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BKS > SEC Filings for BKS > Form 10-Q on 8-Dec-2011All Recent SEC Filings

Show all filings for BARNES & NOBLE INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BARNES & NOBLE INC


8-Dec-2011

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

The primary sources of Barnes & Noble, Inc.'s (Barnes & Noble or the Company) 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 $23.6 million as of October 29, 2011, compared with $30.2 million as of October 30, 2010.

Merchandise inventories increased $75.6 million, or 4.3%, to $1.837 billion as of October 29, 2011, compared with $1.761 billion as of October 30, 2010. This increase was primarily due to additional inventories to support the growth in the eReader device and accessories businesses. This increase was partially offset by declines in trade book and textbook inventories, consistent with comparable sales decline in those categories.

The Company's investing activities consist principally of capital expenditures for the Company's website and digital initiatives, new store construction, the maintenance of existing stores and system enhancements for the Company's stores. Capital expenditures totaled $75.5 million and $51.4 million during the 26 weeks ended October 29, 2011 and October 30, 2010, respectively. This increase was primarily due to the build-out of digital shops in the Retail stores, as well as increased digital investments.

On April 29, 2011, the Company entered into an amended and restated credit agreement (the Amended Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, which amends and restates the Credit Agreement entered into on September 30, 2009. Under the Amended Credit Agreement, Lenders are providing up to $1.0 billion in aggregate commitments under a five-year asset-backed revolving credit facility (the Amended Credit Facility), which is secured by eligible inventory with the ability to include eligible real estate and accounts receivable and related assets. Borrowings under the Amended Credit Agreement are limited to a specified percentage of eligible inventories and accounts receivable and accrued interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the Amended Credit Agreement). In addition, the Company has the option to request an increase in commitments under the Amended Credit Agreement by up to $300 million, subject to certain restrictions.

The Amended Credit Agreement requires Availability (as defined in the Amended Credit Agreement) to be greater than the greater of (i) 10% of the Loan Cap (as defined in the Amended Credit Agreement) and (ii) $50 million. In addition, the Amended Credit Agreement contains covenants that limit, among other things, the Company's ability to incur indebtedness, create liens, make investments, make restricted payments, merge or acquire assets, and contains default provisions that are typical for this type of financing, among other things. Proceeds from the Amended Credit Agreement are used for general corporate purposes, including seasonal working capital needs.

The Company had $274.9 million of outstanding debt under its Credit Facility as of October 29, 2011 compared with $376.9 million as of October 30, 2010. The decrease in borrowings was due to proceeds received from the issuance of Series J Preferred Stock, offset primarily by digital investments.


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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 million in a private placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock will be 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 reflects an initial conversion price of $17.00 and is subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock is equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock to be paid quarterly and subject to adjustment in certain circumstances. The entry into the investment agreement and the issuance and sale of the Preferred Stock was approved by the Company's Board of Directors following a recommendation made by a Special Committee of the Board of Directors. In light of the investment by Liberty, the Company and Liberty Media Corporation have ceased discussions regarding Liberty Media's previously announced acquisition proposal. The terms, rights, obligations and preferences of the Preferred Stock are set forth in a Certificate of Designations of the Company, which was filed with the Secretary of State of the State of Delaware on August 18, 2011. For further detail, please see the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 18, 2011.

Based upon the Company's current operating levels, management believes cash and cash equivalents on hand, net cash flows from operating activities, short-term vendor financing and the capacity under the Amended 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 regularly evaluates its capital structure and conditions in the financing markets to ensure it maintains adequate flexibility to successfully execute its business plan.

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. The Company has three operating segments: B&N Retail, B&N College and B&N.com.

Seasonality

The B&N Retail and B&N.com business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the third fiscal quarter, which includes the holiday selling season. The B&N College business is also seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase textbooks for the upcoming semesters.

Business Overview

The Company's financial performance has been adversely impacted in recent years by a number of factors, including the economic downturn, increased competition and the expanding digital market.

The Company's core business is the operation of B&N Retail and B&N College stores, from which it derives the majority of its sales and net income. B&N Retail comparable store sales have declined in recent years due to lower consumer traffic. One of B&N Retail's largest competitors in the sale of physical books, Borders Group, Inc. (Borders), recently completed liquidating all of its stores under Chapter 11 of the Bankruptcy Code. While B&N Retail's sales have benefited from the liquidation of the Borders stores, the Company expects declining


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physical book trends to continue as consumer spending shifts further online and toward digital products. The Company faces increasing competition from the expanding market for electronic books, or "eBooks", eBook readers and digital distribution of content.

Despite these challenges, the Company believes it has attractive opportunities for future development.

The Company has leveraged its unique assets, iconic brands and reach to become a leader in the distribution of digital content. In 2009, the Company entered the eBook market with its acquisition of Fictionwise, a leader in the eBook marketplace, and the popularity of its eBook site continues to grow. Since then, the Company launched its NOOK™ brand of eReading products, which provide a fun, easy-to-use and immersive digital reading experience. With NOOK™, customers gain access to the Company's expansive NOOK Bookstore™ of more than two million digital titles, and the ability to enjoy content across a wide array of popular devices.

In October 2010, Barnes & Noble introduced NOOK Color™, the first full-color touch Reader's Tablet, complementing its NOOK 1st Edition™ and NOOK Wi-Fi 1st Edition™ devices, which offer a paper-like reading experience with a color touch screen for navigation. In May 2011, the Company introduced The All-New NOOK™, The Simple Touch Reader™, the easiest-to-use, most intuitive eReader available that is ultra light, features best-in-class battery performance, a 6-inch full touchscreen and the most advanced E Ink Pearl display at a desirable market price point. On November 7, 2011, Barnes & Noble launched NOOK Tablet™, the Company's fastest and lightest tablet with the best in entertainment. Concurrent with the launch of NOOK Tablet™, the Company also announced enhancements and new low prices for NOOK Color™ and NOOK Simple Touch™.

In addition to NOOK™ devices, the Company makes it easy for customers to enjoy any book, anytime, anywhere with its free line of NOOK™ software specific application, which has won the Webby People's Voice Award. Customers can use Barnes & Noble's free eReading software to access and read books from their personal Barnes & Noble digital library on devices including iPad™, iPhone®, Android™ smartphones and tablets PC and Mac®. The Lifetime Library™ helps ensure that Barnes & Noble customers will always be able to access their digital libraries on NOOK™ products and software-enabled devices and BN.com. The Company also offers NOOK Newsstand™, which provides an extensive selection of digital newspapers and magazines, available in both subscription and single copy format, NOOK Kids™, a collection of digital picture and chapter books for children and NOOK Study™, an innovative study platform and software solution for higher education.

As digital and electronic sales become a larger part of its business, the Company believes its footprint of more than 1,300 stores will continue to be a major competitive asset. The Company plans to integrate its traditional retail, trade book and college bookstores businesses with its electronic and internet offerings, using retail stores in attractive geographic markets to promote and sell digital devices and content. Customers can see, feel and experiment with NOOK™ in the Company's stores.

Although the stores will be just a part of the offering, they will remain a key driver of sales and cash flow as the Company expands its multi-channel relationships with its customers. The Company does not expect to expand the total number of retail stores in the near future.

B&N College provides direct access to a large and well-educated demographic group, enabling the Company to build relationships with students throughout their college years and beyond. The Company also expects to be the beneficiary of market consolidation as more and more schools outsource their bookstore management. The


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Company is in a unique market position to benefit from this trend given its full suite of services: bookstore management, textbook rental and digital delivery.

Although the Company believes cash on hand, cash flows from operating activities, funds available from its senior credit facility and short-term vendor financing provide the Company with adequate liquidity and capital resources for seasonal working capital requirements, the Company may raise additional capital to support the growth of its digital businesses.

Strategic alternative process. On August 3, 2010, the Company's Board of Directors created a Special Committee to review strategic alternatives, including a possible sale of the Company. On May 19, 2011, the Company announced that the Special Committee received a proposal from Liberty Media Corporation to acquire the Company. Following the entry by the Company into the investment agreement between the Company and Liberty, the Company and Liberty Media Corporation have ceased discussions regarding Liberty Media Corporation's previously announced acquisition proposal. For further detail, please see the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 18, 2011 and the Liquidity and Capital Resources section of this Form 10-Q.

Results of Operations

13 and 26 weeks ended October 29, 2011 compared with the 13 and 26 weeks ended October 30, 2010

Sales

The following table summarizes the Company's sales for the 13 and 26 weeks ended
October 29, 2011 and October 30, 2010:



                                            13 weeks ended                                                26 weeks ended
                       October 29,                    October 30,                    October 29,                    October 30,
Dollars in thousands       2011         % Total           2010         % Total           2011         % Total           2010         % Total
B&N Retail             $    917,576         48.5 %    $    930,793         48.9 %    $  1,918,141         57.9 %    $  1,957,062         59.3 %
B&N College                 768,463         40.6 %         796,650         41.8 %         988,254         29.9 %       1,021,512         31.0 %
B&N.com                     205,922         10.9 %         176,703          9.3 %         403,970         12.2 %         321,415          9.7 %

Total Sales            $  1,891,961        100.0 %    $  1,904,146        100.0 %    $  3,310,365        100.0 %    $  3,299,989        100.0 %

During the 13 weeks ended October 29, 2011, the Company's sales decreased $12.2 million, or 0.6%, to $1.892 billion from $1.904 billion during the 13 weeks ended October 30, 2010. The increase or (decrease) by segment is as follows:

• B&N Retail sales for the 13 weeks ended October 29, 2011 decreased $13.2 million, or 1.4%, to $917.6 million from $930.8 million during the same period a year ago, and accounted for 48.5% of total Company sales. This decrease was primarily attributable to a 0.6% decrease in comparable store sales, which decreased sales by $5.1 million and by closed stores that decreased sales by $13.3 million. The 0.6% decrease in comparable sales was primarily due to a decline in trade books, offset by increases in digital products and non-book categories. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc., a wholly-owned subsidiary of the Company.

• B&N College sales decreased $28.2 million, or 3.5%, to $768.5 million during the 13 weeks ended October 29, 2011 from $796.7 million during the 13 weeks ended October 30, 2010. The decrease in sales was primarily due to a higher mix of textbook rentals, which have a lower price than new or used


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textbooks. In addition, a portion of textbook rental sales are deferred over the rental period. For the 13 weeks ended October 29, 2011, closed stores decreased sales by $18.5 million and new B&N College stores contributed to an increase in sales of $20.5 million. Comparable store sales for the 13 weeks ended October 29, 2011 increased 0.4%.

• B&N.com sales increased $29.2 million, or 16.5%, to $205.9 million during the 13 weeks ended October 29, 2011 from $176.7 million during the 13 weeks ended October 30, 2010. Comparable sales for B&N.com increased 38.2% for the 13 weeks ended October 29, 2011. This increase to sales was primarily due to higher sales of devices and digital content.

During the 13 weeks ended October 29, 2011, B&N Retail had no store openings and one store closing, and B&N College added five stores and closed three.

During the 26 weeks ended October 29, 2011, the Company's sales increased $10.4 million, or 0.3%, to $3.310 billion from $3.300 billion during the 26 weeks ended October 30, 2010. The increase or (decrease) by segment is as follows:

• B&N Retail sales for the 26 weeks ended October 29, 2011 decreased $38.9 million, or 2.0%, to $1.918 billion from $1.957 billion during the same period a year ago, and accounted for 57.9% of total Company sales. This decrease was primarily attributable to a 1.1% decrease in comparable store sales, which decreased sales by $20.4 million, and by closed stores that decreased sales by $27.3 million. The decrease in comparable sales was primarily due to a decline in trade books, offset by increases in digital products and non-book categories.

• B&N College sales decreased $33.3 million, or 3.3% to $988.3 million during the 26 weeks ended October 29, 2011 from $1.022 billion during the 26 weeks ended October 30, 2010. The decrease in sales was primarily due to a higher mix of textbook rentals, which have a lower price than new or used textbooks. In addition, a portion of textbook rental sales are deferred over the rental period. For the 26 weeks ended October 29, 2011, closed stores decreased sales by $20.9 million and new B&N College stores contributed to an increase in sales of $24.2 million. Comparable store sales for the 26 weeks ended October 29, 2011 decreased 0.1%.

• B&N.com sales increased $82.6 million, or 25.7%, to $404.0 million during the 26 weeks ended October 29, 2011 from $321.4 million during the 26 weeks ended October 30, 2010. Comparable sales for B&N.com increased 50.0% for the 26 weeks ended October 29, 2011. This increase to sales was primarily due to higher sales of devices and digital content.

During the 26 weeks ended October 29, 2011, B&N Retail had no store openings and two store closings, bringing its total number of Barnes & Noble stores to 703 with 18.4 million square feet, and B&N College added 19 stores and closed 18, ending the period with 637 B&N College stores. As of October 29, 2011, the Company operated 1,340 stores in the fifty states and the District of Columbia.


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Cost of Sales and Occupancy



                                                          13 weeks ended                                            26 weeks ended
                                       October 29,       % of       October 30,       % of       October 29,       % of       October 30,       % of
Dollars in thousands                       2011         Sales           2010         Sales           2011         Sales           2010         Sales
B&N Retail                             $    644,507       70.2 %    $    661,079       71.0 %    $  1,350,206       70.4 %    $  1,391,677       71.1 %
B&N College                                 600,875       78.2 %         627,500       78.8 %         769,510       77.9 %         801,665       78.5 %
B&N.com                                     174,915       84.9 %         165,447       93.6 %         331,427       82.0 %         304,827       94.8 %

Total Cost of Sales and Occupancy      $  1,420,297       75.1 %    $  1,454,026       76.4 %    $  2,451,143       74.0 %    $  2,498,169       75.7 %

The Company's cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation 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.

During the 13 weeks ended October 29, 2011, cost of sales and occupancy decreased $33.7 million, or 2.3%, to $1.420 billion from $1.454 billion during the 13 weeks ended October 30, 2010. Cost of sales and occupancy decreased as a percentage of sales to 75.1% from 76.4% during the same period one year ago. The increase or (decrease) by segment is as follows:

• B&N Retail cost of sales and occupancy decreased as a percentage of sales to 70.2% from 71.0% during the same period one year ago. This decrease was primarily attributable to higher margins realized through improved efficiencies associated with NOOK hardware, and lower occupancy costs, offset by deleveraging against the negative comparable sales of trade books.

• B&N College cost of sales and occupancy decreased as a percentage of sales to 78.2% from 78.8% during the same period one year ago driven by increased textbook rentals and higher margin general merchandise products.

• B&N.com cost of sales and occupancy decreased as a percentage of sales to 84.9% from 93.6% during the same period one year ago. This decrease was primarily attributable to a higher mix of more profitable digital content sales, as well as higher margins realized through improved efficiencies associated with NOOK hardware.

During the 26 weeks ended October 29, 2011, cost of sales and occupancy decreased $47.0 million, or 1.9%, to $2.451 billion from $2.498 billion during the 26 weeks ended October 30, 2010. Cost of sales and occupancy decreased as a percentage of sales to 74.0% from 75.7% during the same period one year ago. The decrease by segment is as follows:

• B&N Retail cost of sales and occupancy decreased as a percentage of sales to 70.4% from 71.1% during the same period one year ago. This decrease was primarily attributable to higher margins realized through improved efficiencies associated with NOOK hardware and lower occupancy costs, offset by deleveraging against the negative comparable sales of trade books.

• B&N College cost of sales and occupancy decreased as a percentage of sales to 77.9% from 78.5% during the same period one year ago driven by increased textbook rentals and higher margin general merchandise products.


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• B&N.com cost of sales and occupancy decreased as a percentage of sales to 82.0% from 94.8% during the same period one year ago. This decrease was primarily attributable to a higher mix of more profitable digital content sales, as well as higher margins realized through improved efficiencies associated with NOOK hardware.

Selling and Administrative Expenses



                                                                13 weeks ended                                              26 weeks ended
                                             October 29,       % of        October 30,       % of        October 29,       % of        October 30,       % of
Dollars in thousands                            2011          Sales           2010          Sales           2011          Sales           2010          Sales
B&N Retail                                  $     252,052       27.5 %    $     268,449       28.8 %    $     501,400       26.1 %    $     538,599       27.5 %
B&N College                                        73,684        9.6 %           73,869        9.3 %          135,642       13.7 %          134,099       13.1 %
B&N.com                                            89,896       43.7 %           61,504       34.8 %          189,708       47.0 %          113,533       35.3 %

Total Selling and Administrative Expenses   $     415,632       22.0 %    $     403,822       21.2 %    $     826,750       25.0 %    $     786,231       23.8 %

Selling and administrative expenses increased $11.8 million, or 2.9%, to $415.6 million during the 13 weeks ended October 29, 2011 from $403.8 million during the 13 weeks ended October 30, 2010. Selling and administrative expenses increased as a percentage of sales to 22.0% from 21.2% during the same period one year ago. The increase or (decrease) by segment is as follows:

• B&N Retail selling and administrative expenses decreased as a percentage of sales to 27.5% from 28.8% during the same period one year ago due primarily to lower legal costs relating to the shareholder rights plan litigation and a proxy contest in the prior year period.

• B&N College selling and administrative expenses increased as a percentage of sales to 9.6% from 9.3% during the same period one year ago primarily attributable to the deleveraging against the increase in textbook rentals.

• B&N.com selling and administrative expenses increased as a percentage of sales to 43.7% from 34.8% during the same period one year ago. This increase was primarily attributable to increased costs to support digital growth, higher legal costs and higher advertising production costs.

Selling and administrative expenses increased $40.5 million, or 5.2%, to $826.8 million during the 26 weeks ended October 29, 2011 from $786.2 million during the 26 weeks ended October 30, 2010. Selling and administrative expenses increased as a percentage of sales to 25.0% from 23.8% during the same period one year ago. The increase (decrease) by segment is as follows:

• B&N Retail selling and administrative expenses decreased as a percentage of sales to 26.1% from 27.5% during the same period one year ago due primarily to lower legal costs.

• B&N College selling and administrative expenses increased as a percentage of sales to 13.7% from 13.1% during the same period one year ago primarily attributable to the deleveraging against the increase in textbook rentals.

• B&N.com selling and administrative expenses increased as a percentage of sales to 47.0% from 35.3% during the same period one year ago. This increase was primarily attributable to increased costs to support digital growth and higher legal costs.


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Depreciation and Amortization



                                                              13 weeks ended                                              26 weeks ended
                                           October 29,       % of        October 30,       % of        October 29,       % of        October 30,       % of
Dollars in thousands                          2011          Sales           2010          Sales           2011          Sales           2010          Sales
B&N Retail                                $      38,884        4.2 %    $      39,919        4.3 %    $      76,821        4.0 %    $      79,321        4.1 %
B&N College                                      11,426        1.5 %           10,758        1.4 %           22,276        2.3 %           21,326        2.1 %
B&N.com                                           7,445        3.6 %            6,100        3.5 %           14,330        3.5 %           13,034        4.1 %

Total Depreciation and Amortization       $      57,755        3.1 %    $      56,777        3.0 %    $     113,427        3.4 %    $     113,681        3.4 %

During the 13 weeks ended October 29, 2011, depreciation and amortization increased $1.0 million, or 1.7%, to $57.8 million from $56.8 million during the same period one year ago.

During the 26 weeks ended October 29, 2011, depreciation and amortization decreased $0.3 million, or 0.2%, to $113.4 million from $113.7 million during the same period last year.

Operating Profit (Loss)



                                             13 weeks ended                                                  26 weeks ended
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