barnes & Noble Retail (B&N Retail) operates 630 retail bookstores, primarily under the Barnes & Noble Booksellers ® trade name, and includes the Company’s eCommerce site. B&N Retail also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Company’s digital business, offering digital books and magazines for sale and consumption online, NOOK ® 2 reading devices, co-branded NOOK ® tablets and reading software for iOS, Android and Windows. As of April 28, 2018, the Company employed approximately 23,000 employees (8,000 full-time and 15,000 part-time employees).
The Company’s principal business is the sale of trade books (generally hardcover and paperback titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, NOOK ® and related accessories, bargain books, magazines, gifts, café products and services, educational toys & games, music and movies direct to customers through its bookstores or on www.barnesandnoble.com. The Company offers its customers a full suite of textbook options (new, used, digital and rental).
Barnes & Noble has been experiencing declining sales trends primarily due to lower store traffic. The Company has been able to offset some of the traffic decline through its efforts to increase conversion through higher customer engagement. Additionally, the Company has been able to mitigate the impact of the sales decline on profit levels through cost reductions. While the Company believes it has lost share on its recent sales performance, it sees opportunities in an industry that has become more stable.
To improve its performance, the Company has initiated a strategic turnaround plan. The Company’s long-term strategic plan is focused on strengthening the core business by enhancing the customer value proposition; improving profitability through an aggressive expense management program, which will be used to fund growth initiatives; accelerating execution through simplification; and innovating for the future, which will position the Company for long-term growth.
To strengthen its core business, the Company is enhancing this customer value proposition by improving its merchandise mix, enhancing the overall shopping experience, increasing the value of its Membership Program and improving its omni-channel capabilities. The Company will leverage the strength of its Barnes & Noble brand, knowledgeable booksellers, vast book selection and retail footprint to attract customers to its omni-channel offerings and grow sales.
| 1 | Based upon sales reported in trade publications and public filings. |
| 2 |
Any references to NOOK ® include the Company’s NOOK ® Tablet, Samsung Galaxy Tab ® A NOOK ® , Samsung Galaxy Tab ® S2 NOOK ® , Samsung Galaxy Tab ® E NOOK ® and NOOK GlowLight TM 3 devices, each of which includes the trademark symbol ( ® or ™, as applicable) even if a trademark symbol is not included. |
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Merchandising initiatives are focused on increasing the impact of promotional activities, narrowing product assortments, improving SKU productivity, improving inventory management processes, testing changes to existing store layouts and remerchandising select business units in stores. Additionally, the Company has created a new business development team, which will introduce new business categories that are complementary to its existing businesses. The Company believes there is opportunity to increase conversion through higher customer engagement and by improving navigation and discovery throughout the store, including a customer friendly and more intuitive organization of books and improved signage for easier browsing within and across sections.
In-store events also drive traffic, reinforcing Barnes & Noble as a destination where customers can meet, browse and discover. The Company is also utilizing social media, where booksellers communicate events, promotions and new product offerings with customers at the local level in order to drive traffic.
The Company’s Membership Program provides the Company with valuable data and insights into its customer base, enabling the Company to better understand and market to its customers. Members are more productive than non-members, as they spend more and visit more often. The Company continues to test programs to grow sales to both members and non-members, increase membership, improve price perception and enhance its overall customer value proposition.
The Company is focused on simplification throughout its organization to create efficiencies and reinvest resources to support sales growth. The Company is also committed to right sizing its cost structure. At B&N Retail, the Company has implemented a new labor model for its stores that has resulted in the elimination of certain store positions. The new model allows stores to adjust staff up or down based on the needs of the business, increase store productivity and streamline store operations. At NOOK, the Company exited non-core businesses and outsourced certain functions. NOOK expects to continue to re-calibrate its cost structure commensurate with sales, further reducing its losses.
In addition to initiatives focused on growing sales through its existing store base, the Company is innovating for the future and is expecting to open smaller, newly designed prototype stores later this year, which it believes could foster sales growth in the future. The Company has also created a Test & Learn pipeline process, through which it is testing a number of new initiatives to improve future performance.
The Company was incorporated in Delaware in 1986.
Segments
The Company identifies its operating segments based on the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management and makes decisions on the allocation of resources. The Company’s two operating segments are B&N Retail and NOOK.
B&N Retail
This segment includes 630 bookstores as of April 28, 2018, primarily under the Barnes & Noble Booksellers trade name. These Barnes & Noble stores generally offer a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toys & Games, DVDs, Music & Vinyl, Gift, Magazine, Bargain products and a dedicated NOOK ® area. The stores also offer a calendar of ongoing events, including author appearances and children’s activities. The B&N Retail segment also includes the Company’s eCommerce website, www.barnesandnoble.com, and its publishing operation, Sterling Publishing.
Barnes & Noble stores range in size from 3,000 to 60,000 square feet depending upon market size, with an overall average store size of 26,000 square feet. In fiscal 2018, the Company reduced the Barnes & Noble store base by approximately 135,000 square feet, bringing the total square footage to 16.6 million square feet, a net reduction of 0.8% from fiscal 2017.
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The Company believes that the key elements contributing to the success of B&N Retail are:
Proximity to Customers. The Company’s strategy has been to increase its share of the consumer book market, as well as to increase the size of the market through a market clustering strategy. As of April 28, 2018, Barnes & Noble had stores in 161 of the total 210 Designated Market Area markets. In 68 of the 161 markets, the Company has only one Barnes & Noble store. The Company believes its bookstores’ proximity to its customers strengthens its market position and increases the value of its brand. Most Barnes & Noble stores are located in high-traffic areas with convenient access to major commercial thoroughfares and ample parking. Most stores offer extended shopping hours seven days a week.
Extensive Title Selection. Each Barnes & Noble store features an authoritative selection of books, ranging from 19,000 to 143,000 titles. The comprehensive title selection is diverse and reflects local interests and regional titles and authors’ works. Bestsellers typically represent between approximately 4% and 6% of Barnes & Noble store sales. Complementing this extensive on-site selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers at www.barnesandnoble.com by offering an option to have the book sent to the store or shipped directly to the customer. Additionally, the website allows customers to purchase over three million eBooks, newspapers and magazines. The Company believes that its tremendous selection, including many otherwise hard-to-find titles, builds customer loyalty.
Store Design and Ambiance . Many of the Barnes & Noble stores create a comfortable atmosphere with ample public space, a café offering sandwiches, soups and bakery items, among other things, and public restrooms. The cafés, for which the Starbucks Corporation is the sole provider of coffee products, foster the image of the stores as a community meeting place. In addition, the Company continues to develop and introduce new product line extensions, such as proprietary gifts and B&N Educator Program, providing education tools for teachers, librarians and parents. These offerings and services have helped to make many of the stores neighborhood institutions.
NOOK ® Demonstrations. The Company has utilized its traditional retail bookstores to promote NOOK ® within the bookstores. Customers have the ability to see, feel, and experiment with NOOK ® , speak to knowledgeable booksellers, and receive pre- and post-sales customer support within the Company’s bookstores. The Company offers NOOK ® owners free NOOK ® support in all of its retail bookstores, as well as free Wi-Fi connectivity to enjoy the Read In Store™ feature to read NOOK Books™ for free within the store. These acclaimed devices, which provide a fun, easy-to-use and immersive reading experience, include the NOOK ® Tablet, Samsung Galaxy Tab ® A NOOK ® , Samsung Galaxy Tab ® S2 NOOK ® , Samsung Galaxy Tab ® E NOOK ® and NOOK GlowLight™ 3 devices. The NOOK ® devices have also opened up an additional market for NOOK ® -related accessories such as stands, covers, lights, and other items.
Educational Toys & Games Department. The Educational Toys & Games Department at Barnes & Noble offers parents and gift-givers unique, best in class, learning products from around the world. In addition to an exceptional educational assortment, customers can rely on Barnes & Noble for many of the most requested top toys in any season. Whether customers are browsing Science & Tech, Arts & Crafts or Kids’ Games & Puzzles, there is consistently something new to discover. At Barnes & Noble, customers can shop in three distinct ways: by brand, by category and by age. And, by showcasing powerful brands like LEGO, Playmobil and Fisher-Price, along with favorite characters like Thomas the Tank Engine, Hatchimals, Paw Patrol and LOL Dolls, the Company has become a destination for kids and gift-givers across the country.
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Games, Puzzles, Trend & Collectibles . Barnes & Noble continues to maintain focus on Games & Puzzles with a thoughtful and deliberate merchandising segmentation. Featuring an assortment of puzzles, family games, strategy games, party games, card games and mind, memory and logic games, Barnes & Noble offers table top gaming products allowing customers to immerse themselves in dynamic game-play. In the ever evolving world of pop culture, Barnes & Noble is proud to offer trend-based merchandise for an array of fans through an inspired collection of products from many of the hottest entertainment properties, featuring many of the latest trends from around the globe and the Company’s most revered book franchises.
Music and Movies & TV Departments. Many of the Barnes & Noble stores have Music and Movies & TV departments, which offer CDs, Vinyl LPs, DVDs and Blu-ray discs. These departments range in size from approximately 300 to 8,000 square feet and typically stock approximately 10,000 titles. The Company’s DVD and Blu-ray selection focuses on current and classic movies, documentaries, fitness and instructional titles, British TV series and movies, and foreign films. The music selection is tailored to the tastes of the Company’s customers, centering on classical music, jazz, pop rock, and show tunes. The Company also offers a strong selection of Vinyl titles, available in all stores, along with turntables.
Discount Pricing. Barnes & Noble stores employ an aggressive nationwide discount pricing strategy and offer special promotions throughout the year. The Barnes & Noble Membership Program offers members greater discounts and other benefits for products and services as well as exclusive offers and promotions via email or direct mail. The Company’s website, www.barnesandnoble.com, also utilizes a competitive model that includes various promotional offerings designed for members and non-members alike and enables the Company to offer better value to its customers. The Barnes & Noble Kids’ Club Program offers free rewards and special offers to participants and invites children to celebrate their birthday within the retail bookstores.
Community Business Development. The Company’s retail bookstores host a variety of national and local events, which feature the many products and services it offers. Each store plans its own community-based calendar of events, including author appearances, children’s storytimes, poetry readings and book discussion groups. In addition, the Company hosts a number of national campaigns around various themes or audiences such as National Book Club, Summer Reading, My Favorite Teacher Essay Contest, Educator Appreciation Days and the annual Holiday Book Drive, which provides books to at risk children in the communities the stores serve. All of these campaigns increase traffic and sales, and further reinforce Barnes & Noble as a community center.
The Company also provides fund-raising opportunities through its Bookfair program for schools and local non-profit arts and literacy organizations, as well as a Holiday Gift Wrap program, which allows non-profit organizations to gain exposure and raise funds while wrapping gifts inside the stores. The Company believes its community business development programs encourage customer loyalty, drive sales and traffic into its stores and provide positive publicity and media coverage.
Merchandising and Marketing . The Company’s merchandising strategy for its Barnes & Noble stores is to be the authoritative community bookstore carrying an extensive selection of titles in all subjects, including an extensive selection of titles from small independent publishers and university presses. Each Barnes & Noble store features an extensive selection of books from 19,000 to 143,000 unique titles, of which approximately 24,000 titles are common to virtually all stores. Each store is tailored to reflect the lifestyles and interests of the area’s customers.
Product Master, the Company’s proprietary inventory management database, has approximately 19.6 million titles. It includes approximately 7.2 million active titles and provides each store with comprehensive title selections. By enhancing the Company’s existing merchandise replenishment systems, Product Master allows the Company to achieve higher in-stock positions and better productivity at the bookstore level through efficiencies in receiving, cashiering and returns processing. Complementing this extensive on-site selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers at www.barnesandnoble.com by offering an option to have the book sent to the store or shipped directly to the customer.
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The Company has a multi-channel eCommerce marketing strategy that deploys various merchandising programs and promotional activities to drive traffic to both its stores and website. At the center of this eCommerce program is the Company’s website, www.barnesandnoble.com. The website serves as both the Company’s direct-to-home delivery service and as an important broadcast channel and advertising medium for the Barnes & Noble brand. For example, the online store locator at www.barnesandnoble.com receives millions of customer visits each year providing store hours, directions, information about author events and other in-store activities. Similarly, in Barnes & Noble stores, NOOK ® customers can access free Wi-Fi connectivity, enjoy the Read In Store™ feature to browse many complete eBooks for free.
The Company has implemented a number of new website features to improve the overall user experience. BN.com is an important component to the Company’s omni-channel strategy, and it believes that, in the long-term, the platform will enable it to be more competitive in the marketplace.
Another example of a multi-channel initiative is the Barnes & Noble MasterCard ® , a co-brand credit card issued by Barclaycard. Card members earn 5% back on purchases at any Barnes & Noble stores or online at www.barnesandnoble.com. They also earn points for every dollar spent on purchases where MasterCard is accepted (excluding Barnes & Noble purchases); when they reach 2,500 points, they automatically earn a $25 Barnes & Noble gift card. Customers can apply in any B&N store or online at BN.com. Upon approval, they can use the new account to receive the 5% statement credit rebate on their B&N purchase, as well as a $25 Barnes & Noble gift card after first use of the account.
The Company believes that its website complements its bookstores in many ways. It not only serves as a marketing tool, it offers convenient shopping alternatives for its customers.
Store Locations and Properties. The Company’s experienced real estate personnel select sites for new Barnes & Noble stores after an extensive review of demographic data and other information relating to market potential, bookstore visibility and access, available parking, surrounding businesses, compatible nearby tenants, competition and the location of other Barnes & Noble stores. Most stores are located in high-visibility areas adjacent to main traffic corridors in strip shopping centers, freestanding buildings and regional shopping malls. The real estate personnel continue to focus on renegotiating leases as they expire.
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The B&N Retail segment includes 630 bookstores as of April 28, 2018, primarily under the Barnes & Noble Booksellers trade name. The number of Barnes & Noble stores located in each state as of April 28, 2018 is listed below:
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STATE |
NUMBER OF STORES |
STATE |
NUMBER OF STORES |
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| Alabama | 7 | Montana | 4 | |||
| Alaska | 2 | Nebraska | 4 | |||
| Arizona | 15 | Nevada | 4 | |||
| Arkansas | 5 | New Hampshire | 4 | |||
| California | 69 | New Jersey | 23 | |||
| Colorado | 15 | New Mexico | 3 | |||
| Connecticut | 12 | New York | 38 | |||
| Delaware | 2 | North Carolina | 21 | |||
| Florida | 39 | North Dakota | 3 | |||
| Georgia | 19 | Ohio | 18 | |||
| Hawaii | 2 | Oklahoma | 5 | |||
| Idaho | 3 | Oregon | 7 | |||
| Illinois | 26 | Pennsylvania | 26 | |||
| Indiana | 12 | Rhode Island | 3 | |||
| Iowa | 7 | South Carolina | 10 | |||
| Kansas | 4 | South Dakota | 1 | |||
| Kentucky | 7 | Tennessee | 8 | |||
| Louisiana | 7 | Texas | 52 | |||
| Maine | 1 | Utah | 10 | |||
| Maryland | 11 | Vermont | 1 | |||
| Massachusetts | 17 | Virginia | 25 | |||
| Michigan | 18 | Washington | 17 | |||
| Minnesota | 16 | West Virginia | 1 | |||
| Mississippi | 3 | Wisconsin | 11 | |||
| Missouri | 11 | Wyoming | 1 |
Sterling Publishing
Sterling Publishing is a leading publisher of non-fiction trade titles. Founded in 1949, Sterling publishes a wide range of non-fiction and illustrated books and kits across a variety of imprints, in categories such as health & wellness, music & popular culture, food & wine, crafts, puzzles & games and history & current affairs, as well as a large children’s line. Sterling, with a solid backlist and robust value publishing program, has a title base of approximately 15,000 print books and eBooks. In addition, Sterling also distributes approximately 1,300 titles on behalf of client publishers.
Operations
The Company has seasoned management teams for its retail stores, including those for real estate, merchandising and store operations. Field management includes regional vice presidents and district managers supervising multiple store locations.
During fiscal 2018, the Company implemented a new labor model for its retail stores that resulted in the elimination of certain store positions. The new model allows stores to adjust staff up or down based on the needs of the business, increase store productivity and streamline store operations.
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The Barnes & Noble management team is led by experienced management in both traditional product lines and in digital eCommerce. The Barnes & Noble management team employs highly skilled professionals with both media expertise and supply chain management skills. This combination ensures a positive customer experience regardless of a customer’s preference for a physical product or a digital one.
Each Barnes & Noble store generally employs a store manager, one assistant store manager, two sales and inventory managers, a café manager and on average 27 booksellers (combination of full-time and part-time). Many Barnes & Noble stores also employ a full-time community business development manager. The large bookseller base provides the Company with experienced employees to fill new manager positions in the Company’s Barnes & Noble stores. The Company anticipates that a significant percentage of the personnel required to manage its stores will continue to come from within its existing operations.
Field management for all of the Company’s bookstores, including regional vice presidents, district managers and store managers, participate in an annual incentive program tied to store sales and profit goals (for regional vice presidents) as well as execution of certain retail initiatives. The Company believes that the compensation of its field management is competitive with that offered by other specialty retailers of comparable size.
Barnes & Noble has in-store training programs providing specific information needed for success at each level, beginning with the entry-level positions of bookseller. District managers participate in annual training and merchandising conferences. Store managers are generally responsible for training other booksellers and employees in accordance with detailed procedures and guidelines prescribed by the Company utilizing a blended learning approach, including on-the-job training, eLearning, facilitator-led training and training aids available at each bookstore.
Purchasing
Barnes & Noble’s buyers negotiate costs on select items, marketing funds, promotional discounts, cooperative advertising and showroom allowances with publishers and other suppliers for www.barnesandnoble.com and all of the Company’s bookstores. The Company has buyers who specialize in customizing inventory for bookselling in stores and online. Store inventories are further customized by store managers, who may respond to local demand by purchasing a limited amount of fast-selling titles through a nationwide wholesaling network, including the Company’s distribution centers.
The Company’s B&N Retail segment purchases physical books on a regular basis from over 400 publishers and nearly 40 wholesalers or distributors. Purchases from the top five suppliers (including publishers, wholesalers and distributors) accounted for approximately 67% of the B&N Retail’s book purchases during fiscal 2018, and no single supplier accounted for more than 27% of B&N Retail’s book purchases during this period. Consistent with industry practice, a substantial majority of the physical book purchases are returnable for full credit, a practice which substantially reduces the Company’s risk of inventory obsolescence.
Publishers periodically offer their excess inventory in the form of remainder books to book retailers and wholesalers through an auction process, which generally favors booksellers such as the Company, who are able to buy substantial quantities. These books are generally purchased in large quantities at favorable prices and are then sold to consumers at significant discounts off publishers’ list prices.
Distribution
The Company has invested significant capital in its systems and technology by building new platforms, implementing new software applications and building and maintaining efficient distribution centers. This investment has enabled the Company to source a majority of its inventory through its own
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distribution centers, resulting in direct buying from vendors rather than wholesalers. Using the Company’s own distribution centers rather than wholesalers lowers distribution costs per unit, increases inventory turns, and improves product margins. The Company’s distribution centers’ 3-prong strategy of (1) accelerating speed to market, (2) improving order quality (on-time, complete and damage free) and (3) reducing costs has improved just-in-time deliveries to stores as well as deliveries to the Company’s customers on orders placed via the Barnes & Noble website and through the Company’s in-store order network.
As of April 28, 2018, the Company has approximately 1,745,000 square feet of distribution center capacity. The Company has an approximately 1,145,000 square foot distribution center in Monroe Township, New Jersey, which ships merchandise to stores throughout the country and to online customers. The Company also has an approximately 600,000 square foot distribution center in Reno, Nevada, which is used to facilitate distribution to stores and online customers in the western United States.
Information Technologies
The Company has focused a majority of its information technology resources on strategically positioning and implementing systems to support store operations, online technology requirements, merchandising, distribution, marketing and finance.
BookMaster, the Company’s proprietary bookstore inventory management system, integrates point-of-sale features with a proprietary data warehouse-based replenishment system. BookMaster enhances communications and real-time access to the Company’s network of bookstores, distribution centers and wholesalers. The Company continues to implement systems to improve efficiencies in back office processing in the human resources, finance and merchandising areas.
The Company plans to continue to invest in technologies that will enable it to offer its customers the more convenient and user-friendly online shopping experience. B&N Retail has licensed existing commercial technology when available and has focused its internal development efforts on those proprietary systems necessary to provide the highest level of service to its customers. The overall mix of technologies and applications allows the Company to support a distributed, scalable and secure eCommerce environment.
The Company uses Intel ® -based server technology in a fully redundant configuration to power its current website, which is hosted in two Company-owned locations. Each of these sites has sufficient capacity to independently support the volume of traffic directed toward the Company’s website during peak periods. Both hosting locations are configured with redundant power, Internet telecommunications capacity and cooling to significantly reduce its exposure to downtime and service outages. Additionally, the Company believes its technology investments are scalable to meet the future growth demands of the business.
Competition
The book business is highly competitive in every channel in which the Company operates. The Company competes with mass merchandisers, such as Costco, Target and Wal-Mart. The Company faces competition from many online distributors, notably Amazon.com. The Company also competes with other large bookstores, including Books-A-Million, and smaller format bookstores, including new Amazon retail stores and independent store operators. In addition, the Company faces competition from digital distributors, such as Amazon.com and Apple, including through digital books or “eBooks” and eBook readers. The B&N Retail business’s stores also compete with specialty retail stores that offer books in particular subject areas, variety discounters, drug stores, warehouse clubs, mail-order clubs and other retailers offering books, music, toys, games, gifts and other products in its market segments.
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The music and movie businesses are also highly competitive and the Company faces competition from mass merchants, discounters and electronic distribution. The store experience is geared towards the Company’s customer base, including a strong Blu-ray presence as well as a tailored, returnable product assortment.
Seasonality
The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating income typically realized during its third fiscal quarter, which includes the holiday selling season.
Employees
The Company cultivates a culture of outgoing, helpful and knowledgeable employees. As of April 28, 2018, the B&N Retail segment had approximately 23,000 employees (8,000 full-time and 15,000 part-time employees). The B&N Retail segment’s employees are not represented by unions.
NOOK
This segment represents the Company’s digital business, including the development and support of the Company’s NOOK ® product offerings. The digital business includes digital content such as eBooks, digital newsstand and sales of NOOK ® devices and accessories to B&N Retail. The underlying strategy of the NOOK business is to offer customers any digital book, newspaper or magazine, anytime, on any device. The Company remains committed to delivering to customers the best digital bookstore experience, providing easy access to Barnes & Noble’s expansive digital collection of over three million eBooks, digital magazines and newspapers, while rationalizing its existing cost structure. As part of this commitment, the Company partners with Samsung to develop co-branded NOOK ® tablets that feature the award-winning Barnes & Noble digital reading experience, while continuing to develop and offer its own black-and-white NOOK ® eReaders and NOOK ® Tablet.
Barnes & Noble’s NOOK digital bookstore and Reading Apps™ provide customers the ability to purchase and read their digital content and access their Lifetime Library on a wide range of digital platforms, including Windows PCs and tablets, iPad™, iPhone ® , Android™ smartphones and tablets, PC and Mac ® . Barnes & Noble has implemented innovative features on its digital platform to ensure that customers can access their NOOK content from almost all of today’s most popular devices.
NOOK currently sells a number of different devices to satisfy customers’ digital needs, including the NOOK ® Tablet, Samsung Galaxy Tab ® A NOOK ® , Samsung Galaxy Tab ® S2 NOOK ® , Samsung Galaxy Tab ® E NOOK ® and NOOK GlowLight™ 3 devices. These devices provide customers access to the millions of books and magazines in the NOOK Store and through Google Play, Android apps and games, songs, movies and TV shows, plus popular Google services like the Chrome™ browser, Gmail™, YouTube™, Google Search™ and Google Maps™. NOOK GlowLight™ 3 provides customers a simple, easy to use, intuitive eReader on an E-Ink display that replicates the experience of reading from physical paper and provides access to the Company’s digital content store. The free NOOK support in any of the B&N Retail bookstores provides customers the ability to interact with a knowledgeable bookseller to receive pre- and post-customer sales support. The bookstores also provide free Wi-Fi connectivity for NOOK ® devices and Read In Store™ access, which allows customers to read NOOK Books™ for free within the store. NOOK ® devices also allow for digital lending of a wide selection of books through its LendMe ® technology.
Operations
The digital products group has knowledgeable product development and operational management teams in the areas of reading software, digital content retailing and mobile device development. Digital product management oversees product concept, software development, engineering, and user
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experience. Operational management has historically overseen demand planning, strategic sourcing, manufacturing, return and refurbishment of hardware. The Company expects that digital product management’s role will continue to focus on eReading devices and reading platforms, while also shifting to the management of third-party partner relationships, such as NOOK’s partnership with Samsung and Bahwan CyberTek (BCT), a global software products and services company, in which the Company outsourced certain NOOK functions, including cloud management and development support for NOOK ® software.
Purchasing/Distribution
NOOK acquires the rights to distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK ® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model, in which the publishers set fixed prices for eBooks and NOOK receives a fixed commission on content sold through the eBookstore. The majority of the Company’s eBooks sold are under the agency model.
NOOK utilizes the Company’s purchasing power and its distribution centers to synergistically facilitate the purchasing and shipping of devices and accessories.
Competition
The eReader and tablet businesses are highly competitive. NOOK competes primarily on price, device functionality, consumer appeal and availability of digital content. The importance of price varies depending on the competitor, with some of NOOK’s competitors engaging in significant discounting and other promotional activities. NOOK competes with many online digital businesses, notably Amazon.com and Apple. Some of the Company’s competitors have substantially greater financial and other resources and may have different business strategies than NOOK does.
Seasonality
The NOOK business, like that of many technology companies, is impacted by the launch of new products and the promotional efforts to support those new products, as well as the traditional retail holiday selling seasonality.
Employees
As of April 28, 2018, NOOK had 57 employees (combination of full-time and part-time). NOOK employees are not represented by unions, and the Company believes that its relationship with its employees is generally excellent.
Trademarks and Service Marks
The trademarks and service marks owned by the Company and its subsidiaries include, but are not limited to, B&N ® , Barnes & Noble ® , Barnes & Noble.com ® , barnesandnoble.com ® , Barnes & Noble Booksellers ® , Barnsie ® , Noble ® , Espari ® , Discover Great New Writers ® , NOOK ® , NOOK Color ® , NOOK Tablet ® , Reader’s Tablet ® , NOOK Simple Touch ® , GlowLight ® , NOOK GlowLight™, The Simple Touch Reader ® , NOOK Press ® , NOOK Books ® , NOOK Book Enhanced ® , NOOK Developer ® , The NOOK Book Store ® , NOOK Newsstand ® , NOOK Newspaper ® , NOOK Kids ® , Read In Store ® , NOOK Friends ® , LendMe ® , NOOK Boutique ® , NOOK Study ® , ArticleView ® , Daily Shelf ® , Read To Me ® , Punctuate! ® , Wobblio ® , Get Pop-Cultured ® , B-Fest ® , B&N Readouts ® , SparkNotes ® , Borders ® , Borders Books & Music ® , and Waldenbooks ® , some of which are registered or pending with the United States Patent and Trademark Office.
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The Company regards its trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technology and similar intellectual property as important to its operations, and it relies on trademark, copyright and patent law, domain name regulations, trade secret protection and confidentiality or license agreements to protect its proprietary rights. The Company has registered, or applied for the registration of, a number of domain names, trademarks, service marks, patents, and copyrights by U.S. and foreign governmental authorities. Additionally, the Company has filed U.S. and international patent applications covering certain of its proprietary technology. The Company renews its registrations, which vary in duration, as it deems appropriate from time to time.
The Company has licensed in the past, and expects that it may license in the future, certain of its proprietary rights to third parties. Some of the Company’s products are designed to include intellectual property licensed or otherwise obtained from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of the Company’s products and business methods, the Company believes, based upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms; however, there is no guarantee such licenses could be obtained at all.
Available Information
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy statements and other information with the SEC. Any materials filed by the Company with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the SEC’s Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including the Company) file electronically with the SEC. The Internet address of the SEC’s website is https://www.sec.gov .
The Company makes available on its corporate website at www.barnesandnobleinc.com under “Investor Relations” - “SEC Filings,” free of charge, all its SEC filings as soon as reasonably practicable after the Company electronically files such material with or furnishes such materials to the SEC.
The Company has adopted Corporate Governance Guidelines, a Code of Business Conduct and Ethics and written charters for the Company’s Audit Committee, Compensation Committee and Corporate Governance & Nominating Committee. Each of the foregoing is available on the Company’s website at www.barnesandnobleinc.com under “Investor Relations” – “Corporate Governance” and in print to any stockholder who requests it, in writing to the Company’s Corporate Secretary, Barnes & Noble, Inc., 122 Fifth Avenue, New York, New York 10011. In accordance with SEC rules, the Company intends to disclose any amendment (other than any technical, administrative, or other non-substantive amendment) to either of the above codes, or any waiver of any provision thereof with respect to any of the executive officers, on the Company’s website within four business days following such amendment or waiver.
| ITEM 1A. | Risk Factors |
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones faced by the Company. Additional risks and uncertainties not presently known or that are currently deemed immaterial also may impair the Company’s business operations. If any of the following risks occur, the Company’s business, financial condition, operating results and cash flows could be materially adversely affected.
Unless otherwise specified or the context otherwise requires, references below to (1) “the Company” refer to Barnes & Noble, Inc. and its subsidiaries, (2) “Retail business” refer to the Company’s business included in the Retail segment, and (3) “Digital business” refer to the Company’s business included in the NOOK segment, including the sales of digital content, devices and accessories.
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Intense competition, including from the Internet and other retail sources, may adversely affect the Company’s businesses.
The book business is highly competitive in every channel in which the Company operates. The Company competes with mass merchandisers, such as Costco, Target and Wal-Mart. The Company faces competition from many online distributors, notably Amazon.com. The Company also competes with other large bookstores, including Books-A-Million, and smaller format bookstores, including new Amazon retail stores and independent store operators. In addition, the Company faces competition from digital distributors, such as Amazon.com and Apple, including through digital books or “eBooks” and eBook readers. The Retail business’s stores also compete with specialty retail stores that offer books in particular subject areas, variety discounters, drug stores, warehouse clubs, mail-order clubs and other retailers offering books, music, toys, games, gifts and other products in its market segments.
Some of the Company’s competitors may have greater financial and other resources and different business strategies than the Company does. New and enhanced technologies, including new digital technologies and new web services technologies, may increase the Company’s competition. Competition may also intensify as the Company’s competitors enter into business combinations or alliances or established companies in other market segments expand into its market segments. Increased competition may reduce the Company’s sales and profits.
The Retail business’s stores compete primarily on the quality of the shopping and store experience and the price and availability of products. The importance of price varies depending on the competitor, with some of the Retail business’s competitors engaging in significant discounting and other promotional activities.
Because of shifting consumer preferences and demographic shifts, coupled with the maturity of the market for traditional retail stores, the Company’s sales or net income may decline unless it successfully implements its business strategies.
The Company’s primary business is its operation of the Retail business’s stores across the United States, and it derived a substantial majority of its sales and profits from the Retail business’s stores in its most recent fiscal year. Continued increases in consumer spending via the Internet may significantly affect its ability to generate sales in the Retail business’s stores. Management’s strategies are subject to the risks described herein and elsewhere, and may be subject to other risks that have not yet been identified, and management cannot make assurances that its business strategies will be successful.
The Company’s businesses are dependent on the overall economic environment and consumer spending patterns.
A deterioration of the current economic environment could have a material adverse effect on the Company’s financial condition and operating results, as well as the Company’s ability to fund its growth or its strategic business initiatives.
The Retail and Digital businesses’ sales are primarily dependent upon discretionary consumer spending, which is affected by the overall economic environment, consumer confidence and other factors beyond the Company’s control. In addition, the Retail and Digital businesses’ sales are dependent in part on the strength of new release products, which are controlled by publishers and other suppliers.
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If the Retail business is unable to renew or enter into new leases on favorable terms, or at all, its sales and earnings may decline.
Substantially all of the Retail business’s stores are located in leased premises. The Retail business’s profitability depends in part on its ability to continue to optimize its store lease portfolio as to the number of retail stores, store locations and lease terms and conditions. Its ability to do so depends on, among other things, general economic and business conditions and general real estate development conditions, which are beyond its control. The Retail business has 321 leases up for renewal by April 30, 2021. If the cost of leasing existing retail stores increases, the Retail business may not be able to maintain its existing store locations as leases expire. In addition, the Retail business may not be able to enter into new leases on acceptable terms, or at all, or it may not be able to locate suitable alternative sites or additional sites for new retail stores in a timely manner. The Retail business’s sales and earnings may decline if it fails to maintain existing store locations, enter into new leases, renew leases or relocate to alternative sites, in each case on attractive terms.
In addition to the bookstores, the Company leases two distribution centers for its B&N Retail operations: one in Monroe Township, New Jersey and the other in Reno, Nevada. The Retail business’s profitability depends in part on its ability to continue to optimize its distribution centers. Its ability to do so depends on, among other things, general economic and business conditions and general real estate development conditions, which are beyond its control. Both distribution centers’ leases are up for renewal in 2020. If the cost of leasing these distribution centers increases, the Retail business may not be able to maintain its existing distribution centers as leases expire. In addition, the Retail business may not be able to enter into new leases on acceptable terms, or at all, or it may not be able to locate suitable alternative sites or in a timely manner. The Retail business’s earnings may decline if it fails to maintain existing distribution centers, enter into new leases, renew leases or relocate to alternative sites, in each case on attractive terms.
The Company is dependent upon access to capital, including bank credit facilities and short-term vendor financing, for its liquidity needs.
The Company must have sufficient sources of liquidity to fund its working capital requirements and indebtedness. The Company believes that the combination of its cash and cash equivalents on hand, cash flow received from operations, funds available under the Company’s credit facility and short-term vendor financing will be sufficient to meet the Company’s normal working capital and debt service requirements for at least the next twelve months. If these sources of liquidity do not satisfy the Company’s requirements, the Company may need to seek additional financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, the availability of credit and the Company’s credit rating, as well as the Company’s reputation with potential lenders. These factors could materially adversely affect the Company’s ability to fund its working capital requirements, costs of borrowing, and the Company’s financial position and results of operations would be adversely impacted.
The Company’s expansion into new products, services and technologies subjects it to additional business, legal, financial and competitive risks.
The Company may require additional capital in the future to sustain or grow the Company’s business. The Company’s gross profits and margins in its newer activities may be lower than in its traditional activities, and it may not be successful enough in these newer activities to recoup its investments in them. In addition, the Company may have limited or no experience in its newer products and services, and its customers may not adopt its new product or service offerings, which include digital, web services and electronic devices, including but not limited to its NOOK ® eBook readers and tablets, as well as new gift products and educational toys and games products. Some of these offerings may present new and difficult technological challenges, and the Company may be subject to claims or recalls if customers of these offerings experience service disruptions or failures or other quality issues. If any of these were to occur, it could damage the Company’s reputation, limit its growth and negatively affect its operating results.
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The complexity of the Company’s businesses could place a significant strain on its management, operations, performance and resources.
The complexity of the Company’s businesses could place a significant strain on its management, operations, technical performance, financial resources, and internal financial control and reporting functions. The Company operates two different businesses: the Retail business and the Digital business. There can be no assurance that the Company will be able to manage the complexity of its businesses effectively. The Company’s current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage its future operations, especially as it employs personnel in multiple geographic locations. The Company may not be able to hire, train, retain, motivate and manage the required personnel, which may limit its growth. If any of these were to occur, it could damage the Company’s reputation, limit growth, negatively affect operating results and harm its business.
The Company faces the risk of disruption of supplier relationships and/or supply chain and/or inventory surplus.
The products that the Company sells originate from a wide variety of domestic and international vendors. During fiscal 2018, the Retail business’s five largest suppliers accounted for approximately 67% of the dollar value of merchandise purchased. While the Company believes that its relationships with its suppliers are strong, suppliers may modify the terms of these relationships due to general economic conditions or otherwise. The Company does not have long-term arrangements with most of its suppliers to guarantee availability of merchandise, content, components or services, particular payment terms or the extension of credit limits. If the Company’s current suppliers were to stop selling merchandise, content, components or services to it on acceptable terms, including as a result of one or more supplier bankruptcies due to poor economic conditions, the Company may be unable to procure the same merchandise, content, components or services from other suppliers in a timely and efficient manner and on acceptable terms, or at all.
The Retail business is dependent on the continued supply of trade books. The publishing industry generally has suffered recently due to, among other things, changing consumer preferences and the economic climate. A significant disruption in this industry generally could adversely impact the Company’s business. A significant unfavorable change in the Company’s relationships with key suppliers could materially adversely affect its sales and profits. In addition, any significant change in the payment terms that the Company has with its key suppliers, including payment terms, return policies, the discount or margin on products or changes to the distribution model could adversely affect its financial condition and liquidity.
The Company has arrangements with third-party manufacturers with respect to digital devices. These manufacturers procure and assemble unfinished parts and components from third-party suppliers based on forecasts provided by the Company. Given production lead times, commitments may be made far in advance of finished product delivery. In addition, certain of our merchandise, including electronic readers, are sourced, directly or indirectly, from outside the United States, including, without limitation, from suppliers in China. Political or financial instability, merchandise quality issues, product safety concerns, trade restrictions, work stoppages, tariffs, foreign currency exchange rates, transportation capacity and costs, inflation, civil unrest, natural disasters, outbreaks of pandemics and other factors relating to foreign trade are beyond our control and could disrupt our supply of foreign-sourced merchandise and/or adversely affect our results of operations.
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The Company’s relationship with strategic partners could have adverse impacts on the Company and its business.
The Company relies on third parties to provide certain services for its business. The Company’s business may be adversely impacted if such third parties fail to meet their obligations or to provide high levels of service to the Company’s customers. Further, the Company could be subject to claims as a result of the activities, products or services provided by these third-party service providers even though the Company was not directly involved in the circumstances leading to those claims. These claims could include, among other things, claims by the Company’s customers and claims relating to data security. Even if these claims do not result in liability to the Company, defending and investigating these claims could be expensive and time-consuming, divert personnel and other resources from the Company’s business and result in adverse publicity that could harm the Company’s business.
The Company’s businesses rely on certain key personnel.
Management believes that the Company’s continued success will depend to a significant extent upon the efforts and abilities of certain key personnel of the Company. The loss of the services of any of these key personnel could have a material adverse effect on the Company. The Company does not maintain “key man” life insurance on any of its officers or other employees.
The Company’s businesses are seasonal and the Company’s results of operations may fluctuate from quarter to quarter, which could affect the Company’s business, financial condition and results of operations.
The Company’s results of operations may fluctuate from quarter to quarter depending upon several factors, some of which are beyond its control. These factors include the timing of new product releases, weather, the level of success of the Company’s product releases, the timing of store openings and closings, shifts in the timing of certain promotions and the effect of impairments on the Company’s assets. These and other factors could affect the Company’s business, financial condition and results of operations, and this makes the prediction of the Company’s financial results on a quarterly basis difficult. The Company’s quarterly financial results have been and may in the future be below the expectations of public market analysts and investors.
The Company’s sales are generally highest in the third fiscal quarter and lowest in the second and fourth fiscal quarters. Operating results in the Company’s businesses depend significantly upon the holiday selling season in the third fiscal quarter.
Less than satisfactory net sales during the Company’s peak fiscal quarter could have a material adverse effect on its financial condition or operating results for the year, and the Company’s results of operations from those quarters may not be sufficient to cover any losses, which may be incurred in the other fiscal quarters of the year.
The Company may not be able to adequately protect its intellectual property rights or may be accused of infringing upon intellectual property rights of third parties.
The Company regards its trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as important to its success, and it relies on trademark, copyright and patent law, domain name regulations, trade secret protection and confidentiality or license agreements to protect its proprietary rights. Laws and regulations may not adequately protect its trademarks and similar proprietary rights. The Company may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or diminish the value of its trademarks and other proprietary rights.
The Company may not be able to discover or determine the extent of any unauthorized use of its proprietary rights. The protection of the Company’s intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps it takes to protect its intellectual property may not adequately protect its rights or prevent third parties from infringing or misappropriating its proprietary rights. The Company also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.
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Other parties also may claim that the Company infringes their proprietary rights. Because of the changes in Internet commerce, the electronic reader and digital content business, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain components of our products and business methods may unknowingly infringe existing patents or intellectual property rights of others. Because the Company’s products include complex technology, much of which is acquired from suppliers through the purchase of components or licensing of software, the Company and its suppliers and customers are and have been involved in or have been impacted by assertions, including both requests for licenses and litigation, regarding patent and other intellectual property rights. The Company has been and is currently subject to, and expects to continue to be subject to, claims and legal proceedings regarding alleged infringement by it of the intellectual property rights of third parties. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against the Company prohibiting the Company from marketing or selling certain products or the payment of damages. The Company may need to obtain licenses from third parties who allege that it has infringed their rights, but such licenses may not be available on terms acceptable to the Company, or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licenses or other rights with respect to intellectual property it does not own in providing services to other businesses and individuals under commercial agreements. These risks have been amplified by the increase in third parties whose primary business appears to be to assert such claims. If any infringement or other intellectual property claim made against the Company by any third-party is successful, if the Company is required to indemnify a customer with respect to a claim against the customer, or if the Company is unable to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, the Company’s business, operating results, and financial condition could be materially and adversely affected.
The Company’s digital content offerings, including NOOK ® , depend in part on effective digital rights management technology to control access to digital content. If the digital rights management technology that it uses is compromised or otherwise malfunctions, the Company could be subject to claims, and content providers may be unwilling to include their content in its service.
The Company faces data security risks with respect to personal information.
The Company’s business involves the receipt, storage, processing and transmission of personal information about customers and employees. Personal information about customers is obtained in connection with the Company’s membership programs, eCommerce operations, digital media businesses, as well as through retail transactions in stores operated by the Company. The Company’s online operations and the Digital business depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. We may share such information with vendors and third parties that assist with certain aspects of our business.
The Company’s handling and use of personal information is regulated at the international, federal and state levels. Privacy and information security laws, regulations, and standards, such as the Payment Card Industry Data Security Standard, change from time to time, and compliance with them may result in cost increases due to necessary systems changes and the development of new processes and may be difficult to achieve. If the Company fails to comply with these laws, regulations and standards, it could be subjected to legal risk. Also, hardware, software or applications developed or procured internally or from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. In addition, even if the Company fully complies with all laws, regulations, and standards and even though the Company has taken significant steps to protect personal information, the Company could experience a data security breach, and its reputation could be damaged, possibly resulting in lost future sales or decreased usage of credit and debit card products. Because the techniques used to
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obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent the Company’s security measures could misappropriate the Company’s or its users’ proprietary information and cause interruption in its operations. Any compromise of the Company’s data security could result in a violation of applicable privacy and other laws or standards, significant legal and financial exposure beyond the scope or limits of insurance coverage, increased operating costs associated with remediation, negative publicity, equipment acquisitions or disposal and added personnel, and a loss of confidence in its security measures, which could harm the business or investor confidence. Data security breaches may also result from non-technical means, for example, actions by an employee.
The Company has suffered data security breaches in the past, including the Company’s discovery in 2012 that PIN pads in certain of its stores had been tampered with to allow criminal access to card data and PIN numbers on credit and debit cards swiped through the terminals. This matter has given rise to putative class action litigation, including ongoing class action litigation, on behalf of customers, banks, or other card issuers, and inquiries from federal and state government agencies. It is possible that additional litigation arising out of this matter may be filed on behalf of customers, banks, payment card companies or stockholders seeking damages allegedly arising out of this incident and other related relief. In addition, payment card companies and associations may impose fines by reason of the tampering and federal and state enforcement authorities may impose penalties or other remedies against the Company. At this point the Company is unable to predict the developments in, outcome of, and economic and other consequences of pending or future litigation or government inquiries related to this matter.
The concentration of the Company’s capital stock ownership with certain executive officers, directors and their affiliates limits its stockholders’ ability to influence corporate matters and may involve other risks.
Leonard Riggio, the Company’s Founder and Chairman, is currently the beneficial owner of an aggregate of approximately 19.3% of the Company’s outstanding capital stock as of April 28, 2018.
This concentrated control may limit the ability of the Company’s other stockholders to influence corporate matters and, as a result, the Company may take certain actions, with which its other stockholders do not agree. In addition, there may be risks related to the relationships Leonard Riggio and other members of the Riggio family have with the various entities with which the Company has related party transactions.
Changes in sales and other tax collection regulations or inability of the Company to utilize tax credits or assets, could harm the Company’s businesses or financial performance.
The Retail business and the Digital business collected sales tax on the majority of the products and services that they sold in their respective prior fiscal years that were subject to sales tax, and they generally have continued the same policies for sales tax within the current fiscal year. While management believes that the financial statements included elsewhere herein reflect management’s best current estimate of any potential additional sales tax liability based on current discussions with taxing authorities, there can be no assurance that the outcome of any discussions with any taxing authority will not result in the payment of sales taxes for prior periods or otherwise, or that the amount of any such payments will not be materially in excess of any liability currently recorded. In the future, the Company’s businesses may be subject to claims for not collecting sales tax on the products and services it currently sells for which sales tax is not collected. There is a risk that existing tax credits and tax assets may not be utilized or may expire.
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The Spin-Off of Barnes & Noble Education could result in significant tax liability to the Company and its stockholders.
The Spin-Off was conditioned on the Company’s receipt of written opinions from Cravath, Swaine & Moore LLP and KPMG LLP to the effect that the Spin-Off would qualify for non-recognition of gain and loss to the Company and its stockholders, which were received. These opinions do not address any U.S. state or local or foreign tax consequences of the Spin-Off. These opinions assume that the Spin-Off will be completed according to the terms of the Separation Agreement and rely on the facts as stated in the Separation Agreement, the Tax Matters Agreement, the other ancillary agreements, the prospectus for the Spin-Off and a number of other documents. In addition, these opinions are based on certain representations as to factual matters from, and certain covenants by, the Company and Barnes & Noble Education. The opinions cannot be relied on if any of the assumptions, representations or covenants are incorrect, incomplete or inaccurate or are violated in any material respect. The opinions are not binding on the Internal Revenue Service (IRS) or the courts, and we cannot assure you that the IRS or a court will not take a contrary position. If the Spin-Off were determined not to qualify for non-recognition of gain and loss, U.S. holders could be subject to tax. In this case, each U.S. holder who receives the Barnes & Noble Education Common Stock in the Spin-Off would generally be treated as receiving a distribution in an amount equal to the fair market value of Barnes & Noble Education common stock received, which would generally result in (i) a taxable dividend to the U.S. holder to the extent of that U.S. holder’s pro rata share of the Company’s current and accumulated earnings and profits; (ii) a reduction in the U.S. holder’s basis (but not below zero) in the Company’s common stock to the extent the amount received exceeds the stockholder’s share of the Company’s earnings and profits; and (iii) a taxable gain from the exchange of the Company’s common stock to the extent the amount received exceeds the sum of the U.S. holder’s share of the Company’s earnings and profits and the U.S. holder’s basis in its common stock.
If the Spin-Off were determined not to qualify for non-recognition of gain and loss, then the Company would recognize gain in an amount up to the fair market value of the Barnes & Noble Education stock held by the Company immediately before the Spin-Off.
The Company’s classified Board of Directors and other anti-takeover defenses could deter acquisition proposals and make it difficult for a third-party to acquire control of the Company. This could have a negative effect on the price of the Company’s common stock.
Pursuant to the stockholder proposal that was approved at the Company’s 2017 annual meeting of stockholders, the declassification of the Company’s Board of Directors will be phased in, such that the Class II directors will stand for election for a one-year term at the 2018 annual meeting of stockholders, the Class III directors and the Class II directors will stand for election for a one-year term at the 2019 annual meeting of stockholders, and all directors will stand for election for one-year terms at the 2020 annual meeting of stockholders and at each annual meeting of stockholders thereafter. Until declassification is complete, the Company’s classified Board of Directors could serve as an anti-takeover defense. The Company also has other anti-takeover defenses in its certificate of incorporation and by-laws. Each of the Company’s defenses could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. These deterrents could adversely affect the price of the Company’s common stock and make it difficult to remove or replace members of the Board of Directors or management of the Company. The Company’s previous shareholder rights plan expired on November 17, 2012 and was not replaced. The Board may, subject to its fiduciary duties under applicable law, choose to implement a shareholder rights plan in the future.
The Company’s businesses could be impacted by changes in international, federal, state or local laws, rules or regulations.
The Company is subject to general business regulations and laws relating to all aspects of its business, including regulations and laws relating to the Internet, online commerce, digital content and products as well as its other lines of business (including governmental investigations and litigation relating to the agency pricing model for digital content distribution). Existing and future laws and regulations and their application and/or enforcement may impede the growth of the Internet, digital content distribution or other online services and impact digital content pricing, including requiring modifications or elimination of related pricing models, including the agency pricing model. Changes in international, federal, state or local laws, rules or regulations, including, but not limited to, laws, rules or regulations related to employment,
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wages, data privacy, information security, intellectual property, taxes, products, product safety, health and safety, imports and exports, anti-corruption, and anti-competition could diminish the demand for the Company’s products and services, increase the Company’s costs of doing business, decrease the Company’s margins or otherwise materially adversely impact the Company’s business.
The Company faces additional operating risks through the operation of the Digital business and as an Internet retailer.
The Company faces risks related to the operation of the Digital business. The Digital business’s content sales decreased during fiscal 2018 and may continue to decline in the future, which could affect the Company’s results of operations and liquidity. Also, the sales of digital devices and accessories declined during fiscal 2018, and there is no guarantee that the possible introduction of future NOOK ® digital devices will increase future sales of digital devices or content or the earnings of the Digital business. NOOK ® competes primarily with other tablets and eBook readers on functionality, consumer appeal, availability of digital content and price. The previously announced efforts to rationalize the costs associated with the Digital business also may not be successful, which may adversely impact the Company’s results of operations. The Digital business faces certain risks associated with its business, including protection of digital rights and uncertainties relating to the regulation of digital content.
Business risks related to the Company’s online business include risks associated with the need to keep pace with rapid technological change, risks associated with the adoption of new products or platforms. Internet security risks, risks of system failure or inadequacy, supply chain risks, government regulation and legal uncertainties with respect to the Internet, risks related to data privacy and collection of sales or other taxes by one or more states or foreign jurisdictions. If any of these risks materializes, it could have an adverse effect on the Company’s business.
The Company depends on component and product manufacturing provided by third parties, many of whom are located outside of the U.S.
NOOK ® and other Company products are manufactured by third-party manufacturers, many of which are located outside the United States. While the Company’s arrangements with these manufacturers may lower costs, they also reduce its direct control over production. It is uncertain what effect such diminished control will have on the quality or quantity of products or services, or the Company’s flexibility to respond to changing conditions. Although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, if reimbursement from such manufacturers is unenforceable or insufficient, the Company may remain responsible to the consumer for warranty service in the event of product defects. Any unanticipated product defect or warranty liability, whether pursuant to arrangements with contract manufacturers or otherwise, could materially adversely affect the Company’s reputation, financial condition and operating results.
The Company, including the Digital business, may be unable to obtain a sufficient supply of components and parts that are free of minerals mined from the Democratic Republic of Congo and adjoining countries (DRC), which could result in a shortage of such components and parts or reputational damages if the Company is unable to certify that its products are free of such minerals. The Company filed its Conflict Minerals Report for the calendar year 2017 with the SEC on May 31, 2018.
The Company relies on third-party digital content and applications, which may not be available to the Company on commercially reasonable terms or at all.
The Company contracts with certain third parties to offer their digital content, including on NOOK ® and through its eBookstore. Its licensing arrangements with these third parties do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some third-party content providers currently or in the future may offer competing products and services, and could take action to
22
make it more difficult or impossible for the Company to license their content in the future. Other content owners, providers or distributors may seek to limit the Company’s access to, or increase the total cost of, such content. If the Company is unable to offer a wide variety of content at reasonable prices with acceptable usage rules, its financial condition and operating results may be materially adversely affected.
The Company’s businesses could be adversely impacted if it is unsuccessful in making and integrating acquisitions it has made or may decide to pursue.
To enhance the Company’s efforts to grow and compete, from time to time it has engaged in acquisitions and entered into joint ventures, and it may engage in acquisitions or enter into joint ventures in the future. Any future acquisitions are subject to the Company’s ability to identify attractive opportunities and to negotiate favorable terms for them. Accordingly, the Company cannot make assurances that future acquisitions will be completed, or that if completed, they will be successful. These transactions may create risks such as: (1) disruption of the Company’s ongoing business, including loss of management focus on existing businesses; (2) the dilution of the equity interest of the Company’s stockholders; (3) problems retaining key personnel; (4) increased debt to finance any transaction and additional operating losses, debt and expenses of the businesses the Company acquires; (5) the difficulty of integrating a new company’s accounting, financial reporting, management, information, human resources and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented; (6) the difficulty of implementing at acquired companies the controls, procedures and policies appropriate for a larger public company; and (7) potential unknown liabilities associated with an acquired company. In addition, valuations supporting the Company’s acquisitions could change rapidly given the current global economic climate. The Company could determine that such valuations have experienced impairments or other-than-temporary declines in fair value, which could adversely impact its financial condition.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
All but one of the active Barnes & Noble stores are leased. The leases typically provide for an initial term of 10 or 15 years with one or more renewal options. Most stores are currently in renewal periods. The terms of the Barnes & Noble store leases for its 629 leased stores open as of April 28, 2018 expire as follows:
|
Lease Terms to Expire During (12 months ending on or about April 30) |
Number of
Stores (a) |
|||
|
2019 |
89 | |||
|
2020 |
142 | |||
|
2021 |
90 | |||
|
2022 |
126 | |||
|
2023 |
93 | |||
|
2024 and later |
87 | |||
| (a) |
Two Barnes & Noble stores are under month-to-month leases. |
In addition to the bookstores, the Company leases two distribution centers for its B&N Retail operations: one in Monroe Township, New Jersey and the other in Reno, Nevada, both under leases expiring in 2020. The Company’s B&N Retail distribution centers total 1,745,000 square feet.
23
The Company’s principal administrative facilities are situated in New York, New York, and are covered by two leases: 184,000 square feet lease and 9,500 square feet lease, both expiring in 2023.
The Company leases two additional locations in New York, New York for office space: approximately 40,000 square feet lease for eCommerce and NOOK administrative offices and approximately 40,000 square feet lease for Sterling Publishing administrative offices, both expiring in 2020.
The Company also leases approximately 79,000 square feet of office space in Westbury, New York under a lease expiring in 2022 and approximately 56,000 square feet of office space in Santa Clara, California under a lease expiring in 2019.
| ITEM 3. | LEGAL PROCEEDINGS |
The information included in the Company’s Annual Report to Shareholders for the fiscal year ended April 28, 2018 included as Exhibit 13.1 to this Annual Report on Form 10-K (the Annual Report) under the section entitled “Notes to Consolidated Financial Statements, Note 15. Legal Proceedings” is incorporated herein by reference.
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
Price Range of Common Stock
The Company’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol “BKS”. The following table sets forth, for the quarterly periods indicated, the high and low sales prices of the common stock on the NYSE Composite Tape:
| Fiscal 2018 | Fiscal 2017 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
First Quarter |
$ | 8.70 | $ | 6.25 | $ | 13.31 | $ | 10.25 | ||||||||
|
Second Quarter |
8.30 | 6.60 | 13.63 | 10.15 | ||||||||||||
|
Third Quarter |
8.00 | 4.83 | 13.20 | 9.40 | ||||||||||||
|
Fourth Quarter |
5.80 | 4.10 | 10.95 | 8.45 | ||||||||||||
Approximate Number of Holders of Common Equity
|
Title of Class |
Approximate
Number of Record Holders as of May 31, 2018 |
|||
|
Common stock, $0.001 par value |
1,648 | |||
Dividends
The Company paid dividends to common stockholders in the amount of $43.6 million and $43.9 million during fiscal 2018 and fiscal 2017, respectively.
24
The following table provides information with respect to purchases by the Company of shares of its common stock during the fourth quarter of fiscal 2018:
|
Period |
Total
Number of Shares Purchased |
Average
Price Paid per Share |
Total Number
of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate
Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
||||||||||||
|
January 28, 2018 – February 24, 2018 |
— | $ | 0 | — | $ | 50,000,000 | ||||||||||
|
February 25, 2018 – March 31, 2018 |
— | $ | 0 | — | $ | 50,000,000 | ||||||||||
|
April 1, 2018 – April 28, 2018 |
— | $ | 0 | — | $ | 50,000,000 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Total |
— | $ | 0 | — | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
On October 20, 2015, the Company’s Board of Directors authorized a stock repurchase program (prior repurchase plan) of up to $50.0 million of its common shares. During fiscal 2016, the Company repurchased 2,763,142 shares at a cost of $26.7 million under the prior repurchase plan. During fiscal 2017, the Company repurchased 2,019,798 shares at a cost of $23.3 million under the prior repurchase plan. On March 15, 2017, subsequent to completing the prior repurchase plan, the Company’s Board of Directors authorized a new stock repurchase program of up to $50.0 million of its common shares. Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. The new stock repurchase program has no expiration date and may be suspended or discontinued at any time. The Company’s repurchase plan is intended to comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The Company did not repurchase shares under this plan in fiscal 2018 and fiscal 2017. The Company has remaining capacity of $50.0 million under the new repurchase program as of April 28, 2018.
As of April 28, 2018, the Company has repurchased 39,584,907 shares at a cost of approximately $1.09 billion since the inception of the Company’s stock repurchase programs. The repurchased shares are held in treasury.
| ITEM 6. | SELECTED FINANCIAL DATA |
The information included in the Annual Report under the section entitled “Selected Consolidated Financial Data” is incorporated herein by reference.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information included in the Annual Report under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.
25
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company limits its interest rate risks by investing certain of its excess cash balances in short-term, highly-liquid instruments with an original maturity of one year or less. The Company does not expect any material losses from its invested cash balances and the Company believes that its interest rate exposure is modest. As of April 28, 2018, the Company’s cash and cash equivalents totaled approximately $10.8 million. A 50 basis point increase in annual interest rates would have increased the Company’s interest income by $0.0 million in fiscal 2018. Conversely, a 50 basis point decrease in annual interest rates would have reduced interest income by $0.0 million in fiscal 2018.
Additionally, the Company may from time to time borrow money under its credit facility at various interest rate options based on the Base Rate or LIBO Rate (each term as defined in the amended and restated credit agreement described in the Annual Report under the section titled “Notes to Consolidated Financial Statements”) depending upon certain financial tests. Accordingly, the Company may be exposed to interest rate risk on borrowings under its credit facility. The Company had borrowings under its credit facility of $158.7 million at April 28, 2018 and $64.9 million at April 29, 2017. A 50 basis point increase in annual interest rates would have increased the Company’s interest expense by $0.7 million in fiscal 2018. Conversely, a 50 basis point decrease in annual interest rates would have reduced interest expense by $0.7 million in fiscal 2018.
The Company does not have any material foreign currency exposure as nearly all of its business is transacted in United States currency.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information included in the Annual Report under the sections entitled: “Consolidated Statements of Operations,” “Consolidated Statements of Comprehensive Income (Loss),” “Consolidated Balance Sheets,” “Consolidated Statements of Changes in Shareholders’ Equity,” “Consolidated Statements of Cash Flows” and “Notes to Consolidated Financial Statements” are incorporated herein by reference.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures
The management of the Company established and maintains disclosure controls and procedures that are designed to ensure that material information relating to the Company and its subsidiaries required to be disclosed in the reports that are filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. As of the end of the period covered by this report, the Company’s management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Exchange Act), under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
26
Based on management’s evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officers, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based upon the Company’s evaluation under this framework, management concluded that the Company’s internal control over financial reporting was effective as of April 28, 2018.
The effectiveness of internal control over financial reporting was audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report included elsewhere herein.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the most recent quarter ended April 28, 2018 that have materially affected, or are reasonably likely to affect, internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information with respect to directors, executive officers, the code of ethics and corporate governance of the Company is incorporated herein by reference to the Company’s definitive Proxy Statement relating to the Company’s 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the Company’s fiscal year ended April 28, 2018 (the Proxy Statement).
27
The information with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the Proxy Statement.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information with respect to executive compensation is incorporated herein by reference to the Proxy Statement.
The information with respect to compensation of directors is incorporated herein by reference to the Proxy Statement.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Equity Compensation Plan Information
The following table sets forth equity compensation plan information as of April 28, 2018:
|
Plan Category |
Number of
securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average
exercise price of outstanding options, warrants and rights |
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities in column (a)) |
|||||||||
| (a) | (b) | (c) | ||||||||||
|
Equity compensation plans approved by security holders |
175,169 | 9.95 | 5,689,643 | |||||||||
|
Equity compensation plans not approved by security holders |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
175,169 | 9.95 | 5,689,643 | |||||||||
|
|
|
|
|
|
|
|||||||
The information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the Proxy Statement.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information with respect to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information with respect to principal accountant fees and services is incorporated herein by reference to the Proxy Statement.
28
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a) | 1. Consolidated Financial Statements: |
| (i) | “The Report of Independent Registered Public Accountants” included in the Annual Report is incorporated herein by reference. |
| (ii) | The information included in the Annual Report under the sections entitled “Consolidated Statements of Operations,” “Consolidated Statements of Comprehensive Income (Loss),” “Consolidated Balance Sheets,” “Consolidated Statements of Changes in Shareholders’ Equity,” “Consolidated Statements of Cash Flows” and “Notes to Consolidated Financial Statements” are incorporated herein by reference. |
| 2. | Schedule: |
Valuation and Qualifying Accounts.
For the 52 week period ended April 28, 2018, the 52 week period ended April 29, 2017 and the 52 week period ended April 30, 2016 (in thousands):
|
Balance at
beginning of period |
Charge
(recovery) to costs and expenses |
Write-offs |
Balance at end
of period |
|||||||||||||
|
Allowance for Doubtful Accounts |
||||||||||||||||
|
April 28, 2018 |
$ | 3,831 | $ | (392 | ) | $ | (2,487 | ) | $ | 952 | ||||||
|
April 29, 2017 |
$ | 4,571 | $ | 464 | $ | (1,204 | ) | $ | 3,831 | |||||||
|
April 30, 2016 |
$ | 3,721 | $ | 1,377 | $ | (527 | ) | $ | 4,571 | |||||||
|
Balance at
beginning of period |
Addition
Charged to Costs |
Deductions |
Balance at
end of period |
|||||||||||||
|
Sales Returns Reserves |
||||||||||||||||
|
April 28, 2018 |
$ | 6,145 | $ | 16,385 | $ | (16,314 | ) | $ | 6,216 | |||||||
|
April 29, 2017 |
$ | 5,940 | $ | 18,558 | $ | (18,353 | ) | $ | 6,145 | |||||||
|
April 30, 2016 |
$ | 4,623 | $ | 17,380 | $ | (16,063 | ) | $ | 5,940 | |||||||
29
| (b) | The following are filed as Exhibits to this form: |
30
31
32
33
34
35
|
Exhibit No. |
Description |
|
| 31.2 | Certification by the Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a), under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (38) | |
| 32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (38 ) | |
| 32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (38) | |
| 101.INS | XBRL Instance Document. (38) | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. (38) | |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document. (38) | |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document. (38) | |
| 101.LAB | XBRL Taxonomy Label Linkbase Document. (38) | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document. (38) | |
| (1) | Previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (Commission File No. 33-59778) filed with the SEC on March 22, 1993. | |
| (2) | Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (Commission File No. 333-90538) filed with the SEC on June 14, 2002. | |
| (3) | Previously filed as an exhibit to the Company’s Form 10-Q for the fiscal quarter ended May 1, 2004. | |
| (4) | Previously filed as an exhibit to the Company’s Form 10-K for the fiscal year ended January 29, 2005. | |
| (5) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on December 21, 2006. | |
36
|
Exhibit No. |
Description |
|
| (6) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on December 19, 2008. | |
| (7) | Previously filed as an exhibit to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 16, 2009. | |
| (8) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on August 10, 2009. | |
| (9) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on November 18, 2009. | |
| (10) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on May 13, 2010. | |
| (11) | Previously filed as an exhibit to the Company’s Form 10-Q for the fiscal quarter ended July 31, 2010. | |
| (12) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on January 10, 2011. | |
| (13) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on April 30, 2012. | |
| (14) | Previously filed as an exhibit to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on July 23, 2012. | |
37
|
Exhibit No. |
Description |
|
| (15) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on September 12, 2012. | |
| (16) | Previously filed as an exhibit to the Company’s Form 8-K/A filed with the SEC on October 2, 2012. | |
| (17) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on October 19, 2012. | |
| (18) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on December 24, 2013. | |
| (19) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on March 13, 2014. | |
| (20) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on June 5, 2014. | |
| (21) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on December 4, 2014. | |
| (22) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on February 17, 2015. | |
| (23) | Previously filed as an exhibit to the Company’s Form 10-Q filed with the SEC on March 10, 2015. | |
38
|
Exhibit No. |
Description |
|
| (24) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on July 14, 2015. | |
| (25) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on July 27, 2015. | |
| (26) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on August 3, 2015. | |
| (27) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on August 6, 2015. | |
| (28) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on December 7, 2015. | |
| (29) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on April 7, 2016. | |
| (30) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on May 18, 2016. | |
| (31) | Previously filed as an exhibit to the Company’s Form 10-K filed with the SEC on June 23, 2016. | |
| (32) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on October 6, 2016. | |
| (33) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on November 21, 2016. | |
| (34) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on April 27, 2017. | |
| (35) | Previously filed as an exhibit to the Company’s Form 10-Q filed with the SEC on September 7, 2017. | |
| (36) | Previously filed as an exhibit to the Company’s Form 10-Q filed with the SEC on November 30, 2017. | |
| (37) | Previously filed as an exhibit to the Company’s Form 8-K filed with the SEC on September 29, 2017. | |
| (38) | Filed herewith. | |
| (P) | Paper filing. | |
39
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
BARNES & NOBLE, INC. (Registrant) |
||
| By: |
/s/ Demos Parneros |
|
| Demos Parneros | ||
| Chief Executive Officer | ||
| June 21, 2018 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Name |
Title |
Date |
||
|
/s/ Leonard Riggio |
Chairman of the Board | June 21, 2018 | ||
| Leonard Riggio | ||||
|
/s/ Demos Parneros |
Chief Executive Officer and Director | June 21, 2018 | ||
| Demos Parneros | (principal executive officer) | |||
|
/s/ Allen W. Lindstrom |
Chief Financial Officer | June 21, 2018 | ||
| Allen W. Lindstrom | (principal financial officer) | |||
|
/s/ Peter M. Herpich |
Vice President and Corporate Controller | June 21, 2018 | ||
| Peter M. Herpich | (principal accounting officer) | |||
|
/s/ George Campbell, Jr. |
Director | June 21, 2018 | ||
| George Campbell, Jr. | ||||
|
/s/ Mark D. Carleton |
Director | June 21, 2018 | ||
| Mark D. Carleton | ||||
|
/s/ Scott S. Cowen |
Director | June 21, 2018 | ||
| Scott S. Cowen | ||||
|
/s/ Al Ferrara |
Director | June 21, 2018 | ||
| Al Ferrara | ||||
|
/s/ William T. Dillard II |
Director | June 21, 2018 | ||
| William T. Dillard II | ||||
|
/s/ Paul Guenther |
Director | June 21, 2018 | ||
| Paul Guenther | ||||
|
/s/ Patricia L. Higgins |
Director | June 21, 2018 | ||
| Patricia L. Higgins | ||||
|
/s/ Kimberley A. Van Der Zon |
Director | June 21, 2018 | ||
| Kimberley A. Van Der Zon | ||||
40
Exhibit 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of Barnes & Noble, Inc. and its subsidiaries (collectively, the Company) set forth on the following pages should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The Statement of Operations Data for the 52 weeks ended April 28, 2018 (fiscal 2018), 52 weeks ended April 29, 2017 (fiscal 2017) and 52 weeks ended April 30, 2016 (fiscal 2016), and the Balance Sheet Data as of April 28, 2018 and April 29, 2017 are derived from, and are incorporated by reference to, audited consolidated financial statements which are included elsewhere in this report. The Statement of Operations Data for the 52 weeks ended May 2, 2015 (fiscal 2015) and 53 weeks ended May 3, 2014 (fiscal 2014), the Balance Sheet Data as of April 30, 2016, May 2, 2015 and May 3, 2014 are derived from audited consolidated financial statements not included elsewhere in this report.
|
Fiscal Year (In thousands, except per share data) |
Fiscal
2018 |
Fiscal
2017 |
Fiscal
2016 |
Fiscal
2015 |
Fiscal
2014 |
|||||||||||||||
|
STATEMENT OF OPERATIONS DATA: |
||||||||||||||||||||
|
Sales |
||||||||||||||||||||
|
Barnes & Noble Retail |
$ | 3,575,614 | 3,784,655 | 4,028,614 | 4,108,243 | 4,295,140 | ||||||||||||||
|
NOOK |
111,487 | 146,514 | 191,520 | 263,833 | 505,862 | |||||||||||||||
|
Elimination (a) |
(24,821 | ) | (36,611 | ) | (56,290 | ) | (74,968 | ) | (167,657 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total sales |
3,662,280 | 3,894,558 | 4,163,844 | 4,297,108 | 4,633,345 | |||||||||||||||
|
Cost of sales and occupancy |
2,551,077 | 2,682,356 | 2,836,547 | 2,871,184 | 3,214,396 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Gross profit |
1,111,203 | 1,212,202 | 1,327,297 | 1,425,924 | 1,418,949 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Selling and administrative expenses |
999,109 | 1,040,007 | 1,176,778 | 1,192,065 | 1,287,163 | |||||||||||||||
|
Depreciation and amortization |
106,340 | 117,887 | 135,863 | 143,665 | 168,793 | |||||||||||||||
|
Goodwill impairment |
133,612 | — | _— | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Operating income (loss) |
(127,858 | ) | 54,308 | 14,656 | 90,194 | (37,007 | ) | |||||||||||||
|
Interest expense, net and amortization of deferred financing fees (b) |
9,837 | 7,509 | 8,770 | 17,678 | 29,122 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Income (loss) before taxes |
(137,695 | ) | 46,799 | 5,886 | 72,516 | (66,129 | ) | |||||||||||||
|
Income tax provision (benefit) |
(12,215 | ) | 24,776 | (8,814 | ) | 39,644 | 13,011 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Net income (loss) from continuing operations |
(125,480 | ) | 22,023 | 14,700 | 32,872 | (79,140 | ) | |||||||||||||
|
Net income (loss) from discontinued operations |
— | — | (39,146 | ) | 3,724 | 31,872 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Net income (loss) |
$ | (125,480 | ) | 22,023 | (24,446 | ) | 36,596 | (47,268 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Basic income (loss) per common share: |
||||||||||||||||||||
|
Income (loss) from continuing operations |
$ | (1.73 | ) | 0.30 | 0.05 | 0.15 | (1.67 | ) | ||||||||||||
|
Income (loss) from discontinued operations |
— | — | (0.54 | ) | 0.06 | 0.54 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Basic income (loss) per common share |
$ | (1.73 | ) | 0.30 | (0.49 | ) | 0.21 | (1.12 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Diluted income (loss) per common share: |
||||||||||||||||||||
|
Income (loss) from continuing operations |
$ | (1.73 | ) | 0.30 | 0.05 | 0.15 | (1.67 | ) | ||||||||||||
|
Income (loss) from discontinued operations |
— | — | (0.54 | ) | 0.06 | 0.54 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Diluted income (loss) per common share |
$ | (1.73 | ) | 0.30 | (0.49 | ) | 0.21 | (1.12 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Weighted average common shares outstanding: |
||||||||||||||||||||
|
Basic |
72,588 | 72,188 | 72,410 | 60,842 | 58,971 | |||||||||||||||
|
Diluted |
72,588 | 72,328 | 72,542 | 60,928 | 58,971 | |||||||||||||||
|
Dividends declared per common share |
$ | 0.60 | 0.60 | 0.60 | — | — | ||||||||||||||
F-1
|
(In thousands of dollars, except per share data) |
Fiscal
2018 |
Fiscal
2017 |
Fiscal
2016 |
Fiscal
2015 |
Fiscal
2014 |
|||||||||||||||
|
OTHER OPERATING DATA: |
||||||||||||||||||||
|
Number of Barnes & Noble Retail stores |
630 | 633 | 640 | 648 | 661 | |||||||||||||||
|
Comparable sales increase (decrease): |
||||||||||||||||||||
|
Barnes & Noble Retail store sales (c) |
(5.4 | )% | (6.3 | )% | 0.0 | % | (1.9 | )% | (5.8 | )% | ||||||||||
|
Capital expenditures |
$ | 87,651 | 96,258 | 94,274 | 94,805 | 96,728 | ||||||||||||||
|
BALANCE SHEET DATA: |
||||||||||||||||||||
|
Total assets – continuing operations |
$ | 1,749,568 | 1,932,921 | 2,012,782 | 2,045,104 | 2,270,649 | ||||||||||||||
|
Total assets – discontinued operations |
$ | — | — | — | 1,067,327 | 1,122,071 | ||||||||||||||
|
Total liabilities – continuing operations |
$ | 1,337,585 | 1,358,610 | 1,409,272 | 1,347,384 | 1,798,649 | ||||||||||||||
|
Total liabilities – discontinued operations |
$ | — | — | — | 379,630 | 357,180 | ||||||||||||||
|
Long-term debt |
$ | 158,700 | 64,900 | 47,200 | — | — | ||||||||||||||
|
Shareholders’ equity |
$ | 411,983 | 574,311 | 603,510 | 1,189,358 | 658,696 | ||||||||||||||
| (a) | Represents sales from NOOK to B&N Retail on a sell-through basis. |
| (b) | Amounts for fiscal 2018, fiscal 2017, fiscal 2016, fiscal 2015 and fiscal 2014 are net of interest income of $0, $0, $0, $58 and $190, respectively. |
| (c) | Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with Accounting Standards Codification 605-25, Revenue Recognition, Multiple-Element Arrangements , and does not include sales from closed or relocated stores. |
F-2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Barnes & Noble, Inc.’s (Barnes & Noble or the Company) fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. As used in this section, “fiscal 2018” represents the 52 weeks ended April 28, 2018, “fiscal 2017” represents the 52 weeks ended April 29, 2017 and “fiscal 2016” represents the 52 weeks ended April 30, 2016.
General
Barnes & Noble, Inc., one of the nation’s largest booksellers, 1 provides customers a unique experience across its multi-channel distribution platform. As of April 28, 2018, the Company operates 630 bookstores in 50 states, maintains an eCommerce site, develops digital reading products and operates NOOK, one of the largest digital bookstores. Barnes & Noble is utilizing the strength of its retail footprint in combination with its online and digital businesses to provide an omni-channel experience for its customers, fulfilling its commitment to offer customers any book, anytime, anywhere and in any format.
Barnes & Noble Retail (B&N Retail) operates 630 retail bookstores, primarily under the Barnes & Noble Booksellers ® trade name, and includes the Company’s eCommerce site. B&N Retail also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Company’s digital business, offering digital books and magazines for sale and consumption online, NOOK ® 2 reading devices, co-branded NOOK ® tablets and reading software for iOS, Android and Windows. As of April 28, 2018, the Company employed approximately 23,000 employees (8,000 full-time and 15,000 part-time employees).
The Company’s principal business is the sale of trade books (generally, hardcover and paperback titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, NOOK ® and related accessories, bargain books, magazines, gifts, café products and services, educational toys & games, music and movies direct to customers through its bookstores or on www.barnesandnoble.com. The Company offers its customers a full suite of textbook options (new, used, digital and rental).
Segments
The Company identifies its operating segments based on the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management and makes decisions on the allocation of resources. The Company’s two operating segments are B&N Retail and NOOK.
B&N Retail
This segment includes 630 bookstores as of April 28, 2018, primarily under the Barnes & Noble Booksellers trade name. These Barnes & Noble stores generally offer a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toys & Games, DVDs, Music & Vinyl, Gift, Magazine, Bargain products and a dedicated NOOK ® area. The stores also offer a calendar of ongoing events, including author appearances and children’s activities. The B&N Retail segment also includes the Company’s eCommerce website, www.barnesandnoble.com, and its publishing operation, Sterling Publishing.
| 1 | Based upon sales reported in trade publications and public filings. |
| 2 |
Any references to NOOK ® include the Company’s NOOK ® Tablet, Samsung Galaxy Tab ® A NOOK ® , Samsung Galaxy Tab ® S2 NOOK ® , Samsung Galaxy Tab ® E NOOK ® and NOOK GlowLight TM 3 devices, each of which includes the trademark symbol ( ® or ™, as applicable) even if a trademark symbol is not included. |
F-3
Barnes & Noble stores range in size from 3,000 to 60,000 square feet depending upon market size, with an overall average store size of 26,000 square feet. In fiscal 2018, the Company reduced the Barnes & Noble store base by approximately 135,000 square feet, bringing the total square footage to 16.6 million square feet, a net reduction of 0.8% from fiscal 2017.
Each Barnes & Noble store features an authoritative selection of books, ranging from 19,000 to 143,000 titles. The comprehensive title selection is diverse and reflects local interests and regional titles and authors’ works. Bestsellers typically represent between approximately 4% and 6% of Barnes & Noble store sales. Product Master, the Company’s proprietary inventory management database, has approximately 19.6 million titles. It includes approximately 7.2 million active titles and provides each store with comprehensive title selections. By enhancing the Company’s existing merchandise replenishment systems, Product Master allows the Company to achieve higher in-stock positions and better productivity at the bookstore level through efficiencies in receiving, cashiering and returns processing. Complementing this extensive on-site selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers at www.barnesandnoble.com by offering an option to have the book sent to the store or shipped directly to the customer.
Sterling Publishing
Sterling Publishing is a leading publisher of non-fiction trade titles. Founded in 1949, Sterling publishes a wide range of non-fiction and illustrated books and kits across a variety of imprints, in categories such as health & wellness, music & popular culture, food & wine, crafts, puzzles & games and history & current affairs, as well as a large children’s line. Sterling, with a solid backlist and robust value publishing program, has a title base of approximately 15,000 print books and eBooks. In addition, Sterling also distributes approximately 1,300 titles on behalf of client publishers.
NOOK
This segment represents the Company’s digital business, including the development and support of the Company’s NOOK ® product offerings. The digital business includes digital content such as eBooks, digital newsstand and sales of NOOK ® devices and accessories to B&N Retail. The underlying strategy of the NOOK business is to offer customers any digital book, newspaper or magazine, anytime, on any device. The Company remains committed to delivering to customers the best digital bookstore experience, providing easy access to Barnes & Noble’s expansive digital collection of over three million eBooks, digital magazines and newspapers, while rationalizing its existing cost structure. As part of this commitment, the Company partners with Samsung to develop co-branded NOOK ® tablets that feature the award-winning Barnes & Noble digital reading experience, while continuing to develop and offer its own black-and-white NOOK ® eReaders and NOOK ® Tablet.
F-4
Results of Operations
|
Fiscal Year |
Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | |||||||||
|
Sales (in thousands) |
$ | 3,662,280 | 3,894,558 | 4,163,844 | ||||||||
|
Net Income (Loss) From Continuing Operations (in thousands) |
$ | (125,480 | ) | 22,023 | 14,700 | |||||||
|
Net Loss From Discontinued Operations (in thousands) |
$ | — | — | (39,146 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Net Income (Loss) (in thousands) |
$ | (125,480 | ) | 22,023 | (24,446 | ) | ||||||
|
Diluted Income (Loss) Per Common Share From Continuing Operations |
$ | (1.73 | ) | 0.30 | 0.05 | |||||||
|
Diluted Loss Per Common Share From Discontinued Operations |
$ | — | — | (0.54 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Diluted Income (Loss) Per Common Share |
$ | (1.73 | ) | $ | 0.30 | $ | (0.49 | ) | ||||
|
Comparable Sales Increase (Decrease) |
||||||||||||
|
Barnes & Noble Retail store sales (a) |
(5.4 | )% | (6.3 | )% | 0.0 | % | ||||||
|
Stores Opened |
||||||||||||
|
Barnes & Noble Retail stores |
3 | 3 | 0 | |||||||||
|
Stores Closed |
||||||||||||
|
Barnes & Noble Retail stores |
6 | 10 | 8 | |||||||||
|
Number of Stores Open at Year End |
||||||||||||
|
Barnes & Noble Retail stores |
630 | 633 | 640 | |||||||||
|
Square Feet of Selling Space at Year End (in millions) |
||||||||||||
|
Barnes & Noble Retail stores |
16.6 | 16.7 | 16.9 | |||||||||
| (a) | Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with Accounting Standards Codification (ASC) 605-25, Revenue Recognition, Multiple-Element Arrangements , and does not include sales from closed or relocated stores. |
The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company:
|
Fiscal Year |
Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | |||||||||
|
Sales |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost of sales and occupancy |
69.7 | 68.9 | 68.1 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Gross profit |
30.3 | 31.1 | 31.9 | |||||||||
|
Selling and administrative expenses |
27.3 | 26.7 | 28.3 | |||||||||
|
Depreciation and amortization |
2.9 | 3.0 | 3.3 | |||||||||
|
Goodwill impairment |
3.6 | 0.0 | 0.0 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Operating income (loss) |
(3.5 | ) | 1.4 | 0.4 | ||||||||
|
Interest expense, net and amortization of deferred financing fees |
0.3 | 0.2 | 0.2 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income (loss) before taxes |
(3.8 | ) | 1.2 | 0.1 | ||||||||
|
Income tax provision (benefit) |
(0.3 | ) | 0.6 | (0.2 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) from continuing operations |
(3.4 | ) | 0.6 | 0.4 | ||||||||
|
Net loss from discontinued operations |
— | — | (0.9 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) |
(3.4 | )% | 0.6 | % | (0.6 | )% | ||||||
F-5
Business Overview
Barnes & Noble has been experiencing declining sales trends primarily due to lower store traffic. The Company has been able to offset some of the traffic decline through its efforts to increase conversion through higher customer engagement. Additionally, the Company has been able to partially mitigate the impact of the sales decline on profit levels through cost reductions. While the Company believes it has lost share on its recent sales performance, it sees opportunities in an industry that has become more stable.
To improve its performance, the Company has initiated a strategic turnaround plan, focused on strengthening the core business by enhancing the customer value proposition; improving profitability through an aggressive expense management program, which will be used to fund growth initiatives; accelerating execution through simplification; and innovating for the future, which will position the Company for long-term growth.
To strengthen its core business, the Company is enhancing this customer value proposition by improving its merchandise mix, enhancing the overall shopping experience, increasing the value of its Membership Program and improving its omni-channel capabilities. The Company will leverage the strength of its Barnes & Noble brand, knowledgeable booksellers, vast book selection and retail footprint to attract customers and grow sales.
Merchandising initiatives are focused on increasing the impact of promotional activities, narrowing product assortments, improving SKU productivity, improving inventory management processes, testing changes to existing store layouts and remerchandising select business units in stores. Additionally, the Company has created a new business development team, which will introduce new business categories that are complementary to its existing businesses. The Company believes there is opportunity to increase conversion through higher customer engagement and by improving navigation and discovery throughout the store, including a customer friendly and more intuitive organization of books and improved signage for easier browsing within and across sections.
In-store events also drive traffic, reinforcing Barnes & Noble as a destination where customers can meet, browse and discover. The Company is also utilizing social media, where booksellers communicate events, promotions and new product offerings with customers at the local level in order to drive traffic.
The Company’s Membership Program provides the Company with valuable data and insights into its customer base, enabling the Company to better understand and market to its customers. Members are more productive than non-members, as they spend more and visit more often. The Company continues to test programs to grow sales to both members and non-members, increase membership, improve price perception and enhance its overall customer value proposition.
The Company is focused on simplification throughout its organization to create efficiencies and reinvest resources to support sales growth. The Company is also committed to right sizing its cost structure. At B&N Retail, the Company has implemented a new labor model for its stores, which allows Store Managers to adjust staff up or down based on the needs of the business, increase store productivity and streamline store operations. This action resulted in the elimination of certain store positions. At NOOK, the Company exited non-core businesses and outsourced certain functions. NOOK expects to continue to re-calibrate its cost structure commensurate with sales.
F-6
In addition to initiatives focused on growing sales through its existing store base, the Company is innovating for the future and is expecting to open smaller, newly designed prototype stores later this year, which it believes could foster sales growth in the future. The Company has also created a Test & Learn pipeline process, through which it is testing a number of new initiatives to improve future performance.
52 Weeks Ended April 28, 2018 Compared with 52 Weeks Ended April 29, 2017
The following tables summarize the Company’s results of operations for the 52 weeks ended April 28, 2018 and 52 weeks ended April 29, 2017.
Sales
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 28,
2018 |
%
Total |
April 29,
2017 |
%
Total |
||||||||||||
|
B&N Retail |
$ | 3,575,614 | 97.6 | % | $ | 3,784,655 | 97.2 | % | ||||||||
|
NOOK |
111,487 | 3.0 | % | 146,514 | 3.8 | % | ||||||||||
|
Elimination |
(24,821 | ) | (0.7 | )% | (36,611 | ) | (0.9 | )% | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Sales |
$ | 3,662,280 | 100.0 | % | $ | 3,894,558 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s sales decreased $232.3 million, or 6.0%, during fiscal 2018 to $3.662 billion from $3.895 billion during fiscal 2017. The changes by segment are as follows:
| • |
B&N Retail sales decreased $209.0 million, or 5.5%, to $3.576 billion from $3.785 billion during the same period one year ago, and accounted for 97.6% of total Company sales. Comparable store sales decreased $172.4 million, or 5.4%, as compared to the prior year on lower store traffic and comparisons to the prior year release of Harry Potter and the Cursed Child . Closed stores decreased sales by $31.3 million, while new stores increased sales by $11.2 million. Online sales decreased $29.5 million, or 9.6%, on lower conversion rates, which were impacted by reduced promotional activity and comparisons to the prior year eBook settlement. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc., which increased by $3.8 million, or 10.6%, versus the prior year. Gift card breakage increased $8.4 million as redemptions continue to run lower than historical patterns. |
Of the $172.4 million decrease in comparable store sales, book categories decreased sales by $83.0 million, or 4.0%, due primarily to declines in Juvenile, Trade and Bargain titles, while non-book categories decreased sales by $77.0 million, or 7.0%, primarily on Gift, Music and DVD, partially offset by increases in Toys & Games. Comparable sales of NOOK ® products at B&N Retail stores decreased $12.4 million, or 33.6%, primarily on lower device unit volume and lower average selling prices.
| • |
NOOK sales decreased $35.0 million, or 23.9%, to $111.5 million from $146.5 million during the same period one year ago, and accounted for 3.0% of total Company sales. Digital content sales decreased $21.4 million, or 20.1%, compared to the prior year primarily on lower unit sales. Device and accessories sales decreased $13.6 million, or 34.0%, primarily on lower average selling prices and lower unit sales. |
| • |
Elimination sales, which represent sales from NOOK to B&N Retail on a sell-through basis, decreased $11.8 million, or 32.2%, versus the prior year. NOOK sales, net of elimination, accounted for 2.4% of total Company sales. |
F-7
In fiscal 2018, the Company opened three and closed six Barnes & Noble stores, bringing its total number of B&N Retail stores to 630, with 16.6 million square feet, in the 50 states.
Cost of Sales and Occupancy
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 28,
2018 |
% Sales |
April 29,
2017 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 2,521,419 | 70.5 | % | $ | 2,636,113 | 69.7 | % | ||||||||
|
NOOK |
54,479 | 48.9 | % | 82,854 | 56.6 | % | ||||||||||
|
Elimination |
(24,821 | ) | (22.3 | )% | (36,611 | ) | (25.0 | )% | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Cost of Sales and Occupancy |
$ | 2,551,077 | 69.7 | % | $ | 2,682,356 | 68.9 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies and other operating expenses), rental expense, common area maintenance and real estate taxes, partially offset by landlord tenant allowances amortized over the life of the lease.
Cost of sales and occupancy decreased $131.3 million, or 4.9%, to $2.551 billion in fiscal 2018 from $2.682 billion in fiscal 2017. Cost of sales and occupancy increased as a percentage of sales to 69.7% in fiscal 2018 from 68.9% in fiscal 2017. The changes by segment are as follows:
| • |
B&N Retail cost of sales and occupancy increased as a percentage of sales to 70.5% from 69.7%, or 85 basis points, during the same period one year ago primarily due to occupancy deleverage (60 basis points) and higher markdowns to clear non-returnable merchandise (30 basis points). The remaining variance was attributable to sales mix and the general timing of expenses. |
| • |
NOOK cost of sales and occupancy decreased as a percentage of sales to 48.9% from 56.6% during the same period one year ago primarily on lower occupancy and sales mix. |
Gross Profit
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 28,
2018 |
% Sales |
April 29,
2017 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 1,054,195 | 29.5 | % | $ | 1,148,542 | 30.3 | % | ||||||||
|
NOOK |
57,008 | 65.8 | % | 63,660 | 57.9 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Gross Profit |
$ | 1,111,203 | 30.3 | % | $ | 1,212,202 | 31.1 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s consolidated gross profit decreased $101.0 million, or 8.3%, to $1.111 billion in fiscal 2018 from $1.212 billion in fiscal 2017. This change was due to the matters discussed above.
F-8
Selling and Administrative Expenses
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 28,
2018 |
% Sales |
April 29,
2017 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 945,643 | 26.4 | % | $ | 959,002 | 25.3 | % | ||||||||
|
NOOK |
53,466 | 61.7 | % | 81,005 | 73.7 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Selling and Administrative Expenses |
$ | 999,109 | 27.3 | % | $ | 1,040,007 | 26.7 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Selling and administrative expenses decreased $40.9 million, or 3.9%, to $999.1 million in fiscal 2018 from $1.040 billion in fiscal 2017. Selling and administrative expenses increased as a percentage of sales to 27.3% in fiscal 2018 from 26.7% in fiscal 2017. The changes by segment are as follows:
| • |
B&N Retail selling and administrative expenses decreased $13.4 million as compared to prior year, while increasing 110 basis points as a percentage of sales to 26.4% from 25.3% for the year. The current year included severance costs of $16.2 million (45 basis points). The Company implemented a new labor model for its stores, resulting in the elimination of certain store positions. Unfavorable variances to the prior year also included higher store payroll (25 basis points on store sales) as sales deleverage and wage increases outpaced productivity gains, higher employee benefit costs (20 basis points) on increased medical claims and strategic consulting costs (20 basis points). The remaining variance was attributable to sales deleverage and the general timing of expenses. |
| • |
NOOK selling and administrative expenses decreased $27.5 million as compared to the prior year, decreasing as a percentage of sales to 61.7% from 73.7% during the same period a year ago. The prior year included severance and transitional costs of $10.7 million related to the outsourcing of certain services and the closure of NOOK’s California and Taiwan offices. Excluding these costs, the decrease in dollars was primarily attributable to continued cost rationalization efforts, as well as lower variable costs on the sales decline. The current year also includes a favorable expense impact from a channel partner settlement. |
Goodwill Impairment
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 28,
2018 |
% Sales |
April 29,
2017 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 133,612 | 3.7 | % | $ | — | 0.0 | % | ||||||||
|
NOOK |
— | 0.0 | % | — | 0.0 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Goodwill Impairment |
$ | 133,612 | 3.6 | % | $ | — | 0.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets. ASC 350-30, Goodwill and Other Intangible Assets , requires that goodwill and other unamortizable intangible assets be tested for impairment at least annually or earlier if there are impairment indicators.
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (ASU) 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (ASU 2017-04) , which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment.
F-9
Following the announcement on January 4, 2018 of the Company’s holiday sales results and its revised outlook, the market price of the Company’s common stock sharply declined. Due to these new impairment indicators, the Company performed an interim goodwill impairment test as of December 30, 2017. As a result of this interim testing, the Company recognized an impairment of its B&N Retail reporting unit goodwill of $133.6 million during the third quarter of fiscal 2018.
Depreciation and Amortization
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 28,
2018 |
% Sales |
April 29,
2017 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 94,334 | 2.6 | % | $ | 98,877 | 2.6 | % | ||||||||
|
NOOK |
12,006 | 13.9 | % | 19,010 | 17.3 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Depreciation and Amortization |
$ | 106,340 | 2.9 | % | $ | 117,887 | 3.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Depreciation and amortization decreased $11.5 million, or 9.8%, to $106.3 million in fiscal 2018 from $117.9 million in fiscal 2017. This decrease was primarily attributable to fully depreciated assets, partially offset by additional capital expenditures.
Operating Income (Loss)
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 28,
2018 |
% Sales |
April 29,
2017 |
% Sales | ||||||||||||
|
B&N Retail |
$ | (119,394 | ) | (3.3 | )% | $ | 90,663 | 2.4 | % | |||||||
|
NOOK |
(8,464 | ) | (9.8 | )% | (36,355 | ) | (33.1 | )% | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Operating Income (Loss) |
$ | (127,858 | ) | (3.5 | )% | $ | 54,308 | 1.4 | % | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s consolidated operating income decreased $182.2 million, or 335.4%, to an operating loss of $127.9 million in fiscal 2018 from an operating income of $54.3 million in fiscal 2017. This change was due to the matters discussed above.
Interest Expense, Net and Amortization of Deferred Financing Fees
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||
|
Dollars in thousands |
April 28, 2018 | April 29, 2017 | % of Change | |||||||||
|
Interest Expense, Net and Amortization of Deferred Financing Fees |
$ | 9,837 | $ | 7,509 | 31.0 | % | ||||||
|
|
|
|
|
|
|
|||||||
Net interest expense and amortization of deferred financing fees increased $2.3 million, or 31.0%, to $9.8 million in fiscal 2018 from $7.5 million in fiscal 2017 primarily on higher average borrowings.
F-10
Income Tax Provision (Benefit)
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 28,
2018 |
Effective
Rate |
April 29,
2017 |
Effective
Rate |
||||||||||||
|
Income Tax Provision (Benefit) |
$ | (12,215 | ) | 8.9 | % | $ | 24,776 | 52.9 | % | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company recorded an income tax benefit of $12.2 million in fiscal 2018 compared with an income tax provision of $24.8 million in fiscal 2017. The Company’s effective tax rate was 8.9% and 52.9% in fiscal 2018 and fiscal 2017, respectively. The Company’s effective tax rate differs from the statutory rate due to the impact of the remeasurement of deferred taxes resulting from the Tax Cuts and Jobs Act, the impact of return to provision adjustments, the establishment of valuation allowance on definite lived NOLs, and state tax provision, net of federal benefit. The prior year rate was impacted primarily by changes in uncertain tax positions and changes in deferred taxes and payables.
In accordance with accounting principles generally accepted in the United States (GAAP) rules on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a particular deferred tax asset will not be realized. As part of this evaluation, the Company reviews all evidence, both positive and negative, to determine if a valuation allowance is needed. The Company’s review of positive evidence included the review of historic profitability, projected profitability, feasible tax planning strategies that may be implemented and the reversal of temporary items. The Company determined that there was sufficient negative evidence to establish valuation allowances against certain deferred tax assets, totaling $36.7 million. The Company will monitor the need for additional valuation allowances at each quarter in the future and adjust the valuation allowance as necessary.
Net Income (Loss)
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 28,
2018 |
Diluted
EPS |
April 29,
2017 |
Diluted
EPS |
||||||||||||
|
Net Income (Loss) |
$ | (125,480 | ) | $ | (1.73 | ) | $ | 22,023 | $ | 0.30 | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
As a result of the factors discussed above, the Company reported a consolidated net loss of $125.5 million (or $1.73 per diluted share) during fiscal 2018, compared with consolidated net income of $22.0 million (or $0.30 per diluted share) during fiscal 2017.
F-11
52 Weeks Ended April 29, 2017 Compared with 52 Weeks Ended April 30, 2016
The following tables summarize the Company’s results of operations for the 52 weeks ended April 29, 2017 and 52 weeks ended April 30, 2016.
Sales
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
% Total |
April 30,
2016 |
% Total | ||||||||||||
|
B&N Retail |
$ | 3,784,655 | 97.2 | % | $ | 4,028,614 | 96.8 | % | ||||||||
|
NOOK |
146,514 | 3.8 | % | 191,520 | 4.6 | % | ||||||||||
|
Elimination |
(36,611 | ) | (0.9 | )% | (56,290 | ) | (1.4 | )% | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Sales |
$ | 3,894,558 | 100.0 | % | $ | 4,163,844 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s sales decreased $269.3 million, or 6.5%, during fiscal 2017 to $3.895 billion from $4.164 billion during fiscal 2016. The changes by segment are as follows:
| • |
B&N Retail sales decreased $244.0 million, or 6.1%, to $3.785 billion from $4.029 billion during the same period one year ago, and accounted for 97.2% of total Company sales. Comparable store sales decreased $216.5 million, or 6.3%, as compared to the prior year. Closed stores decreased sales by $46.7 million. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc., which decreased by $13.4 million, or 27.3%, versus the prior year on lower coloring book sales. Online sales increased $10.8 million, or 3.7%, versus the prior year period on benefits from an eBook settlement, site improvements and increased promotional activity. New stores increased sales by $7.7 million. Gift card breakage increased $6.5 million as redemptions continue to run lower than historical patterns. |
Of the $216.5 million decrease in comparable store sales, core comparable store sales, which exclude sales of NOOK ® products, decreased $194.2 million, or 5.7%, as compared to the prior year due in large part to lower traffic, comparisons to last year’s coloring book and artist supplies phenomenon and the challenging retail environment. Book categories decreased sales by $134.5 million, or 6.0%, on lower sales of Trade, Bargain (primarily coloring books) and Juvenile titles, while non-book core categories decreased sales by $59.7 million, or 5.1%, on declines in the DVD, Café, Newsstand and Gift businesses. Comparable sales of NOOK ® products at B&N Retail stores decreased $22.3 million, or 37.5%, primarily on lower device unit volume and lower average selling prices.
| • |
NOOK sales decreased $45.0 million, or 23.5%, to $146.5 million from $191.5 million during the same period one year ago, and accounted for 3.8% of total Company sales. Digital content sales decreased $23.6 million, or 18.1%, compared to prior year on lower unit sales, partially offset by higher average selling prices. Current year content volume benefited from an eBook settlement. Device and accessories sales decreased $21.4 million, or 34.9%, primarily on lower unit sales and lower average selling prices. |
| • |
Elimination sales, which represent sales from NOOK to B&N Retail on a sell-through basis, decreased $19.7 million, or 35.0%, versus the prior year. NOOK sales, net of elimination, accounted for 2.8% of total Company sales. |
F-12
In fiscal 2017, the Company opened three and closed ten Barnes & Noble stores, bringing its total number of B&N Retail stores to 633, with 16.7 million square feet, in the 50 states.
Cost of Sales and Occupancy
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
% Sales |
April 30,
2016 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 2,636,113 | 69.7 | % | $ | 2,770,209 | 68.8 | % | ||||||||
|
NOOK |
82,854 | 56.6 | % | 122,628 | 64.0 | % | ||||||||||
|
Elimination |
(36,611 | ) | (25.0 | )% | (56,290 | ) | (29.4 | )% | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Cost of Sales and Occupancy |
$ | 2,682,356 | 68.9 | % | $ | 2,836,547 | 68.1 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies and other operating expenses), rental expense, common area maintenance and real estate taxes, partially offset by landlord tenant allowances amortized over the life of the lease.
Cost of sales and occupancy decreased $154.2 million, or 5.4%, to $2.682 billion in fiscal 2017 from $2.837 billion in fiscal 2016. Cost of sales and occupancy increased as a percentage of sales to 68.9% in fiscal 2017 from 68.1% in fiscal 2016. The changes by segment are as follows:
| • |
B&N Retail cost of sales and occupancy increased as a percentage of sales to 69.7% from 68.8%, or 90 basis points, during the same period one year ago primarily on occupancy deleverage (60 basis points), higher markdowns (50 basis points) from promotional activity, including Harry Potter and the Cursed Child, as well as markdowns to clear non-returnable merchandise resulting from the holiday sales shortfall. The remaining variance included product mix, sales deleverage and general timing differences. |
| • |
NOOK cost of sales and occupancy decreased as a percentage of sales to 56.6% from 64.0% during the same period one year ago. This decrease was primarily due to sales mix, improved device margins and a favorable channel partner settlement. |
Gross Profit
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
% Sales |
April 30,
2016 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 1,148,542 | 30.3 | % | $ | 1,258,405 | 31.2 | % | ||||||||
|
NOOK |
63,660 | 57.9 | % | 68,892 | 50.9 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Gross Profit |
$ | 1,212,202 | 31.1 | % | $ | 1,327,297 | 31.9 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s consolidated gross profit decreased $115.1 million, or 8.7%, to $1.212 billion in fiscal 2017 from $1.327 billion in fiscal 2016. This decrease was due to the matters discussed above.
F-13
Selling and Administrative Expenses
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
% Sales |
April 30,
2016 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 959,002 | 25.3 | % | $ | 1,043,221 | 25.9 | % | ||||||||
|
NOOK |
81,005 | 73.7 | % | 133,557 | 98.8 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Selling and Administrative Expenses |
$ | 1,040,007 | 26.7 | % | $ | 1,176,778 | 28.3 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Selling and administrative expenses decreased $136.8 million, or 11.6%, to $1.040 billion in fiscal 2017 from $1.177 billion in fiscal 2016. Selling and administrative expenses decreased as a percentage of sales to 26.7% in fiscal 2017 from 28.3% in fiscal 2016. The changes by segment are as follows:
| • |
B&N Retail selling and administrative expenses decreased $84.2 million as compared to prior year, decreasing 60 basis points as a percentage of sales to 25.3% from 25.9% for the year. Favorable variances to the prior year include lower pension expense (60 basis points) on the prior year pension settlement charge, lower holiday advertising (45 basis points) and lower website expenses (25 basis points) as the prior year included investments to stabilize the site and improve traffic and customer experience. The prior year also included a net CEO separation-related severance charge of $10.5 million (25 basis points). Unfavorable variances to the prior year include higher store payroll (65 basis points on store sales) as sales deleverage and wage increases offset productivity gains, higher non-CEO severance costs (25 basis points) primarily resulting from a cost reduction program and a severance charge (net of reversal of expense relating to equity awards) of $3.0 million resulting from the current year CEO departure (10 basis points). The remaining variance included the general timing of expenses. |
| • |
NOOK selling and administrative expenses decreased $52.6 million as compared to the prior year, decreasing as a percentage of sales to 73.7% from 98.8% during the same period a year ago. Current year expenses include severance and transitional costs of $10.7 million related to the outsourcing of certain services and the closure of its California and Taiwan offices. Excluding these costs, the decrease in dollars was primarily attributable to continued cost rationalization efforts, including lower compensation, as well as lower variable costs on the sales decline. |
Depreciation and Amortization
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
% Sales |
April 30,
2016 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 98,877 | 2.6 | % | $ | 101,888 | 2.5 | % | ||||||||
|
NOOK |
19,010 | 17.3 | % | 33,975 | 25.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Depreciation and Amortization |
$ | 117,887 | 3.0 | % | $ | 135,863 | 3.3 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Depreciation and amortization decreased $18.0 million, or 13.2%, to $117.9 million in fiscal 2017 from $135.9 million in fiscal 2016. This decrease was primarily attributable to fully depreciated assets, partially offset by additional capital expenditures.
F-14
Operating Income (Loss)
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
% Sales |
April 30,
2016 |
% Sales | ||||||||||||
|
B&N Retail |
$ | 90,663 | 2.4 | % | $ | 113,296 | 2.8 | % | ||||||||
|
NOOK |
(36,355 | ) | (33.1 | )% | (98,640 | ) | (72.9 | )% | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total Operating Income |
$ | 54,308 | 1.4 | % | $ | 14,656 | 0.4 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s consolidated operating income increased $39.7 million, or 270.6%, to an operating income of $54.3 million in fiscal 2017 from an operating income of $14.7 million in fiscal 2016. This increase was due to the matters discussed above.
Interest Expense, Net and Amortization of Deferred Financing Fees
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||
|
Dollars in thousands |
April 29,
2017 |
April 30,
2016 |
% of Change | |||||||||
|
Interest Expense, Net and Amortization of Deferred Financing Fees |
$ | 7,509 | $ | 8,770 | (14.4 | )% | ||||||
|
|
|
|
|
|
|
|||||||
Net interest expense and amortization of deferred financing fees decreased $1.3 million, or 14.4%, to $7.5 million in fiscal 2017 from $8.8 million in fiscal 2016. This decrease was primarily due to lower deferred financing fees in conjunction with the refinancing of the credit facility in August 2015.
Income Tax Provision (Benefit)
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
Effective
Rate |
April 30,
2016 |
Effective
Rate |
||||||||||||
|
Income Tax Provision (Benefit) |
$ | 24,776 | 52.9 | % | $ | (8,814 | ) | (149.7 | )% | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company recorded an income tax provision of $24.8 million in fiscal 2017 compared with an income tax benefit of $8.8 million in fiscal 2016. The Company’s effective tax rate was 52.9% and (149.7)% in fiscal 2017 and fiscal 2016, respectively. The Company’s effective tax rate differs from the statutory rate due to the impact of permanent items such as meals and entertainment, non-deductible executive compensation, tax credits, changes in uncertain tax positions and the impact of return to provision adjustments and state tax provision, net of federal benefit. The Company continues to maintain a valuation allowance against certain state items. The prior year rate was impacted by uncertain tax positions, finalization of the federal income tax audit covering the 2008 through 2012 tax years, the closure of many state taxing jurisdiction statutes, the impact of new legislation enacted by Congress permanently reinstating the research and development credit and the impact of filing the income tax returns.
F-15
In accordance with United States GAAP rules on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a particular deferred tax asset will not be realized. As part of this evaluation, the Company reviews all evidence, both positive and negative, to determine if a valuation allowance is needed. The Company’s review of positive evidence included the review of historic profitability, projected profitability, feasible tax planning strategies that may be implemented and the reversal of temporary items. The Company determined that there was sufficient negative evidence to establish valuation allowances against certain deferred tax assets, totaling $7.6 million. The Company will monitor the need for additional valuation allowances at each quarter in the future and adjust the valuation allowance as necessary.
Net Income from Continuing Operations
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
Diluted EPS |
April 30,
2016 |
Diluted EPS | ||||||||||||
|
Net Income from Continuing Operations |
$ | 22,023 | $ | 0.30 | $ | 14,700 | $ | 0.05 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
As a result of the factors discussed above, the Company reported a consolidated net income from continuing operations of $22.0 million (or $0.30 per diluted share) during fiscal 2017, compared with consolidated net income from continuing operations of $14.7 million (or $0.05 per diluted share) during fiscal 2016.
Net Loss from Discontinued Operations
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
Diluted EPS |
April 30,
2016 |
Diluted EPS | ||||||||||||
|
Net Loss from Discontinued Operations |
$ | — | $ | — | $ | (39,146 | ) | $ | (0.54 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company has recognized the separation of Barnes & Noble Education, Inc. (B&N Education) (the Spin-Off) in accordance with ASC 205-20, Discontinued Operations . As such, the historical results of B&N Education have been classified as discontinued operations. See Note 16 to the Consolidated Financial Statements for a further discussion on the separation of B&N Education.
Discontinued operations for fiscal 2016 primarily consisted of pre-spin B&N Education results, investment banking fees (as they directly related to the Spin-Off) and separation-related costs, and excluded corporate allocation adjustments with B&N Retail.
Net Income (Loss)
| 52 Weeks Ended | 52 Weeks Ended | |||||||||||||||
|
Dollars in thousands |
April 29,
2017 |
Diluted EPS |
April 30,
2016 |
Diluted EPS | ||||||||||||
|
Net Income (Loss) |
$ | 22,023 | $ | 0.30 | $ | (24,446 | ) | $ | (0.49 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
As a result of the factors discussed above, the Company reported a consolidated net income of $22.0 million (or $0.30 per diluted share) during fiscal 2017, compared with consolidated net loss of $24.4 million (or $0.49 per diluted share) during fiscal 2016.
F-16
Seasonality
The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating income typically realized during its third fiscal quarter, which includes the holiday selling season.
The NOOK business, like that of many technology companies, is impacted by the launch of new products and the promotional efforts to support those new products, as well as the traditional retail holiday selling seasonality.
Liquidity and Capital Resources
The primary sources of the Company’s cash are net cash flows from operating activities, funds available under its credit facility and short-term vendor financing.
Cash Flows
The Company’s cash and cash equivalents were $10.8 million as of April 28, 2018, compared with $12.0 million as of April 29, 2017. The decrease in cash and cash equivalents of $1.2 million versus the prior year period was due to the earnings decline, changes in working capital and cash flows as outlined below.
Net cash flows provided by operating activities for fiscal 2018 were $37.1 million, as compared to net cash flows provided by operating activities of $146.8 million for fiscal 2017. The unfavorable year-over-year comparison was primarily attributable to changes in working capital and the earnings decline.
Net cash flows used in investing activities for fiscal 2018 were $87.7 million, as compared to net cash flows used in investing activities of $96.3 million for fiscal 2017. The Company’s investing activities primarily consisted of capital expenditures for the maintenance of existing stores, merchandising initiatives, new store construction and enhancements to systems and the website.
Net cash flows provided by financing activities for fiscal 2018 were $49.3 million, as compared to net cash flows used in financing activities of $52.4 million for fiscal 2017. The Company’s financing activities during fiscal 2018 consisted primarily of net proceeds on its credit facility, offset by common dividends. Financing activities during fiscal 2017 consisted primarily of common dividends and share repurchases, partially offset by net proceeds on its credit facility.
Over the past 12 months, the Company has returned $43.6 million in cash to its shareholders through dividends.
Additional year-over-year balance sheet changes include the following:
| • |
Receivables, net decreased $2.7 million, or 4.1%, to $64.6 million as of April 28, 2018, compared to $67.3 million as of April 29, 2017. |
| • |
Merchandise inventories, net increased $11.3 million, or 1.2%, to $958.2 million as of April 28, 2018, compared to $946.9 million as of April 29, 2017 due in part to the timing of merchandise returns. |
F-17
| • |
Prepaid expenses and other current assets decreased $36.7 million, or 36.0%, to $65.2 million as of April 28, 2018, compared to $101.8 million as of April 29, 2017, primarily related to income taxes. |
| • |
Property and equipment, net decreased $20.6 million, or 7.5%, to $255.5 million as of April 28, 2018, compared to $276.1 million as of April 29, 2017, as depreciation outpaced capital expenditures. |
| • |
Goodwill decreased $135.8 million, or 65.5%, to $71.6 million as of April 28, 2018, compared to $207.4 million as of April 29, 2017, due to a $133.6 million impairment charge recorded during the third quarter of fiscal 2018. |
| • |
Intangible assets, net decreased $0.6 million, or 0.2%, to $309.6 million as of April 28, 2018, compared to $310.2 million as of April 29, 2017, on additional amortization. |
| • |
Other non-current assets increased $2.9 million, or 26.1%, to $14.1 million as of April 28, 2018, compared to $11.2 million as of April 29, 2017, primarily related to income taxes, partially offset by amortization of deferred financing fees. |
| • |
Accounts payable decreased $14.8 million, or 3.1%, to $458.9 million as of April 28, 2018, compared to $473.7 million as of April 29, 2017. Accounts payable represented 47.9% and 50.0% of merchandise inventories as of April 28, 2018 and April 29, 2017, respectively. This ratio is subject to changes in product mix and the timing of purchases, payments and returns. |
| • |
Accrued liabilities decreased $22.9 million, or 8.1%, to $260.2 million as of April 28, 2018, compared to $283.2 million as of April 29, 2017. Accrued liabilities include deferred income, compensation, occupancy related, legal and other selling and administrative miscellaneous accruals. |
| • |
Gift card liabilities decreased $28.0 million, or 8.0%, to $323.5 million as of April 28, 2018, compared to $351.4 million as of April 29, 2017. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company recognized gift card breakage of $43.9 million and $35.5 million during fiscal 2018 and fiscal 2017, respectively. Gift card breakage increased over last year as redemptions continue to run lower than historical patterns. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns. |
| • |
Deferred taxes decreased $34.1 million, or 39.6%, to $52.0 million as of April 28, 2018, compared to $86.1 million as of April 29, 2017 due to the remeasurement of deferred taxes as a result of the Tax Cuts and Jobs Act and the deferred tax impact of the goodwill impairment charge, partially offset by the valuation allowance recorded. |
| • |
Other long-term liabilities decreased $15.0 million, or 15.1%, to $84.3 million as of April 28, 2018, compared to $99.3 million as of April 29, 2017, primarily due to lower deferred rent. |
The Company has arrangements with third-party manufacturers to produce certain NOOK ® products. These manufacturers procure and assemble unfinished parts and components from third-party suppliers based on forecasts provided by the Company. Given production lead times, commitments are generally made far in advance of finished product delivery. Based on current purchase commitments and product development plans, the Company did not record any provision for purchase commitments. Future charges may be required based on changes in forecasted sales or strategic direction.
Capital Structure
Credit Facility
On August 3, 2015, the Company and certain of its subsidiaries entered into a credit agreement (Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of up to $700.0 million (Revolving Credit Facility). On September 30, 2016, the Company amended the
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Credit Agreement to provide for a new “first-in, last-out” revolving credit facility (the FILO Credit Facility and, together with the Revolving Credit Facility, the Credit Facility) in an aggregate principal amount of up to $50.0 million, which supplements availability under the Revolving Credit Facility. The Company generally must draw down the FILO Credit Facility before making any borrowings under the Revolving Credit Facility.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the Credit Facility. The Credit Facility replaced the prior credit facility. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs.
The Company and certain of its subsidiaries are permitted to borrow under the Credit Facility. The Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the Credit Facility (collectively, the Loan Parties), but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. Borrowings under the Credit Facility are limited to a specified percentage of eligible collateral. The Company has the option to request an increase in commitments under the Credit Facility of up to $250.0 million, subject to certain restrictions.
The Credit Facility allows the Company to declare and pay up to $70.0 million in dividends annually to its stockholders without compliance with any availability or ratio-based limitations.
Interest under the Revolving Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the Revolving Credit Facility. Through the end of the fiscal quarter during which the closing of the Revolving Credit Facility occurred, loans under the Revolving Credit Facility bore interest at LIBOR plus 1.750% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.750% per annum, in the alternative, and thereafter the interest rate began to fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.500% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.500% per annum), based upon the average daily availability under the Revolving Credit Facility for the immediately preceding fiscal quarter. Interest under the FILO Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is also determined by reference to the level of excess availability under the Revolving Credit Facility. Loans under the FILO Credit Facility bear interest at 1.000% per annum more than loans under the Revolving Credit Facility.
The Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders would assume dominion and control over the Loan Parties’ cash.
The Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreement also contains customary affirmative covenants and representations and warranties.
F-19
The following table presents selected information related to the Company’s credit facilities (in thousands):
|
Fiscal
2018 |
Fiscal
2017 |
Fiscal
2016 |
||||||||||
|
Credit facility at period end |
$ | 158,700 | 64,900 | 47,200 | ||||||||
|
Average balance outstanding during the period |
$ | 141,478 | 96,297 | 66,948 | ||||||||
|
Maximum borrowings outstanding during the period |
$ | 287,933 | 285,278 | 293,200 | ||||||||
|
Weighted average interest rate during the period (a) |
5.55 | % | 5.77 | % | 8.21 | % | ||||||
|
Interest rate at end of period |
3.92 | % | 3.73 | % | 2.69 | % | ||||||
| (a) | Includes commitment fees. |
The Company wrote off $0.5 million of deferred financing fees related to the prior credit facility during fiscal 2016 and the remaining unamortized deferred financing fees of $3.5 million were deferred and are being amortized over the five-year term of the Credit Facility. The Company also incurred $5.7 million of fees to secure the Credit Facility, which are being amortized over the five-year term accordingly. During fiscal 2017, the Company incurred $0.5 million of fees to secure the FILO Credit Facility, which are being amortized over the same term as the Credit Facility.
Fees expensed with respect to the unused portion of the credit facilities were $2.2 million, $2.2 million and $2.8 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
The Company had $158.7 million and $64.9 million of outstanding debt under the Credit Facility as of April 28, 2018 and April 29, 2017, respectively. The Company had $34.2 million and $38.8 million of outstanding letters of credit under the Credit Facility as of April 28, 2018 and April 29, 2017, respectively.
The Company has no agreements to maintain compensating balances.
Capital Investment
The Company’s investing activities consist principally of capital expenditures for the maintenance of existing stores, merchandising initiatives, new store construction and enhancements to systems and the website. Capital expenditures totaled $87.7 million, $96.3 million and $94.3 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Fiscal 2019 capital expenditure levels are expected to be approximately $100.0 million, although commitment to many such expenditures has not yet been made. Capital expenditures planned for fiscal 2019 primarily include new store development, merchandising initiatives, maintenance of existing stores, enhancements to systems and the website.
Based upon the Company’s current operating levels and capital expenditures for fiscal 2019, management believes cash and cash equivalents on hand, funds available under its credit facility and short-term vendor financing will be sufficient to meet the Company’s normal working capital and debt service requirements for at least the next 12 months. The Company regularly evaluates its capital structure and conditions in the financing markets to ensure it maintains adequate flexibility to successfully execute its business plan.
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On October 20, 2015, the Company’s Board of Directors authorized a stock repurchase program (prior repurchase plan) of up to $50.0 million of its common shares. During fiscal 2016, the Company repurchased 2,763,142 shares at a cost of $26.7 million under the prior repurchase plan. During fiscal 2017, the Company repurchased 2,019,798 shares at a cost of $23.3 million under the prior repurchase plan. On March 15, 2017, subsequent to completing the prior repurchase plan, the Company’s Board of Directors authorized a new stock repurchase program of up to $50.0 million of its common shares. Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. The new stock repurchase program has no expiration date and may be suspended or discontinued at any time. The Company’s repurchase plan is intended to comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934. The Company did not repurchase shares under this plan in fiscal 2018 and fiscal 2017. The Company has remaining capacity of $50.0 million under the new repurchase program as of April 28, 2018.
As of April 28, 2018, the Company has repurchased 39,584,907 shares at a cost of approximately $1.1 billion since the inception of the Company’s stock repurchase programs. The repurchased shares are held in treasury.
Contractual Obligations
The following table sets forth the Company’s contractual obligations as of April 28, 2018 (in millions):
|
Contractual Obligations |
Payments Due by Period | |||||||||||||||||||
| Total |
Less Than
1 Year |
1-3
Years |
3-5
Years |
More Than
5 Years |
||||||||||||||||
|
Operating lease obligations (a) |
$ | 1,112.5 | $ | 316.3 | $ | 467.6 | $ | 240.1 | $ | 88.5 | ||||||||||
|
Purchase obligations (b) |
72.6 | 56.9 | 15.7 | — | — | |||||||||||||||
|
Interest obligations (c) |
7.8 | 3.3 | 4.5 | — | — | |||||||||||||||
|
Other long-term liabilities reflected on the Company’s balance sheet under U.S. GAAP (d) |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total |
$ | 1,192.9 | $ | 376.5 | $ | 487.8 | $ | 240.1 | $ | 88.5 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (a) | Excludes obligations under store leases for insurance, taxes and other maintenance costs, which totaled approximately 21.1% of the minimum rent payments under those leases. |
| (b) | Includes hardware and software maintenance contracts and inventory purchase commitments. |
| (c) | Represents commitment fees related to the Company’s Credit Facility. |
| (d) | Excludes $6.8 million of unrecognized tax benefits for which the Company cannot make a reasonably reliable estimate of the amount and period of payment. See Note 9 to the Notes to Consolidated Financial Statements. |
See also Note 8 to the Notes to Consolidated Financial Statements for information concerning the Company’s pension and postretirement plans.
Off-Balance Sheet Arrangements
As of April 28, 2018, the Company had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.
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Impact of Inflation
The Company does not believe that inflation has had a material effect on its net sales or results of operations.
Certain Relationships and Related Transactions
See Note 18 to the Notes to Consolidated Financial Statements.
Critical Accounting Policies
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments with respect to certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Revenue Recognition
Revenue from sales of the Company’s products is recognized at the time of sale or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience. ECommerce revenue from sales of products ordered through the Company’s websites is recognized upon estimated delivery and receipt of the shipment by its customers. Freight costs are included within the Company’s cost of sales and occupancy. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.
In accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements, and ASU 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK ® device revenue is recognized at the segment point of sale.
The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis with the purchase of a NOOK ® from the Company. Using the relative selling-price method described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or
F-22
third-party evidence exists for any of the elements. Revenue allocated to NOOK ® and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK ® device.
The average percentage of a NOOK ® ’s sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 0% and 5%, depending on the type of device sold. The amount of NOOK ® -related deferred revenue as of April 28, 2018 and April 29, 2017 was $0.1 million and $0.2 million, respectively. These amounts are classified on the Company’s balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.
The Company also pays certain vendors who distributed NOOK ® a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK ® based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent , on a net basis. All other revenue is recognized on a gross basis.
The Company rents physical textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.
NOOK acquires the rights to distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK ® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model, in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Company’s eBooks sold are under the agency model.
The Barnes & Noble Membership Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions via e-mail or direct mail, for an annual fee of $25.00, which is non-refundable after the first 30 days. Revenue is recognized over the 12-month period based upon historical spending patterns for Barnes & Noble members.
Merchandise Inventories
Merchandise inventories, except NOOK merchandise inventories, are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under the first-in, first-out (FIFO) basis. NOOK merchandise inventories are recorded based on the average cost method and are valued at the lower of cost and net realizable value.
Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory. The Company does not believe there is a reasonable likelihood that there will be a
F-23
material change in the future estimates or assumptions used to calculate the non-returnable inventory reserve. However, if assumptions based on the Company’s history of liquidating non-returnable inventory are incorrect, it may be exposed to losses or gains that could be material. A 10% change in actual non-returnable inventory reserve would have affected pre-tax earnings by approximately $4.4 million in fiscal 2018.
The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate shortage rates. However, if the Company’s estimates regarding shortage rates are incorrect, it may be exposed to losses or gains that could be material. A 10 basis point change in actual shortage rates would have affected pre-tax earnings by approximately $0.7 million in fiscal 2018.
Internal-Use Software and Website Development Costs
Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized over an estimated useful life of three to seven years. During fiscal 2018 and fiscal 2017, the Company capitalized costs, primarily related to labor, consulting, hardware and software, of $17.6 million and $18.5 million, respectively. Amortization of previously capitalized amounts was $21.8 million, $23.6 million and $30.5 million for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Costs related to the design or maintenance of internal-use software and website development are expensed as incurred.
Research and Development Costs for Software Products
The Company follows the guidance in ASC 985-20, Cost of Software to be Sold, Leased or Marketed, regarding research and development costs for software products to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as for the ongoing assessment of the recoverability of capitalized costs. The Company’s products reach technological feasibility shortly before the products are released and, therefore, research and development costs are generally expensed as incurred.
Property and Equipment and Other Long-Lived Assets
The Company’s long-lived assets include property and equipment and amortizable intangibles. At April 28, 2018, the Company had $255.5 million of property and equipment, net of accumulated depreciation, and $0.4 million of amortizable intangible assets, net of amortization, accounting for approximately 14.6% of the Company’s total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and considers market participants in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets . The Company evaluates its stores’ long-lived assets and its other long-lived assets for impairment at the individual Barnes & Noble store level and at the reporting unit level, respectively, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the
F-24
assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses included in selling and administrative expenses related to amortizable assets totaled $1.8 million, $0.3 million and $0.2 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate long-lived asset impairment losses. However, if the Company is subject to further risk of impairment if comparable store sales continue to decline, the Company’s cost reduction plans do not materialize, the assumed long-term discount rate increases or in general the Company does not achieve its forecasted strategic turnaround plan. A 10% decrease in the Company’s estimated discounted cash flows would not have resulted in a material impairment charge on the Company’s results of operations in fiscal 2018.
Goodwill and Unamortizable Intangible Assets
The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets.
At April 28, 2018, the Company had $71.6 million of goodwill (on its Retail reporting unit) and $309.3 million of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 21.8% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets (ASC 350-30), requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators.
In January 2017, the FASB issued ASU 2017-04, which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. The Company has early adopted ASU 2017-04 on October 29, 2017, the first day of the third quarter of fiscal 2018.
The Company compares the fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment loss as required by ASU 2017-04. Fair value was determined using the combination of a discounted cash flow method (income approach) and the guideline public company method (market comparable approach), weighted equally in determining the fair value of the Company. The market comparable approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies. In performing the valuations, significant assumptions utilized include unobservable Level 3 inputs including cash flows and long-term growth rates reflective of management’s forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. Discount rates are based on the development of a weighted average cost of capital using guideline public company data, factoring in current market data and any company specific risk factors.
F-25
The Company completed its annual goodwill impairment test as of the first day of the third quarter of fiscal 2018 (October 29, 2017). The fair value of the B&N Retail reporting unit had been in excess of carrying value as of the first day of the third quarter of fiscal 2017 (October 30, 2016) and fiscal 2018 (October 29, 2017) based on the annual goodwill impairment test performed as of those dates. In addition, no impairment indicators had arisen after that test to signal that an interim impairment test should be performed prior to the next annual test. Although no impairment resulted from the Company’s next annual goodwill impairment test as of October 29, 2017, the fair value of the B&N Retail reporting unit (for which $207.4 million of goodwill was allocated as of such date) only exceeded its carrying value by approximately $26.8 million or 5%.
Subsequent to the annual goodwill impairment test as of October 29, 2017, sales trends unexpectedly softened during the holiday selling season. Given these lower than expected sales results, the Company revised its forecasted outlook. Following the announcement on January 4, 2018 of the Company’s holiday sales results and its revised outlook, the market price of the Company’s common stock sharply declined. Due to these new impairment indicators, the Company performed an interim goodwill impairment test as of December 30, 2017. As a result of this interim testing, the Company recognized an impairment of its B&N Retail reporting unit goodwill of $133.6 million. While the Company has initiated a strategic turnaround plan focused on stabilizing sales, improving productivity and reducing expenses, achievement of its long-term goals requires a significant multi-year transformation. The interim test incorporated revised discounted cash flow projections given the Company’s holiday sales performance and the early stage of its turnaround efforts. The fair value of the B&N Retail reporting unit had declined from the prior test primarily as a result of the revised forecast and an increased discount rate to account for risk in the Company’s plan. The goodwill of the B&N Retail reporting unit is subject to further risk of impairment if B&N Retail comparable store sales continue to decline, the Company’s cost reduction plans do not materialize, store closings accelerate, the assumed long-term discount rate increases or in general the Company does not achieve its forecasted strategic turnaround plan. A 50 basis point decline in its expected long-term growth rates would result in an approximate $10.1 million incremental goodwill impairment charge, or a 100 basis point increase in the Company’s discount rate would result in an approximate $23.5 million incremental goodwill impairment charge. There were no indicators of impairment identified subsequent to the December 30, 2017 impairment test.
There were no impairment losses related to goodwill during fiscal 2017 and fiscal 2016.
In addition to goodwill, the Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets. Based on the results of the Company’s tests, it recorded impairment losses included in selling and administrative expenses related to unamortizable intangible assets totaled $0, $0 and $3.8 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
With regard to valuing its trade name, the Company uses the relief from royalty method (income approach). The estimated fair value of the Company’s trade name exceeded its carrying value by approximately $17.1 million, or 5%, as of October 29, 2017. Based on the impairment indicators noted above, the Company performed an interim impairment test of its trade name as of December 30, 2017 and the estimated fair value exceeded its carrying value by approximately $23.5 million, or 8%, as of that date. Significant assumptions used to determine fair value under the relief from royalty method include future trends in sales, a royalty rate and an appropriate discount rate inclusive of risk adjustments consistent with market conditions and company specific risk factors. The fair value of the Company’s trade name had declined from the prior year primarily as a result of declining sales and an increased discount rate to account for risk in the Company’s revised forecast. Although the Company determined that no impairment charge was necessary, the Company’s trade name is at risk of impairment if B&N Retail comparable store sales continue to decline, forecasted sales expectations are not met, store closings
F-26
accelerate, the assumed long-term discount rate increases, or in general the Company does not achieve its forecasted strategic turnaround plan. For example, an 800 basis point decline in expected sales would result in an approximate $1.9 million trade name impairment charge or a 200 basis point increase in the Company’s discount rate would result in an approximate $29.3 million trade name impairment charge. There were no indicators of impairment identified subsequent to the December 30, 2017 impairment test.
The fair value of the Company’s publishing contracts was determined using the discounted cash flow method (income approach). Based on this test, the estimated fair value of the Company’s publishing contracts exceeded its carrying value by approximately $4.2 million or 26%. The Company’s publishing contracts are subject to risk of impairment if forecasted sales expectations are not met, the assumed long-term discount rate increases, or in general the Company does not achieve its forecasted strategic turnaround. Such publishing contracts were tested for impairment and the Company determined that no impairment charge was necessary for fiscal 2018 and fiscal 2017. During fiscal 2016, the Company impaired one of its publishing contracts due to a significant drop in business with that publisher, driven by lower title offerings, product quality and the loss of a distribution partner. As a result, the Company recorded an impairment charge of $3.8 million in selling and administrative expenses. The publishing contracts include the value of long-standing relationships with authors, agents and publishers established upon the Company’s acquisition of Sterling in 2003. Given Sterling’s strong history of maintaining such relationships, the Company believes they produce value indefinitely without an identifiable remaining useful life.
A 10% decrease in the Company’s estimated discounted cash flows would have no impact on the Company’s evaluation of publishing contracts in fiscal 2018.
Gift Cards
The Company sells gift cards, which can be used in its stores, on www.barnesandnoble.com, on NOOK ® devices and at B&N Education stores. The Company does not charge administrative or dormancy fees on gift cards and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Gift cards redeemed at B&N Education are funded by the gift card liability at the Company. Over time, a portion of the gift cards issued is typically not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in revenue on a straight-line basis over a 12-month period beginning in the 13 th month after the month the gift card was originally sold. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.
The Company recognized gift card breakage of $43.9 million, $35.5 million and $29.1 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The Company had gift card liabilities of $323.5 million and $351.4 million as of April 28, 2018 and April 29, 2017, respectively. Gift card breakage increased over last year as redemptions continue to run lower than historical patterns. If estimates regarding the Company’s history of gift card breakage are incorrect, it may be exposed to losses or gains that could be material. A 25 basis point change in the Company’s gift card breakage rate at April 28, 2018 would have affected pre-tax earnings by approximately $11.7 million in fiscal 2018.
F-27
Income Taxes
Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, tax issues may arise where the ultimate outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various tax authorities. Consequently, changes in the Company’s estimates for contingent tax liabilities may materially impact the Company’s results of operations or financial position. A 1% variance in the Company’s effective tax rate would have affected the Company’s results of operations in fiscal 2018 by $1.4 million.
Disclosure Regarding Forward-Looking Statements
This report contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information relating to Barnes & Noble that are based on the beliefs of the management of Barnes & Noble as well as assumptions made by and information currently available to the management of Barnes & Noble. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to Barnes & Noble or the management of Barnes & Noble, identify forward-looking statements.
Such statements reflect the current views of Barnes & Noble with respect to future events, the outcome of which is subject to certain risks, including, among others, the general economic environment and consumer spending patterns, decreased consumer demand for Barnes & Noble’s products, low growth or declining sales and net income due to various factors, including store closings, higher-than-anticipated or increasing costs, including with respect to store closings, relocation, occupancy (including in connection with lease renewals) and labor costs, the effects of competition, the risk of insufficient access to financing to implement future business initiatives, risks associated with data privacy and information security, risks associated with Barnes & Noble’s supply chain, including possible delays and disruptions and increases in shipping rates, various risks associated with the digital business, including the possible loss of customers, declines in digital content sales, risks and costs associated with ongoing efforts to rationalize the digital business, risks associated with the eCommerce business, including the possible loss of eCommerce customers and declines in eCommerce sales, the risk that financial and operational forecasts and projections are not achieved, the performance of Barnes & Noble’s initiatives including but not limited to new store concepts and eCommerce initiatives, unanticipated adverse litigation results or effects, potential infringement of Barnes & Noble’s intellectual property by third parties or by Barnes & Noble of the intellectual property of third parties, and other factors, including those factors discussed in detail in Item 1A, “Risk Factors,” and in Barnes & Noble’s other filings made hereafter from time to time with the SEC.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to Barnes & Noble or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Barnes & Noble undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Annual Report.
F-28
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(In thousands, except per share data) |
Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | |||||||||
|
Sales |
$ | 3,662,280 | $ | 3,894,558 | $ | 4,163,844 | ||||||
|
Cost of sales and occupancy |
2,551,077 | 2,682,356 | 2,836,547 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Gross profit |
1,111,203 | 1,212,202 | 1,327,297 | |||||||||
|
Selling and administrative expenses |
999,109 | 1,040,007 | 1,176,778 | |||||||||
|
Depreciation and amortization |
106,340 | 117,887 | 135,863 | |||||||||
|
Goodwill impairment |
133,612 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Operating income (loss) |
(127,858 | ) | 54,308 | 14,656 | ||||||||
|
Interest expense, net and amortization of deferred financing fees |
9,837 | 7,509 | 8,770 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income (loss) before income taxes |
(137,695 | ) | 46,799 | 5,886 | ||||||||
|
Income tax provision (benefit) |
(12,215 | ) | 24,776 | (8,814 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) from continuing operations |
$ | (125,480 | ) | $ | 22,023 | $ | 14,700 | |||||
|
Net loss from discontinued operations |
— | — | (39,146 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) |
$ | (125,480 | ) | $ | 22,023 | $ | (24,446 | ) | ||||
|
|
|
|
|
|
|
|||||||
|
Basic income (loss) per common share: |
||||||||||||
|
Income (loss) from continuing operations |
$ | (1.73 | ) | $ | 0.30 | $ | 0.05 | |||||
|
Loss from discontinued operations |
— | — | (0.54 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Basic income (loss) per common share |
$ | (1.73 | ) | $ | 0.30 | $ | (0.49 | ) | ||||
|
|
|
|
|
|
|
|||||||
|
Diluted income (loss) per common share: |
||||||||||||
|
Income (loss) from continuing operations |
$ | (1.73 | ) | $ | 0.30 | $ | 0.05 | |||||
|
Loss from discontinued operations |
— | — | (0.54 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Diluted income (loss) per common share |
$ | (1.73 | ) | $ | 0.30 | $ | (0.49 | ) | ||||
|
|
|
|
|
|
|
|||||||
|
Weighted average common shares outstanding: |
||||||||||||
|
Basic |
72,588 | 72,188 | 72,410 | |||||||||
|
Diluted Dividends declared per common share |
$ |
72,588
0.60 |
|
$ |
72,328
0.60 |
|
$ |
72,542
0.60 |
|
|||
See accompanying notes to consolidated financial statements.
F-29
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
(In thousands) |
Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | |||||||||
|
Net income (loss) |
$ | (125,480 | ) | $ | 22,023 | $ | (24,446 | ) | ||||
|
Other comprehensive income (loss), net of tax: |
||||||||||||
|
(Increase) decrease in minimum pension/post-retirement liability (net of deferred tax benefit (expense) of $15, $(107) and $(2,188), respectively) |
(39 | ) | 164 | 3,662 | ||||||||
|
Pension reclassification (net of deferred tax expense of $0, $0 and $7,780, respectively) (see Note 8) |
— | — | 13,022 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total comprehensive income (loss) |
$ | (125,519 | ) | $ | 22,187 | $ | (7,762 | ) | ||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to consolidated financial statements.
F-30
CONSOLIDATED BALANCE SHEETS
|
(In thousands, except per share data) |
April 28, 2018 | April 29, 2017 | ||||||
|
ASSETS |
||||||||
|
Current assets: |
||||||||
|
Cash and cash equivalents |
$ | 10,769 | $ | 11,993 | ||||
|
Receivables, net |
64,562 | 67,294 | ||||||
|
Merchandise inventories, net |
958,196 | 946,909 | ||||||
|
Prepaid expenses and other current assets |
65,153 | 101,816 | ||||||
|
|
|
|
|
|||||
|
Total current assets |
1,098,680 | 1,128,012 | ||||||
|
|
|
|
|
|||||
|
Property and equipment: |
||||||||
|
Land and land improvements |
2,541 | 2,541 | ||||||
|
Buildings and leasehold improvements |
1,080,952 | 1,072,007 | ||||||
|
Fixtures and equipment |
1,523,485 | 1,608,433 | ||||||
|
|
|
|
|
|||||
| 2,606,978 | 2,682,981 | |||||||
|
Less accumulated depreciation and amortization |
2,351,454 | 2,406,859 | ||||||
|
|
|
|
|
|||||
|
Net property and equipment |
255,524 | 276,122 | ||||||
|
|
|
|
|
|||||
|
Goodwill |
71,593 | 207,381 | ||||||
|
Intangible assets, net |
309,649 | 310,205 | ||||||
|
Other non-current assets |
14,122 | 11,201 | ||||||
|
|
|
|
|
|||||
|
Total assets |
$ | 1,749,568 | $ | 1,932,921 | ||||
|
|
|
|
|
|||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
|
Current liabilities: |
||||||||
|
Accounts payable |
$ | 458,896 | $ | 473,686 | ||||
|
Accrued liabilities |
260,209 | 283,157 | ||||||
|
Gift card liabilities |
323,465 | 351,424 | ||||||
|
|
|
|
|
|||||
|
Total current liabilities |
1,042,570 | 1,108,267 | ||||||
|
|
|
|
|
|||||
|
Long-term debt |
158,700 | 64,900 | ||||||
|
Deferred taxes |
52,044 | 86,132 | ||||||
|
Other long-term liabilities |
84,271 | 99,311 | ||||||
|
Shareholders’ equity: |
||||||||
|
Common stock; $0.001 par value; 300,000 shares authorized; 112,238 and 111,933 shares issued, respectively |
112 | 112 | ||||||
|
Additional paid-in capital |
1,749,555 | 1,741,380 | ||||||
|
Accumulated other comprehensive income |
276 | 315 | ||||||
|
Retained earnings |
(216,236 | ) | (46,425 | ) | ||||
|
Treasury stock, at cost, 39,585 and 39,497 shares, respectively |
(1,121,724 | ) | (1,121,071 | ) | ||||
|
|
|
|
|
|||||
|
Total shareholders’ equity |
411,983 | 574,311 | ||||||
|
|
|
|
|
|||||
|
Commitments and contingencies |
— | — | ||||||
|
|
|
|
|
|||||
|
Total liabilities and shareholders’ equity |
$ | 1,749,568 | $ | 1,932,921 | ||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
F-31
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
(In thousands) |
Common
Stock |
Additional
Paid-In Capital |
Accumlated
Other Comprehensive Gains (Losses) |
Retained
Earnings |
Treasury
Stock at Cost |
Total | ||||||||||||||||||
|
Balance at May 2, 2015 |
$ | 98 | 1,927,997 | (16,533 | ) | 357,512 | (1,079,716 | ) | $ | 1,189,358 | ||||||||||||||
|
Net loss |
— | — | — | (24,446 | ) | — | (24,446 | ) | ||||||||||||||||
|
Minimum pension liability, net of tax |
— | — | 3,662 | — | — | 3,662 | ||||||||||||||||||
|
Pension reclassification (see Note 8) |
— | — | 13,022 | — | — | 13,022 | ||||||||||||||||||
|
Exercise of 111 common stock options |
2 | 1,301 | — | — | — | 1,303 | ||||||||||||||||||
|
Stock options and restricted stock tax benefits |
— | 1,094 | — | — | — | 1,094 | ||||||||||||||||||
|
Stock-based compensation expense |
— | 14,889 | — | — | — | 14,889 | ||||||||||||||||||
|
Accretive dividend on preferred stockholders and membership interests |
— | — | — | (4,204 | ) | — | (4,204 | ) | ||||||||||||||||
|
Inducement fee paid upon conversion of Series J preferred stock |
— | — | — | (3,657 | ) | — | (3,657 | ) | ||||||||||||||||
|
Cash dividends declared |
— | — | — | (46,056 | ) | — | (46,056 | ) | ||||||||||||||||
|
Accrued dividends for long-term incentive awards |
— | — | — | (451 | ) | — | (451 | ) | ||||||||||||||||
|
Purchase of treasury stock related to stock-based compensation, 337 shares |
— | — | — | — | (4,004 | ) | (4,004 | ) | ||||||||||||||||
|
Treasury stock repurchase plan, 2,763 shares |
— | — | — | — | (26,718 | ) | (26,718 | ) | ||||||||||||||||
|
Dividend to preferred shareholders paid in shares |
— | 1,783 | — | (1,783 | ) | — | — | |||||||||||||||||
|
Common shares issued upon conversion of Series J preferred stock |
12 | 200,250 | — | — | — | 200,262 | ||||||||||||||||||
|
Cash settlement of equity award |
— | (8,022 | ) | — | — | — | (8,022 | ) | ||||||||||||||||
|
Separation of B&N Education, Inc. |
— | (401,258 | ) | — | (301,264 | ) | — | (702,522 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Balance at April 30, 2016 |
$ | 112 | 1,738,034 | 151 | (24,349 | ) | (1,110,438 | ) | $ | 603,510 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
See accompanying notes to consolidated financial statements.
F-32
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)
|
(In thousands) |
Common
Stock |
Additional
Paid-In Capital |
Accumlated
Other Comprehensive Gains (Losses) |
Retained
Earnings |
Treasury
Stock at Cost |
Total | ||||||||||||||||||
|
Balance at April 30, 2016 |
$ | 112 | 1,738,034 | 151 | (24,349 | ) | (1,110,438 | ) | $ | 603,510 | ||||||||||||||
|
Net income |
— | — | — | 22,023 | — | 22,023 | ||||||||||||||||||
|
Postretirement plan liability, net of tax |
— | — | 164 | — | — | 164 | ||||||||||||||||||
|
Exercise of 31 common stock options |
— | 312 | — | — | — | 312 | ||||||||||||||||||
|
Stock options and restricted stock tax benefit |
— | 1,110 | — | — | — | 1,110 | ||||||||||||||||||
|
Stock-based compensation expense |
— | 6,299 | — | — | — | 6,299 | ||||||||||||||||||
|
Cash dividends declared |
— | — | — | (43,887 | ) | — | (43,887 | ) | ||||||||||||||||
|
Accrued dividends for long-term incentive awards |
— | — | — | (212 | ) | — | (212 | ) | ||||||||||||||||
|
Purchase of treasury stock related to stock-based compensation, 248 shares |
— | — | — | — | (2,694 | ) | (2,694 | ) | ||||||||||||||||
|
Treasury stock repurchase plan, 2,020 shares |
— | — | — | — | (23,281 | ) | (23,281 | ) | ||||||||||||||||
|
Distribution of Rabbi Trust shares (see Note 3) |
— | (15,342 | ) | — | — | 15,342 | — | |||||||||||||||||
|
Tax benefit from distribution of Rabbi Trust |
— | 10,967 | — | — | — | 10,967 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Balance at April 29, 2017 |
$ | 112 | 1,741,380 | 315 | (46,425 | ) | (1,121,071 | ) | $ | 574,311 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Adoption of ASU 2016-09 (see Note 1) |
— | 1,310 | — | 155 | — | 1,465 | ||||||||||||||||||
|
Net loss |
— | — | — | (125,480 | ) | — | (125,480 | ) | ||||||||||||||||
|
Postretirement plan liability, net of tax |
— | — | (39 | ) | — | — | (39 | ) | ||||||||||||||||
|
Stock-based compensation expense |
— | 6,865 | — | — | — | 6,865 | ||||||||||||||||||
|
Cash dividends declared |
— | — | — | (43,638 | ) | — | (43,638 | ) | ||||||||||||||||
|
Accrued dividends for long-term incentive awards |
— | — | — | (848 | ) | — | (848 | ) | ||||||||||||||||
|
Purchase of treasury stock related to stock-based compensation, 88 shares |
— | — | — | — | (653 | ) | (653 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Balance at April 28, 2018 |
$ | 112 | 1,749,555 | 276 | (216,236 | ) | (1,121,724 | ) | $ | 411,983 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
See accompanying notes to consolidated financial statements.
F-33
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Year |
Fiscal
2018 |
Fiscal
2017 |
Fiscal
2016 |
|||||||||
|
(In thousands) |
||||||||||||
|
Cash flows from operating activities: |
||||||||||||
|
Net income (loss) |
$ | (125,480 | ) | $ | 22,023 | $ | (24,446 | ) | ||||
|
Net loss from discontinued operations |
— | — | (39,146 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) from continuing operations |
$ | (125,480 | ) | $ | 22,023 | $ | 14,700 | |||||
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
||||||||||||
|
Depreciation and amortization (including amortization of deferred financing fees) |
108,293 | 119,837 | 139,138 | |||||||||
|
Stock-based compensation expense |
6,865 | 6,299 | 14,201 | |||||||||
|
Impairment charges |
135,435 | 349 | 3,991 | |||||||||
|
Deferred taxes |
(30,865 | ) | 28,534 | 34,604 | ||||||||
|
Loss on disposal of property and equipment |
730 | 1,262 | 2,428 | |||||||||
|
Net decrease in other long-term liabilities |
(15,094 | ) | (14,602 | ) | (48,025 | ) | ||||||
|
Pension contributions |
— | — | (12,707 | ) | ||||||||
|
Pension reclassification |
— | — | 20,802 | |||||||||
|
Net (increase) decrease in other non-current assets |
(4,962 | ) | 872 | (3,405 | ) | |||||||
|
Changes in operating assets and liabilities, net |
(37,816 | ) | (17,752 | ) | 31,798 | |||||||
|
|
|
|
|
|
|
|||||||
|
Net cash flows provided by operating activities |
$ | 37,106 | $ | 146,822 | $ | 197,525 | ||||||
|
|
|
|
|
|
|
|||||||
|
Cash flows from investing activities: |
||||||||||||
|
Purchases of property and equipment |
(87,651 | ) | (96,258 | ) | (94,274 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Net cash flows used in investing activities |
$ | (87,651 | ) | $ | (96,258 | ) | $ | (94,274 | ) | |||
|
|
|
|
|
|
|
|||||||
|
Cash flows from financing activities: |
||||||||||||
|
Proceeds from credit facility |
1,173,317 | 1,140,178 | 929,500 | |||||||||
|
Payments on credit facility |
(1,079,517 | ) | (1,122,478 | ) | (882,300 | ) | ||||||
|
Cash dividends paid |
(43,638 | ) | (43,887 | ) | (46,056 | ) | ||||||
|
Treasury stock repurchase plan |
— | (23,281 | ) | (26,718 | ) | |||||||
|
Purchase of treasury stock related to stock-based compensation |
(653 | ) | (2,694 | ) | (4,004 | ) | ||||||
|
Payment of credit facility related fees |
— | (474 | ) | (5,701 | ) | |||||||
|
Proceeds from exercise of common stock options |
— | 312 | 1,303 | |||||||||
|
Cash dividends paid for long-term incentive awards |
(188 | ) | (85 | ) | — | |||||||
|
Cash settlement of equity award |
— | — | (8,022 | ) | ||||||||
|
Cash dividends paid to preferred shareholders |
— | — | (3,941 | ) | ||||||||
|
Inducement fee paid upon conversion of Series J preferred stock |
— | — | (3,657 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Net cash flows provided by (used in) financing activities |
$ | 49,321 | $ | (52,409 | ) | $ | (49,596 | ) | ||||
|
|
|
|
|
|
|
|||||||
|
Cash flows from discontinued operations: |
||||||||||||
|
Operating cash flows |
— | — | (86,384 | ) | ||||||||
|
Investing cash flows |
— | — | (11,764 | ) | ||||||||
|
Financing cash flows (including cash at date of Spin-Off) |
— | — | (16,029 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Net cash flows used in discontinued operations |
$ | — | $ | — | $ | (114,177 | ) | |||||
|
|
|
|
|
|
|
|||||||
|
Net decrease in cash and cash equivalents |
(1,224 | ) | (1,845 | ) | (60,522 | ) | ||||||
|
Cash and cash equivalents at beginning of period |
11,993 | 13,838 | 74,360 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Cash and cash equivalents at end of period |
$ | 10,769 | $ | 11,993 | $ | 13,838 | ||||||
|
|
|
|
|
|
|
|||||||
|
Changes in operating assets and liabilities, net: |
||||||||||||
|
Receivables, net |
$ | 2,732 | $ | 57,623 | $ | (64,652 | ) | |||||
|
Merchandise inventories, net |
(11,287 | ) | (13,186 | ) | 62,015 | |||||||
|
Prepaid expenses and other current assets |
37,096 | 4,096 | (11,947 | ) | ||||||||
|
Accounts payable, accrued liabilities and gift card liabilities |
(66,357 | ) | (66,285 | ) | 46,382 | |||||||
|
|
|
|
|
|
|
|||||||
|
Changes in operating assets and liabilities, net |
$ | (37,816 | ) | $ | (17,752 | ) | $ | 31,798 | ||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to consolidated financial statements.
F-34
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
| Fiscal Year |
Fiscal
2018 |
Fiscal
2017 |
Fiscal
2016 |
|||||||||
|
(In thousands) |
||||||||||||
|
Supplemental cash flow information |
||||||||||||
|
Cash paid during the period for: |
||||||||||||
|
Interest |
$ | 7,611 | $ | 5,487 | $ | 12,217 | ||||||
|
Income taxes (net of refunds) |
$ | (3,145 | ) | $ | (16,859 | ) | $ | 16,107 | ||||
|
Non-cash financing activity: |
||||||||||||
|
Accrued dividends for long-term incentive awards |
$ | 1,237 | $ | 577 | $ | 451 | ||||||
|
Dividends to preferred stockholders paid in shares |
$ | — | $ | — | $ | 1,783 | ||||||
|
Issuance of common stock upon conversion of Series J preferred stock |
$ | — | $ | — | $ | 200,262 | ||||||
See accompanying notes to consolidated financial statements.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars, except per share data)
For the 52 weeks ended April 28, 2018 (fiscal 2018), 52 weeks ended April 29, 2017 (fiscal 2017) and 52 weeks ended April 30, 2016 (fiscal 2016).
| 1. | Summary of Significant Accounting Policies |
Business
Barnes & Noble, Inc. (Barnes & Noble or the Company), one of the nation’s largest booksellers, 3 provides customers a unique experience across its multi-channel distribution platform. As of April 28, 2018, the Company operates 630 bookstores in 50 states, maintains an eCommerce site, develops digital reading products and operates NOOK, one of the largest digital bookstores. Barnes & Noble is utilizing the strength of its retail footprint in combination with its online and digital businesses to provide an omni-channel experience for its customers, fulfilling its commitment to offer customers any book, anytime, anywhere and in any format.
Barnes & Noble Retail (B&N Retail) operates 630 retail bookstores, primarily under the Barnes & Noble Booksellers ® trade name, and includes the Company’s eCommerce site. B&N Retail also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Company’s digital business, offering digital books and magazines for sale and consumption online, NOOK ® 4 reading devices, co-branded NOOK ® tablets and reading software for iOS, Android and Windows.
The Company’s principal business is the sale of trade books (generally, hardcover and paperback titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, NOOK ® and related accessories, bargain books, magazines, gifts, café products and services, educational toys & games, music and movies direct to customers through its bookstores or on www.barnesandnoble.com. The Company offers its customers a full suite of textbook options (new, used, digital and rental).
The Company identifies its operating segments based on the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management, and makes decisions on the allocation of resources. The Company’s two operating segments are B&N Retail and NOOK.
Consolidation
The consolidated financial statements include the accounts of Barnes & Noble, Inc. and its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
| 3 | Based upon sales reported in trade publications and public filings. |
| 4 |
Any references to NOOK ® include the Company’s NOOK ® Tablet, Samsung Galaxy Tab ® A NOOK ® , Samsung Galaxy Tab ® S2 NOOK ® , Samsung Galaxy Tab ® E NOOK ® and NOOK GlowLight TM 3 devices, each of which includes the trademark symbol ( ® or ™, as applicable) even if a trademark symbol is not included. |
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Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
Merchandise Inventories
Merchandise inventories, except NOOK merchandise inventories, are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under the first-in, first-out (FIFO) basis. NOOK merchandise inventories are recorded based on the average cost method and are valued at the lower of cost and net realizable value.
Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory.
The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.
Property and Equipment and Other Long-Lived Assets
Property and equipment are carried at cost, less accumulated depreciation and amortization. For financial reporting purposes, depreciation is computed using the straight-line method over estimated useful lives. Maintenance and repairs are expensed as incurred, while major maintenance and remodeling costs are capitalized if they extend the useful life of the asset. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases. Fixtures and equipment are capitalized and amortized over the shorter of their estimated useful lives or 10 years. Capitalized lease acquisition costs are being amortized over the lease terms of the underlying leases. System costs are capitalized and included in property and equipment. These costs are depreciated over their estimated useful lives from the date the systems become operational. The Company had $255,524 and $276,122 of property and equipment, net of accumulated depreciation, at April 28, 2018 and April 29, 2017, respectively, and $105,696, $117,105 and $134,850 of depreciation expense for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Capitalized software costs of $72,462 and $75,893 for fiscal 2018 and fiscal 2017, respectively, are included in property and equipment.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and considers market participants in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10). The Company evaluates its stores’ long-lived assets and its other long-lived assets for impairment at the individual Barnes & Noble store level and at the reporting unit level, respectively, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses included in selling and administrative expenses related to amortizable assets totaled $1,823, $349 and $150 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
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Goodwill and Unamortizable Intangible Assets
The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets.
At April 28, 2018, the Company had $71,593 of goodwill (on its Retail reporting unit) and $309,294 of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 21.8% of the Company’s total assets. ASC 350-30 requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators.
In January 2017, the FASB issued ASU 2017-04, which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. The Company has early adopted ASU 2017-04 on October 29, 2017, the first day of the third quarter of fiscal 2018.
The Company compares the fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment loss as required by ASU 2017-04. Fair value was determined using the combination of a discounted cash flow method (income approach) and the guideline public company method (market comparable approach), weighted equally in determining the fair value of the reporting units. The market comparable approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies. In performing the valuations, significant assumptions utilized include unobservable Level 3 inputs including cash flows and long-term growth rates reflective of management’s forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. Discount rates are based on the development of a weighted average cost of capital using guideline public company data, factoring in current market data and any company specific risk factors.
The Company completed its annual goodwill impairment test as of the first day of the third quarter of fiscal 2018 (October 29, 2017). The fair value of the B&N Retail reporting unit had been in excess of carrying value as of the first day of the third quarter of fiscal 2017 (October 30, 2016) and fiscal 2018 (October 29, 2017) based on the annual goodwill impairment test performed as of those dates. In addition, no impairment indicators had arisen after that test to signal that an interim impairment test should be performed prior to the next annual test. Although no impairment resulted from the Company’s next annual goodwill impairment test as of October 29, 2017, the fair value of the B&N Retail reporting unit (for which $207,381 of goodwill was allocated as of such date) only exceeded its carrying value by approximately $26,800 or 5%.
Subsequent to the annual goodwill impairment test as of October 29, 2017, sales trends unexpectedly softened during the holiday selling season. Given these lower than expected sales results, the Company revised its forecasted outlook. Following the announcement on January 4, 2018 of the Company’s holiday sales results and its revised outlook, the market price of the Company’s common stock sharply declined. Due to these new impairment indicators, the Company performed an interim goodwill impairment test as of December 30, 2017. As a result of this interim testing, the Company recognized an impairment of its B&N Retail reporting unit goodwill of $133,612. While the
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Company has initiated a strategic turnaround plan focused on stabilizing sales, improving productivity and reducing expenses, achievement of its long-term goals requires a significant multi-year transformation. The interim test incorporated revised discounted cash flow projections given the Company’s holiday sales performance and the early stage of its turnaround efforts. The fair value of the B&N Retail reporting unit had declined from the prior test primarily as a result of the revised forecast and an increased discount rate to account for risk in the Company’s plan. The goodwill of the B&N Retail reporting unit is subject to further risk of impairment if B&N Retail comparable store sales continue to decline, the Company’s cost reduction plans do not materialize, store closings accelerate, the assumed long-term discount rate increases or in general the Company does not achieve its forecasted strategic turnaround plan. There were no indicators of impairment identified subsequent to the December 30, 2017 impairment test.
There were no impairment losses related to goodwill during fiscal 2017 and fiscal 2016.
In addition to goodwill, the Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets. Based on the results of the Company’s tests, it recorded impairment losses included in selling and administrative expenses related to unamortizable intangible assets totaling $0, $0 and $3,840 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
With regard to valuing its trade name, the Company uses the relief from royalty method (income approach). The estimated fair value of the Company’s trade name exceeded its carrying value by approximately $17,100, or 5%, as of October 29, 2017. Based on the impairment indicators noted above, the Company performed an interim impairment test of its trade name as of December 30, 2017 and the estimated fair value exceeded its carrying value by approximately $23,500, or 8%, as of that date. Significant assumptions used to determine fair value under the relief from royalty method include future trends in sales, a royalty rate and an appropriate discount rate inclusive of risk adjustments consistent with market conditions and company specific risk factors. The fair value of the Company’s trade name had declined from the prior year primarily as a result of declining sales and an increased discount rate to account for risk in the Company’s revised forecast. Although the Company determined that no impairment charge was necessary, the Company’s trade name is at risk of impairment if B&N Retail comparable store sales continue to decline, forecasted sales expectations are not met, store closings accelerate, the assumed long-term discount rate increases, or in general the Company does not achieve its forecasted strategic turnaround plan. There were no indicators of impairment identified subsequent to the December 30, 2017 impairment test.
The fair value of the Company’s publishing contracts was determined using the discounted cash flow method (income approach). Based on this test, the estimated fair value of the Company’s publishing contracts exceeded its carrying value by approximately $4,200, or 26%. The Company’s publishing contracts are subject to risk of impairment if forecasted sales expectations are not met, the assumed long-term discount rate increases, or in general the Company does not achieve its forecasted strategic turnaround. Such publishing contracts were tested for impairment and the Company determined that no impairment charge was necessary for fiscal 2018 and fiscal 2017. During fiscal 2016, the Company impaired one of its publishing contracts due to a significant drop in business with that publisher, driven by lower title offerings, product quality and the loss of a distribution partner. As a result, the Company recorded an impairment charge of $3,840 in selling and administrative expenses. The publishing contracts include the value of long-standing relationships with authors, agents and publishers established upon the Company’s acquisition of Sterling in 2003. Given Sterling’s strong history of maintaining such relationships, the Company believes they produce value indefinitely without an identifiable remaining useful life.
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Deferred Charges
Costs incurred to obtain long-term financing are amortized over the terms of the respective debt agreements using the straight-line method, which approximates the effective interest method. Unamortized costs included in other non-current assets as of April 28, 2018 and April 29, 2017 were $4,393 and $6,346, respectively. Amortization expense included in interest and amortization of deferred financing fees was $1,953, $1,950 and $3,276 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
Revenue Recognition
Revenue from sales of the Company’s products is recognized at the time of sale or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience. ECommerce revenue from sales of products ordered through the Company’s websites is recognized upon estimated delivery and receipt of the shipment by its customers. Freight costs are included within the Company’s cost of sales and occupancy. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.
In accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements, and Accounting Standards Updates (ASU) 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK ® device revenue is recognized at the segment point of sale.
The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis with the purchase of a NOOK ® from the Company. Using the relative selling-price method described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK ® and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK ® device.
The average percentage of a NOOK ® ’s sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 0% and 5%, depending on the type of device sold. The amount of NOOK ® -related deferred revenue as of April 28, 2018 and April 29, 2017 was $61 and $226, respectively. These amounts are classified on the Company’s balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.
The Company also pays certain vendors who distributed NOOK ® a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK ® based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes
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revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent , on a net basis. All other revenue is recognized on a gross basis.
The Company rents physical textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.
NOOK acquires the rights to distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK ® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model, in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Company’s eBooks sold are under the agency model.
The Barnes & Noble Membership Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions via e-mail or direct mail, for an annual fee of $25.00, which is non-refundable after the first 30 days. Revenue is recognized over the 12-month period based upon historical spending patterns for Barnes & Noble members.
Research and Development Costs for Software Products
The Company follows the guidance in ASC 985-20, Cost of Software to Be Sold, Leased or Marketed, regarding research and development costs for software products to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. The Company’s products reach technological feasibility shortly before the products are released and, therefore, research and development costs are generally expensed as incurred.
Internal-Use Software and Website Development Costs
Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized over an estimated useful life of three to seven years. During fiscal 2018 and fiscal 2017, the Company capitalized costs, primarily related to labor, consulting, hardware and software, of $17,572 and $18,450, respectively. Amortization of previously capitalized amounts was $21,807, $23,584 and $30,461 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Costs related to the design or maintenance of internal-use software and website development are expensed as incurred.
Advertising Costs
The costs of advertising are expensed as incurred during the year pursuant to ASC 720-35, Advertising Costs . Advertising costs charged to selling and administrative expenses were $27,553, $36,420 and $53,569 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
The Company receives payments and credits from vendors pursuant to co-operative advertising and other programs, including payments for product placement in stores, catalogs and online. In accordance with ASC 605-50-25-10, Customer’s Accounting for Certain Consideration Received from a Vendor , the Company classifies certain co-op advertising received as a reduction in costs of sales and occupancy. Allowances received from vendors exceeded gross advertising costs in each of the fiscal years noted above.
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Closed Store Expenses
When the Company closes or relocates a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements and, when a store is closed prior to the expiration of the lease, a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $474, $1,434 and $744 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations.
Net Earnings (Loss) per Share
In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, unvested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s unvested restricted shares and unvested restricted stock units granted prior to July 15, 2015 and shares issuable under the Company’s deferred compensation plan were considered participating securities. Cash dividends to restricted stock units and performance-based stock units granted on or after July 15, 2015 are not distributed until and except to the extent that the restricted stock units vest, and in the case of performance-based stock units, until and except to the extent that the performance metrics are achieved or are otherwise deemed satisfied. Stock options do not receive cash dividends. As such, these awards are not considered participating securities.
Basic earnings per common share is calculated by dividing the net income, adjusted for preferred dividends and income allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the dilution that would occur if any potentially dilutive instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method or two-class method. Other potentially dilutive securities include preferred stock, stock options, restricted stock units granted after July 15, 2015, and performance-based stock units and are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. See Note 7 to the Consolidated Financial Statements for further information regarding the calculation of basic and diluted earnings (loss) per common share.
Income Taxes
The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance, if determined to be necessary. The Company establishes a reserve for uncertain tax positions. If the Company considers that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the largest amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. A reserve for an uncertain income tax position will be recognized if it has less than a 50% likelihood of being sustained. The tax positions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments for those positions. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.
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Gift Cards
The Company sells gift cards, which can be used in its stores, on www.barnesandnoble.com, on NOOK ® devices and at B&N Education stores. The Company does not charge administrative or dormancy fees on gift cards and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Gift cards redeemed at B&N Education are funded by the gift card liability at the Company. Over time, a portion of the gift cards issued is typically not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in revenue on a straight-line basis over a 12-month period beginning in the 13 th month after the month the gift card was originally sold. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.
The Company recognized gift card breakage of $43,922, $35,524 and $29,074 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The Company had gift card liabilities of $323,465 and $351,424 as of April 28, 2018 and April 29, 2017, respectively.
Accounts Receivable
Accounts receivable, as presented on the Company’s Consolidated Balance Sheets, is net of allowances. An allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable and assessments of collectability based on historic trends, the financial condition of the Company’s customers and an evaluation of economic conditions. The Company writes off uncollectible trade receivables once collection efforts have been exhausted. Costs associated with allowable customer markdowns and operational chargebacks, net of the expected recoveries, are part of the provision for allowances included in accounts receivable. These provisions result from seasonal negotiations, as well as historic deduction trends net of expected recoveries, and the evaluation of current market conditions.
Reclassifications
Certain prior period amounts have been reclassified for comparative purposes to conform with the fiscal 2018 presentation.
Recent Accounting Pronouncements
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects as a result of the newly enacted federal corporate income tax rate under the Tax Cuts and Jobs Act. This guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. Two transition methods are available: at the beginning of the period of adoption, or retrospective to each period in which the income tax effects of the Tax Cuts and Jobs Act related to items remaining in accumulated other comprehensive income are recognized. The Company is evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.
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In January 2017, the FASB issued ASU 2017-04. The standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. The Company has early adopted ASU 2017-04 on October 29, 2017, the first day of the third quarter of fiscal 2018.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). This update clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. ASU 2016-15 is effective for the Company beginning April 29, 2018 under a retrospective approach. The Company does not expect adoption will have a material impact on its consolidated statement of cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 includes provisions to simplify certain aspects related to the accounting for share-based awards and the related financial statement presentation. ASU 2016-09 provides for changes to accounting for stock compensation, including: 1) excess tax benefits and tax deficiencies related to share based payment awards to be recognized as income tax benefit or expense when the awards vest or are settled (previously such amounts were recognized in additional paid-in capital); entities must apply the new guidance on accounting for excess tax benefits and tax deficiencies prospectively, except for excess tax benefits that were identified from previous transactions that had not been previously recognized because the related tax deduction did not reduce income taxes payable; entities must use a modified retrospective transition method to recognize such excess tax benefits as a credit to retained earnings; any deferred tax assets recorded in connection with the modified retrospective recognition of excess tax benefits must be assessed for realizability, and, if necessary, a valuation allowance must be recognized through a cumulative-effect adjustment to retained earnings; 2) excess tax benefits will be classified as an operating activity in the statement of cash flows; 3) the option to elect to estimate forfeitures or account for them when they occur; 4) classification of cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity in the statements of cash flows; and 5) eliminating the requirement to delay the recognition of excess tax benefits until it reduces current taxes payable.
The Company adopted ASU 2016-09 during the first quarter ended July 29, 2017. Accordingly, the primary effects of the adoption are as follows: 1) excess tax expense of $915 was recorded during fiscal 2018 related to the prospective application of excess tax benefits and tax deficiencies related to stock-based compensation settlements; 2) using a modified retrospective application, the Company recorded unrecognized excess tax benefits of $1,235 as a cumulative-effect adjustment, which increased retained earnings, and reduced deferred taxes by the same; 3) using a modified retrospective application, the Company has elected to recognize forfeitures as they occur and recorded a $1,310 increase to additional paid-in capital, a $1,079 reduction to retained earnings, and a $231 reduction to deferred taxes to reflect the incremental stock-based compensation expense, net of the related tax impacts, that would have been recognized in prior years under the modified guidance; and 4) $1,579 and $1,838 in excess tax benefits from stock-based compensation was reclassified from cash flows from financing activities to cash flows from operating activities for fiscal 2017 and fiscal 2016, respectively, in the Consolidated Statements of Cash Flows.
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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous Generally Accepted Accounting Principles. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 requires expanded disclosures about the nature and terms of lease agreements and is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company plans to adopt ASU 2016-02 effective April 28, 2019. The Company remains on schedule and has implemented key system functionality to enable the preparation of restated financial information. The Company is currently evaluating the provisions of this standard and assessing its existing lease portfolio in order to determine the impact on its accounting systems, processes and internal controls over financial reporting. The Company expects the adoption of this standard will result in a significant increase to its long-term assets and liabilities on its consolidated balance sheet. However, the Company does not expect adoption will have a material impact on its consolidated statement of operations and cash flows.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), modifying the accounting for inventory. Under ASU 2015-11, the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. ASU 2015-11 defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is applicable to inventory that is accounted for under the first-in, first-out method and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-11 effective April 30, 2017. The majority of the Company’s merchandise inventories are valued using the retail inventory method, which is outside the scope of ASU 2015-11. The remaining inventory of the Company’s merchandise inventories are valued at the lower of cost and net realizable value using the average cost method. The Company applied the amendments in this update prospectively to the measurement of inventory after the date of adoption with no material impact to the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which was further amended in 2015 and 2016 (Topic 606). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. Topic 606 was effective for the Company on April 29, 2018. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented (full retrospective method), or apply the requirements in the year of adoption, through a cumulative adjustment (modified retrospective method). The Company will adopt Topic 606 in the first quarter of fiscal 2019 using the modified retrospective method. The new standard primarily impacts the Company’s accounting for gift card breakage. Under Topic 606, the Company will recognize gift card breakage proportionately as redemptions occur. The changes in accounting policies related to the adoption of Topic 606 will result in a cumulative adjustment net of income taxes to increase retained earnings of approximately $65,000 to $80,000. The Company is in the process of implementing changes to its processes, controls and systems in support of the adoption of this ASU.
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Reporting Period
The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The reporting periods ended April 28, 2018, April 29, 2017 and April 30, 2016 each contained 52 weeks.
| 2. | Credit Facility |
On August 3, 2015, the Company and certain of its subsidiaries entered into a credit agreement (Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of up to $700,000 (Revolving Credit Facility). On September 30, 2016, the Company amended the Credit Agreement to provide for a new “first-in, last-out” revolving credit facility (the FILO Credit Facility and, together with the Revolving Credit Facility, the Credit Facility) in an aggregate principal amount of up to $50,000, which supplements availability under the Revolving Credit Facility. The Company generally must draw down the FILO Credit Facility before making any borrowings under the Revolving Credit Facility.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the Credit Facility. The Credit Facility replaced the prior credit facility. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs.
The Company and certain of its subsidiaries are permitted to borrow under the Credit Facility. The Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the Credit Facility (collectively, the Loan Parties), but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. Borrowings under the Credit Facility are limited to a specified percentage of eligible collateral. The Company has the option to request an increase in commitments under the Credit Facility of up to $250,000, subject to certain restrictions.
The Credit Facility allows the Company to declare and pay up to $70,000 in dividends annually to its stockholders without compliance with any availability or ratio-based limitations.
Interest under the Revolving Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the Revolving Credit Facility. Through the end of the fiscal quarter during which the closing of the Revolving Credit Facility occurred, loans under the Revolving Credit Facility bore interest at LIBOR plus 1.750% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.750% per annum, in the alternative, and thereafter the interest rate began to fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.500% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.500% per annum), based upon the average daily availability under the Revolving Credit Facility for the immediately preceding fiscal quarter. Interest under the FILO Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is also determined by reference to the level of excess availability under the Revolving Credit Facility. Loans under the FILO Credit Facility bear interest at 1.000% per annum more than loans under the Revolving Credit Facility.
F-46
The Credit Agreement contains customary negative covenants, which limit the Company’s ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders would assume dominion and control over the Loan Parties’ cash.
The Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreement also contains customary affirmative covenants and representations and warranties.
The Company wrote off $460 of deferred financing fees related to the prior credit facility during fiscal 2016 and the remaining unamortized deferred financing fees of $3,542 were deferred and are being amortized over the five-year term of the Credit Facility. The Company also incurred $5,701 of fees to secure the Credit Facility, which are being amortized over the five-year term accordingly. During fiscal 2017, the Company incurred $474 of fees to secure the FILO Credit Facility, which are being amortized over the same term as the Credit Facility.
The Company had $158,700 and $64,900 of outstanding debt under the Credit Facility as of April 28, 2018 and April 29, 2017, respectively. The Company had $34,213 and $38,833 of outstanding letters of credit under its Credit Facility as of April 28, 2018 and April 29, 2017, respectively.
The following table presents selected information related to the Company’s credit facilities:
|
Fiscal
2018 |
Fiscal
2017 |
Fiscal
2016 |
||||||||||
|
Credit facility at period end |
$ | 158,700 | 64,900 | 47,200 | ||||||||
|
Average balance outstanding during the period |
$ | 141,478 | 96,297 | 66,948 | ||||||||
|
Maximum borrowings outstanding during the period |
$ | 287,933 | 285,278 | 293,200 | ||||||||
|
Weighted average interest rate during the period (a) |
5.55 | % | 5.77 | % | 8.21 | % | ||||||
|
Interest rate at end of period |
3.92 | % | 3.73 | % | 2.69 | % | ||||||
| (a) | Includes commitment fees. |
Fees expensed with respect to the unused portion of the credit facilities were $2,235, $2,235 and $2,781 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
The Company has no agreements to maintain compensating balances.
| 3. | Stock-Based Compensation |
The Company maintains one active share-based incentive plan: the Amended and Restated 2009 Incentive Plan. Prior to June 2, 2009, the Company issued restricted stock and stock options under the 1996 and 2004 Incentive Plans. On June 2, 2009, the Company’s shareholders approved the 2009 Incentive Plan. Under the 2009 Incentive Plan, the Company has issued restricted stock units, restricted stock and stock options. On September 11, 2012, the Company’s shareholders approved the Amended and Restated 2009 Incentive Plan. Under the Amended and Restated 2009 Incentive Plan, the Company has issued performance-based stock units, restricted stock units, restricted stock and stock options. At April 28, 2018, there were approximately 5,689,643 shares of common stock available for future grants under the Amended and Restated 2009 Incentive Plan.
F-47
A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of unvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company’s restricted stock awards vest over a period of one to four years. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company’s common stock on the grant date.
A restricted stock unit is a grant valued in terms of the Company’s common stock, but no stock is issued at the time of grant. The restricted stock units may be redeemed for one share of common stock each once vested. Restricted stock units are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the units except in very limited circumstances and with the consent of the compensation committee. Shares of unvested restricted stock units have no voting rights but are entitled to receive dividends and other distributions thereon. Cash dividends to restricted stock units granted on or after July 15, 2015 are not distributed until the restricted stock units vest. The Company’s restricted stock units vest over a period of one to four years. The Company expenses the cost of the restricted stock units, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock unit is determined based on the closing price of the Company’s common stock on the grant date.
A performance-based stock unit is a grant valued in terms of the Company’s common stock, but no stock is issued at the time of grant. Each performance-based stock unit may be redeemed for one share of common stock once vested. In general, upon the achievement of a minimum threshold, 50% to 150% of these awards vest at the end of a three year performance period from the date of grant based upon achievement of the performance goal specified in the performance-based stock unit agreement. Performance-based stock units are generally subject to forfeiture if employment terminates prior to the settlement of the award. The grantee cannot transfer the units except in very limited circumstances and with the consent of the compensation committee. Shares of unvested performance-based stock units have no voting rights but are entitled to receive dividends and other distributions thereon. Cash dividends to performance-based stock units are not distributed until the award is settled. The Company expenses the cost of the performance-based stock units, which is determined to be the fair market value of the shares at the date of grant, ratably over the requisite service period, based on the probability of achieving the performance goal, with changes in expectations recognized as an adjustment to earnings in the period of the change. If the performance goal is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.
The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for each stock option award. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards, which are generally subject to pro-rata vesting annually over four years, is expensed on a straight-line basis over the vesting period of the stock options. The expected volatility assumption is based on traded options volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The expected term assumption incorporates the contractual term of an option grant, which is ten years, as well as the vesting period of an award, which is generally pro-rata vesting annually over four years. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted.
F-48
No stock options were granted during fiscal 2018, fiscal 2017 or fiscal 2016.
The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award and recognizes forfeitures as they occur.
In September 2003, Leonard Riggio, the Company’s Executive Chairman, exercised 1,318,750 stock options by tendering in payment of the exercise price of the stock options 606,277 shares that he held in the Company’s stock. Mr. Riggio elected to defer receipt of the balance of the shares (712,473) due from the exercise pursuant to the Company’s Executive Deferred Compensation Plan (Plan). In accordance therewith, the Company established a rabbi trust (Rabbi Trust) under the Plan for the benefit of Mr. Riggio, which holds 712,473 shares of the Company’s common stock. The shares held by the Rabbi Trust were treated as treasury stock. Due to the deferred compensation arrangement, these shares were included in the denominator of the earnings per share calculation in accordance with ASC 260, Earnings Per Share, when the impact was not antidilutive.
On March 15, 2017, the Board of Directors of the Company approved the termination of the Plan and the Rabbi Trust. As part of the termination of the Plan, all amounts deferred under the Plan and held in the Rabbi Trust were distributed in March 2017 to Mr. Riggio, who was the sole participant in the Plan.
Stock-Based Compensation Activity
The following table presents a summary of the Company’s stock option activity:
|
Number of Shares
(in thousands) |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Term |
Aggregate
Intrinsic Value (in thousands) |
|||||||||||||
|
Balance, May 2, 2015 |
455 | $ | 16.62 | 6.27 years | $ | 3,114 | ||||||||||
|
Granted |
— | 0.00 | (a) | |||||||||||||
|
Exercised |
(111 | ) | 11.71 | (a) | ||||||||||||
|
Forfeited |
(239 | ) | 10.89 | (a) | ||||||||||||
|
Adjustment due to the Spin-Off of B&N Education |
219 | |||||||||||||||
|
|
|
|||||||||||||||
|
Balance, April 30, 2016 |
324 | $ | 11.29 | 5.09 years | $ | 516 | ||||||||||
|
Granted |
— | 0.00 | ||||||||||||||
|
Exercised |
(31 | ) | 9.91 | |||||||||||||
|
Forfeited |
(38 | ) | 21.14 | |||||||||||||
|
|
|
|||||||||||||||
|
Balance, April 29, 2017 |
255 | $ | 9.99 | 4.62 years | $ | 11 | ||||||||||
|
Granted |
— | 0.00 | ||||||||||||||
|
Exercised |
— | 0.00 | ||||||||||||||
|
Forfeited |
(79 | ) | 10.08 | |||||||||||||
|
|
|
|||||||||||||||
|
Balance, April 28, 2018 |
176 | $ | 9.95 | 3.63 years | $ | 0 | ||||||||||
|
|
|
|||||||||||||||
|
Vested and expected to vest in the future at April 28, 2018 |
176 | $ | 9.95 | 3.63 years | $ | 0 | ||||||||||
|
Exercisable at April 28, 2018 |
176 | $ | 9.95 | 3.63 years | $ | 0 | ||||||||||
|
Available for grant at April 28, 2018 |
5,690 | |||||||||||||||
| (a) |
Weighted average exercise price is calculated using exercise price prior to the Spin-Off and after the Spin-Off. |
F-49
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the related fiscal year and the exercise price, multiplied by the related in-the-money options) that would have been received by the option holders had they exercised their options at the end of the fiscal year. This amount changes based on the market value of the Company’s common stock. Total intrinsic value of options exercised for fiscal 2018, fiscal 2017 and fiscal 2016 (based on the difference between the Company’s stock price on the exercise date and the respective exercise price, multiplied by the number of options exercised) was $0, $99 and $546, respectively.
As of April 28, 2018, there was no unrecognized compensation expense related to unvested stock options granted under the Company’s share-based compensation plans.
The following table presents a summary of the Company’s restricted stock activity:
|
Number of Shares
(in thousands) |
Weighted
Average Grant Date Fair Value |
|||||||
|
Balance, May 2, 2015 |
43 | $ | 22.24 | |||||
|
Granted |
64 | 13.04 | ||||||
|
Vested |
(43 | ) | 22.24 | |||||
|
Forfeited |
— | 0.00 | ||||||
|
|
|
|||||||
|
Balance, April 30, 2016 |
64 | $ | 13.04 | |||||
|
Granted |
77 | 10.95 | ||||||
|
Vested |
(64 | ) | 13.04 | |||||
|
Forfeited |
— | 0.00 | ||||||
|
|
|
|||||||
|
Balance, April 29, 2017 |
77 | $ | 10.95 | |||||
|
Granted |
141 | 7.10 | ||||||
|
Vested |
(77 | ) | 10.95 | |||||
|
Forfeited |
— | 0.00 | ||||||
|
|
|
|||||||
|
Balance, April 28, 2018 |
141 | $ | 7.10 | |||||
|
|
|
|||||||
Total fair value of shares of restricted stock that vested during fiscal 2018, fiscal 2017 and fiscal 2016 was $548, $680 and $637, respectively. As of April 28, 2018, there was $333 of unrecognized stock-based compensation expense related to non-vested restricted stock awards. That cost is expected to be recognized over a weighted average period of 0.40 years.
F-50
The following table presents a summary of the Company’s restricted stock unit activity:
|
Number of Shares
(in thousands) |
Weighted
Average Grant Date Fair Value |
|||||||
|
Balance, May 2, 2015 |
2,055 | $ | 15.62 | |||||
|
Granted |
692 | 18.82 | (a) | |||||
|
Vested |
(1,312 | ) | 10.68 | (a) | ||||
|
Forfeited |
(1,054 | ) | 10.74 | (a) | ||||
|
Adjustment due to the Spin-Off of B&N Education |
1,057 | |||||||
|
|
|
|||||||
|
Balance, April 30, 2016 |
1,438 | $ | 13.76 | |||||
|
Granted |
547 | 12.42 | ||||||
|
Vested |
(609 | ) | 11.75 | |||||
|
Forfeited |
(826 | ) | 14.22 | |||||
|
|
|
|||||||
|
Balance, April 29, 2017 |
550 | $ | 13.96 | |||||
|
Granted |
813 | 7.17 | ||||||
|
Vested |
(228 | ) | 14.10 | |||||
|
Forfeited |
(99 | ) | 11.39 | |||||
|
|
|
|||||||
|
Balance, April 28, 2018 |
1,036 | $ | 8.85 | |||||
|
|
|
|||||||
| (a) |
Weighted average grant date fair value is calculated using the grant price prior to the Spin-Off and after the Spin-Off. |
Total fair value of shares of restricted stock units that vested during fiscal 2018, fiscal 2017 and fiscal 2016 were $1,694, $6,612 and $18,047, respectively. As of April 28, 2018, there was $5,685 of unrecognized stock-based compensation expense related to non-vested restricted stock units. That cost is expected to be recognized over a weighted average period of 1.93 years.
F-51
The following table presents a summary of the Company’s performance-based stock unit activity:
|
Number of Shares
(in thousands) |
Weighted
Average Grant Date Fair Value |
|||||||
|
Balance, May 2, 2015 |
— | $ | 0.00 | |||||
|
Granted |
110 | 28.08 | (a) | |||||
|
Vested |
— | 0.00 | (a) | |||||
|
Forfeited |
(17 | ) | 18.46 | (a) | ||||
|
Adjustment due to the Spin-Off of B&N Education |
58 | |||||||
|
|
|
|||||||
|
Balance, April 30, 2016 |
151 | $ | 18.41 | |||||
|
Granted |
507 | 12.48 | ||||||
|
Vested |
— | 0.00 | ||||||
|
Forfeited |
(238 | ) | 13.55 | |||||
|
|
|
|||||||
|
Balance, April 29, 2017 |
420 | $ | 14.00 | |||||
|
Granted |
706 | 7.35 | ||||||
|
Vested |
— | 0.00 | ||||||
|
Forfeited |
(117 | ) | 12.01 | |||||
|
|
|
|||||||
|
Balance, April 28, 2018 |
1,009 | $ | 9.58 | |||||
|
|
|
|||||||
| (a) |
Weighted average grant date fair value is calculated using the grant price prior to the Spin-Off and after the Spin-Off. |
There were no vesting of performance-based stock units during fiscal 2018, fiscal 2017 and fiscal 2016. As of April 28, 2018, there was $4,069 of unrecognized stock-based compensation expense related to non-vested performance-based stock units. That cost is expected to be recognized over a weighted average period of 1.80 years.
For fiscal 2018, fiscal 2017 and fiscal 2016, stock-based compensation expense of $6,865, $6,299 and $14,201, respectively, is included in selling and administrative expenses.
F-52
| 4. | Receivables, Net |
Receivables represent customer, private and public institutional and government billings, credit/debit card, advertising, landlord and other receivables due within one year as follows:
|
April 28,
2018 |
April 29,
2017 |
|||||||
|
Trade accounts |
$ | 19,446 | $ | 16,189 | ||||
|
Credit/debit card receivables |
22,564 | 25,136 | ||||||
|
eBook settlement receivable (see Note 21) |
452 | 2,478 | ||||||
|
Other receivables |
22,100 | 23,491 | ||||||
|
|
|
|
|
|||||
|
Total receivables, net |
$ | 64,562 | $ | 67,294 | ||||
|
|
|
|
|
|||||
| 5. | Other Long-Term Liabilities |
Other long-term liabilities consist primarily of deferred rent, long-term insurance liabilities, asset retirement obligations and tax liabilities and reserves. The Company provides for minimum rent expense over the lease terms (including the build-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of tenant allowances) is classified as deferred rent. Other long-term liabilities also include store closing expenses, long-term deferred revenues and a health care and life insurance plan for certain retired employees. The Company had the following other long-term liabilities at April 28, 2018 and April 29, 2017:
|
April 28,
2018 |
April 29,
2017 |
|||||||
|
Deferred rent |
$ | 50,720 | $ | 59,142 | ||||
|
Insurance liabilities |
12,589 | 14,225 | ||||||
|
Asset retirement obligations |
11,629 | 11,482 | ||||||
|
Tax liabilities and reserves |
5,124 | 8,711 | ||||||
|
Other |
4,209 | 5,751 | ||||||
|
|
|
|
|
|||||
|
Total other long-term liabilities |
$ | 84,271 | $ | 99,311 | ||||
|
|
|
|
|
|||||
| 6. | Fair Values of Financial Instruments |
In accordance with ASC 820, Fair Value Measurements and Disclosures (ASC 820), the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
| Level 1 – | Observable inputs that reflect quoted prices in active markets | |
| Level 2 – | Inputs other than quoted prices in active markets that are either directly or indirectly observable | |
| Level 3 – | Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions | |
F-53
The Company’s financial instruments include cash, receivables, gift cards, accrued liabilities, accounts payable and its credit facility. The fair values of cash, receivables, gift cards, accrued liabilities and accounts payable approximate carrying values because of the short-term nature of these instruments. The Company believes that its credit facility approximates fair value since interest rates are adjusted to reflect current rates.
The Company compares the fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment loss as required by ASU 2017-04. During fiscal 2018, the Company recognized an impairment of its B&N Retail reporting unit goodwill of $133,612 as a result of lower than expected holiday season sales, which resulted in a revised forecast outlook and lower market price of the Company’s common stock. Fair value was determined using the combination of a discounted cash flow method (income approach) and the guideline public company method (market comparable approach), weighted equally in determining the fair value of the Company. The market comparable approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies. In performing the valuations, significant assumptions utilized include unobservable Level 3 inputs including cash flows and long-term growth rates reflective of management’s forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. Discount rates are based on the development of a weighted average cost of capital using guideline public company data, factoring in current market data and any company specific risk factors. See Note 1 for further discussion on goodwill impairment.
During fiscal 2018, the Company impaired long-lived asset at B&N Retail stores due to lower than expected holiday season. As a result, the Company recorded an impairment charge of $1,823 in selling and administrative expenses. In determining whether the carrying value of long-lived assets is less than its estimated fair value, a discounted cash flow approach to value was used, which was based on Level 3 inputs as defined by ASC 820.
During fiscal 2016, the Company impaired one of its publishing contracts due to a significant drop in business with that publisher, driven by lower title offerings, product quality and the loss of a distribution partner. As a result, the Company recorded an impairment charge of $3,840 in selling and administrative expenses. In determining whether the carrying value of unamortizable intangible assets is less than its estimated fair value, a discounted cash flow approach to value was used, which was based on Level 3 inputs as defined by ASC 820.
| 7. | Net Earnings (Loss) per Share |
In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, unvested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s unvested restricted shares and unvested restricted stock units granted prior to July 15, 2015 and shares issuable under the Company’s deferred compensation plan were considered participating securities. Cash dividends to restricted stock units and performance-based stock units granted on or after July 15, 2015 are not distributed until and except to the extent that the restricted stock units vest, and in the case of performance-based stock units, until and except to the extent that the performance metrics are achieved or are otherwise deemed satisfied. Stock options do not receive cash dividends. As such, these awards are not considered participating securities.
Basic earnings per common share are calculated by dividing the net income, adjusted for preferred dividends and income allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the dilution that would occur if any potentially dilutive instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method or two-class method. Other potentially dilutive securities include preferred stock, stock options, restricted stock units granted after July 15, 2015, and performance-based stock units and are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods.
F-54
During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. Due to the net loss during fiscal 2018 and fiscal 2016, participating securities in the amounts of 127,509 and 2,163,190, respectively, were excluded from the calculation of loss per share using the two-class method because the effect would be antidilutive. The Company’s outstanding non-participating securities consisting of dilutive stock options and restricted stock units of 38,584, 140,341 and 129,450 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively, and accretion/payments of dividends on preferred shares in fiscal 2006 were also excluded from the calculation of loss per share using the two-class method because the effect would be antidilutive.
The following is a reconciliation of the Company’s basic and diluted income (loss) per share calculation:
|
Fiscal
2018 |
Fiscal
2017 |
Fiscal
2016 |
||||||||||
|
Numerator for basic income (loss) per share: |
||||||||||||
|
Net income (loss) from continuing operations |
$ | (125,480 | ) | 22,023 | 14,700 | |||||||
|
Inducement fee paid upon conversion of Series J preferred stock |
— | — | (3,657 | ) | ||||||||
|
Preferred stock dividends paid in shares |
— | — | (1,783 | ) | ||||||||
|
Accretion of dividends on preferred stock |
— | — | (4,204 | ) | ||||||||
|
Less allocation of dividends to participating securities |
(80 | ) | (576 | ) | (1,219 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) from continuing operations available to common shareholders |
(125,560 | ) | 21,447 | 3,837 | ||||||||
|
Net loss from discontinued operations available to common shareholders |
— | — | (39,146 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) available to common shareholders |
$ | (125,560 | ) | 21,447 | (35,309 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Numerator for diluted income (loss) per share: |
||||||||||||
|
Net income (loss) from continuing operations available to common shareholders |
$ | (125,560 | ) | 21,447 | 3,837 | |||||||
|
Accretion of dividends on preferred stock (a) |
— | — | — | |||||||||
|
Allocation of undistributed earnings to participating securities |
— | — | — | |||||||||
|
Less diluted allocation of undistributed earnings to participating securities |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) from continuing operations available to common shareholders |
(125,560 | ) | 21,447 | 3,837 | ||||||||
|
Net loss from discontinued operations available to common shareholders |
— | — | (39,146 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) available to common shareholders |
$ | (125,560 | ) | 21,447 | (35,309 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Denominator for basic income (loss) per share: |
||||||||||||
|
Basic weighted average common shares |
72,588 | 72,188 | 72,410 | |||||||||
|
Denominator for diluted income (loss) per share: |
||||||||||||
|
Basic weighted average shares |
72,588 | 72,188 | 72,410 | |||||||||
|
Average dilutive options |
— | 63 | 118 | |||||||||
|
Average dilutive non-participating securities |
— | 77 | 14 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Diluted weighted average common shares |
72,588 | 72,328 | 72,542 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Basic income (loss) per common share: |
||||||||||||
|
Income (loss) from continuing operations |
$ | (1.73 | ) | 0.30 | 0.05 | |||||||
|
Loss from discontinued operations |
— | — | (0.54 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Basic income (loss) per common share |
$ | (1.73 | ) | 0.30 | (0.49 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Diluted income (loss) per common share: |
||||||||||||
|
Income (loss) from continuing operations |
$ | (1.73 | ) | 0.30 | 0.05 | |||||||
|
Loss from discontinued operations |
— | — | (0.54 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Diluted income (loss) per common share |
$ | (1.73 | ) | 0.30 | (0.49 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| (a) |
Although the Company was in a net income position during fiscal 2016, the dilutive effect of the Company’s convertible preferred shares was excluded from the calculation of income per share using the two-class method because the effect would be antidilutive. |
F-55
| 8. | Pension and Other Postretirement Benefit Plans |
The Company previously maintained a non-contributory defined benefit pension plan (the Pension Plan). On June 18, 2014, the Company’s Board of Directors approved a resolution to terminate the Pension Plan. The Pension Plan termination was effective November 1, 2014 and the accrued benefit for active participants was vested as of such date.
In fiscal 2016, there was a final Pension Plan termination lump-sum opportunity offered to 2,300 active and terminated vested participants at the final Pension Plan termination distribution date. As a result, lump-sum payments of approximately $18,100 were distributed in March 2016 to about 1,800 participants who elected to receive an immediate distribution of their benefit as part of the plan termination lump-sum window. Benefits for the remaining plan population were transferred to Massachusetts Mutual Life Insurance Company for an annuity purchase premium of $34,300. Further, in October 2016, a payment was made by the Company to the Pension Benefit Guaranty Corporation to transfer the liability for benefits payable to 28 missing participants. A final distribution of remaining assets from the trust was made on November 8, 2016.
Pension expense was $3, $276 and $25,330 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. For fiscal 2016, regular annual expense was $4,433, with pension settlement charge of $20,897 from the plan liquidation, for a total pension expense for fiscal 2016 of $25,330.
The Company maintains a defined contribution plan (the Savings Plan) for the benefit of substantially all employees. Total Company contributions charged to employee benefit expenses for the Savings Plan were $11,275, $11,815 and $12,251 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
F-56
| 9. | Income Taxes |
Income (loss) before income taxes for fiscal 2018, fiscal 2017 and fiscal 2016 are as follows:
| Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | ||||||||||
|
Domestic operations |
$ | (137,693 | ) | 47,127 | 6,827 | |||||||
|
Foreign operations |
(2 | ) | (328 | ) | (941 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total income (loss) before taxes |
(137,695 | ) | 46,799 | 5,886 | ||||||||
|
|
|
|
|
|
|
|||||||
Income tax provisions (benefits) for fiscal 2018, fiscal 2017 and fiscal 2016 are as follows:
| Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | ||||||||||
|
Current: |
||||||||||||
|
Federal |
$ | 19,990 | 3,722 | (47,053 | ) | |||||||
|
State |
(1,340 | ) | (7,480 | ) | 3,908 | |||||||
|
Foreign |
— | — | (273 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total current |
18,650 | (3,758 | ) | (43,418 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Deferred: |
||||||||||||
|
Federal |
(52,831 | ) | 25,724 | 21,570 | ||||||||
|
State |
21,966 | 2,810 | 13,018 | |||||||||
|
Foreign |
— | — | 16 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total deferred |
(30,865 | ) | 28,534 | 34,604 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | (12,215 | ) | 24,776 | (8,814 | ) | ||||||
|
|
|
|
|
|
|
|||||||
Reconciliation between the effective income tax rate and the federal statutory income tax rate is as follows:
| Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | ||||||||||
|
Federal statutory income tax rate |
30.3 | % | 35.0 | % | 35.0 | % | ||||||
|
State income taxes, net of federal income tax benefit |
3.0 | 10.0 | 8.3 | |||||||||
|
Changes to unrecognized tax benefits |
1.8 | (5.9 | ) | (111.3 | ) | |||||||
|
Excess executive compensation |
(0.1 | ) | 0.3 | 8.0 | ||||||||
|
Meals and entertainment disallowance |
(0.2 | ) | 0.5 | 5.1 | ||||||||
|
Tax credits |
0.6 | — | (76.3 | ) | ||||||||
|
Changes in valuation allowance |
(26.7 | ) | (1.2 | ) | 108.6 | |||||||
|
Changes in deferred taxes and payables |
(3.7 | ) | 7.0 | (134.8 | ) | |||||||
|
Amounts not deductible for tax |
0.1 | 1.9 | — | |||||||||
|
State law changes |
1.5 | 3.1 | 4.7 | |||||||||
|
Impact of Tax Cuts and Jobs Act |
4.1 | — | — | |||||||||
|
Goodwill impairment |
(1.8 | ) | — | — | ||||||||
|
Other, net |
— | 2.2 | 3.0 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Effective income tax rate |
8.9 | % | 52.9 | % | (149.7 | )% | ||||||
|
|
|
|
|
|
|
|||||||
The Company recorded an income tax benefit of $12,215 in fiscal 2018 compared with an income tax provision of $24,776 and income tax benefit of $8,814 in fiscal 2017 and fiscal 2016, respectively. The current federal tax expense of $19,990 is primarily due to certain reclassifications recorded as a result of the Company changing its tax year during fiscal 2018, with a corresponding deferred tax benefit. The net impact of the tax year-end change on total tax expense was nominal. The Company’s effective tax rate was 8.9%, 52.9% and (149.7)% in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The primary drivers of the effective tax rate in fiscal 2018 include the impact of remeasurement of deferred taxes as a result of the Tax Cuts and Jobs Act, changes in
F-57
deferred taxes and payables and the establishment of valuation allowance against federal and certain state net operating losses. Due to the change in the federal tax rate from 35% to 21%, fiscal year filers are required to use a blended rate for their fiscal year that includes the date of enactment. Accordingly, the federal statutory rate for the Company is 30.3% for fiscal 2018.
The primary drivers of the effective tax rate in fiscal 2017 included changes in uncertain tax positions and changes in deferred taxes and payables. In fiscal 2016, as shown above in the changes in deferred taxes and payables, changes to unrecognized tax benefits and changes in valuation allowance, certain adjustments to earnings were recorded to correct immaterial errors attributable to prior fiscal years. The Company has evaluated the effects of these errors, both qualitatively and quantitatively, and concluded that the correction of these errors in prior period amounts was not material to fiscal 2016 or any previously reported periods, including quarterly reporting.
Effects of the Tax Cuts and Jobs Act
New tax legislation, commonly referred to as the Tax Cuts and Jobs Act or Tax Reform, was enacted on December 22, 2017. Certain aspects of the new law, including the federal corporate tax rate change, had an impact recorded in the Company’s financial statements.
Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act.
Items for which a reasonable estimate was determined include the impact of the change in the corporate tax rate from 35% to 21% and the changes to the non-deductible executive compensation provisions. The Company recorded a benefit of $27,128 on the remeasurement of its deferred tax assets and liabilities during fiscal 2018. During fiscal 2018, the Company also recorded a net tax detriment as a result of the changes to the non-deductible executive compensation provisions. As the Company awaits further guidance regarding the transition rules, the tax impact recorded during fiscal 2018 represents a provisional amount based on the guidance that is available. As no additional guidance on the transition rules has been released, the amount recorded remains provisional.
Other significant provisions that did not have an impact on the fiscal 2018 provision but may impact the Company’s income taxes for future fiscal years include: limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable income, a limitation of net operating losses generated after fiscal 2018 to 80% of taxable income, and entertainment and other expense deduction limitation.
The Company continues to not be subject to any transition tax as there are no untaxed foreign earnings.
F-58
The Company accounts for income taxes using the asset and liability method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. At April 28, 2018 and April 29, 2017, the significant components of the Company’s deferred taxes consisted of the following:
| April 28, 2018 | April 29, 2017 | |||||||
|
Deferred tax assets: |
||||||||
|
Accrued liabilities |
$ | 70,891 | $ | 110,029 | ||||
|
Insurance liability |
4,830 | 7,973 | ||||||
|
Loss and credit carryovers |
43,704 | 31,221 | ||||||
|
Lease transactions |
93 | 7,131 | ||||||
|
Pension and post-retirement healthcare |
340 | 581 | ||||||
|
Stock-based compensation |
2,237 | 3,182 | ||||||
|
Other |
1,542 | 1,379 | ||||||
|
|
|
|
|
|||||
|
Gross deferred tax assets |
123,637 | 161,496 | ||||||
|
|
|
|
|
|||||
|
Valuation allowance |
(45,861 | ) | (7,644 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax assets |
77,776 | 153,852 | ||||||
|
|
|
|
|
|||||
|
Deferred tax liabilities: |
||||||||
|
Prepaid expenses |
(2,779 | ) | (4,670 | ) | ||||
|
Goodwill and intangible asset amortization |
(65,910 | ) | (140,270 | ) | ||||
|
Inventory |
(1,440 | ) | (2,608 | ) | ||||
|
Investment in Barnes & Noble.com |
(53,304 | ) | (78,756 | ) | ||||
|
Depreciation |
(6,387 | ) | (13,680 | ) | ||||
|
|
|
|
|
|||||
|
Gross deferred tax liabilities |
(129,820 | ) | (239,984 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax liabilities |
$ | (52,044 | ) | $ | (86,132 | ) | ||
|
|
|
|
|
|||||
The change in deferred tax asset balance during fiscal 2018 is primarily due to the reduction of the corporate tax rate from 35% to 21% under the Tax Cuts and Jobs Act.
In assessing the realizability of the deferred tax assets, management considered whether it is more likely than not that some or all of the deferred tax assets would be realized. In evaluating the Company’s ability to utilize its deferred tax assets, it considered all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. The Company has recorded a valuation allowance of $45,861 and $7,644 at April 28, 2018 and April 29, 2017, respectively. The increase in the valuation allowance during fiscal 2018 is due principally to additional allowance being established against any non-indefinite lived net operating losses.
At April 28, 2018, the Company had federal net operating loss carryforwards (NOLs) of approximately $128,414 and state net operating loss carryforwards of $212,192 that are available to offset taxable income in its respective taxing jurisdictions. The federal net operating losses begin to expire in 2019 through 2024. The utilization of $54,880 of the federal NOLs are subject to IRC Section 382 and are limited to approximately $6,653 on an annual basis. NOLs not used during a particular period may be carried forward to future years, though not beyond the expiration years. Additionally, the Company had approximately $73,533 and $211,356 of federal and state NOLs, respectively, that have no annual limitation. The Company had state tax credits totaling $10,168, which have an indefinite life.
As of April 28, 2018, the Company had $6,849 of unrecognized tax benefits, all of which, if recognized, would affect the Company’s effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal 2018, fiscal 2017 and fiscal 2016 is as follows:
F-59
|
Balance at May 2, 2015 |
$ | 18,382 | ||
|
Additions for tax positions of the current period |
238 | |||
|
Additions for tax positions of prior periods |
7,433 | |||
|
Reductions due to settlements |
(5,980 | ) | ||
|
Reductions for tax positions of prior periods |
(5,501 | ) | ||
|
|
|
|||
|
Balance at April 30, 2016 |
$ | 14,572 | ||
|
Additions for tax positions of the current period |
337 | |||
|
Additions for tax positions of prior periods |
1,644 | |||
|
Reductions due to settlements |
— | |||
|
Reductions for tax positions of prior periods |
(7,134 | ) | ||
|
|
|
|||
|
Balance at April 29, 2017 |
$ | 9,419 | ||
|
Additions for tax positions of the current period |
— | |||
|
Additions for tax positions of prior periods |
— | |||
|
Reductions due to settlements |
(22 | ) | ||
|
Reductions for tax positions of prior periods |
(2,548 | ) | ||
|
|
|
|||
|
Balance at April 28, 2018 |
$ | 6,849 |
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company recorded net interest and penalties (benefit) expense of approximately $587, $(2,860), and $(7,774) during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. As of April 28, 2018 and April 29, 2017, the Company had net accrued interest and penalties of $974 and $1,561 respectively.
The amount of unrecognized tax benefits decreased primarily due to the expiration of various state statutes. Further, we believe that it is reasonably possible that the total amount of unrecognized tax benefits at April 28, 2018 could decrease by approximately $1,162 within the next 12 months as a result of settlement of certain tax audits or lapses of statutes of limitations, which could impact the effective tax rate.
The Company is subject to U.S. federal income tax as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are primarily from fiscal 2014 and forward.
| 10. | Intangible Assets and Goodwill |
|
Amortizable intangible assets |
Useful
Life |
As of April 28, 2018 | ||||||||||||||
|
Gross Carrying
Amount |
Accumulated
Amortization |
Total | ||||||||||||||
|
Technology |
5-10 | $ | 10,710 | $ | (10,404 | ) | $ | 306 | ||||||||
|
Other |
3-10 | 6,546 | (6,497 | ) | 49 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| $ | 17,256 | $ | (16,901 | ) | $ | 355 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Unamortizable intangible assets |
||||||||||||||||
|
Trade name |
$ | 293,400 | ||||||||||||||
|
Publishing contracts |
15,894 | |||||||||||||||
|
|
|
|||||||||||||||
| $ | 309,294 | |||||||||||||||
|
|
|
|||||||||||||||
|
Total amortizable and unamortizable intangible assets as of April 28, 2018 |
$ | 309,649 | ||||||||||||||
|
|
|
|||||||||||||||
F-60
|
Amortizable intangible assets |
Useful
Life |
As of April 29, 2017 | ||||||||||||||
|
Gross Carrying
Amount |
Accumulated
Amortization |
Total | ||||||||||||||
|
Technology |
5-10 | $ | 10,710 | $ | (9,997 | ) | $ | 713 | ||||||||
|
Distribution contracts |
10 | 8,325 | (8,201 | ) | 124 | |||||||||||
|
Other |
3-10 | 6,458 | (6,384 | ) | 74 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| $ | 25,493 | $ | (24,582 | ) | $ | 911 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Unamortizable intangible assets |
||||||||||||||||
|
Trade name |
$ | 293,400 | ||||||||||||||
|
Publishing contracts |
15,894 | |||||||||||||||
|
|
|
|||||||||||||||
| $ | 309,294 | |||||||||||||||
|
|
|
|||||||||||||||
|
Total amortizable and unamortizable intangible assets as of April 29, 2017 |
$ | 310,205 | ||||||||||||||
|
|
|
|||||||||||||||
All amortizable intangible assets are being amortized over their useful life on a straight-line basis.
|
Aggregate Amortization Expense |
||||
|
For the 52 weeks ended April 28, 2018 |
$ | 644 | ||
|
For the 52 weeks ended April 29, 2017 |
$ | 782 | ||
|
For the 52 weeks ended April 30, 2016 |
$ | 1,012 | ||
|
Estimated Amortization Expense |
||||
|
(12 months ending on or about April 30) |
||||
|
2019 |
$ | 355 | ||
See Note 1 for discussion on impairment testing of unamortizable intangible assets.
The changes in the carrying amount of goodwill, which relate to the B&N Retail reporting unit, for fiscal 2018 and fiscal 2017, are as follows:
|
Total
Company |
||||
|
Balance as of April 30, 2016 |
$ | 211,276 | ||
|
Benefit of excess tax amortization (a) |
(3,895 | ) | ||
|
|
|
|||
|
Balance as of April 29, 2017 |
$ | 207,381 | ||
|
Benefit of excess tax amortization (a) |
(2,176 | ) | ||
|
Goodwill impairment (b) |
(133,612 | ) | ||
|
|
|
|||
|
Balance as of April 28, 2018 |
$ | 71,593 | ||
| (a) |
The tax basis of goodwill arising from an acquisition during the 52 weeks ended January 29, 2005 exceeded the related basis for financial reporting purposes by approximately $96,576. In accordance with ASC 740-10-30, Accounting for Income Taxes, the Company is recognizing the tax benefits of amortizing such excess as a reduction of goodwill as it is realized on the Company’s income tax return. |
| (b) |
See Note 1 for discussion on goodwill impairment testing. |
| 11. | Series J Preferred Stock |
On August 18, 2011, the Company entered into an investment agreement between the Company and Liberty GIC, Inc. (Liberty), pursuant to which the Company issued and sold to Liberty, and Liberty purchased, 204,000 shares of the Company’s Series J Preferred Stock, par value $0.001 per share (Preferred Stock), for an aggregate purchase price of $204,000 in a private placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock were
F-61
convertible, at the option of the holders, into shares of Common Stock representing 16.6% of the Common Stock outstanding as of August 29, 2011 (after giving pro forma effect to the issuance of the Preferred Stock) based on the initial conversion rate. The initial conversion rate reflected an initial conversion price of $17.00 and was subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock was equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock paid quarterly and subject to adjustment in certain circumstances.
On April 8, 2014, Liberty sold the majority of its shares to qualified institutional buyers in reliance on Rule 144A under the Securities Act and had retained an approximate 10% stake of its initial investment. As a result, Liberty no longer had the right to elect two preferred stock directors to the Company’s Board. Additionally, the consent rights and pre-emptive rights, to which Liberty was previously entitled, ceased to apply.
On June 5, 2015, the Company entered into conversion agreements with five beneficial owners (Series J Holders) of its Preferred Stock, pursuant to which each of the Series J Holders had agreed to convert (Conversion) shares of Preferred Stock it beneficially owned into shares of the Company’s common stock, par value $0.001 per share (Company Common Stock), and additionally received a cash payment from the Company in connection with the Conversion.
On July 9, 2015, the Company completed the Conversion. Pursuant to the terms of the Conversion Agreements, the Series J Holders converted an aggregate of 103,995 shares of Preferred Stock into 6,117,342 shares of Company Common Stock, and made an aggregate cash payment to the Series J Holders of $3,657 plus cash in lieu of fractional shares in connection with the Conversion.
The number of shares of Company Common Stock issued was determined based on a conversion ratio of 58.8235 shares of Company Common Stock per share of Preferred Stock converted, which was the conversion rate in the Certificate of the Designations with respect to the Preferred Stock, dated as of August 18, 2011.
On July 10, 2015, the Company gave notice of its exercise of the right to force conversion of all outstanding shares of its Senior Convertible Redeemable Series J Preferred Stock into Company Common Stock pursuant to Section 9 of the Certificate of Designations, Preferences and Relative Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions of Series J Preferred Stock, dated as of August 18, 2011 (the Forced Conversion). The effective date of the Forced Conversion was July 24, 2015. On the date of the Forced Conversion, each share of Series J Preferred Stock was automatically converted into 59.8727 shares of Company Common Stock, which included shares of Company Common Stock reflecting accrued and unpaid dividends on Series J Preferred Stock. Each holder of Series J Preferred Stock received whole shares of Company Common Stock and a cash amount in lieu of fractional shares of Company Common Stock.
As a result of the transactions described above, all shares of Series J Preferred Stock were retired by the Company and are no longer outstanding.
| 12. | Shareholders’ Equity |
On October 20, 2015, the Company’s Board of Directors authorized a stock repurchase program (prior repurchase plan) of up to $50,000 of its common shares. During fiscal 2016, the Company repurchased 2,763,142 shares at a cost of $26,718 under the prior repurchase plan. During fiscal 2017, the Company repurchased 2,019,798 shares at a cost of $23,281 under the prior repurchase plan. On March 15, 2017, subsequent to completing the prior repurchase plan, the Company’s Board of Directors authorized a new stock repurchase program of up to $50,000 of its common shares. Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. The new stock repurchase program has no expiration date and may be suspended or discontinued at any time. The Company’s repurchase plan is intended to comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934. The Company did not repurchase shares under this plan in fiscal 2018 and fiscal 2017. The Company has remaining capacity of $50,000 under the new repurchase program as of April 28, 2018.
F-62
As of April 28, 2018, the Company has repurchased 39,584,907 shares at a cost of approximately $1,087,067 since the inception of the Company’s stock repurchase programs. The repurchased shares are held in treasury.
| 13. | Commitments and Contingencies |
The Company leases retail stores, warehouse facilities, office space and equipment. Substantially all of the B&N Retail stores are leased under non-cancelable agreements, which expire at various dates through 2029 with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for both minimum and percentage rentals and require the Company to pay insurance, taxes and other maintenance costs. Percentage rentals are based on sales performance in excess of specified minimums at various stores.
The Company leases office space in New York, New York and Santa Clara, California for its NOOK operations.
Rental expense under operating leases is as follows:
| Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | ||||||||||
|
Minimum rentals |
$ | 301,057 | 302,784 | 297,322 | ||||||||
|
Percentage rentals |
1,076 | 1,353 | 1,821 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 302,133 | 304,137 | 299,143 | |||||||||
|
|
|
|
|
|
|
|||||||
Future minimum annual rentals, excluding percentage rentals, required under B&N Retail leases that had initial, non-cancelable lease terms greater than one year, and NOOK leases as of April 28, 2018 are:
|
Fiscal Year |
||||
|
2019 |
$ | 316,329 | ||
|
2020 |
267,494 | |||
|
2021 |
200,147 | |||
|
2022 |
151,424 | |||
|
2023 |
88,626 | |||
|
After 2023 |
88,498 | |||
|
|
|
|||
| $ | 1,112,518 | |||
|
|
|
|||
The Company provides for minimum rent expense over the lease terms (including the build-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of tenant allowances) is reflected in other long-term liabilities and accrued liabilities in the accompanying balance sheets.
Purchase obligations, which include hardware and software maintenance contracts and inventory purchase commitments, as of April 28, 2018 are as follows:
|
Less Than 1 Year |
$ | 56,929 | ||
|
1-3 Years |
15,721 | |||
|
3-5 Years |
11 | |||
|
More Than 5 Years |
— | |||
|
|
|
|||
|
Total |
$ | 72,661 | ||
|
|
|
F-63
| 14. | Segment Reporting |
The Company’s two operating segments are B&N Retail and NOOK.
B&N Retail
This segment includes 630 bookstores as of April 28, 2018, primarily under the Barnes & Noble Booksellers trade name. These Barnes & Noble stores generally offer a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toys & Games, DVDs, Music & Vinyl, Gift, Magazine, Bargain products and a dedicated NOOK ® area. The stores also offer a calendar of ongoing events, including author appearances and children’s activities. The B&N Retail segment also includes the Company’s eCommerce website, www.barnesandnoble.com, and its publishing operation, Sterling Publishing Co., Inc.
NOOK
This segment includes the Company’s digital business, including the development and support of the Company’s NOOK ® product offerings. The digital business includes digital content such as eBooks, digital newsstand and sales of NOOK ® devices and accessories to B&N Retail.
Summarized financial information concerning the Company’s reportable segments is presented below:
|
Sales by Segment |
52 weeks ended
April 28, 2018 |
52 weeks ended
April 29, 2017 |
52 weeks ended
April 30, 2016 |
|||||||||
|
B&N Retail |
$ | 3,575,614 | $ | 3,784,655 | $ | 4,028,614 | ||||||
|
NOOK |
111,487 | 146,514 | 191,520 | |||||||||
|
Elimination (a) |
(24,821 | ) | (36,611 | ) | (56,290 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 3,662,280 | $ | 3,894,558 | $ | 4,163,844 | ||||||
|
|
|
|
|
|
|
|||||||
|
Sales by Product Line |
52 weeks ended
April 28, 2018 |
52 weeks ended
April 29, 2017 |
52 weeks ended
April 30, 2016 |
|||||||||
|
Media (b) |
69 | % | 70 | % | 70 | % | ||||||
|
Digital (c) |
3 | % | 3 | % | 5 | % | ||||||
|
Other (d) |
28 | % | 27 | % | 25 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Total |
100 | % | 100 | % | 100 | % | ||||||
|
|
|
|
|
|
|
|||||||
|
Depreciation and Amortization |
52 weeks ended
April 28, 2018 |
52 weeks ended
April 29, 2017 |
52 weeks ended
April 30, 2016 |
|||||||||
|
B&N Retail |
$ | 94,334 | $ | 98,877 | $ | 101,888 | ||||||
|
NOOK |
12,006 | 19,010 | 33,975 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 106,340 | $ | 117,887 | $ | 135,863 | ||||||
|
|
|
|
|
|
|
|||||||
|
Operating Income (Loss) |
52 weeks ended
April 28, 2018 |
52 weeks ended
April 29, 2017 |
52 weeks ended
April 30, 2016 |
|||||||||
|
B&N Retail |
$ | (119,394 | ) | $ | 90,663 | $ | 113,296 | |||||
|
NOOK |
(8,464 | ) | (36,355 | ) | (98,640 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | (127,858 | ) | $ | 54,308 | $ | 14,656 | |||||
|
|
|
|
|
|
|
|||||||
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|
Capital Expenditures |
52 weeks ended
April 28, 2018 |
52 weeks ended
April 29, 2017 |
52 weeks ended
April 30, 2016 |
|||||||||
|
B&N Retail |
$ | 80,670 | $ | 89,706 | $ | 81,277 | ||||||
|
NOOK |
6,981 | 6,552 | 12,997 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 87,651 | $ | 96,258 | $ | 94,274 | ||||||
|
|
|
|
|
|
|
|||||||
|
Total Assets (e) |
As of
April 28, 2018 |
As of
April 29, 2017 |
||||||||||
|
B&N Retail |
$ | 1,724,279 | $ | 1,897,122 | ||||||||
|
NOOK |
25,289 | 35,799 | ||||||||||
|
|
|
|
|
|||||||||
|
Total |
$ | 1,749,568 | $ | 1,932,921 | ||||||||
|
|
|
|
|
|||||||||
| (a) |
Represents sales from NOOK to B&N Retail on a sell-through basis. |
| (b) |
Includes tangible books, music, movies, rentals and newsstand. |
| (c) |
Includes NOOK ® , related accessories, eContent and warranties. |
| (d) |
Includes Toys & Games, café products, gifts and miscellaneous other. |
| (e) |
Excludes intercompany balances. |
A reconciliation of operating income (loss) from reportable segments to income (loss) from continuing operations before taxes in the consolidated financial statements is as follows:
|
52 weeks ended
April 28, 2018 |
52 weeks ended
April 29, 2017 |
52 weeks ended
April 30, 2016 |
||||||||||
|
Reportable segments operating income (loss) |
$ | (127,858 | ) | $ | 54,308 | $ | 14,656 | |||||
|
Interest expense, net and amortization of deferred financing costs |
(9,837 | ) | (7,509 | ) | (8,770 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Consolidated income (loss) before taxes |
$ | (137,695 | ) | $ | 46,799 | $ | 5,886 | |||||
|
|
|
|
|
|
|
|||||||
| 15. | Legal Proceedings |
The Company is involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, securities, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.
The Company records a liability when it believes that it is both probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount of a loss or potential loss. The Company may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if proceedings are in the early stages; (iii) if there is uncertainty as to the outcome of pending proceedings (including motions and appeals); (iv) if there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) if there are significant factual issues to be determined or resolved; (vi) if the proceedings involve a large number of parties; (vii) if relevant law is unsettled or novel or untested legal theories are presented; or (viii) if the proceedings are taking place in jurisdictions where the laws are complex or unclear. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.
F-65
With respect to the legal matters described below, the Company has determined, based on its current knowledge, that the amount of loss or range of loss that is reasonably possible, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company’s business, financial condition, results of operations, or cash flows.
The following is a discussion of the material legal matters involving the Company.
PIN Pad Litigation
As previously disclosed, the Company discovered that PIN pads in certain of its stores had been tampered with to allow criminal access to card data and PIN numbers on credit and debit cards swiped through the terminals. Following public disclosure of this matter on October 24, 2012, the Company was served with four putative class action complaints (three in federal district court in the Northern District of Illinois and one in the Northern District of California), each of which alleged on behalf of national and other classes of customers who swiped credit and debit cards in Barnes & Noble Retail stores common law claims such as negligence, breach of contract and invasion of privacy, as well as statutory claims such as violations of the Fair Credit Reporting Act, state data breach notification statutes, and state unfair and deceptive practices statutes. The actions sought various forms of relief including damages, injunctive or equitable relief, multiple or punitive damages, attorneys’ fees, costs, and interest. All four cases were transferred and/or assigned to a single judge in the United States District Court for the Northern District of Illinois, and a single consolidated amended complaint was filed. The Company filed a motion to dismiss the consolidated amended complaint in its entirety, and in September 2013, the Court granted the motion to dismiss without prejudice. The Plaintiffs then filed an amended complaint, and the Company filed a second motion to dismiss. On October 3, 2016, the Court granted the second motion to dismiss, and dismissed the case without prejudice; in doing so, the Court permitted plaintiffs to file a second amended complaint by October 31, 2016. On October 31, 2016, the plaintiffs filed a second amended complaint, and on January 25, 2017, the Company filed a motion to dismiss the second amended complaint. On June 13, 2017, the Court granted the Company’s motion to dismiss with prejudice. Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Seventh Circuit. On April 11, 2018, the Court of Appeals reversed the District Court’s decision granting the motion to dismiss the case, and remanded the case to the District Court for further proceedings. The Company filed with the Court of Appeals a petition for rehearing and rehearing en banc; that petition was denied on May 10, 2018.
Cassandra Carag individually and on behalf of others similarly situated v. Barnes & Noble, Inc., Barnes & Noble Booksellers, Inc. and DOES 1 through 100 inclusive
On November 27, 2013, former Associate Store Manager Cassandra Carag (Carag) brought suit in Sacramento County Superior Court, asserting claims on behalf of herself and all other hourly (non-exempt) Barnes & Noble employees in California in the preceding four years for unpaid regular and overtime wages based on alleged off-the-clock work, penalties and pay based on missed meal and rest breaks, and for improper wage statements, payroll records, and untimely pay at separation as a result of the alleged pay errors during employment. Via the complaint, Carag seeks to recover unpaid wages and statutory penalties for all hourly Barnes & Noble employees within California from November 27, 2009 to present. On February 13, 2014, the Company filed an answer to the complaint in the state court and concurrently requested removal of the action to federal court. On May 30, 2014, the federal court granted Plaintiff’s motion to remand the case to state court and denied Plaintiff’s motion to strike portions of the answer to the complaint (referring the latter motion to the lower court for future consideration). The Court has not yet scheduled any further hearings or deadlines.
F-66
Café Manager Class Actions
Two former Café Managers have filed separate actions alleging similar claims of entitlement to unpaid compensation for overtime. In each action, the plaintiff seeks to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). Specifically, Christine Hartpence filed a complaint against Barnes & Noble in Philadelphia County Court of Common Pleas on May 26, 2015, alleging that she is entitled to unpaid compensation for overtime under Pennsylvania law and seeking to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). On July 14, 2016, Ms. Hartpence amended her complaint to assert a purported collective action for alleged unpaid overtime compensation under the federal Fair Labor Standards Act (FLSA), by which she sought to act as a class representative for similarly situated Café Managers throughout the United States. On July 27, 2016, Barnes & Noble removed the case to the U.S. District Court of the Eastern District of Pennsylvania. Ms. Hartpence then voluntarily dismissed her complaint and subsequently re-filed a similar complaint in the Philadelphia County Court of Common Pleas. The re-filed complaint alleged only claims of unpaid overtime under Pennsylvania law and class claims under Pennsylvania law that were limited to current and former Café Managers within Pennsylvania. On June 22, 2017, Ms. Hartpence filed an additional, separate action in Philadelphia County Court of Common Pleas in which she repeated her allegations under Pennsylvania law and asserts a similar claim for unpaid wages under New Jersey law, purportedly on behalf of herself and others similarly situated. The Court consolidated the two pending cases on November 1, 2017. On December 8, 2017, Barnes & Noble removed the consolidated action after Ms. Hartpence amended her complaint to add a cause of action under the FLSA in which Ms. Hartpence purported to assert claims on behalf of herself and a national class of all similarly situated Café Managers. The Hartpence matter settled pursuant to a settlement agreement and release. The Court approved the settlement in an Order entered on April 25, 2018.
On September 20, 2016, Kelly Brown filed a complaint against Barnes & Noble in the U.S. District Court for the Southern District of New York in which she also alleges that she is entitled to unpaid compensation under the FLSA and Illinois law. Ms. Brown seeks to represent a national class of all similarly situated Café Managers under the FLSA, as well as an Illinois-based class under Illinois law. On November 9, 2016, Ms. Brown filed an amended complaint to add an additional plaintiff named Tiffany Stewart, who is a former Café Manager who also alleges unpaid overtime compensation in violation of New York law and seeks to represent a class of similarly situated New York-based Café Managers under New York law. On May 2, 2017, the Court denied Plaintiffs’ Motion for Conditional Certification, without prejudice. The Plaintiffs filed a renewed motion for Conditional Certification on November 17, 2017, which is now fully briefed by the parties and pending before the Court. There are currently 23 former Café Managers who have joined the action as opt-in plaintiffs.
Bernardino v. Barnes & Noble Booksellers, Inc.
On June 16, 2017, a putative class action complaint was filed against Barnes & Noble Booksellers, Inc. (B&N Booksellers) in the United States District Court for the Southern District of New York, alleging violations of the federal Video Privacy Protection Act and related New York law. The plaintiff, who seeks to represent a class of subscribers of Facebook, Inc. (Facebook) who purchased DVDs or other video media from the Barnes & Noble website, seeks damages, injunctive relief and attorneys’ fees, among other things, based on her allegation that B&N Booksellers supposedly knowingly disclosed her personally identifiable information to Facebook without her consent when she bought a DVD from Barnes & Noble’s website. On July 10, 2017, the plaintiff moved for a preliminary injunction requiring Barnes & Noble to change the operation of its website, which motion B&N Booksellers opposed. On July 31, 2017, B&N Booksellers moved to compel the case to arbitration, consistent with the terms of use on Barnes & Noble’s website. On August 28,
F-67
2017, the court denied the plaintiff’s motion for a preliminary injunction. On January 31, 2018, the court granted B&N Booksellers’ motion to compel arbitration, and the clerk of court closed the case on February 1, 2018. On March 2, 2018, the plaintiff filed an appeal in the United States Court of Appeals for the Second Circuit from the district court’s grant of B&N Booksellers’ motion to compel arbitration.
| 16. | Discontinued Operations of Barnes & Noble Education, Inc. |
On August 2, 2015, Barnes & Noble completed the spin-off of Barnes & Noble Education, Inc. (Barnes & Noble Education or B&N Education) from Barnes & Noble into an independent public company (the Spin-Off) and distributed, on a pro rata basis, all of the shares of B&N Education common stock to the Company’s stockholders of record as of July 27, 2015. These Barnes & Noble stockholders of record as of July 27, 2015 received a distribution of 0.632 shares of B&N Education common stock for each share of Barnes & Noble common stock held as of the record date. Immediately following the completion of the Spin-Off, the Company’s stockholders owned 100% of the outstanding shares of common stock of B&N Education. Following the Spin-Off, B&N Education operates as an independent public company and as the parent of Barnes & Noble College, trading on New York Stock Exchange under the ticker symbol “BNED”.
In connection with the separation of B&N Education, the Company and B&N Education entered into a Separation and Distribution Agreement on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the Company and B&N Education after the separation, allocate between the Company and B&N Education various assets, liabilities, rights and obligations following the separation and describe the Company’s future commitments to provide B&N Education with certain transition services.
This Spin-Off is expected to be a non-taxable event for Barnes & Noble and its shareholders, and Barnes & Noble’s U.S. shareholders (other than those subject to special rules) generally will not recognize gain or loss as a result of the distribution of B&N Education shares.
The Company has recognized the separation of B&N Education in accordance with ASC 205-20, Discontinued Operations . As such, the historical results of Barnes & Noble Education have been adjusted to include pre-spin B&N Education results, separation-related costs and investment banking fees (as they directly related to the Spin-Off) and exclude corporate allocations with B&N Retail, and have been classified as discontinued operations.
The following financial information presents the discontinued operations for fiscal 2016:
| Fiscal 2016 | ||||
|
Sales |
$ | 238,983 | ||
|
Cost of sales and occupancy |
186,697 | |||
|
|
|
|||
| Gross profit | 52,286 | |||
|
Selling and administrative expenses |
94,933 | |||
|
Depreciation and amortization |
13,100 | |||
|
|
|
|||
|
Operating loss from discontinued operations |
(55,747 | ) | ||
|
Interest expense, net and amortization of deferred financing fees |
3 | |||
|
|
|
|||
|
Loss before income taxes from discontinued operations |
(55,750 | ) | ||
|
Income tax benefit |
(16,604 | ) | ||
|
|
|
|||
|
Net loss from discontinued operations |
$ | (39,146 | ) | |
|
|
|
|||
F-68
| 17. | Barnes & Noble Education, Inc. Transactions |
Direct Costs Incurred Related to On-going Agreements with Barnes & Noble Education, Inc. (Subsequent to the Spin-Off)
In connection with the separation of B&N Education, the Company entered into a Separation and Distribution Agreement with B&N Education on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the parties after the separation and allocate between the parties various assets, liabilities, rights and obligations following the separation, including inventory purchases, employee benefits, intellectual property, information technology, insurance and tax-related assets and liabilities. The agreements also describe the Company’s future commitments to provide B&N Education with certain transition services following the Spin-Off. These agreements include the following:
| • |
a Separation and Distribution Agreement that sets forth the Company’s and B&N Education’s agreements regarding the principal actions that both parties took in connection with the Spin-Off and aspects of this relationship following the Spin-Off. The term of the agreement is perpetual after the Distribution date; |
| • |
a Transition Services Agreement, pursuant to which the Company agreed to provide B&N Education with specified services for a limited time to help ensure an orderly transition following the Spin-Off. The Transition Services Agreement specifies the calculation of B&N Education costs for these services. The agreement will expire and services under it will cease no later than two years following the Spin-Off date or sooner in the event B&N Education no longer requires such services; |
| • |
a Tax Matters Agreement governs the respective rights, responsibilities and obligations of the Company and B&N Education after the Spin-Off with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests). The agreement will expire after two years following the Spin-Off date; |
| • |
an Employee Matters Agreement with B&N Education, addressing employment, compensation and benefits matters, including the allocation and treatment of assets and liabilities arising out of employee compensation and benefits programs, in which B&N Education employees participated prior to the Spin-Off. The agreement will expire and services under it will cease when B&N Education no longer requires such services; and |
| • |
a Trademark License Agreement, pursuant to which the Company grants B&N Education an exclusive license in certain licensed trademarks and a non-exclusive license in other licensed trademarks. The term of the agreement is perpetual after the Spin-Off date. |
Summary of Transactions with Barnes & Noble Education, Inc.
During the 52 weeks ended April 28, 2018, the Company charged B&N Education $25,930 for purchases of inventory and direct costs incurred under the agreements discussed above.
As of April 28, 2018, amounts due from B&N Education for book purchases and direct costs incurred under the agreements discussed above were $7,849.
F-69
| 18. | Certain Relationships and Related Transactions |
The Company believes that the transactions and agreements discussed below (including renewals of any existing agreements) between the Company and related third parties are at least as favorable to the Company as could have been entered into with unrelated parties at the time they were entered into. The Audit Committee of the Board of Directors utilizes procedures in evaluating the terms and provisions of proposed related party transactions or agreements in accordance with the fiduciary duties of directors under Delaware law. The Company’s related party transaction procedures contemplate Audit Committee review and approval of all new agreements, transactions or courses of dealing with related parties, including any modifications, waivers or amendments to existing related party transactions. The Company tests to ensure that the terms of related party transactions are at least as favorable to the Company as could have been obtained from unrelated parties at the time of the transaction. The Audit Committee considers, at a minimum, the nature of the relationship between the Company and the related party, the history of the transaction (in the case of modifications, waivers or amendments), the terms of the proposed transaction, the Company’s rationale for entering the transaction and the terms of comparable transactions with unrelated third parties. In addition, management and internal audit annually analyze all existing related party agreements and transactions and review them with the Audit Committee.
In fiscal 2010, the Company entered into an Aircraft Time Sharing Agreement with LR Enterprises Management LLC (LR Enterprises), which is owned by Leonard Riggio and Louise Riggio, pursuant to which LR Enterprises granted the Company the right to use a jet aircraft owned by it on a time-sharing basis in accordance with, and subject to the reimbursement of certain operating costs and expenses as provided in, the Federal Aviation Regulations (FAR). Such operating costs were $185, $153 and $63 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. LR Enterprises is solely responsible for the physical and technical operation of the aircraft, aircraft maintenance and the cost of maintaining aircraft liability insurance, other than insurance obtained for the specific flight as requested by the Company, as provided in the FAR.
The Company has leases for two locations for its corporate offices with related parties: the first location is leased from an entity, in which Leonard Riggio has a majority interest, under a lease expiring in 2023, and the second location is leased from an entity, in which Leonard Riggio has a minority interest, under a lease expiring in 2023. Both locations were rented at an aggregate annual rent, including real estate taxes, of approximately $10,503, $9,637 and $7,784 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
The Company leased an office/warehouse from a partnership, in which Leonard Riggio had a 50% interest, pursuant to a lease terminated effective December 30, 2015. The space was rented at an annual rent of $456 during fiscal 2016 through the date of termination. Net of subtenant income, the Company paid rent of $179 during fiscal 2016 through the date of termination.
Kimberley A. Van Der Zon is a member of the Company’s Board of Directors. Ms. Van Der Zon leads the Global Board Practice at Egon Zehnder (Egon), a global board advisory, executive search and leadership consulting firm, which she joined in 1999. She had served as Partner of Egon from 2005 to April 2018. The Company had retained Egon to provide recruiting consultation for certain executive positions. Total fees paid to Egon were $253 and $64 during fiscal 2018 and fiscal 2017, respectively.
On February 27, 2017, B&N Education purchased MBS Textbook Exchange, Inc. (MBS), which was then privately-held and majority-owned by affiliates of Leonard Riggio (the MBS Purchase). MBS is a new and used textbook wholesaler, which also sells textbooks online and provides bookstore systems and distant learning distribution services. Following the MBS Purchase, Leonard Riggio, his affiliates and other members of the Riggio family ceased to have any ownership interest in MBS.
F-70
The Company entered into an agreement with MBS in 2009, which had a term of ten years and contained restrictive covenants limiting the ability of the Company to become a used textbook wholesaler and placing certain limitations on MBS’s business activities. The Company also entered into an agreement with MBS in fiscal 2011, pursuant to which MBS agreed to purchase at the end of a given semester certain agreed upon textbooks, which the Company shall have rented to students during such semester. Total sales to MBS under this program were $0 and $2 for fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively. Total outstanding amounts payable to MBS for all arrangements, net of any amounts due, were $480 for fiscal 2017.
The Company purchases new and used textbooks directly from MBS. Total purchases were $8,328 and $7,092 for fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively. MBS sells used books through the Barnes & Noble dealer network. The Company earned a commission of $198 and $268 on the MBS used book sales in fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively. In addition, Barnes & Noble hosts pages on its website, through which Barnes & Noble customers are able to sell used books directly to MBS. The Company is paid a fixed commission on the price paid by MBS to the customer. Total commissions paid to the Company under this arrangement were $47 and $68 for fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively.
In fiscal 2010, the Company entered into an agreement with TXTB.com LLC (TXTB), a subsidiary of MBS, pursuant to which the marketplace program on the Barnes & Noble website was made available through the TXTB website. The Company receives a fee from third-party sellers for sales of marketplace items sold on the TXTB website and, upon receipt of such fee, the Company remits a separate fee to TXTB for those sales. In fiscal 2011, the Company entered into an agreement with TXTB, pursuant to which the Company became the exclusive provider of trade books to TXTB customers through the TXTB website. TXTB receives a commission from the Company on each purchase by a TXTB customer. In fiscal 2013, the Company also entered into an agreement with MBS Direct, a division of MBS, pursuant to which the marketplace program on the Barnes & Noble website was made available through the MBS Direct website. The Company receives a fee from third-party sellers for sales of marketplace items sold on the MBS Direct website and, upon receipt of such fee, the Company remits a separate fee to MBS Direct for those sales. Total commissions paid to TXTB and MBS Direct under these arrangements were $645 and $515 during fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively. Outstanding amounts payable to TXTB and MBS Direct were $5 and $0 for fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively.
The Company was provided with national freight distribution and trucking services by Argix Direct Inc. (Argix), a company in which a brother of Leonard Riggio owned a 20% interest. The contracted relationship between Argix and the Company has terminated due to Argix exiting the industry during fiscal 2016. The Company paid Argix $19,102 for such services during fiscal 2016 through the date of termination.
| 19. | Dividends |
The Company paid a dividend to common stockholders in the amount of $43,638 and $43,887 during fiscal 2018 and fiscal 2017, respectively.
| 20. | Severance |
On February 13, 2018, the Company announced that it has implemented a new labor model for its stores that has resulted in the elimination of certain store positions. The new model will allow stores to adjust staff up or down based on the needs of the business, increase store productivity and streamline store operations. Current year also included home office reductions as part of the Company’s strategic initiatives. The Company recorded a charge of $16,212 for aggregate employee-related severance costs in connection with these actions within selling and administrative expenses during fiscal 2018.
F-71
| 21. | EBook Settlement |
The Company provided credits to eligible customers resulting from the settlement reached with Apple Inc. (Apple) in an antitrust lawsuit filed by various State Attorneys General and private class plaintiffs regarding the price of digital books. The Company’s customers were entitled to $95,707 in total credits as a result of the settlement, which was funded by Apple. If a customer’s credit was not used to make a purchase by June 24, 2017, the entire credit would have expired. The program concluded on July 1, 2017, through which date the Company’s customers had activated $60,397 in credits, of which $56,472 were redeemed. No balances were due from the Apple settlement fund as of April 28, 2018 related to this portion of the program.
On September 7, 2017, the court approved redistribution of remaining funds from the Apple settlement. Customers who redeemed some or all of their credits from the first distribution that concluded on July 1, 2017 were eligible to receive additional credits in October 2017. The Company’s customers were entitled to $14,815 in total credits as a result of the redistribution, which were funded by Apple. This program concluded on April 20, 2018, through which date the Company’s customers had activated $10,851 in credits, of which $10,249 were redeemed. Total receivables from the Apple settlement fund were $452 and $2,478 as of April 28, 2018 and April 29, 2017, respectively.
| 22. | CEO Departure |
On October 26, 2016, the Company entered into a release agreement (the Release Agreement) with its former Chief Executive Officer, Ronald D. Boire. Under the Release Agreement, Mr. Boire and the Company agreed to release claims against each other in connection with Mr. Boire’s termination of employment in exchange for a cash payment contemplated by his employment agreement. In connection with the execution of the Release Agreement, Mr. Boire also agreed to forfeit all equity awards that were granted to him by the Company.
The cash payment in connection with the Release Agreement totaled $4,826. The Company has previously recognized $1,933 in expense relating to the equity awards granted to Mr. Boire during his employment. Taking into account the reversal of those expenses, the Company recorded a net charge related to the cash payment to Mr. Boire in connection with the Release Agreement of $2,892 within selling and administrative expenses during fiscal 2017.
| 23. | Resignation Charge |
On August 2, 2015, Michael P. Huseby resigned from the Company’s Board of Directors and as Chief Executive Officer of the Company, which was contingent upon the successful separation of B&N Education. In connection with his termination of employment, he received severance payments based on the terms of his employment agreement with the Company, effective as of January 7, 2014. Under the terms of his employment agreement, upon a resignation for “Good Reason”, Mr. Huseby was entitled to receive lump-sum severance equal to two times the sum of (a) annual base salary, (b) the average annual incentive compensation paid to the named executive officer with respect to the preceding two completed years and (c) the cost of benefits. In addition, Mr. Huseby was entitled to accelerated vesting of the equity-based awards granted pursuant to his employment agreement. As a result, Mr. Huseby received a severance payment equal to $7,742 and additionally was entitled to 300,000 shares of the Company’s common stock pursuant to the accelerated vesting of the equity-based awards, which were settled for cash based on the closing price of the Company’s common stock on the record date of the Spin-Off in an amount equal to $8,022. The net cash payments related to Mr.
F-72
Huseby’s resignation totaled $15,764 during the second quarter of fiscal 2016. Mr. Huseby’s 300,000 shares have been ratably expensed from the initial grant date, thereby reducing the total resignation charge to $10,510, which was recorded within selling and administrative expenses during fiscal 2016.
| 24. | Selected Quarterly Financial Information (Unaudited) |
A summary of quarterly financial information for fiscal 2018 and fiscal 2017 is as follows:
|
Fiscal 2018 Quarterly Period Ended On |
July 29,
2017 |
October 28,
2017 |
January 27,
2018 |
April 28,
2018 |
Fiscal
Year 2018 |
|||||||||||||||
|
Sales |
$ | 853,316 | 791,117 | 1,231,771 | 786,076 | $ | 3,662,280 | |||||||||||||
|
Gross profit |
253,481 | 228,695 | 400,026 | 229,001 | 1,111,203 | |||||||||||||||
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|
|
|
|
|
|
|
|
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|
Net loss |
$ | (10,778 | ) | (30,094 | ) | (63,536 | ) | (21,072 | ) | $ | (125,480 | ) | ||||||||
|
Basic loss per common share |
$ | (0.15 | ) | (0.41 | ) | (0.87 | ) | (0.29 | ) | $ | (1.73 | ) | ||||||||
|
Diluted loss per common share |
$ | (0.15 | ) | (0.41 | ) | (0.87 | ) | (0.29 | ) | $ | (1.73 | ) | ||||||||
|
Fiscal 2017 Quarterly Period Ended On |
July 30,
2016 |
October 29,
2016 |
January 28,
2017 |
April 29,
2017 |
Fiscal
Year 2017 |
|||||||||||||||
|
Sales |
$ | 913,882 | 858,548 | 1,300,908 | 821,220 | $ | 3,894,558 | |||||||||||||
|
Gross profit |
277,539 | 255,375 | 436,801 | 242,487 | 1,212,202 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Net income (loss) |
$ | (14,416 | ) | (20,409 | ) | 70,276 | (13,428 | ) | $ | 22,023 | ||||||||||
|
Basic income (loss) per common share |
$ | (0.20 | ) | (0.29 | ) | 0.97 | (0.19 | ) | $ | 0.30 | ||||||||||
|
Diluted income (loss) per common share |
$ | (0.20 | ) | (0.29 | ) | 0.96 | (0.19 | ) | $ | 0.30 | ||||||||||
| 25. | Subsequent Events |
Dividends to Stockholders
On June 13, 2018, the Company announced its Board of Directors declared a quarterly cash dividend of $0.15 per share, payable on July 27, 2018 to stockholders of record at the close of business on July 6, 2018.
F-73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Barnes & Noble, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Barnes & Noble, Inc. (the “Company”) as of April 28, 2018 and April 29, 2017, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended April 28, 2018, and the related notes and the financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 28, 2018 and April 29, 2017, and the results of its operations and its cash flows for each of the three years in the period ended April 28, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of April 28, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated June 21, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
New York, NY
June 21, 2018
F-74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Barnes & Noble, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Barnes & Noble, Inc.’s internal control over financial reporting as of April 28, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Barnes & Noble, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of April 28, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2018 consolidated balance sheets of the Company as of April 28, 2018 and April 29, 2017, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended April 28, 2018, and the related notes and the financial statement schedules listed in the Index at Item 15(a), and our report dated June 21, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-75
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New York, NY
June 21, 2018
F-76
MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The management of Barnes & Noble, Inc. is responsible for the contents of the Consolidated Financial Statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The Consolidated Financial Statements necessarily include amounts based on judgments and estimates. Financial information elsewhere in the Annual Report is consistent with that in the Consolidated Financial Statements.
The Company maintains a comprehensive accounting system, which includes controls designed to provide reasonable assurance as to the integrity and reliability of the financial records and the protection of assets. An internal audit staff is employed to regularly test and evaluate both internal accounting controls and operating procedures, including compliance with the Company’s statement of policy regarding ethical and lawful conduct. The Audit Committee of the Board of Directors composed of directors who are not members of management, meets regularly with management, the independent registered public accountants and the internal auditors to ensure that their respective responsibilities are properly discharged. Ernst & Young LLP and the Internal Audit Department of the Company have full and free independent access to the Audit Committee. The role of Ernst & Young LLP, an independent registered public accounting firm, is to provide an objective examination of the Consolidated Financial Statements and the underlying transactions in accordance with the standards of the Public Company Accounting Oversight Board. The report of Ernst & Young LLP accompanies the Consolidated Financial Statements.
OTHER INFORMATION
The Company has included the Section 302 certifications of the Chief Executive Officer and the Chief Financial Officer of the Company as Exhibits 31.1 and 31.2 to its Annual Report on Form 10-K for fiscal 2018 filed with the Securities and Exchange Commission, and the Company will submit to the New York Stock Exchange a certificate of the Chief Executive Officer of the Company certifying that he is not aware of any violation by the Company of New York Stock Exchange corporate governance listing standards.
F-77
Code of Business Conduct & Ethics
Last amended April 29, 2015
INTRODUCTION
It is the policy of Barnes & Noble, Inc. (together with its subsidiaries and affiliates, “Barnes & Noble” or the “Company”) to conduct its business with the highest level of integrity and ethical standards and to follow the law. Following the law both in letter and in spirit is the foundation of Barnes & Noble’s ethical standards. In carrying out this policy, Barnes & Noble has adopted the following Code of Business Conduct & Ethics (the “Code”).
The Code applies to all directors, officers and employees of Barnes & Noble. It covers a wide range of business practices and procedures. It does not cover every ethics and compliance issue that may arise, but it sets out basic principles to guide you. Additional policies and procedures that supplement the policies in the Code are in the Employee Handbook and in the HR & Learning section on Barnes & Noble Inside.
In doing your work for Barnes & Noble, you must follow the highest ethical standards and make every effort to avoid even the appearance of improper behavior. In addition, you are responsible for:
| • |
Asking questions if you have doubts about the best course of action in a particular situation; and |
| • |
Reporting ethics and compliance issues promptly. |
If you have questions about the Code, you should ask your supervisor unless a specific section of the Code tells you to contact someone else. Alternatively, you can contact one of the resources listed under Section 15 (“Approaching Ethics and Compliance Issues”) below. To report ethics and compliance issues, you should also follow the guidelines in Section 15 . If you are an executive officer or director, you should see Section 15 for information about how to raise questions and report ethics and compliance issues.
Violations of the Code will be addressed promptly. Individuals who violate the standards in the Code will be subject to appropriate disciplinary action, which may include termination of employment.
| 1. | Compliance with Laws, Rules and Regulations |
Barnes & Noble complies with applicable laws, rules and regulations in conducting its business and expects you to do the same. You do not have to know the details of all the laws, rules and regulations that apply to Barnes & Noble’s business, but you should be familiar with specific legal requirements that apply to your areas of responsibility. If you have questions about particular legal requirements, or what the law permits, you should contact Barnes & Noble’s Legal Department.
| 2. | Conflicts of Interest |
You are expected to act in the best interests of Barnes & Noble and to avoid activities and situations that would interfere in any way with the interests of Barnes & Noble or your responsibilities to Barnes & Noble. If an activity or situation could make it hard for you to do your work for Barnes & Noble objectively or effectively, it may create a conflict of interest. In thinking about whether something creates a conflict, you should remember that:
| • |
Situations involving your immediate family members may create a conflict if they interfere with the interests of Barnes & Noble or your responsibilities to Barnes & Noble. As used herein, immediate family members include your spouse, domestic partner, parent, child or sibling. |
| © April 2018 Barnes & Noble, Inc. All Rights Reserved. | 1 | |
| • |
Situations involving close personal relations other than immediate family members may create a conflict if they interfere with the interests of Barnes & Noble or your responsibilities to Barnes & Noble. As used herein, close personal relations include anyone with whom you have a personal relationship which could project the presence or appearance of a conflict. |
| • |
Situations involving an organization that you or an immediate family member or close personal relation have a significant relationship with, such as a small business, may create a conflict if they interfere with the interests of Barnes & Noble or your responsibilities to Barnes & Noble. |
| • |
Even the appearance of a conflict may be a conflict of interest and affect Barnes & Noble’s relationships with its customers, suppliers and employees. |
The Code cannot list every possible conflict of interest, but some common examples of situations that could create a conflict are:
| • |
Personal Benefits. Receiving improper personal benefits as a result of your position with Barnes & Noble. |
| • |
Competing with Barnes & Noble. Working for a competitor of Barnes & Noble. This includes serving as an employee, consultant or board member, marketing products or services in competition with Barnes & Noble’s business activities, or owning part of a company that competes with Barnes & Noble. Owning less than 1% of the stock of a public company that is a competitor of Barnes & Noble, or investing in mutual funds that hold stock in Barnes & Noble competitors, typically would not create a conflict. |
| • |
Relationships with Other Organizations. Working for a company that does business with Barnes & Noble (such as a customer or supplier). This includes serving as an employee, consultant or board member or owning part of a company that does business with Barnes & Noble. Owning less than 1% of the stock of a public company that does business with Barnes & Noble, or investing in mutual funds that hold stock in public companies that do business with Barnes & Noble, typically would not create a conflict. |
| • |
Business Opportunities. Taking for yourself business opportunities that you learn about through your position with Barnes & Noble. See Section 5 below for more information. |
| • |
Gifts and Entertainment. Offering, giving, soliciting or accepting gifts, money, services or anything of value when doing so may influence, or be perceived as influencing, a decision or action. See Section 7 below for more information. |
| • |
Working with Immediate Family Members or Close Personal Relations. Working in the same department at Barnes & Noble, or having a supervisor/subordinate relationship, with an immediate family member or a close personal relation. |
Barnes & Noble recognizes that actual or potential conflicts of interest may arise from time to time. You must disclose any actual or potential conflicts of interest to us. Many conflicts can be avoided or appropriately managed if they are disclosed and approved. Sometimes, steps can be taken to manage the conflict, such as seeing that you do not participate in making decisions on Barnes & Noble’s behalf about a matter where you have a conflict. Remember, having a conflict of interest is not necessarily a violation of the Code, but failing to disclose it is.
| 2 | © April 2018 Barnes & Noble, Inc. All Rights Reserved. | |
The first step in addressing an actual or potential conflict is to inform your supervisor of the situation. Conflicts of interest may not always be clear-cut, so you should also contact Human Resources if you have questions about whether something creates a conflict. If you are an executive officer or director, you should contact Barnes & Noble’s General Counsel.
| 3. | Charitable, Government and Other Outside Activities |
Barnes & Noble encourages you to participate in projects and causes that help your local community. Your private life is very much your own, and in most cases, activities like volunteering for a charity or serving in local government are unlikely to affect what you do for Barnes & Noble. At the same time, you should be sensitive to the possibility that participating in charitable, government or other outside activities could interfere with your obligations to Barnes & Noble or create a conflict of interest. You should avoid the activity if this would or could happen. When you get involved in outside activities, you should remember that you are participating on your own behalf and are not representing Barnes & Noble.
In addition, if you are an executive officer or director, before accepting a board seat at another for-profit organization, you should obtain approval from the Audit Committee.
| 4. | Insider Trading |
In the course of your work for Barnes & Noble, you may learn information about Barnes & Noble or other companies that has not been made public. Using non-public, or “inside,” information for your own or others’ financial benefit is unethical and may also violate the law. U.S. laws prohibit a person who has “material” inside information about a company from trading the company’s stock (or other securities of the company, such as options, puts or calls) and from disclosing this information to other people who may trade. Violation of these laws may result in civil and criminal penalties, including fines and prison sentences.
Material inside information includes information that is not available to the general public and that could influence a reasonable investor to buy, sell or hold stock or other securities. It is not possible to identify all the information that could be viewed as material, but some examples include non-public information about: (a) Barnes & Noble’s financial performance, including earnings and dividend decisions; (b) significant acquisitions, divestitures or other business transactions; (c) announcements about major new products or services; (d) major new contracts; (e) changes in senior management or Board members; and (f) other significant activities affecting Barnes & Noble.
Some guidelines that can help you avoid improper trading based on inside information are:
| • |
If you know that Barnes & Noble is about to make an announcement that could affect the price of its stock, you should not buy or sell Barnes & Noble stock on the open market until the information becomes available to the general public. |
| • |
If you know that Barnes & Noble is about to announce a new product or make a purchasing decision that could affect the stock price of a Barnes & Noble supplier or another company, you should not buy or sell the stock of that company until the information becomes available to the general public. |
| • |
You should not buy or sell the stock of a Barnes & Noble customer or supplier if you have inside information about that company. |
| © April 2018 Barnes & Noble, Inc. All Rights Reserved. | 3 | |
| • |
You should not disclose inside information to other Barnes & Noble employees who do not have a business need to know the information or to anyone outside of Barnes & Noble. Disclosing inside information to other people who buy or sell a company’s stock based on the information violates U.S. insider trading laws and can result in the same penalties that apply if you trade yourself, even if you do not receive any money or benefit from trades made by the other people. |
You should read and ensure you fully understand Barnes & Noble’s Insider Trading policy. If you are uncertain about whether you can buy or sell Barnes & Noble stock or the securities of another company that you learn about through your work at Barnes & Noble, you should contact Barnes & Noble’s Legal Department before buying or selling.
| 5. | Business Opportunities |
As a director, officer or employee of Barnes & Noble, you owe a duty to the company to advance its interests when the opportunity to do so arises. You may not use company property or information, or your position with Barnes & Noble, for improper personal gain or gain for an immediate family member or close personal relation.
In addition, unless you obtain prior approval, you may not participate in a business opportunity that you reasonably expect may be of interest to Barnes & Noble, or a business opportunity that you learn about through your work at Barnes & Noble if it relates to the company’s current or potential business. To obtain approval, you should contact your supervisor. If you are an executive officer or director, you should contact Barnes & Noble’s General Counsel.
| 6. | Competition and Fair Dealing |
Barnes & Noble seeks to outperform its competition fairly and honestly, and to obtain competitive advantages through superior performance, never through unethical or illegal business practices. Stealing proprietary information, obtaining trade secret information without the owner’s consent, or inducing disclosures by past or present employees of other companies is prohibited. You should make every effort to respect the rights of Barnes & Noble’s customers, suppliers, competitors and employees and to deal fairly with them. You should not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other practice involving unfair dealing.
All directors, officers and employees are required to comply with antitrust and related competition laws in jurisdictions in which we do business. You should not engage a Barnes & Noble competitor in discussions, agreements or understandings about prices or allocations of territory, customers or sales, or share information about company prices, discounts or customers with a competitor. In addition, you should avoid discussing with a competitor any other agreements that inhibit free and open competition or involve tie-in sales or reciprocal transactions without prior authorization from Barnes & Noble’s senior management. If you believe you are dealing with a potential antitrust or competition issue, you should contact Barnes & Noble’s Legal Department.
| 7. | Gifts and Entertainment |
The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage. Actions that you take on behalf of Barnes & Noble should be free from any suggestion that you are giving favorable treatment to individuals or organizations that do business with, or are seeking to do business with Barnes & Noble, or that you received favorable treatment from them.
Gifts offered by employees of different companies vary widely. They can range from advertising novelties and product samples of nominal value, which you may give or accept, to bribes, which you may not give or accept under any circumstances. Gifts include cash, other material goods, services and anything else of value, including promotional premiums and discounts.
| 4 | © April 2018 Barnes & Noble, Inc. All Rights Reserved. | |
You may not offer or give gifts to an individual or organization that Barnes & Noble does business with, or is seeking to do business with, if the gift could influence, or reasonably give the appearance of influencing, decision or action. However, you may give gifts of nominal value, such as an advertising novelty or a product sample. You also may give common courtesies, such as meals and entertainment, that are consistent with customary business practices and are not excessive in value.
You and your immediate family members and close personal relations may not solicit or accept gifts from an individual or organization that does business with, or is seeking to do business with Barnes & Noble, if the gift could influence, or reasonably give the appearance of influencing, a decision or action. However, provided it does not influence or reasonably give the appearance of influencing a purchasing decision, you and your immediate family members and close personal relations may accept gifts of nominal value, such as an advertising novelty or a product sample. Additionally, provided it does not influence or reasonably give the appearance of influencing a purchasing decision, you and your immediate family members and close personal relations also may accept common courtesies, such as meals and entertainment, that are consistent with customary business practices and are infrequent and not excessive in value. The Company may consider a variety of factors in determining what is excessive including but not limited to the value of what is received, the personal benefit to the recipient, the relationship between the provider, the recipient and the Company, the recipient’s position in the Company, the nature of what is provided, and the underlying facts and circumstances. Different rules may apply in the context of dealing with governments and government personnel. Generally speaking, no gifts, regardless of value, should be provided to any government official by the Company or employees on behalf of or to obtain a benefit for the Company, such as for example in the context of any current, previous, or potential procurement or investigation, without the express advance authorization of the Legal Department. See Section 13 below for more information.
Before any gift is exchanged, you should determine if it is permitted under the Code and the Company’s policies. Any questions with regard to gifts and entertainment should be directed to the Barnes & Noble Legal Department.
| 8. | Equal Employment and Working Conditions |
You have a fundamental responsibility to show respect and consideration to your teammates. The diversity of Barnes & Noble’s employees is a tremendous asset. Barnes & Noble is firmly committed to providing equal opportunity in all aspects of employment and does not tolerate any illegal discrimination or harassment of any kind. All employment practices and decisions, including those involving application procedures, recruiting, hiring, placement, job assignment, transfer, promotion, training, compensation, benefits, discipline, leave of absence, layoff, recall and termination, must be conducted without regard to age, race, color, ancestry, national origin, citizenship status, military or veteran status, religion, creed, disability, sex, sexual orientation, marital status, genetic information, gender identity and expression, or any other characteristic protected by applicable laws and not related to the job, and must comply with all applicable laws.
In addition, Barnes & Noble prohibits harassing, retaliatory or discriminatory conduct in the workplace, whether based upon age, race, color, ancestry, national origin, citizenship status, military or veteran status, religion, creed, citizenship status, disability, sex, sexual orientation, marital status, genetic information, gender identity and expression, or any other unlawful basis. This includes sexual harassment, regardless of whether it is committed by supervisory or non-supervisory personnel or any other third party.
| © April 2018 Barnes & Noble, Inc. All Rights Reserved. | 5 | |
| 9. | Health and Safety and Environmental |
Barnes & Noble strives to provide each of its employees with a safe and healthful work environment. You are responsible for maintaining a safe and healthy workplace for yourself and other employees by following safety and health rules and practices and by reporting accidents, injuries and unsafe equipment, practices or conditions and must comply with all environmental rules and regulations.
Violence and threatening behavior are not permitted. All potentially dangerous situations, including threats by co-workers, should be reported immediately to any member of management with whom you feel comfortable.
The Company prohibits employees from being under the influence of drugs, alcohol, or prescription drugs that may impair their ability to perform their job up to standards or hinder the safety of employees and customers. Consumption of alcoholic beverages on Barnes & Noble premises is only permitted, with prior management approval, for company-sponsored events.
| 10. | Record-keeping and Public Communications |
Barnes & Noble requires honest and accurate recording and reporting of information in order to make responsible business decisions. For example, you should report only the actual number of hours that you worked. In addition, for those employees that use business expense accounts, business expenses must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor. You may also obtain rules and guidelines from Barnes & Noble’s Accounting Department. You are also prohibited from knowingly misrepresenting, omitting or causing others to misrepresent or omit, material facts about Barnes & Noble to others in any public disclosures, within or without Barnes & Noble, including Barnes & Noble’s independent auditors.
All of Barnes & Noble’s books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect Barnes & Noble’s transactions and must conform both to applicable legal requirements and to Barnes & Noble’s system of internal controls. All Barnes & Noble business data, records and reports must be prepared truthfully and accurately. Reports and other documents that Barnes & Noble files with or submits to the Securities and Exchange Commission, and other public communications, should contain full, fair, accurate, timely and understandable disclosure. You should retain records in accordance with Barnes & Noble’s record retention policies.
Business records and communications often become public. You should avoid exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies in communications you send in the course of your duties, since these can be misunderstood. This applies equally to business correspondence, e-mail, internal memos, and formal reports.
If you notice an inaccuracy in a company record, or a failure to follow our internal control processes, you should report such inaccuracy or failure through the channels described in Section 15 .
| 11. | Confidentiality |
You must protect confidential information and be careful not to disclose it except when disclosure is required or permitted by law. You should avoid disclosing confidential information to other Barnes & Noble employees who do not have a business need to know the information.
Confidential information includes all information about Barnes & Noble and its business that has not been made public. It also includes non-public information about suppliers and customers, as well as other non-public information that comes to you in the course of performing your duties for Barnes & Noble. The obligation to maintain the confidentiality of this information continues even after your work at Barnes & Noble ends.
| 6 | © April 2018 Barnes & Noble, Inc. All Rights Reserved. | |
For clarity, neither the Code nor any provision hereof, including but not limited to this Section 11, prohibits you from (i) filing and maintaining the confidentiality of a claim with a government agency that is responsible for enforcing a law, such as the Securities and Exchange Commission, (ii) providing confidential information to such a government agency where required or permitted by law, or (iii) cooperating, participating or assisting in any government or regulatory entity investigation or proceeding.
| 12. | Protection and Proper Use of Barnes & Noble Assets |
You should make every effort to protect Barnes & Noble’s assets and use them efficiently. Theft, carelessness, and waste have a direct impact on Barnes & Noble’s profitability. You should use Barnes & Noble’s assets for legitimate business purposes, although incidental non-business use of equipment such as e-mail and telephone systems is permitted in accordance with the Electronic Communication Standards and the Solicitation and Distribution Policies.
The obligation to protect Barnes & Noble’s assets includes its confidential information. This includes intellectual property such as trade secrets, patents, trademarks, and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, customer or employee information provided to you solely in the course of performing your duties and any unpublished financial data and reports. Unless required or permitted by law, unauthorized use or distribution of this information violates Barnes & Noble policy and the Code. It may also be illegal and result in civil or criminal penalties.
| 13. | Political Contributions and Payments to Government Personnel |
You are free to participate in personal political activities, unrelated to Barnes & Noble, on your own time and at your own expense. If you intend to run for election or seek appointment to a government-related position, or otherwise participate in government activities, you should remember the guidelines on conflicts of interest and outside activities in Sections 2 and 3 of the Code.
Federal law and many state and local laws prohibit corporate contributions to political parties or candidates. You should keep in mind that using your work time or Barnes & Noble assets for political activities is tantamount to a political contribution. For this reason, Barnes & Noble’s assets, facilities and resources may not be used for political purposes at any time, except as may be expressly authorized by the Legal Department, and you should avoid even the appearance of doing so. Because of the significant potential legal ramifications, government relations and lobbying activities by Barnes & Noble are conducted under the direction of the Legal Department.
In addition, acceptable practices in the commercial business environment, such as providing meals or entertainment, may be entirely unacceptable if you are dealing with government employees or other people acting on the government’s behalf, and may even violate the law. If you are working with government personnel, you need to be aware of the laws and regulations in this area and follow them.
The Foreign Corrupt Practices Act, a U.S. law, makes it a crime to give or offer to give anything of value (including payments of money), directly or indirectly, to officials of foreign governments (which can include executives and employees of foreign companies in which governments have an ownership interest), foreign political candidates or parties, or any other person in order to obtain or retain business or for the purpose of obtaining special treatment, even if the payment is requested. It is strictly prohibited to make illegal payments to government officials of any country.
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In addition, the U.S. government has a number of laws and regulations about business gratuities that U.S. government personnel may not accept. Promising, offering or delivering a gift, favor or other gratuity to an official or employee of the U.S. government in violation of these rules not only violates the Code but could be a criminal offense. Many state and local governments, as well as foreign governments, have similar rules.
You should contact Barnes & Noble’s Legal Department if you have any questions in this area.
| 14. | Raising Questions and Reporting Potential Ethics and Compliance Issues |
If you encounter an ethics or compliance issue and you are not sure about the best course of action, you should ask for help. In addition, you have a duty to report any ethics or compliance issues promptly, including possible violations of the Code, the law or other Barnes & Noble policies, and to assist Barnes & Noble in preventing and addressing ethics and compliance issues. You are also expected to cooperate fully with Barnes & Noble or governmental authorities in any investigation of alleged ethics or compliance issues and, as described in Sections 11 and 12 of the Code, may disclose confidential information to governmental authorities if disclosure is required or permitted by law.
| 15. | Approaching Ethics and Compliance Issues |
You are expected to promote compliance with the Code. However, in some situations it is difficult to know right from wrong. Since it is not possible to anticipate every situation that will arise, it is important to think about ways to approach ethics and compliance issues. These are the steps to keep in mind:
| • |
Make sure you have all the facts. In order to reach the right solutions, you must be as fully informed as possible. |
| • |
Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This will enable you to focus on the specific question you are facing, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is. |
| • |
Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem. |
| • |
Discuss the problem with your supervisor. This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question and will appreciate being brought into the decision-making process. Remember that it is your supervisor’s responsibility to help solve problems. |
| • |
Seek help from Barnes & Noble resources. |
| - | There may be times when it is not appropriate to discuss an issue with your supervisor, or where you do not feel comfortable approaching your supervisor. If that happens, you should discuss the issue locally with your management team. |
| - | In addition, you may contact We Listen at (877) WE-LISTN (877-935-4786) or welisten@bn.com. Another resource to contact is the Loss & Fraud Prevention hotline at 877-887-2948. |
| - | Another option available to you is calling Barnes & Noble’s Legal Department at 212-633-3300. The Legal Department can put you in direct contact with the appropriate person at Barnes & Noble headquarters. If you prefer to write, address your concerns to: Barnes & Noble Legal Department, 122 Fifth Avenue, New York, New York 10011. |
| 8 | © April 2018 Barnes & Noble, Inc. All Rights Reserved. | |
| • |
You have additional avenues available for reporting accounting-related matters. If an accounting, internal accounting control or auditing matter is involved, you may contact the Chief Financial Officer or the Audit Committee through e-mail at Auditcomm@bn.com, or by regular mail at 122 Fifth Avenue, New York, New York 10011. You can find additional information about the types of concerns you can report through these procedures in the Employee Handbook . |
| • |
You may report ethics and compliance issues anonymously and confidentially. A number of the resources mentioned above (calling the We Listen hotline or the Loss & Fraud Prevention hotline or otherwise contacting We Listen or Loss & Fraud Prevention, writing to Barnes & Noble’s Legal Department, and e-mailing the Chief Financial Officer or the Audit Committee) allow you to make reports anonymously. However, you are encouraged to identify yourself, since this can make follow-up and investigation easier. All reports will be kept confidential to the fullest extent possible, except where disclosure is required to investigate a report or by law. |
| • |
Retaliation for reporting ethics and compliance issues is prohibited. Barnes & Noble does not permit retaliation of any kind against you for reporting potential ethics or compliance issues in good faith or for assisting in the investigation of these issues. Barnes & Noble will take appropriate disciplinary action against individuals who engage in retaliation, which may include termination of employment. |
| • |
Always ask first, act later. If you are unsure of what to do in any situation, seek guidance before you act. |
| • |
What to do if you are an executive officer or director. If you are an executive officer or director, you should contact Barnes & Noble’s General Counsel to raise questions or report ethics and compliance issues. |
| 16. | Waivers |
You should contact Barnes & Noble’s General Counsel for a request for a waiver of any provision of this Code. Any waiver of a provision of this Code for executive officers or directors may be made only by the Board of Directors or a committee of the Board of Directors and will be promptly disclosed as required by applicable laws or regulations.
| 17. | Administrative |
This Code may be changed or amended from time to time at the discretion of Barnes & Noble. Where any applicable law imposes requirements in conflict with or in addition to the provisions of this Code or its enforcement, such law will govern for applicable employees and the Code will be enforced in a manner consistent with such laws. You will be asked periodically to certify that you have read and understand the Code and your obligations. This Code is not a contract of employment and does not alter the at-will status of an employee. The employment of all at-will employees may be terminated at any time, with or without cause, so long as such action does not violate applicable law.
| © April 2018 Barnes & Noble, Inc. All Rights Reserved. | 9 | |
Exhibit 21.1
Significant Subsidiaries of Barnes & Noble, Inc.
| 1. | Barnes & Noble Booksellers, Inc., a Delaware corporation. |
| 2. | Barnes & Noble Marketing Services LLC, a Virginia limited liability company. |
| 3. | Barnes & Noble Purchasing, Inc., a New York corporation. |
| 4. | Barnes & Noble Services, Inc., a New York corporation. |
| 5. | NOOK Digital, LLC, a Delaware limited liability company. |
| 6. | Sterling Publishing Co., Inc., a Delaware corporation. |
| 7. | Barnes & Noble Café LLC, a Delaware limited liability company. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-3 No. 333-201222, No. 333-23855, No. 333-69731, No. 33-84826 and No. 33-89258) of Barnes & Noble, Inc., and
(2) Registration Statement (Form S-8 No. 333-27033, No. 33-89260, No. 333-90538, No. 333-116382, No. 333-59111, No. 333-160560 and No. 333-183869) pertaining to the Employees’ Savings Plan of Barnes & Noble, Inc.;
of our reports dated June 21, 2018, with respect to the consolidated financial statements and schedule of Barnes & Noble, Inc. and the effectiveness of internal control over financial reporting of Barnes & Noble, Inc. included in this Annual Report (Form 10-K) of Barnes & Noble, Inc. for the year ended April 28, 2018.
|
/s/ ERNST & YOUNG LLP |
| New York, New York |
| June 21, 2018 |
Exhibit 31.1
CERTIFICATION BY THE
CHIEF EXECUTIVE OFFICER PURSUANT TO
17 CFR 240.13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Demos Parneros, certify that:
| 1. | I have reviewed this report on Form 10-K of Barnes & Noble, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: June 21, 2018
| By: |
/s/ Demos Parneros |
|
|
Demos Parneros Chief Executive Officer Barnes & Noble, Inc. |
Exhibit 31.2
CERTIFICATION BY THE
CHIEF FINANCIAL OFFICER PURSUANT TO
17 CFR 240.13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Allen W. Lindstrom, certify that:
| 1. | I have reviewed this report on Form 10-K of Barnes & Noble, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: June 21, 2018
|
By: |
/s/ Allen W. Lindstrom |
|
|
Allen W. Lindstrom Chief Financial Officer Barnes & Noble, Inc. |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Barnes & Noble, Inc. (the “Company”) on Form 10-K for the period ended April 28, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Demos Parneros, Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Demos Parneros |
| Demos Parneros |
| Chief Executive Officer |
| Barnes & Noble, Inc. |
| June 21, 2018 |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Barnes & Noble, Inc. (the “Company”) on Form 10-K for the period ended April 28, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Allen W. Lindstrom, Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Allen W. Lindstrom |
| Allen W. Lindstrom |
| Chief Financial Officer |
| Barnes & Noble, Inc. |
| June 21, 2018 |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.