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 $20.2 million as of July 28, 2012, compared with $22.4 million as of July 30, 2011.

Merchandise inventories increased $133.0 million, or 7.3%, to $1.95 billion as of July 28, 2012, compared with $1.81 billion as of July 30, 2011. This increase was due to several factors, including college new stores, timing of college back-to-school rush, expanded title count and increased depth per title in the growing retail Juvenile business, and expanded footage in non-book categories such as Toys & Games and Gift. Receivables, net decreased $12.2 million or 7.8% to $144.3 million as of July 28, 2012, compared to $156.5 million as of July 30, 2011. This decrease was due to lower channel partner balances. Prepaid expenses and other current assets increased $35.7 million or 22.8% to $192.3 million as of July 28, 2012, compared to $156.6 million as of July 30, 2011. This increase was primarily due to higher short-term deferred taxes. Accounts Payable increased $111.3 million or 8.7% to $1.39 billion as of July 28, 2012, compared to $1.28 billion as of July 30, 2011. The increase in Accounts Payable was in proportion to the increase in inventory and was 71% and 70% of merchandise inventory as of July 28, 2012 and July 30, 2011, respectively. Accrued liabilities increased $70.8 million or 17.5% to $474.5 million as of July 28, 2012, compared to $403.7 million as of July 30, 2011. This increase was primarily due to several factors, including timing of expenses, compensation, legal fees, accrued taxes and deferred income. Gift card liabilities increased $11.6 million or 3.9% to $312.9 million as of July 28, 2012, compared to $301.2 million as of July 30, 2011 on higher sales.

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 $26.5 million and $26.6 million during the 13 weeks ended July 28, 2012 and July 30, 2011, respectively.

On April 27, 2012, the Company entered into an amendment (the 2012 Amended Credit Facility) to its existing agreement with Bank of America, N.A. entered into on April 29, 2011, as administrative agent, collateral agent and swing line lender, and other lenders in order to permit the transactions contemplated by the investment agreement among the Company, Morrison Investment Holdings, Inc. (Morrison), and Microsoft Corporation (Microsoft) and to make certain other changes to the Company's 2011 Amended Credit Agreement in connection therewith.

On April 29, 2011, the Company entered into an amended and restated credit agreement (the 2011 Amended Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, which amended and restated the credit agreement (the 2009 Credit Agreement) entered into on September 30, 2009 with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders. Under the 2011 Amended Credit Agreement, Lenders are providing up to $1.0 billion in aggregate commitments under a five-year asset-backed revolving credit facility (the 2011 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 2011 Amended Credit Agreement are limited

to a specified percentage of eligible inventories with the ability to include eligible real estate, 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 2011 Amended Credit Agreement). In addition, the Company has the option to request an increase in commitments under the 2011 Amended Credit Agreement by up to $300.0 million, subject to certain restrictions.

The 2011 Amended Credit Agreement requires Availability (as defined in the 2011 Amended Credit Agreement) to be greater than the greater of (i) 10% of the Loan Cap (as defined in the 2011 Amended Credit Agreement) and (ii) $50 million. In addition, the 2011 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 2011 Amended Credit Agreement are used for general corporate purposes, including seasonal working capital needs.

On July 28, 2012, the Company had borrowings of $282.6 million net of cash on hand against its $1.0 billion credit facility. Compared to the same time last year, this is a reduction of $204.7 million as the Company used the net proceeds from the Liberty investment last August to reduce its debt. The Company had $35.1 million of outstanding letters of credit under the 2012 Amended Credit Facility as of July 28, 2012 compared with $31.2 million as of July 30, 2011.

On April 27, 2012, the Company entered into an investment agreement among the Company, Morrison and Microsoft pursuant to which the Company will form a Delaware limited liability company (NewCo), and transfer to NewCo the Company's digital device, digital content and college bookstore businesses and NewCo will sell to Morrison, and Morrison will purchase, 300 million convertible preferred membership interests in NewCo for an aggregate purchase price of $300.0 million. Concurrently with its entry into this agreement, the Company has also entered into a commercial agreement with Microsoft, pursuant to which, among other things, NewCo will develop and distribute a Windows 8 application for e-reading and digital content purchases, and an intellectual property license and settlement agreement with Microsoft and Microsoft Licensing GP.

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 $204.0 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. 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.

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.

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

Seasonality

The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during its third fiscal quarter, which includes the holiday selling season.

The B&N College business is highly 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. Textbook rentals, which primarily occur at the beginning of the semester, are being recognized over the rental period.

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.

Business Overview

The Company's financial performance has been significantly impacted in recent years by a number of factors, including the economic downturn, increased competition and the expanding digital market. However, recently the Company has benefited from reduced physical bookstore competition in the marketplace, as well as the successful execution of new marketing strategies.

The Company derives the majority of its sales and net income from its B&N Retail and B&N College stores.

B&N Retail comparable store sales trends have improved as one of B&N Retail's largest competitors in the sale of physical books, Borders Group, Inc. (Borders), completed liquidating all of its stores under Chapter 11 of the Bankruptcy Code in early fiscal 2012. While the Company expects declining physical book trends to continue industry-wide as consumer spending shifts further online and toward digital products, it expects to be the beneficiary of further market consolidation as other non-book retailers reduce their presence in the book category. Additionally, the Company continues to experience positive trends in its Juvenile, Gift and Toys & Games businesses as a result of the successful execution of new marketing strategies. Other categories such as Café and Newsstand also improved as a result of increased store traffic.

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, Inc., 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 access to 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. On February 21, 2012, Barnes & Noble launched NOOK Tablet™ - 8GB, a new addition to the highly rated NOOK Tablet™ line. On April 12, 2012, the Company introduced NOOK Simple Touch™ with GlowLightTM, the world's first E Ink device with patent-pending lighting technology that lets you read in the dark.

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 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 will continue 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 the 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. While the Company plans to open a few retail stores in new geographic markets, 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 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.

Results of Operations

13 weeks ended July 28, 2012 compared with the 13 weeks ended July 30, 2011

Sales

The following table summarizes the Company's sales for the 13 weeks ended July 28, 2012 and July 30, 2011:

                                                  13 weeks ended
                              July 28,                        July 30,
      Dollars in thousands      2012          % Total           2011          % Total
      B&N Retail             $ 1,119,387          77.0 %     $ 1,097,252          77.4 %
      B&N College                220,718          15.2 %         220,494          15.5 %
      NOOK                       191,975          13.2 %         191,412          13.5 %
      Elimination                (78,573 )        (5.4 )%        (90,754 )        (6.4 )%

      Total Sales            $ 1,453,507         100.0 %     $ 1,418,404         100.0 %

During the 13 weeks ended July 28, 2012, the Company's sales increased $35.1 million, or 2.5%, to $1.45 billion from $1.42 billion during the 13 weeks ended July 30, 2011. The increase by segment is as follows:

• B&N Retail sales for the 13 weeks ended July 28, 2012 increased $22.1 million, or 2.0%, to $1.12 billion from $1.10 billion during the same period a year ago, and accounted for 77.0% of total Company sales. This increase was primarily attributable to a 4.6% increase in comparable store sales, which increased sales by $43.1 million, offset by closed stores that decreased sales by $16.1 million. The comparable sales increase was driven by higher physical book sales due to the Borders liquidations and bestselling titles. B&N Retail also experienced positive comparable sales in categories where it has relayed its stores and expanded its product assortment, such as Juvenile, Toys & Games, and Gift. Sales of NOOK® products in bookstores declined due primarily to lower average selling prices. B&N Retail also includes its eCommerce business and third-party sales of Sterling Publishing Co., Inc.

• B&N College sales increased $0.2 million, or 0.1%, to $220.7 million during the 13 weeks ended July 28, 2012 from $220.5 million during the 13 weeks ended July 30, 2011. Sales were essentially flat, as new store sales were offset by a higher mix of textbook rentals, which have a lower price than new or used textbooks. Comparable store sales for the 13 weeks ended July 28, 2012 decreased 2.0% during this non back-to-school rush period. New B&N College stores contributed to an increase in sales of $7.3 million during the quarter, while closed stores decreased sales by $3.0 million.

• NOOK sales increased $0.5 million, or 0.3%, to $192.0 million during the 13 weeks ended July 28, 2012 from $191.4 million during the 13 weeks ended July 30, 2011. Digital content sales increased 46.1% for the quarter. Digital content sales are defined to include digital lockers, digital newsstand and the apps business. Device sales revenue declined for the quarter due to lower average selling prices and device production scaling issues related to the NOOK Simple Touch™ with GlowLight ™.

• The elimination represents sales from NOOK to B&N Retail and B&N College that were sold through to the end user.

During the 13 weeks ended July 28, 2012, B&N Retail had no store openings and two store closings, and B&N College had 25 openings and five closings.

Cost of Sales and Occupancy



                                                   13 weeks ended
                                  July 28,        % of        July 30,        % of
          Dollars in thousands      2012         Sales          2011         Sales
          B&N Retail             $   782,651       69.9 %    $   786,803       71.7 %
          B&N College                169,675       76.9 %        169,322       76.8 %
          NOOK                        87,293       77.0 %         74,721       74.2 %

          Total Cost of Sales
          and Occupancy          $ 1,039,619       71.5 %    $ 1,030,846       72.7 %

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, management service agreement costs with schools, 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 July 28, 2012, cost of sales and occupancy increased $8.8 million, or 0.9%, to $1.04 billion from $1.03 billion during the 13 weeks ended July 30, 2011. Cost of sales and occupancy decreased as a percentage of sales to 71.5% from 72.7% 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 69.9% from 71.7% during the same period one year ago. This decrease was primarily attributable to a higher mix of higher margin core products and slightly lower occupancy costs.

• B&N College cost of sales and occupancy increased slightly as a percentage of sales to 76.9% from 76.8% during the same period one year ago.

• NOOK cost of sales and occupancy increased as a percentage of sales to 77.0% from 74.2% during the same period one year ago. This increase in cost of sales and occupancy was primarily due to product markdowns on NOOK® price adjustments as well as higher occupancy costs on increased office space in Palo Alto, CA.

Gross Margin



                                                   13 weeks ended
                                   July 28,       % of       July 30,       % of
            Dollars in thousands     2012        Sales         2011        Sales
            B&N Retail             $ 336,736       30.1 %    $ 310,449       28.3 %
            B&N College               51,043       23.1 %       51,172       23.2 %
            NOOK                      26,109       23.0 %       25,937       25.8 %

            Total Gross Margin     $ 413,888       28.5 %    $ 387,558       27.3 %

The Company's consolidated gross margin increased $26.3 million, or 6.8%, to $413.9 million during the 13 weeks ended July 28, 2012 from $387.6 million during the 13 weeks ended July 30, 2011. This increase was due to the matters discussed above.

Selling and Administrative Expenses



                                                             13 weeks ended
                                             July 28,       % of       July 30,       % of
 Dollars in thousands                          2012        Sales         2011        Sales
 B&N Retail                                  $ 262,175       23.4 %    $ 270,753       24.7 %
 B&N College                                    65,075       29.5 %       63,376       28.7 %
 NOOK                                           82,805       73.0 %       76,989       76.5 %

 Total Selling and Administrative Expenses   $ 410,055       28.2 %    $ 411,118       29.0 %

Selling and administrative expenses decreased $1.1 million, or 0.3%, to $410.0 million during the 13 weeks ended July 28, 2012 from $411.1 million during the 13 weeks ended July 30, 2011. Selling and administrative expenses decreased as a percentage of sales to 28.2% from 29.0% 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 23.4% from 24.7% during the same period one year ago. The current year selling and administrative expenses included the reversal of an incentive compensation accrual related to fiscal 2012. Excluding this item, selling and administrative expenses as a percentage of sales would have decreased to 23.7% from 24.7% during the same period one year ago. This decrease was primarily due to improved store productivity.

• B&N College selling and administrative expenses increased as a percentage of sales to 29.5% from 28.7% during the same period one year ago primarily due to new store openings and increased expenses for digital higher education initiatives.

• NOOK selling and administrative expenses decreased as a percentage of sales to 73.0% from 76.5% during the same period one year ago. The current year selling and administrative expenses included the reversal of an incentive compensation accrual related to fiscal 2012. Excluding this item, selling and administrative expenses as a percentage of sales would have decreased to 76.0% from 76.5% during the same period one year ago. Expenses increased $5.8 million for the quarter primarily to support international expansion plans as well as increased advertising.

Depreciation and Amortization



                                                          13 weeks ended
                                          July 28,       % of       July 30,       % of
    Dollars in thousands                    2012        Sales         2011        Sales
    B&N Retail                            $  40,940        3.7 %    $  39,485        3.6 %
    B&N College                              11,715        5.3 %       10,849        4.9 %
    NOOK                                      5,380        4.7 %        5,337        5.3 %

    Total Depreciation and Amortization   $  58,035        4.0 %    $  55,671        3.9 %

During the 13 weeks ended July 28, 2012, depreciation and amortization increased $2.4 million, or 4.2%, to $58.0 million from $55.7 million during the same period one year ago.

Operating Profit (Loss)



                                                  13 weeks ended
                                July 28,        % of         July 30,        % of
         Dollars in thousands     2012          Sales          2011          Sales
         B&N Retail             $  33,621          3.0 %     $     211          0.0 %
         B&N College              (25,747 )      (11.7 )%      (23,053 )      (10.5 )%
         NOOK                     (62,076 )      (54.7 )%      (56,389 )      (56.0 )%

         Total Operating Loss   $ (54,202 )       (3.7 )%    $ (79,231 )       (5.6 )%

The Company's consolidated operating loss decreased $25.1 million, or 31.7%, to $(54.2) million during the 13 weeks ended July 28, 2012 from $(79.2) million during the 13 weeks ended July 30, 2011. This decrease was due to the matters discussed above.

Interest Expense, Net and Amortization of Deferred Financing Fees



                                                                    13 weeks ended
                                                         July 28,        July 30,        % of
Dollars in thousands                                       2012            2011         Change
Interest Expense, Net and Amortization of Deferred
Financing Fees                                          $    8,941      $    9,442         (5.3 )%

Net interest expense and amortization of deferred financing fees decreased $0.5 million to $8.9 million during the 13 weeks ended July 28, 2012 from $9.4 million during the 13 weeks ended July 30, 2011.

Income Taxes



                                                   13 weeks ended
                             July 28,        Effective       July 30,        Effective
      Dollars in thousands     2012            Rate            2011            Rate
      Income Taxes           $ (22,163 )           35.1 %    $ (32,067 )           36.2 %

The Company had an income tax benefit of $22.2 million during the 13 weeks ended July 28, 2012 compared with an income tax benefit of $32.1 million during the 13 weeks ended July 30, 2011. The Company's effective tax rate was 35.1% and 36.2% . . .