Barnes & Noble Education Inc BNED
August 11, 2015 - 10:21am EST by
OsoNegro
2015 2016
Price: 12.50 EPS 0 0
Shares Out. (in M): 48 P/E 0 0
Market Cap (in $M): 603 P/FCF 0 0
Net Debt (in $M): -95 EBIT 0 0
TEV ($): 507 TEV/EBIT 0 0

Sign up for free guest access to view investment idea with a 45 days delay.

  • Retail
  • Spin-Off
 

Description

Note to reader – While another member recently posted for the ticker BNED.WI, despite the title, 80% of the discussion was about Barnes and Noble (BKS). After almost two weeks of silence on the message board, I had a different enough take that I wanted to share which was too long to discuss in the comments.

Why does this opportunity still exist? – Despite being the more defensible and attractive of the two businesses, BNED shares have actually underperformed those of BKS, post-split. If you include the period of when issued trading, BNED shares today at $12.50 sit closer to the lower end of its trading range of $15.98 to $11.75.

I am not an event-driven specialist, so I don’t have any specific insight as to what traders are saying at this particular moment. Maybe BKS got lucky and is still benefiting from the positive press around the July release of the book “Go Set a Watchman”. Or maybe the sell-off could be as simple as investors deciding to hold shares in the larger, more liquid, more familiar business, and sell the smaller, lesser known entity. Whatever the reason, let’s just thank Mr. Market for this opportunity.

Valuation – At $12.50 per share at the time of this write-up, BNED has a market cap of $603M. With a net cash balance of $95M, its enterprise value is $507M. It did about $85M in LTM EBITDA. I argue you need to add back $26M of investment spend on their Yuzu software (which will not go on forever), and about $3M in spin-related costs, giving you a PF LTM EBITDA of $114M. Total capex is about $50M per year, so normalized LTM EBITDA – Capex is about $64M.

We can debate how quickly they will add new college stores, but that number is growing. Benjamin Graham summed it up when he said, "The purpose of the margin of safety is to render the forecast unnecessary." I am very happy to pay less than 8x EV/LTM Normalized EBITDA-Capex for a growing business in a duopoly market.   

So upfront the stock is very cheap using normalized LTM figures. I will spend the rest of the write-up explaining why I think the business is defensible and will grow in the future.

Business Overview: BNED operates 720+ college bookstores on college campuses around the nation (only about 150 are branded with the Barnes & Noble name) under exclusive multi-year management agreements, operating as the official bookstore of the university. In addition, these stores have exclusive rights to sell university-licensed apparel and gifts through the bookstore channel, including operating the Universities’ online bookstores.

Campus bookstore industry is a comfortable duopoly - not much share shift between competitors

Of the 47% of schools that outsource bookstore operations, BNED stores account for about 16% - 18%. Privately held Follett (based out of Illinois) is estimated to be slightly larger than BNED. (Note – Direct comparisons are difficult directly because Follett has other businesses.) Nebraska Book Company used to be a distant #3 with ~5% share, until Follett acquired more than 200 of its locations back in June. Despite perceptions (Follett: “folksy Midwesterners”, BNED: “cutthroat New York”), both operate very similarly. Business is usually won or loss based on relationships with the schools. Both are setting their sights on the 53% of schools yet to outsource, rather than beat up each other.

Competitive advantages of the traditional campus bookstore players

1.   College bookstores are the only place where students can use their financial aid/scholarships/student loans to purchase books and other supplies. According to industry surveys, spending on required course materials averaged ~$638 last academic year. (Many sources incorrectly cite $1,200/year, but that includes office stationary, software, hardware, and course fees.) Regardless, this can be a large out-of-pocket cost for students, with ~41% paying for books with financial aid. This benefits BNED because their campus stores’ point of sale systems are connected directly to the school’s financial aid systems. Sure Amazon may be cheaper, but teenagers love to buying things on credit.  

2.   Colleges effectively grant BNED a local monopoly when it comes to advertising to students. People I spoke with repeatedly emphasized that rival textbook sellers are prohibited from advertising on campus. From a former Chegg employee: “You almost have to be there at the moment when the students are literally about to purchase the book.”

3.   The bookstore’s ability to hold significant amounts of inventory on campus is a big competitive advantage – particular during peak rush before each semester. Many colleges can’t, or won’t, let Amazon open a distribution center on or near campus. Freshman and sophomores can get anxious if they don’t have their books in time for class.

4.   Campuses bookstores have the exclusive right to sell collegiate licensed apparel and gifts on the campuses in which they operate. It is estimated that non-book items account for at least 35-40% of college bookstore sales, and have higher than avg. gross margins.

Watch senior management vote with their feet

Michael P. Huseby did an excellent job as CEO of BKS. It is worth noting that post-spin, he is resigning from BKS and joining BNED as its Executive Chairman. I do not have a strong opinion either way on the BNED CEO Max Roberts, so I find it an encouraging sign that Mr. Huseby is voting with his feet, and I am happy to follow him along for the ride.

There are signs that BNED has learned its lessons from their disastrous attempt at selling the NOOK. I don’t expect the Yuzu digital textbook platform to be a cash drain in perpetuity.

Yuzu allows students to organize and manage digital textbooks all in one place, with added digital note-taking, search, and highlighting features. To be clear: Student reception to the product has been very weak, to put it nicely. I think BNED is developing this app just so they have a seat at the table in case the nascent electronic textbooks market ever really develops. I don’t think this is a defensive spend that has to continue forever. What gives me confidence they will be rational? Well, back when he was BKS CEO, Mr. Huseby did right by shareholders by cutting back NOOK losses. And it was really the NOOK hardware that was the biggest cash drain. Yuzu software is hardware agnostic. I assume he will bring this knowledge to BNED, but this needs to be monitored.     

Addressing the Amazon threat

Surprisingly, no one on VIC has discussed Amazon’s entry into this industry. Over the year or so, Amazon has been establishing a physical store presence at 3 U.S. universities (Purdue, UC Davis, University of Massachusetts-Amherst), and counting. This has lead the press to speculate whether or not Amazon intends to more aggressively enter the college bookstore market. Under the name “Amazon Campus”, Amazon will operate co-branded websites with the schools, and open distribution centers where students can pick up packages from code-activated lockers. Similar to BNED, Amazon will pay schools a royalty fee as a percentage of sales.

1. “Amazon Campus” is not a full-fledged store, but more of a pick-up area for students who already buy things on Amazon very similar to Amazon Locker.  As demonstrated by BKS, there is still a large subset of shoppers who want a showroom experience.

2. Amazon’s presence has not eliminated the need for a physical campus store. Some of the reasons the first 3 colleges chose to partner with Amazon are idiosyncratic to their respective institutions, and are not necessarily applicable to other schools. For example:

UMass Amherst – Despite choosing Amazon to handle its textbook sales, Follett will continue to operate a campus store dedicated to higher-margin, non-textbook items.

UC Davis – Despite Amazon, they still have a separate store where they sell all other non-book items. In an article for the blog Inside Higher Ed, a college administrator said that the Amazon store doesn’t compete with the myriad of other products their school stores offer.

Purdue – Several independent stores still operate near campus despite Amazon. The owner of one of these independents said that adjusted for student enrollment, his sales were relatively flat over the past year since Amazon came.   

3. For all the talk of “disruption” in higher education, U.S. colleges and universities are notorious for being resistant to change. Having spoken with administrators who have heard both Amazon as well as the traditional booksellers give their sales pitch, Amazon’s model requires a higher capital investment from the schools and is not that scalable. BNED and Follett bring a consistency many admins desire.

Shift from book purchases to rentals is negative for revenue, but very positive for gross profits

Rentals have a lower price point, but much higher gross margins, so this has allowed BNED to grow gross profits with revenue essentially flat. Gross margins on rented text books are in the high 30%’s to low 40%s, while new book sales are in the low to mid 20%’s. Also, used books get recycled about 75% of the time, but rented books are returned virtually all of the time. This mix shift is positive for BNED’s as it will allow them to earn even more profit over the life-cycle of any given book. 

In conclusion – despite this being a summer of many spinoffs, I believe there is still a very attractive opportunity in BNED to acquire a strong, growing business in a dupoloistic industry, trading at less than 8x EV/Normalized EBITDA-Capex. I am happy to go in greater depth on any of the above points in the comments. 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

-New college store wins can be tracked in real time if you follow higher-education blogs. Financial newswires sometimes miss these headlines

-More sellside firms should start research coverage

 

-Continued shift towards textbook rentals is accretive to gross margins

    sort by   Expand   New

    Description

    Note to reader – While another member recently posted for the ticker BNED.WI, despite the title, 80% of the discussion was about Barnes and Noble (BKS). After almost two weeks of silence on the message board, I had a different enough take that I wanted to share which was too long to discuss in the comments.

    Why does this opportunity still exist? – Despite being the more defensible and attractive of the two businesses, BNED shares have actually underperformed those of BKS, post-split. If you include the period of when issued trading, BNED shares today at $12.50 sit closer to the lower end of its trading range of $15.98 to $11.75.

    I am not an event-driven specialist, so I don’t have any specific insight as to what traders are saying at this particular moment. Maybe BKS got lucky and is still benefiting from the positive press around the July release of the book “Go Set a Watchman”. Or maybe the sell-off could be as simple as investors deciding to hold shares in the larger, more liquid, more familiar business, and sell the smaller, lesser known entity. Whatever the reason, let’s just thank Mr. Market for this opportunity.

    Valuation – At $12.50 per share at the time of this write-up, BNED has a market cap of $603M. With a net cash balance of $95M, its enterprise value is $507M. It did about $85M in LTM EBITDA. I argue you need to add back $26M of investment spend on their Yuzu software (which will not go on forever), and about $3M in spin-related costs, giving you a PF LTM EBITDA of $114M. Total capex is about $50M per year, so normalized LTM EBITDA – Capex is about $64M.

    We can debate how quickly they will add new college stores, but that number is growing. Benjamin Graham summed it up when he said, "The purpose of the margin of safety is to render the forecast unnecessary." I am very happy to pay less than 8x EV/LTM Normalized EBITDA-Capex for a growing business in a duopoly market.   

    So upfront the stock is very cheap using normalized LTM figures. I will spend the rest of the write-up explaining why I think the business is defensible and will grow in the future.

    Business Overview: BNED operates 720+ college bookstores on college campuses around the nation (only about 150 are branded with the Barnes & Noble name) under exclusive multi-year management agreements, operating as the official bookstore of the university. In addition, these stores have exclusive rights to sell university-licensed apparel and gifts through the bookstore channel, including operating the Universities’ online bookstores.

    Campus bookstore industry is a comfortable duopoly - not much share shift between competitors

    Of the 47% of schools that outsource bookstore operations, BNED stores account for about 16% - 18%. Privately held Follett (based out of Illinois) is estimated to be slightly larger than BNED. (Note – Direct comparisons are difficult directly because Follett has other businesses.) Nebraska Book Company used to be a distant #3 with ~5% share, until Follett acquired more than 200 of its locations back in June. Despite perceptions (Follett: “folksy Midwesterners”, BNED: “cutthroat New York”), both operate very similarly. Business is usually won or loss based on relationships with the schools. Both are setting their sights on the 53% of schools yet to outsource, rather than beat up each other.

    Competitive advantages of the traditional campus bookstore players

    1.   College bookstores are the only place where students can use their financial aid/scholarships/student loans to purchase books and other supplies. According to industry surveys, spending on required course materials averaged ~$638 last academic year. (Many sources incorrectly cite $1,200/year, but that includes office stationary, software, hardware, and course fees.) Regardless, this can be a large out-of-pocket cost for students, with ~41% paying for books with financial aid. This benefits BNED because their campus stores’ point of sale systems are connected directly to the school’s financial aid systems. Sure Amazon may be cheaper, but teenagers love to buying things on credit.  

    2.   Colleges effectively grant BNED a local monopoly when it comes to advertising to students. People I spoke with repeatedly emphasized that rival textbook sellers are prohibited from advertising on campus. From a former Chegg employee: “You almost have to be there at the moment when the students are literally about to purchase the book.”

    3.   The bookstore’s ability to hold significant amounts of inventory on campus is a big competitive advantage – particular during peak rush before each semester. Many colleges can’t, or won’t, let Amazon open a distribution center on or near campus. Freshman and sophomores can get anxious if they don’t have their books in time for class.

    4.   Campuses bookstores have the exclusive right to sell collegiate licensed apparel and gifts on the campuses in which they operate. It is estimated that non-book items account for at least 35-40% of college bookstore sales, and have higher than avg. gross margins.

    Watch senior management vote with their feet

    Michael P. Huseby did an excellent job as CEO of BKS. It is worth noting that post-spin, he is resigning from BKS and joining BNED as its Executive Chairman. I do not have a strong opinion either way on the BNED CEO Max Roberts, so I find it an encouraging sign that Mr. Huseby is voting with his feet, and I am happy to follow him along for the ride.

    There are signs that BNED has learned its lessons from their disastrous attempt at selling the NOOK. I don’t expect the Yuzu digital textbook platform to be a cash drain in perpetuity.

    Yuzu allows students to organize and manage digital textbooks all in one place, with added digital note-taking, search, and highlighting features. To be clear: Student reception to the product has been very weak, to put it nicely. I think BNED is developing this app just so they have a seat at the table in case the nascent electronic textbooks market ever really develops. I don’t think this is a defensive spend that has to continue forever. What gives me confidence they will be rational? Well, back when he was BKS CEO, Mr. Huseby did right by shareholders by cutting back NOOK losses. And it was really the NOOK hardware that was the biggest cash drain. Yuzu software is hardware agnostic. I assume he will bring this knowledge to BNED, but this needs to be monitored.     

    Addressing the Amazon threat

    Surprisingly, no one on VIC has discussed Amazon’s entry into this industry. Over the year or so, Amazon has been establishing a physical store presence at 3 U.S. universities (Purdue, UC Davis, University of Massachusetts-Amherst), and counting. This has lead the press to speculate whether or not Amazon intends to more aggressively enter the college bookstore market. Under the name “Amazon Campus”, Amazon will operate co-branded websites with the schools, and open distribution centers where students can pick up packages from code-activated lockers. Similar to BNED, Amazon will pay schools a royalty fee as a percentage of sales.

    1. “Amazon Campus” is not a full-fledged store, but more of a pick-up area for students who already buy things on Amazon very similar to Amazon Locker.  As demonstrated by BKS, there is still a large subset of shoppers who want a showroom experience.

    2. Amazon’s presence has not eliminated the need for a physical campus store. Some of the reasons the first 3 colleges chose to partner with Amazon are idiosyncratic to their respective institutions, and are not necessarily applicable to other schools. For example:

    UMass Amherst – Despite choosing Amazon to handle its textbook sales, Follett will continue to operate a campus store dedicated to higher-margin, non-textbook items.

    UC Davis – Despite Amazon, they still have a separate store where they sell all other non-book items. In an article for the blog Inside Higher Ed, a college administrator said that the Amazon store doesn’t compete with the myriad of other products their school stores offer.

    Purdue – Several independent stores still operate near campus despite Amazon. The owner of one of these independents said that adjusted for student enrollment, his sales were relatively flat over the past year since Amazon came.   

    3. For all the talk of “disruption” in higher education, U.S. colleges and universities are notorious for being resistant to change. Having spoken with administrators who have heard both Amazon as well as the traditional booksellers give their sales pitch, Amazon’s model requires a higher capital investment from the schools and is not that scalable. BNED and Follett bring a consistency many admins desire.

    Shift from book purchases to rentals is negative for revenue, but very positive for gross profits

    Rentals have a lower price point, but much higher gross margins, so this has allowed BNED to grow gross profits with revenue essentially flat. Gross margins on rented text books are in the high 30%’s to low 40%s, while new book sales are in the low to mid 20%’s. Also, used books get recycled about 75% of the time, but rented books are returned virtually all of the time. This mix shift is positive for BNED’s as it will allow them to earn even more profit over the life-cycle of any given book. 

    In conclusion – despite this being a summer of many spinoffs, I believe there is still a very attractive opportunity in BNED to acquire a strong, growing business in a dupoloistic industry, trading at less than 8x EV/Normalized EBITDA-Capex. I am happy to go in greater depth on any of the above points in the comments. 

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    -New college store wins can be tracked in real time if you follow higher-education blogs. Financial newswires sometimes miss these headlines

    -More sellside firms should start research coverage

     

    -Continued shift towards textbook rentals is accretive to gross margins

    Messages


    SubjectE-Books
    Entry08/11/2015 10:43 AM
    MemberWeighingMachine

    As a college student, I'd always thought this would be a great, toll road like business. However that was many, many years ago.  Being old & out of touch with university trends for quite some time, my obvious concern is e-books.  To what extent are e-books a threat to this business (what is penetration today vs. 5 years ago)?  How are these guys positioned in this emerging segment? 


    SubjectCapital allocation
    Entry08/11/2015 11:19 AM
    Memberdarthtrader

    Sorry if I missed it in the writeup or it is covered in the other discussion, but have they indicated clearly what happens to the ~13% of EV that they generate in normalised EBITDA - Capex that they generate each year, assuming the $64m is correct and sustainable? Have they firmly committed to return it or will they potentially spend it going after growth opportunities?

    Thanks a lot


    SubjectRe: Comment
    Entry08/12/2015 09:27 AM
    Memberrhubarb

    BlueViper you hit the nail on the head with the key threat to this business.  I'm hesitant to use too high a terminal multiple here.


    SubjectRe: Re: Comment
    Entry08/12/2015 10:43 AM
    Membermrsox977

    Both of you are missing something critical here.  The market is transitioning from a sale to a rental business.  Even though top line will fall, margins will improve along with profits.  BNED will have a seat at the table by the time digital is the standard.  Profits there should be even better, albeit at the expense of top line.


    Subjectkeep in mind...
    Entry08/12/2015 10:57 AM
    Membermrsox977

    70 percent of college students receive financial aid.....these dollars are only usable in the college's own bookstore (since the college derives income form the bookstore sales) and can not be used to purchase books digital or otherwise from an outside vendor.


    SubjectRe: keep in mind...
    Entry08/12/2015 11:21 AM
    MemberJohnKimble

    So the college gives a student money and then gets some of it back because of their bookstore derived income... why can’t the college just give less money for a student to purchase a digital rental without bookstore involvement?
    I’m just trying to think this through… I’m not convinced either way.
    Mrsox, why do you believe that BNED will have a seat at the table for digital sales? Digital books are a commodity, and I don’t see why a physical retailer needs to be a middleman between a book going from a publisher to a student. It just raises costs for something that is already too expensive. 

     


    SubjectRe: Re: Re: Re: Re: keep in mind...
    Entry08/12/2015 06:58 PM
    Membermrsox977

    Everybody forgets that digital books have been available for a long time now.  Publishers do not sell directly to consumers.  BNED will have a seat at the table via its development of not just a digital textbook platform, but of a full classroom ecosystem.  Liberty Media invested in BKS for this reason, as did MSFT and Pearson.  Pearson is the largest textbook publisher in the world.  If they wanted to go direct to consumer they would not have invested in BKS.  With its new pure play status, BNED will be able to partner with majot publishers looking to penetrate this market.


    SubjectRe: additional points
    Entry08/13/2015 02:22 PM
    Membercuyler1903

    Interesting stuff Deerwood, I don't own this one yet though interesting.  You make a good point about eye strain - I wonder if the advent of Ultra HD screens on tablets and laptops will change that?  I recently upgraded to 4K screens and it is incomparably easier on the eyes.  

    I wonder if the biggest thing this industry has going for it is the fact that nobody really benefits from a move to digital.  Not the professors, not the schools, not the students.  Why not the students, you might ask?  Back when I was in college I had some friends who, every semester, would severely overpurchase their textbooks (especially the expensive ones) and turn around and sell them back used for cash.  I had too much respect for my parents to pull that stunt, but I'm guessing it's fairly common to this day.  So, speaking of beer money, aren't these kids CREATING beer money through the status quo textbook system?

    https://youtu.be/QJY-mGEqKAY?t=1m35s 


    SubjectAbrams Capital adding to their BNED position
    Entry08/14/2015 10:54 AM
    MemberOsoNegro

    http://www.sec.gov/Archives/edgar/data/1634117/000114036115031742/xslF345X03/doc1.xml

    Just wanted to bring to everyone’s attention the recent SEC alert that hit my inbox last night, that Abrams Capital (a long-time holder of BKS pre-spin), has been adding to their BNED position in the past few days. While in the short-term, investing is not a popularity contest, Abrams has a track record of being very right on this name.

     

    Thank you to everyone who has chimed in on the board. I promise to address any of the questions that have not already been answered before the end of the day. (As I’m sure is the case for a few of you, investing is not my full-time job)


    SubjectRe: E-Books (My overall thoughts on the subject)
    Entry08/17/2015 01:14 PM
    MemberOsoNegro

    (Apologies in advance if any of my points are duplicative to what others have said)

    The “shift” to digital textbooks has been the revolution that never ended up happening. I would rank it very low on my list of potential threats here. The situation with digital textbooks is not analogous to what we saw happen in the consumer book market (e.g., Kindles, iPads, etc).

    Here is my rationale (in no particular order):

    -Having spoken with people in the publishing industry, college students strongly prefer print. Some studies have said as much as 92% of students feel they concentrate best in hard copy.

    -In 2014, 65% of 6 to 17-yr old children said they would always want to read books in print—up from 60% two years earlier (http://www.scholastic.com/readingreport/key-findings.htm)

    -You can often buy or rent a hardcover, for less than you can get an electronic book. Also, ebooks cannot be resold, thus increasing the effective price

    -Part of the reason publishers have been trying so hard to push ebooks on the K-12 market (try to hook ‘em while they’re young) has been a de facto acknowledgement they haven’t got much traction with the college market…

    -…But even the K-12 ebook rollout has fallen far short of expectations, to put it nicely. Look up News Corp/Amplify for horror stories of textbook-by-tablet programs going awry.

     

    -Lastly, ebooks work best in education settings where the publisher can do an exclusive deal with the entire school. That might work with a 3rd grade teacher, but that concept is anathema to college professors for value flexibility 


    SubjectRe: Capital allocation
    Entry08/17/2015 01:22 PM
    MemberOsoNegro

    BNED has made it very clear they believe they are in growth mode. Let me say that I don’t have a particularly unique view on capital allocation outside of the company’s public statements, TV interviews, and several high-level calls I have had with Investor Relations over the years.

     

    So this is not a capital returns story like BKS. I am fine with that. I merely used the Adj. LTM EBITDA – Capex as a framework to understand what is “possible”. Again, based on the track record back with BKS, I am willing to bet on management being smart here.   


    SubjectRe: Questions from last thread
    Entry08/17/2015 01:46 PM
    MemberOsoNegro

    Hi mrmgr

    1-FWIW, I have not heard that comment that ROIC on new contracts is bad, so I can’t prove or disprove that point. What I can say is that I do not believe the economics of their deals are getting better or worse than what they historically have been – which is really what I cared about at the time.

    Nebraska was a distant and weak #3, so letting themselves get acquired by the #2 is good, but probably won’t change the competitive landscape all that much. This industry was, and still is, basically a duopoly with rational competitors.

    This point may have gotten edited out between drafts when I was trying to cut down the word count, but I spoke with a college administrator at a school that just put out an RFP (request for proposal) to outsource their bookstore operations. He said the board members of the college were “shocked” that almost a dozen proposals were submitted. The board members were mistakenly of the opinion that this business was going down the drain and nobody would want it. They were very wrong.  

    2-I think textbook sales will continue to steadily shift to rentals vs purchases. I don’t ebooks will be a threat (see my comments on the thread on this), so no, I do not believe textbooks are in terminal decline forever.

    3-Pls see my write-up for my thoughts on Yuzu. I don’t think it is a defensive spend necessarily because college kids don’t like digital textbooks. To be frank, this might be a battle where nobody (not the publishers or BNED) ends up wining. I wouldn’t be surprised if they wave the white flag on Yuzu like they did with the Nook.  In summary, I think it is too early to have a strong opinion on this, but I trust that management will be rational here based on their track record for stopping the bleeding with the Nook...Thanks  


    SubjectRe: University Power / Non-book revenue
    Entry08/17/2015 02:08 PM
    MemberOsoNegro

    Hi Siren. 1) There are indeed some schools who chose to outsource, ended up being unhappy with how BNED or Follett was running the store, and the school decided to take back control. These situations are rare, but they sometimes do happen. I personally have not yet been able to speak with someone at one of these schools so I can’t give you more detail on that right now, but it is on my radar and I’m working on that.  

    So yes, there will be some schools that decide to not use BNED. But I think with all the other issues in higher education that college admins have on their plate, to be honest…they don’t want to be bothered running the store and dealing with textbook rentals and inventory management issues. So I believe that the trend towards more deciding to outsource will continue, even though it will never be 100%.

     

    2) As a rough rule of thumb, new book sales GM’s are in the low to mid 20%s, rented textbooks are in the high 30%’s to low 40%’s, and non-book school apparel merchandise have gross margins in the high 30%’s. Non-book merchandise is typically 35-40% of total store sales BUT keep in mind that there is a very wide range of bookstore formats (floor plans vary from school to school), so many schools won’t fit the “average”. I’m trying to get smarter on this myself, but I hope these rough guidlines help. 


    SubjectValuation
    Entry08/17/2015 02:25 PM
    Memberblaueskobalt

    Thanks for the thoughtful post and messages.

    What do you think is the right price for this business?  Similarly, what do you think cash flow growth for this business is? 

    You have made a nice case for why this business may be more attractive than it first appears, but the market may already be reflecting this fact: 5-6x adjusted EBITDA and 15x adjusted FCF does not sound like a steep discount for a decent-quality, low-to-no growth business.  What multiple(s) do you feel are appropriate and why?


    SubjectInsider alignment
    Entry10/01/2015 04:45 PM
    Membermaggie1002

    OsoNegro, thanks for the interesting idea.  Wonder if you can discuss if management is "owner-oriented" and the incentives that should keep insiders appropriately aligned.  Thanks in advance.


    SubjectCapEx in slow decline scenario
    Entry10/08/2015 11:33 AM
    Memberstraw1023

    How much flexibility does mgmt have here to reduce CapEx if things start to go south? Can they pull an Eddie Lampert and slash capex? After all, if things are going south, they may not care about contract renewals with the college and competition to replace them will not exist. Do the colleges have any leverage to require a certain level of capex spending?

     

    It seems that your $50mm capex is quite high if we are running a slow decline scenario (if mgmt is responsible both with Yuzu and future capex). So long as mgmt slashes capex and Yuzu, this is cheap-to-fair even in a slow decline scenario.

     

    Of course, whether mgmt would be willing to slash capex is another matter. Many retailers have plowed money into their business long after it was wise to do so.


    SubjectThoughts on the Quarter?
    Entry12/08/2015 03:30 PM
    Memberjcoviedo

    Any thoughts on the quarter? Down 26% seems like a massive over reaction for a company sitting on $4.41/share in net cash, but would be interested in getting your thoughts.

     

    Thanks


    SubjectRe: Re: Thoughts on the Quarter?
    Entry12/09/2015 02:57 PM
    MemberOsoNegro

    I’m writing this on the road…so apologies in advance I haven’t fully updated my BNED & and BNED models. But here is my quick take post earnings…

    Thoughts on the Quarter

    Yes – I absolutely, 100% believe the down (-40%) move post-earnings is a BIG overreaction on a stock with a net cash balance of ~25% of the market cap. Not to make excuses for the negatives from the quarter (which I will address), but based on the carnage we’ve seen with the sell-off in legacy Barnes and Noble (BKS), (also down -40% post earnings), I think that the market clearly perceives BNED to be just like BKS… that it is a dying, rapidly shrinking ice cube just like Barnes and Noble. The spinoff hasn’t changed that perception. (Thanks to MJS27 and andreas947 for your work the BKS thread).

    Negatives on the Quarter

    Lower than expected SSS guidance - SSS were down -3% on the Qtr and -1.9% YTD. The big driver was lower enrollments at community colleges down mid-single digits, resulting in SSS down -7% at the corresponding stores. CC represent 24% of sales. Ex-CC’s, SSS were down -1.3% for the Qtr, and -0.2% YTD. Mgmt lowered their SSS outlook range from zero to +1%, to 0 to -2%.

    Clearly I’m not happy they lowered guidance the 1st quarter out as a standalone company. And community college enrollment trends were clearly negative. However, having SSS down in the low-single digits in any given quarter is not at all out of the ordinary for this business. SSS growth for FY 13 – FY 15 was -1.2%, -2.7%, and +0.1%.

    BUT unlike BKS, BNED’s topline is still growing by winning new college contracts. Top line sales were still up +0.6% for the Qtr and +1.8% YTD despite weakness at CC's.   

    Higher expenses in other line items – I haven’t gotten a copy of the transcript yet, but I recall them mentioning an additional ~$5M in misc. public company costs. Plus Yuzu expenses did not come down much, if at all. Do they need Yuzu to run their stores – NO. Do they need Yuzu as a cool tool to market to colleges when trying to win new business – YES. But remember, the Yuzu spend will not continue indefinitely, so I am ok with them investing in growth. 

    Other considerations (For what it’s worth)

    Long-time BKS/BNED holder Abrams Capital ~tripled their BNED stake in 2015 around $12 -$13/share:

    Now I am well aware that one of the big lessons of 2015 was that following the “smart” money doesn’t guarantee success (VRX, SUNE, TRCO…etc. etc. the long list of other hedge fund hotels crushed in 2015).

    However, Abrams Capital is far from a HF hotel copy-cat, and historically they have very much been on the right side of the BKS/BNED trade. Part of what gave me confidence initiating my position at $12.50/share was the fact that Abrams Capital raised their BNED stake from 2.6M as of the July-2015 filing to about 7.6M shares today.

    Abrams shuns publicity and doesn’t speak at HF conferences…but I think a big “hint” of his thoughts on valuation is evidence that he was aggressively buying in the open market between $12 - $13 share.  

    ¯\_()_/¯

    This is not a stock buyback story like BKS, but there is still a lot of cash on the balance sheet: As some have pointed out already, given the school calendar the cash balance swings a lot. But if you take use the ~$95M as of FY 2015 year end, that equates to a net cash position of at least ~$2/share on a $8.20 stock price.

    Price swings likely acerbated from relatively small float: Top 2 shareholders Leonard Riggio (BKS & BNED Founder) and Abrams Capital own a combined 32% of the outstanding shares (each with ~16%). They are both long-time holders and definitely not sellers. 

    But alas...being early is arguably not that different from being wrong in the short term, so I own that. Like MJS27 said on the BKS thread, I have also been a believer that "owner operator will act in his best interest investment". Remember here we have the Chairman of BNED was also the former CEO of BKS, the founder Riggio has a 16% stake, and you have value investor Abrams Capital tripling their stake at prices much higher than here $12 - $13 a share.

     

    I do not believe that a bad quarter of SSS growth, on a stock with so much net cash, that is winning new business in a fragmented market place, deserves to be down -40%. So as was said on the BKS message board, this cheap stock is getting cheaper.

    For what it’s worth I have added to my position around $8.75, but I am also proceeding with caution. I do not belive we have a broken thesis here, but I was clearly too early.  


    SubjectRe: Re: Thoughts on the Quarter?
    Entry12/09/2015 03:28 PM
    Memberstraw1023

    LD and jcoviedo,

     

    I have been re-visiting in light of beatdown.

     

    No doubt cannot drive TEV off Q2 balance sheet due to the working capital dynamics. However, it probably is wrong to go all the way the other way as well. They have a new $400mm credit facility with Libor+2% (2.5% rate). I have been using net cash at $125mm rather than the $214mm jcoviedo is using.

     

    But even with this, at current price of $8.60, the TEV ($292mm) has dropped more than 40% since this write-up.

     

    At this price, I believe there is limited downside IF management adjusts its course (no pun intended) with respect to expenses, capex, and Yuzu. From the call yesterday, it seems they have partially adjusted course (lowering Yuzu spend and capex forecast), but I would have liked to have heard a much more vocal statement from management in light of the SSS drop. Can they cut operating costs at community college stores? Do the results change their capex thinking? 

     

    At this price, the market sees this as a retailer in terminal decline that should be making hay while the sun shines. But management still sees this as a retailer that can grow via new stores and that has an opportunity if digital textbooks takes off. So I do not see this stock taking off until either management focuses on producing cash or management proves that its growth story and Yuzu is viable. It does pose an opportunity for an activist. 

     

     


    SubjectRe: Re: Re: Thoughts on the Quarter?
    Entry12/09/2015 04:37 PM
    Memberjcoviedo

    BNED's balance sheet is incredibly inefficient. The credit facility can finance the entire seasonal working capital needs of the business, so the on balance sheet cash at the end of the seasonal peak in this case is effectively unrestricted and could be used for buybacks, dividends, et cetera.

     

    At the current share price, BNED has a $436MM market cap. Cash was $214MM at the end of the October quarter, $16MM at the end of the August quarter and $59MM at the end of the May quarter. EBITDA for F2016 we estimate at $75MM. There probably is some upside to EBITDA as the run down Yuzu losses and improve their G&A structure. So if we take an average cash balance for the year of around $100MM that would imply this is trading with a TEV of $336MM or 4.5x EBITDA. To put this in context, GME which is clearly a melting ice cube trades at 4.5x EBITDA.

     

    Colleges need a place to sell licensed apparel and chotchkies (which they can control the distribution of) as well as required course materials so it seems like this business ought to be relatively more insulated from Internet competition than other retailers. Given the colleges get a sales based royalty from BNED, they have a large incentive to push students faculty and parents to purchase things from BNED.   

     

    Any sense on if management or the board would be willing to entertain a buyback. A $50MM or $100MM buyback wouldn't stress the balance sheet at all and would send a very strong signal to the market of the gross undervaluation of the company.

     


    SubjectBuyback
    Entry12/14/2015 08:44 AM
    Memberjcoviedo

    BNED announced a $50 million buyback this morning. Step in the right direction.

     

    Barnes & Noble Education, Inc. Announces Adoption of Stock Repurchase Program

    BASKING RIDGE, N.J.--(BUSINESS WIRE)-- Barnes & Noble Education, Inc. (NYSE:BNED) today announced that the Board of Directors has authorized the repurchase of up to $50 million, in the aggregate, of the Company's outstanding common stock. The stock repurchase program will be carried out at the direction of the Company (which may or may not include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock may be repurchased on an ongoing basis. The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.

    About Barnes & Noble Education, Inc.

    Barnes & Noble Education, Inc. (NYSE: BNED) enhances the academic and social purpose of educational institutions. Through its Barnes & Noble College subsidiary, Barnes & Noble Education serves more than 5 million college students and their faculty through its 743 stores on campuses nationwide, delivering essential educational content and tools within a dynamic retail environment. The company is at the forefront of digital education with its digital education platform, Yuzu®, weaving together digital learning materials to enhance the teaching and learning experience. Barnes & Noble Education acts as a strategic partner to drive student success; provide value and support to students and faculty; and create loyalty and retention, all while supporting the financial goals of college and university partners.

    General information on Barnes & Noble Education, Inc. can be obtained by visiting the Company's corporate website: www.bned.com.

    Forward-Looking Statements

    This press release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and information relating to Barnes & Noble Education and its business that are based on the beliefs of the management of Barnes & Noble Education as well as assumptions made by and information currently available to the management of Barnes & Noble Education. 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 Education or the management of Barnes & Noble Education, identify forward-looking statements. Moreover, Barnes & Noble Education operates in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for the management of Barnes & Noble Education to predict all risks, nor can Barnes & Noble Education assess the impact of all factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements Barnes & Noble Education may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this press release may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

    Such statements reflect the current views of Barnes & Noble Education with respect to future events, the outcome of which is subject to certain risks, including, among others: challenges to running Barnes & Noble Education independently from Barnes & Noble, Inc. ("Barnes & Noble") now that the complete legal and structural separation of Barnes & Noble Education from Barnes & Noble (the "Spin-Off") has been completed; general competitive conditions, including actions Barnes & Noble Education's competitors may take to grow their businesses; trends and challenges to Barnes & Noble Education's business and in the locations in which it has stores; decisions by colleges and universities to outsource their bookstore operations or change the operation of their bookstores; non-renewal of contracts; the general economic environment and consumer spending patterns, a decline in college enrollment or decreased funding available for students; decreased consumer demand for Barnes & Noble Education's products, low growth or declining sales; disruptions to Barnes & Noble Education's computer systems, data lines, telephone systems or supply chain, including the loss of suppliers; changes to payment terms, return policies, the discount or margin on products or other terms with Barnes & Noble Education's suppliers; risks associated with data privacy, information security and intellectual property; work stoppages or increases in labor costs; Barnes & Noble Education's ability to attract and retain employees; possible increases in shipping rates or interruptions in shipping service, effects of competition; obsolete or excessive inventory; product shortages; Barnes & Noble Education's ability to successfully implement its strategic initiatives; the performance of Barnes & Noble Education's online, digital and other initiatives, including possible delays in the deployment of, and further enhancements to, Yuzu® and any future higher education digital products; technological changes; risk that digital sales growth is less than expectations and the risk that it does not exceed the rate of investment spend; higher-than-anticipated store closings; changes in law or regulation; the amount of Barnes & Noble Education's indebtedness and ability to comply with covenants applicable to any future debt financing; Barnes & Noble Education's ability to satisfy future capital and liquidity requirements; Barnes & Noble Education's ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms; adverse results from litigation, governmental investigations or tax-related proceedings or audits; changes in accounting standards; the potential adverse impact on Barnes & Noble Education's business resulting from the Spin-Off; and the other risks and uncertainties detailed in the section titled "Risk Factors" in Barnes & Noble Education's Prospectus filed with the Securities and Exchange Commission ("SEC") on July 15, 2015 and in Barnes & Noble Education'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 Education or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Barnes & Noble Education 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 press release.

     

    Media:
    Barnes & Noble Education, Inc.
    Carolyn J. Brown, (908) 991-2967
    Vice President
    Corporate Communications
    cbrown@bned.com
    or
    Investor:
    Barnes & Noble Education, Inc.
    Thomas Donohue, (908) 991-2966
    Vice President
    Treasurer and Investor Relations
    tdonohue@bned.com

    Source: Barnes & Noble Education, Inc.

     

     

    News Provided by Acquire Media


    SubjectLittle to no FCF
    Entry12/14/2015 02:09 PM
    MemberSanQuinn

    My understanding is that Cap X is related mostly to remodeling activities and that will continue at a high level. Yuzu isnt going down for a few years. If management is unwilling to fix the balance sheet, how is this stock cheap on FCF? 

    Bullish Craig Hallum analyst has them doing $.33 in F2017. On a $9 stock that isnt all that attractive to me so in order to win you need them to shut down yuzu, stop spending on Cap X, or properly leverage the balance sheet.. what is the probability any or all of those things happen in the next 12 months? 

     

     


    SubjectRe: Little to no FCF
    Entry12/14/2015 02:21 PM
    Memberstraw1023

    SQ

     

    I agree. This was the intent of my question back on comments #25+29. This is cheap if and only if they turn it into a cash machine. I do believe they can turn it into a cash flow producing machine, but I am not sure management is inclined to do that after the latest call.

     

    As for an activist focusing on this, any chance Abrams would support such an activist? I would guess Riggio would not support it so Abrams becomes critical.

     


    Subject3Q 2016
    Entry03/08/2016 02:24 PM
    Memberskierholic

    Any thoughts on the latest quarter? I thought it was a mixed quarter release with positives that they are cutting back on Yuzu (USD 13m reduction in costs) and negatives with continued problem with enrollment in 2 year colleges. However I dont think it warrants a 12% fall in share price.

    1. How serious is this enrollment situaition?
    2. Any thoughts on VitalSource and LoudCloud?

     


    SubjectRe: 3Q 2016
    Entry03/08/2016 02:25 PM
    Membermrsox977

    I share your thoughts.  They are doing the right things and making appropriate long term investments.  The selloff is an overreaction.


    SubjectProgress so far....
    Entry06/23/2016 10:06 PM
    Memberskierholic

    Just wanted to do a quick summary of the progress on this stock so far as a way to elicit some thoughts into this company...

    1. Announced and conducted share buybacks
    2. Closed down Yuzu and resorted to a cheaper way to explore digital optionality (FCF positive event)
    3. Acquired LoudCloud and Promoversity
    4. Explored new sales channel on campus - selling cosmetics on campus

    I believe the mgmt is pushing the company in the right direction - cut back on capex and leverage its on-campus platform and access to student community to sell more products through both physical and digital channels.

    Thoughts?


    SubjectRe: Progress so far....
    Entry06/24/2016 11:45 AM
    Memberspike945

    sorry, when did they shut down yuzu?


    SubjectRe: Progress so far....
    Entry06/24/2016 12:24 PM
    Memberblaueskobalt

    skierholic, how do you view the valuation here, accounting for all of those changes? 


    SubjectRe: Re: Progress so far....
    Entry06/24/2016 07:28 PM
    Memberskierholic

    Yuzu - the app - is still running. But they have shut down the Yuzu office in Washington & California. Instead they outsourced the development to VitalSource. As a result they expect to spend USD 13m on Yuzu going forward (vs. USD 26m in the past).

    I think it is grossly undervalued today given that major faults with the original thesis have been mitigated.

    There is uncertainty as to how they might generate additional returns using its physical network. And the downside risk is very limited given the pristine b/s and strong preference for physical books.

    http://investor.bned.com/releasedetail.cfm?ReleaseID=959351

    What do people think?


    SubjectFY16 results
    Entry07/02/2016 05:33 AM
    Memberskierholic

    I thought the results are largely encouraging. Below are my notes

    1. The cash burn with Yuzu is expected to half to around USD13-15m

    2. BNED mgmt have been focusing on improving comparable sales through price match program & acquisition of Promoversity (promotes school brand and in turn promotes general merchanise sales)

    3. As expected execution on opening new stores

    4. Comparable sales improvement is, in my POV, largely an outcome due to students spreading their purchases across spring and fall (as evidenced by a poor comp in 3Q and a good comp in 4Q and negative comp in FY16)

    4. The implication is that even if they screw up on the digital strategy, a flat comparable sales + new store opening + continued share buybacks can bring about a decent return

    5. The upside comes if their digital strategy starts to contribute to topline and/or an increasing comparable sales (due to improving enrollment in community college)

    I believe BNED continue to be undervalued with very strong downside protection

    Would welcome any debate on this

      Back to top