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| BKS > SEC Filings for BKS > Form 10-Q on 11-Jun-2009 | All Recent SEC Filings |
11-Jun-2009
Quarterly Report
Liquidity and Capital Resources
The primary sources of the Company's cash are net cash flows from operating activities, funds available under its senior credit facility and short-term vendor financing.
The Company's cash and cash equivalents were $86.6 million as of May 2, 2009, compared with $19.3 million as of May 3, 2008.
Merchandise inventories decreased $122.6 million, or 9.0%, to $1,233.8 million as of May 2, 2009, compared with $1,356.3 million as of May 3, 2008.
The Company's investing activities consist principally of capital expenditures for new store construction, the maintenance of existing stores and system enhancements for the retail stores and the Company's website. Capital expenditures totaled $22.8 million and $38.3 million during the 13 weeks ended May 2, 2009 and May 3, 2008, respectively. This decrease was primarily the result of 6 new store openings during the 13 weeks ended May 2, 2009 compared to 11 new store openings during the 13 weeks ended May 3, 2008.
The Company has an $850 million revolving credit facility dated as of June 17, 2005, as amended and restated on August 2, 2006 (Revolving Credit Facility). The Revolving Credit Facility has a maturity date of July 31, 2011 and may be increased to $1.0 billion under certain circumstances at the option of the Company. The Revolving Credit Facility has an applicable margin that is applied to loans and standby letters of credit ranging from 0.500% to 1.000% above the stated Eurodollar rate. A fee is paid on commercial letters of credit ranging from 0.2500% to 0.5000%. In addition, a commitment fee ranging from 0.100% to 0.200% is paid on the unused portion of the Revolving Credit Facility. In each case, the applicable rate is based on the Company's consolidated fixed charge coverage ratio. Proceeds from the Revolving Credit Facility are used for general corporate purposes, including seasonal working capital needs.
The Company had no debt outstanding as of May 2, 2009 compared to $86.7 million in borrowings as of May 3, 2008.
Based upon the Company's current operating levels, management believes cash and cash equivalents on hand, net cash flows from operating activities and the capacity under the Revolving Credit Facility will be sufficient to meet the Company's normal working capital and debt service requirements for at least the next twelve months.
The Company paid quarterly cash dividends of $0.25 per share on March 31, 2009 to stockholders of record at the close of business on March 10, 2009. On May 21, 2009, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.25 per share payable on June 30, 2009 to stockholders of record at the close of business on June 9, 2009.
Seasonality
The Company's business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the fourth quarter, which includes the holiday selling season.
Results of Operations
13 weeks ended May 2, 2009 compared with the 13 weeks ended May 3, 2008
Sales
During the 13 weeks ended May 2, 2009, the Company's sales decreased $50.7 million, or 4.4%, to $1.105 billion from $1.156 billion during the 13 weeks ended May 3, 2008. This decrease was primarily attributable to a $35.5 million decrease in sales at Barnes & Noble stores, a $7.2 million decrease in sales at Barnes & Noble.com and a $5.3 million decrease in sales at B. Dalton stores.
Barnes & Noble store sales decreased $35.5 million, or 3.5%, to $989.1 million from $1.025 billion during the same period a year ago, and accounted for 89.5% of total Company sales. The 3.5% decrease in Barnes & Noble store sales was primarily attributable to a 5.7% decrease in comparable store sales or $54.6 million, closed stores that decreased sales by $23.4 million, offset by new Barnes & Noble store sales of $42.2 million.
Barnes & Noble.com sales decreased $7.2 million, or 7.2%, to $93.1 million during the 13 weeks ended May 2, 2009 from $100.3 million during the 13 weeks ended May 3, 2008.
B. Dalton sales decreased $5.3 million, or 32.7%, to $10.8 million during the 13 weeks ended May 2, 2009 from $16.1 million during the 13 weeks ended May 3, 2008. This decrease was primarily attributable to the closing of 33 B. Dalton stores.
During the 13 weeks ended May 2, 2009, the Company opened six Barnes & Noble stores and closed six, bringing its total number of Barnes & Noble stores to 726 with 18.8 million square feet. The Company closed one B. Dalton store, ending the period with 51 B. Dalton stores and 0.2 million square feet. As of May 2, 2009, the Company operated 777 stores in the fifty states and the District of Columbia.
Cost of Sales and Occupancy
During the 13 weeks ended May 2, 2009, cost of sales and occupancy decreased $34.4 million, or 4.3%, to $773.5 million from $807.9 million during the 13 weeks ended May 3, 2008. As a percentage of sales, cost of sales and occupancy increased slightly to 70.0% from 69.9% the same period one year ago. This increase was primarily attributable to the deleveraging of fixed occupancy costs on the negative comparable store sales, partially offset by lower distribution expenses as well as merchandising and supply chain initiatives.
Selling and Administrative Expenses
Selling and administrative expenses decreased $17.3 million, or 5.7%, to $286.6 million during the 13 weeks ended May 2, 2009 from $303.9 million during the 13 weeks ended May 3, 2008. During the first quarter, selling and administrative expenses decreased as a percentage of sales to 25.9% from 26.3% during the prior year period. During the first quarter of fiscal 2008, the Company incurred an $8.3 million charge for a settlement with the State of California regarding the collection of sales and use taxes on sales made by Barnes & Noble.com from 1999 to 2005. Excluding this charge, selling and administrative expenses increased as a percentage of sales to 25.9% from 25.6% the same period one year ago. This increase was primarily due to the deleveraging of fixed expenses with the negative comparable store sales, offset in part by planned cost reductions.
Depreciation and Amortization
During the 13 weeks ended May 2, 2009, depreciation and amortization increased $4.6 million, or 11.0%, to $45.9 million from $41.3 million during the same period last year. This increase was primarily due to depreciation on additional capital expenditures for existing store maintenance, technology investments and new store openings.
Pre-opening Expenses
Pre-opening expenses decreased $2.1 million, or 45.5%, to $2.5 million during the 13 weeks ended May 2, 2009 from $4.5 million for the 13 weeks ended May 3, 2008. This decrease was primarily the result of the timing and volume of new store openings.
Operating Loss
The Company's consolidated operating loss increased $1.5 million, or 85.7%, to $3.2 million during the 13 weeks ended May 2, 2009 from $1.7 million during the 13 weeks ended May 3, 2008. This increase was primarily due to the negative comparable store sales, as well as the matters discussed above.
Interest (Expense) Income, Net and Amortization of Deferred Financing Fees
Interest (expense) income, net and amortization of deferred financing fees, decreased $1.0 million, or 124.7%, to ($0.2) million during the 13 weeks ended May 2, 2009 from $0.8 million during the 13 weeks ended May 3, 2008. The decrease in interest income was primarily due to lower investment rates.
Income Taxes
Income tax benefit during the 13 weeks ended May 2, 2009 was $1.4 million compared with $0.4 million during the 13 weeks ended May 3, 2008. The Company's effective tax rate was 39.92% and 39.79% for the first quarter of fiscal 2009 and fiscal 2008, respectively.
Loss from Discontinued Operations
On February 25, 2009, the Company sold its interest in Calendar Club to Calendar Club and its chief executive officer for $7.0 million, which was comprised of $1.0 million in cash and $6.0 million in notes. As a result of this transaction and the operating loss to the date of the sale, the Company incurred a non-cash after-tax charge of approximately $0.7 million during the 13 weeks ended May 2, 2009. Calendar Club is no longer a subsidiary of the Company and the results of Calendar Club have been classified as discontinued operations in all periods presented.
Net Loss
As a result of the factors discussed above, the Company reported a consolidated net loss of $2.7 million (or $0.05 per diluted share) during the 13 weeks ended May 2, 2009, compared with a consolidated net loss of $2.2 million (or $0.04 per diluted share) during the 13 weeks ended May 3, 2008.
Net Loss attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests was $0.03 million during the 13 weeks ended May 2, 2009 and relates to the Company's 50% outside interest in Begin Smart LLC.
Critical Accounting Policies
Securities and Exchange Commission (SEC) Financial Reporting Release No. 60 requests all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Management of 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.
Merchandise Inventories. Merchandise inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) basis. The Company uses the retail inventory method on the FIFO basis for 97%, 98% and 97% of the Company's merchandise inventories as of May 2, 2009, May 3, 2008 and January 31, 2009, respectively.
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.
Other Long-Lived Assets. The Company's other long-lived assets include property and equipment and amortizable intangibles. At May 2, 2009, the Company had $800.7 million of property and equipment, net of accumulated depreciation, and $12.8 million of amortizable intangible assets, net of amortization, accounting for approximately 29.3% 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 in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company evaluates long-lived assets for impairment at the individual store level, 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.
Goodwill and Unamortizable Intangible Assets. At May 2, 2009, the Company had $254.8 million of goodwill and $69.9 million of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 11.7% of the Company's total assets. SFAS No. 142, Goodwill and Other Intangible Assets, 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. The Company performs a two-step process for impairment testing of goodwill as required by SFAS No. 142. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual impairment test on its goodwill in November 2008 and deemed that no impairment charge was necessary. The Company has noted no subsequent indicators of impairment. The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. Changes in market conditions, among other factors, could have a material impact on these estimates.
Gift Cards. The Company sells gift cards which can be used in stores or on Barnes & Noble.com. 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. Over time, some portion of the gift cards issued is 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 income on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. If actual redemption patterns vary from the Company's estimates, actual gift card breakage may differ from the amounts recorded. The Company also sells online gift certificates for use solely on Barnes & Noble.com, which are treated the same way as gift cards.
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 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.
Disclosure Regarding Forward-Looking Statements
This report may contain certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act)) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including, among others, general economic and market conditions, decreased consumer demand for the Company's products, possible disruptions in the Company's computer or telephone systems, possible risks associated with data privacy and information security, possible work stoppages or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible disruptions or delays in the opening of new stores or the inability to obtain suitable sites for new stores, higher-than-anticipated store closing or relocation costs, higher interest rates, the performance of the Company's online and other initiatives, the performance and successful integration of acquired businesses, the success of the Company's strategic investments, unanticipated increases in merchandise or occupancy costs, unanticipated adverse litigation results or effects, the results or effects of any governmental review of the Company's stock option practices, product shortages, and other factors which may be outside of the Company's control, including those factors discussed in detail in Item 1A, "Risk Factors," in the Company's Form 10-K for the fiscal year ended January 31, 2009, and in the Company's other filings made from time to time with the Securities and Exchange Commission. 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 the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company 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-Q.
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