Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________

FORM 10-Q

_______________________________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 26, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-37499

_______________________________________________

BARNES & NOBLE EDUCATION, INC.

(Exact Name of Registrant as Specified in Its Charter)

_______________________________________________



Delaware		46-0599018
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

120 Mountain View Blvd., Basking Ridge, NJ		07920
(Address of Principal Executive Offices)		(Zip Code)

(Registrant’s Telephone Number, Including Area Code): (908) 991-2665

Securities registered pursuant to Section 12(b) of the Act:



Title of Class	Trading Symbol	Name of Exchange on which registered
Common Stock, $0.01 par value per share	BNED	New York Stock Exchange

_______________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨	Smaller reporting company	¨

		Emerging Growth Company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 15, 2019, 48,297,554 shares of Common Stock, par value $0.01 per share, were outstanding.

Table of Contents

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Fiscal Quarter Ended October 26, 2019

Index to Form 10-Q



			Page No.
PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations – For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018		3
	Condensed Consolidated Balance Sheets – As of October 26, 2019, October 27, 2018, and April 27, 2019		4
	Condensed Consolidated Statements of Cash Flows – For the 26 weeks ended October 26, 2019 and October 27, 2018		5
	Condensed Consolidated Statements of Equity – As of October 26, 2019 and October 27, 2018		6
	Notes to Condensed Consolidated Financial Statements		7
	Note 1.	Organization	7
	Note 2.	Summary of Significant Accounting Policies	7
	Note 3.	Recent Accounting Pronouncements	10
	Note 4.	Revenue	11
	Note 5.	Leases	12
	Note 6.	Segment Reporting	13
	Note 7.	Equity and Earnings Per Share	16
	Note 8.	Fair Values of Financial Instruments	17
	Note 9.	Credit Facility	18
	Note 10.	Supplementary Information	18
	Note 11.	Employee Benefit Plans	18
	Note 12.	Stock-Based Compensation	18
	Note 13.	Income Taxes	19
	Note 14.	Legal Proceedings	19

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
	Results of Operations		22
	Adjusted Earnings (Non-GAAP)		31
	Adjusted EBITDA (Non-GAAP)		32
	Liquidity and Capital Resources		34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		37
Item 4.	Controls and Procedures		37

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 5.	Other Information		38
Item 6.	Exhibits		38
	SIGNATURES		39

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)



	13 weeks ended				26 weeks ended
	October 26, 2019		October 27, 2018		October 26, 2019		October 27, 2018
Sales:
Product sales and other	$	718,543	$	756,173	$	1,020,770	$	1,074,018
Rental income	53,685		58,593		71,115		78,232
Total sales	772,228		814,766		1,091,885		1,152,250
Cost of sales:
Product and other cost of sales	553,070		568,971		791,401		827,723
Rental cost of sales	32,208		35,035		41,877		47,157
Total cost of sales	585,278		604,006		833,278		874,880
Gross profit	186,950		210,760		258,607		277,370
Selling and administrative expenses	113,404		115,323		211,095		214,467
Depreciation and amortization expense	15,546		16,421		31,425		32,959
Impairment loss (non-cash)	—		—		433		—
Restructuring and other charges	1,569		—		3,035		—
Transaction costs	—		537		—		537
Operating income	56,431		78,479		12,619		29,407
Interest expense, net	1,446		1,836		3,978		5,358
Income before income taxes	54,985		76,643		8,641		24,049
Income tax expense	19,054		16,946		4,865		2,974
Net income	$	35,931	$	59,697	$	3,776	$	21,075

Earnings per share of common stock:
Basic	$	0.75	$	1.26	$	0.08	$	0.45
Diluted	$	0.74	$	1.25	$	0.08	$	0.44
Weighted average shares of common stock outstanding:
Basic	47,853		47,184		47,717		47,050
Diluted	48,758		47,824		48,412		47,689

See accompanying notes to condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)



	October 26, 2019			October 27, 2018			April 27, 2019
	(unaudited)			(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	24,594		$	20,048		$	14,013
Receivables, net	162,538			138,048			98,246
Merchandise inventories, net	475,422			505,943			420,322
Textbook rental inventories	68,167			70,599			47,001
Prepaid expenses and other current assets	18,494			16,554			11,778
Total current assets	749,215			751,192			591,360
Property and equipment, net	105,156			112,029			109,777
Operating lease right-of-use assets	289,722			—			—
Intangible assets, net	184,188			213,886			194,978
Goodwill	4,700			53,982			4,700
Deferred tax assets, net	8,039			—			2,425
Other noncurrent assets	39,235			41,632			42,940
Total assets	$	1,380,255		$	1,172,721		$	946,180
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	387,704		$	443,319		$	186,818
Accrued liabilities	197,220			170,037			121,720
Current operating lease liabilities	107,721			—			—
Short-term borrowings	—			—			100,000
Total current liabilities	692,645			613,356			408,538
Long-term deferred taxes, net	—			7,906			—
Long-term operating lease liabilities	179,613			—			—
Other long-term liabilities	50,677			59,419			53,514
Long-term borrowings	—			—			33,500
Total liabilities	922,935			680,681			495,552
Commitments and contingencies	—			—			—
Stockholders' equity:
Preferred stock, $0.01 par value; authorized, 5,000 shares; issued and outstanding, none	—			—			—
Common stock, $0.01 par value; authorized, 200,000 shares; issued, 52,139, 51,026 and 51,030 shares, respectively; outstanding, 48,298, 47,561 and 47,563 shares, respectively	521			511			510
Additional paid-in capital	730,501			722,286			726,331
Accumulated deficit	(240,801		)	(199,128		)	(244,577		)
Treasury stock, at cost	(32,901		)	(31,629		)	(31,636		)
Total stockholders' equity	457,320			492,040			450,628
Total liabilities and stockholders' equity	$	1,380,255		$	1,172,721		$	946,180

See accompanying notes to condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



	26 weeks ended
	October 26, 2019			October 27, 2018
Cash flows from operating activities:
Net income	$	3,776		$	21,075
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization expense	31,425			32,959
Content amortization expense	1,909			148
Amortization of deferred financing costs	541			751
Impairment loss (non-cash)	433			—
Deferred taxes	(5,614		)	5,800
Stock-based compensation expense	4,181			4,973
Changes in other long-term liabilities	(2,130		)	(562		)
Changes in operating lease right-of-use assets and liabilities	(2,389		)	—
Changes in other operating assets and liabilities, net	129,317			171,427
Net cash flows provided by operating activities	161,449			236,571
Cash flows from investing activities:
Purchases of property and equipment	(19,255		)	(23,152		)
Acquisition of businesses, net of cash acquired	—			(10,000		)
Net change in other noncurrent assets	3,159			(1,127		)
Net cash flows used in investing activities	(16,096		)	(34,279		)
Cash flows from financing activities:
Proceeds from borrowings under Credit Agreement	150,000			119,900
Repayments of borrowings under Credit Agreement	(283,500		)	(316,300		)
Purchase of treasury shares	(1,265		)	(1,971		)
Net cash flows used in financing activities	(134,765		)	(198,371		)
Net increase in cash, cash equivalents and restricted cash	10,588			3,921
Cash, cash equivalents and restricted cash at beginning of period	14,768			16,869
Cash, cash equivalents and restricted cash at end of period	$	25,356		$	20,790
Changes in other operating assets and liabilities, net:
Receivables, net	$	(64,368	)	$	(37,988	)
Merchandise inventories	(55,100		)	(62,384		)
Textbook rental inventories	(21,166		)	(22,820		)
Prepaid expenses and other current assets	(6,716		)	(4,708		)
Accounts payable and accrued liabilities	276,667			299,327
Changes in other operating assets and liabilities, net	$	129,317		$	171,427

See accompanying notes to condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(In thousands)

(unaudited)




				Additional
	Common Stock			Paid-In			Accumulated			Treasury Stock				Total
	Shares	Amount		Capital			Deficit			Shares	Amount			Equity
Balance at April 28, 2018	50,032	$	501	$	717,323		$	(220,203	)	3,115	$	(29,658	)	$	467,963
Stock-based compensation expense				4,973										4,973
Vested equity awards	994	10		(10		)								—
Shares repurchased for tax withholdings for vested stock awards										350	(1,971		)	(1,971		)
Net income							21,075							21,075
Balance at October 27, 2018	51,026	$	511	$	722,286		$	(199,128	)	3,465	$	(31,629	)	$	492,040


				Additional
	Common Stock			Paid-In			Accumulated			Treasury Stock				Total
	Shares	Amount		Capital			Deficit			Shares	Amount			Equity
Balance at April 27, 2019	51,030	$	510	$	726,331		$	(244,577	)	3,467	$	(31,636	)	$	450,628
Stock-based compensation expense				4,181										4,181
Vested equity awards	1,109	11		(11		)								—
Shares repurchased for tax withholdings for vested stock awards										375	(1,265		)	(1,265		)
Net income							3,776							3,776
Balance at October 26, 2019	52,139	$	521	$	730,501		$	(240,801	)	3,842	$	(32,901	)	$	457,320

See accompanying notes to condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

Unless the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc., a Delaware corporation. References to “Barnes & Noble College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our virtual bookstore and wholesale textbook distribution business operated through our subsidiary MBS Textbook Exchange, LLC. References to “Student Brands” refer to our direct-to-student subscription-based writing services business operated through our subsidiary Student Brands, LLC.

This Form 10-Q should be read in conjunction with our Audited Consolidated Financial Statements and accompanying Notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended April 27, 2019, which includes consolidated financial statements for the Company for each of the three fiscal years ended April 27, 2019, April 28, 2018 and April 29, 2017 (Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively) and the unaudited condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the 13 weeks ended July 27, 2019.

Note 1. Organization

Description of Business

Barnes & Noble Education, Inc. (“BNED”) is one of the largest contract operators of physical and virtual bookstores for college and university campuses and K-12 institutions across the United States. We are also one of the largest textbook wholesalers, inventory management hardware and software providers, and a leading provider of digital education solutions. We operate 1,436 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content and tools within a dynamic omni channel retail environment. Additionally, we offer direct-to-student products and services to help students study more effectively and improve academic performance.

The strengths of our business include our ability to compete by developing new products and solutions to meet market needs, our large operating footprint with direct access to students and faculty, our well-established, deep relationships with partners and stable, long-term contracts, and our well-recognized brands. We expect to continue to introduce scalable and advanced digital solutions focused largely on the student, increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships.

Prior to the fourth quarter of fiscal year 2019, we had three reportable segments: BNC, MBS, and Digital Student Solutions (“DSS”). During the fourth quarter of fiscal year 2019, in an effort to streamline our retail go-to-market strategy, reinforce our company branding, and more efficiently focus our product development efforts, we realigned our business and sales organization into the following three reportable segments: Retail, Wholesale and DSS. For additional information related to our strategies, operations and segments, see Part I - Item 1. Business and Part II - Item 8. Financial Statements and Supplementary Data - Note 6. Segment Reporting in our Annual Report on Form 10-K for the year ended April 27, 2019.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

Our condensed consolidated financial statements reflect our condensed consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position and the results of its operations and cash flows for the periods reported. These condensed consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by GAAP. All material intercompany accounts and transactions have been eliminated in consolidation.

Our business is highly seasonal. Our quarterly results also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. Due to the seasonal nature of the business, the results of operations for the 13 and 26 weeks ended October 26, 2019 are not indicative of the results expected for the 53 weeks ending May 2, 2020 (Fiscal 2020).

For certain of our retail operations, sales are generally highest in the second and third fiscal quarters, when students purchase and rent textbooks and other course materials for the typical academic year, and lowest in the first and fourth fiscal quarters. Sales

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

attributable to our wholesale business are generally highest in our first, second and third quarters, as it sells textbooks and other course materials for retail distribution. Our DSS sales and operating profit are realized relatively consistently throughout the year.

Use of Estimates

In preparing financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Merchandise Inventories

Merchandise inventories, which consist of finished goods, are stated at the lower of cost or market. Market value of our inventory, which is all purchased finished goods, is determined based on its estimated net realizable value, which is generally the selling price less normally predictable costs of disposal and transportation. Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory.

Cost is determined primarily by the retail inventory method for our Retail segment and last-in first out, or “LIFO”, method for our Wholesale segment. Our textbook inventories, for Retail and Wholesale, and trade book inventories are valued using the LIFO method and the related reserve was not material to the recorded amount of our inventories.

For our physical bookstores, we also estimate and accrue shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.

Textbook Rental Inventories

Physical textbooks out on rent are categorized as textbook rental inventories. At the time a rental transaction is consummated, the book is removed from merchandise inventories and moved to textbook rental inventories at cost. The cost of the book is amortized down to its estimated residual value over the rental period. The related amortization expense is included in cost of goods sold. At the end of the rental period, upon return, the book is removed from textbook rental inventories and recorded in merchandise inventories at its amortized cost.

Leases

Effective April 28, 2019, we adopted Accounting Standards Codification ("ASC") Topic 842, Leases, and recognized lease assets and lease liabilities on the condensed consolidated balance sheet for all operating lease arrangements based on the present value of future lease payments. We do not recognize lease assets or lease liabilities for short-term leases (i.e., those with a term of twelve months or less). We recognize lease expense on a straight-line basis over the lease term for contracts with fixed lease payments, including those with fixed annual minimums, or over a rolling twelve month period for leases where the annual guarantee resets at the start of each contract year, in order to best reflect the pattern of usage of the underlying leased asset.

As a result of adopting the new lease, guidance, we recorded an initial operating lease right-of-use asset of $277,006 (inclusive of prepaid assets and accrued liabilities related to existing leases) and an operating lease liability of $294,727 as of April 28, 2019 for all leases that were not completed and with lease terms in excess of twelve months at that date. For additional information, see Note 5. Leases.

Revenue Recognition and Deferred Revenue

Product sales and rentals

The majority of our revenue relates to the sales of products through our bookstore locations, including virtual bookstores, and our bookstore affiliated ecommerce websites, and contains a single performance obligation. Revenue from sales of our products is recognized at the point in time when control of the products is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for the products. For additional information, see Note 4. Revenue.

Retail product revenue is recognized when the customer takes physical possession of our products, which occurs either at the point of sale for products purchased at physical locations or upon receipt of our products by our customers for products ordered through our websites and virtual bookstores. Wholesale product revenue is recognized upon shipment of physical textbooks at which point title passes and risk of loss is transferred to the customer. Additional revenue is recognized for shipping charges billed to customers and shipping costs are accounted for as fulfillment costs within cost of goods sold.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

Revenue from the rental of physical textbooks, which contains a single performance obligation, is deferred and recognized over the rental period based on the passage of time commencing at the point of sale, when control of the product transfers to the customer. Rental periods are typically for a single semester and are always less than one year in duration. We offer a buyout option to allow the purchase of a rented physical textbook at the end of the rental period if the customer desires to do so. We record the buyout purchase when the customer exercises and pays the buyout option price which is determined at the time of the buyout. In these instances, we accelerate any remaining deferred rental revenue at the point of sale.

Revenue from the rental of digital textbooks, which contains a single performance obligation, is recognized at the point of sale. A software feature is embedded within the content of our digital textbooks, such that upon expiration of the rental term the customer is no longer able to access the content. While the digital rental allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer, our performance obligation is complete.

We estimate returns based on an analysis of historical experience. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded.

For sales and rentals involving third-party products, we evaluate whether we are acting as a principal or an agent. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. There are significant judgments involved in determining whether we control the specified goods or services prior to transferring them to the customer including whether we have the ability to direct the use of the good or service and obtain substantially all of the remaining benefits from the good or service. For those transactions where we are the principal, we record revenue on a gross basis, and for those transactions where we are an agent to a third-party, we record revenue on a net basis.

We do not have gift card or customer loyalty programs. We do not treat any promotional offers as expenses. Sales tax collected from our customers is excluded from reported revenues. Our payment terms are generally 30 days and do not extend beyond one year.

Service and other revenue

Service and other revenue primarily relates to direct-to-student subscription-based service revenues and partnership marketing services which includes promotional activities and advertisements within our physical bookstores and web properties performed on behalf of third-party customers.

Subscription-based revenue, which contains a single performance obligation, is deferred and recognized based on the passage of time over the subscription period commencing at the point of sale, when control of the service transfers to the customer. The majority of subscriptions sold are one month in duration.

Partnership marketing agreements often include multiple performance obligations which are individually negotiated with our customers. For these arrangements that contain distinct performance obligations, we allocate the transaction price based on the relative standalone selling price method by comparing the standalone selling price (“SSP”) of each distinct performance obligation to the total value of the contract. The revenue is recognized as each performance obligation is satisfied, typically at a point in time for partnership marketing service and overtime for advertising efforts as measured based upon the passage of time for contracts that are based on a stated period of time or the number of impressions delivered for contracts with a fixed number of impressions.

Cost of Sales

Our cost of sales primarily include costs such as merchandise costs, textbook rental amortization, content development cost amortization, warehouse costs related to inventory management and order fulfillment, insurance, certain payroll costs, and management service agreement costs, including rent expense, related to our college and university contracts and other facility related expenses.

Selling and Administrative Expenses

Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include stock-based compensation and general office expenses, such as merchandising, procurement, field support, finance and accounting, and operating costs related to our direct-to-student subscription-based services business. Shared-service costs such as human resources, legal, treasury, information technology, and various other corporate level expenses and other governance functions, are not allocated to any specific reporting segment and are recorded in Corporate Services.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

Evaluation of Goodwill and Other Long-Lived Assets

As of October 26, 2019, we had $0, $0 and $4,700 of goodwill on our condensed consolidated balance sheet related to our Retail, Wholesale and DSS reporting units, respectively. In accordance with ASC 350-10, Intangibles - Goodwill and Other, we complete our annual goodwill impairment test as of the first day of the third quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of the reporting unit exceeds its fair value.

Our other long-lived assets include property and equipment and amortizable intangibles. As of October 26, 2019, we had $105,156 and $184,188 of property and equipment and amortizable intangible assets, net of depreciation and amortization, respectively, on our condensed consolidated balance sheet. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. During the 26 weeks ended October 26, 2019, we recorded an impairment loss (non-cash) of $433 in the Retail segment related to net capitalized development costs for a project which are not recoverable.

Income Taxes

As of October 26, 2019, other long-term liabilities includes $32,847 related to the long-term tax payable associated with the LIFO reserve. The LIFO reserve is impacted by changes in the consumer price index (“CPI”) and is dependent on the inventory levels at the end of our tax year (on or about January 31st) which is in the middle of our second largest selling cycle. At the end of the most recent tax year, inventory levels declined as compared to the prior year resulting in approximately $7,260 of the LIFO reserve becoming currently payable. Given recent trends relating to the pricing and rental of textbooks, management believes that an additional portion of the remaining long-term tax payable associated with the LIFO reserve could be payable within the next twelve months. We are unable to predict future trends for CPI and inventory levels, therefore it is difficult to project with reasonable certainty how much of this liability will become payable within the next twelve months.

Note 3. Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), which requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance to determine which implementation costs to capitalize as an asset (as prepaid expense) related to the service contract and which costs to expense. The ASU requires upfront implementation costs incurred in a cloud computing arrangement (or hosting arrangement) that is a service contract to be amortized to hosting expense over the term of the arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. We have adopted this standard effective April 28, 2019 (first day of this fiscal quarter) prospectively for all implementation costs incurred in a cloud computing arrangement (or hosting arrangement) that is a service contract after the date of adoption. Under previous accounting guidance, we capitalized certain implementation costs, primarily related to digital and consumer data platforms, to property and equipment on the condensed consolidated balance sheets and depreciated these implementation costs to depreciation and amortization expense in the consolidated statement of operations over the term of the service contract once the asset was ready for its intended use. The adoption of this standard will impact our condensed consolidated financial statements to the extent that implementation costs which were previously capitalized and depreciated as described above, will be included in prepaid expenses and other assets in the condensed consolidated balance sheets and amortized to selling and administrative expense in the consolidated statement of operations under this adopted guidance. We expect to incur additional costs to implement cloud computing arrangements during the remainder of Fiscal 2020 and expect the implementation costs capitalized to prepaid expense in the condensed consolidated balance sheet will increase accordingly.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU replaces the existing incurred loss impairment model for trade receivables with an expected loss model which requires the use of forward-looking information to calculate expected credit loss estimates. These changes may result in earlier recognition of credit losses. Early adoption is permitted and the guidance requires a modified retrospective method of adoption through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This guidance is effective for annual periods beginning after December 15, 2019. We plan to adopt this guidance during the first quarter of Fiscal 2021 and we are currently in the process of evaluating the impact of this update. We believe the adoption of the guidance will not have a material impact on our condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

Note 4. Revenue

Revenue from sales of our products and services is recognized either at the point in time when control of the products is transferred to our customers or over time as services are provided in an amount that reflects the consideration we expect to be entitled to in exchange for the products or services. See Note 2. Summary of Significant Accounting Pronouncements for additional information related to our revenue recognition policies and Note 6. Segment Reporting for a description of each segments product and service offerings.

Disaggregation of Revenue

The following table disaggregates the revenue associated with our major product and service offerings:



	13 weeks ended						26 weeks ended
	October 26, 2019			October 27, 2018			October 26, 2019			October 27, 2018
Retail
Product Sales	$	674,042		$	709,271		$	920,417		$	965,381
Rental Income	53,685			58,593			71,115			78,232
Service and Other Revenue ^(a)	14,042			16,042			24,893			27,378
Retail Total Sales	$	741,769		$	783,906		$	1,016,425		$	1,070,991
Wholesale Sales	$	40,210		$	40,830		$	112,519		$	130,774
DSS Sales ^(b)	$	5,215		$	4,934		$	10,589		$	10,611
Eliminations ^(c)	$	(14,966	)	$	(14,904	)	$	(47,648	)	$	(60,126	)
Total Sales	$	772,228		$	814,766		$	1,091,885		$	1,152,250


(a)	Service and other revenue primarily relates to brand partnerships and other service revenues.


(b)	DSS sales primarily relate to direct-to-student subscription-based revenue.


(c)	The sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale.

Contract Assets and Contract Liabilities

Contract assets represent the sale of goods or services to a customer before we have the right to obtain consideration from the customer. Contract assets consist of unbilled amounts at the reporting date and are transferred to accounts receivable when the rights become unconditional. Contract assets (unbilled receivables) were $0 as of October 26, 2019, October 27, 2018 and April 27, 2019 on our condensed consolidated balance sheets.

Contract liabilities represent an obligation to transfer goods or services to a customer for which we have received consideration and consists of our deferred revenue liability (deferred revenue). Deferred revenue primarily consists of advanced payments from customers related to textbook rental and subscription-based performance obligations that have not yet been satisfied, as well as unsatisfied performance obligations associated with partnership marketing services. Deferred revenue is recognized ratably over the terms of the related rental or subscription periods, or when the contracted services are provided to our partnership marketing customers. Deferred revenue of $48,994, $51,126, and $20,418 is recorded within Accrued Liabilities on our condensed consolidated balance sheets for the periods ended October 26, 2019, October 27, 2018 and April 27, 2019, respectively. The following table presents changes in contract liabilities:



	26 weeks ended
	October 26, 2019			October 27, 2018
Deferred revenue at the beginning of period	$	20,418		$	20,144
Additions to deferred revenue during the period	108,430			116,649
Reductions to deferred revenue for revenue recognized during the period	(79,854		)	(85,667		)
Deferred revenue balance at the end of period	$	48,994		$	51,126

As of October 26, 2019, we expect to recognize $48,994 of the deferred revenue balance within in the next 12 months.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

Note 5. Leases

Effective the first quarter of Fiscal 2020 (April 28, 2019), we adopted FASB ASC 842, Leases (Topic 842), which requires us to recognize lease assets and lease liabilities on the condensed consolidated balance sheets for substantially all lease arrangements. We adopted this standard using a modified retrospective basis, with no restatement of prior periods. We elected the package of practical expedients permitted under the transition guidance for existing or expired contracts and did not reassess whether such contracts contain leases, the lease classification or the initial direct costs. Additionally, we utilized the historical lease term and did not utilize the practical expedient allowing the use of hindsight in determining the lease term and in assessing impairment of its right-of-use (“ROU”) assets. Additionally, we elected to apply the available practical expedient allowing for the election of an accounting policy by class of underlying asset to combine lease and non-lease components for all of our asset classes.

Our portfolio of leases consists of operating leases comprised of operations agreements which grant us the right to operate on-campus bookstores at colleges and universities; real estate leases for office and warehouse operations; and vehicle leases. We do not have finance leases or short-term leases (i.e., those with a term of twelve months or less).

We recognize a ROU asset and lease liability in our condensed consolidated balance sheets for leases with a term greater than twelve months. Options to extend or terminate a lease are included in the determination of the ROU asset and lease liability when it is reasonably certain that such options will be exercised. Our lease terms generally range from one year to fifteen years and a number of agreements contain minimum annual guarantees, many of which are adjusted at the start of each contract year based on the actual sales activity of the leased premises for the most recently completed contract year.

Payment terms are based on the fixed rates explicit in the lease, including minimum annual guarantees, and/or variable rates based on: i) a percentage of revenues or sales arising at the relevant premises ("variable commissions"), and/or ii) operating expenses, such as common area charges, real estate taxes and insurance. For contracts with fixed lease payments, including those with minimum annual guarantees, we recognize lease expense on a straight-line basis over the lease term or over the contract year in order to best reflect the pattern of usage of the underlying leased asset and our minimum obligations arising from these types of leases. Our lease agreements do not contain any material residual value guarantees, material restrictions or covenants.

We used our incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable. We utilized an estimated collateralized incremental borrowing rate as of the effective date or the commencement date of the lease, whichever is later.

The following table summarizes lease expense for the 13 and 26 weeks ended October 26, 2019:



	13 weeks ended		26 weeks ended
	October 26, 2019		October 26, 2019
Variable lease expense	$	24,140	$	31,010
Operating lease expense	74,566		99,960
Net lease expense	$	98,706	$	130,970

The following table summarizes our minimum fixed lease obligations, excluding variable commissions, as of October 26, 2019:



	As of
	October 26, 2019
Remainder of Fiscal 2020	$	80,746
Fiscal 2021	67,931
Fiscal 2022	46,757
Fiscal 2023	39,559
Fiscal 2024	31,159
Thereafter	57,972
Total lease payments	324,124
Less: imputed interest	(36,790		)
Operating lease liabilities at period end	$	287,334

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

Future lease payment obligations related to leases that were entered into, but did not commence as of October 26, 2019, were not material.

The following summarizes additional information related to our operating leases:



	As of
	October 26, 2019
Weighted average remaining lease term (in years)	5.0 years
Weighted average discount rate	4.3		%

Supplemental cash flow information:
Cash payments for lease liabilities within operating activities	$	80,937
ROU assets obtained in exchange for lease liabilities from initial recognition	$	73,545

Note 6. Segment Reporting

Prior to the fourth quarter of Fiscal 2019, we had three reportable segments: BNC, MBS, and DSS. During the fourth quarter of Fiscal 2019, in an effort to streamline our retail go-to-market strategy, reinforce our company branding, and more efficiently focus our product development efforts, we realigned our business and sales organization into the following three reportable segments: Retail, Wholesale and DSS. The Retail Segment combines the operations of the former BNC segment with MBS Direct (from the former MBS segment), the Wholesale Segment is comprised of the MBS wholesale business (from the former MBS segment), and the DSS Segment remains unchanged.

Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, continue to be presented as “Corporate Services”.

We identify our segments in accordance with the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance. The following summarizes the three segments. For additional information about this segments operations, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year ended April 27, 2019.

Retail

The Retail Segment operates 1,436 college, university, and K-12 school bookstores, comprised of 772 physical bookstores and 664 virtual bookstores. Our bookstores typically operate under agreements with the college, university, or K-12 schools to be the official bookstore and the exclusive seller of course materials and supplies, including physical and digital products. The majority of the physical campus bookstores have school-branded e-commerce sites which we operate and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. The Retail Segment also offers inclusive access programs, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students on or before the first day of class. Additionally, the Retail Segment offers a suite of digital content and services to colleges and universities, including a variety of open educational resource-based courseware.

Wholesale

The Wholesale Segment is comprised of our wholesale textbook business and is one of the largest textbook wholesalers in the country. The Wholesale Segment centrally sources, sells, and distributes new and used textbooks to approximately 3,500 physical bookstores (including our Retail Segment's 772 physical bookstores) and sources and distributes new and used textbooks to our 664 virtual bookstores. Additionally, the Wholesale Segment sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 400 college bookstores.

DSS

The Digital Student Solutions (“DSS”) Segment includes direct-to-student products and services to assist students to study more effectively and improve academic performance. The DSS Segment is comprised of the operations of Student Brands, LLC,

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

a leading direct-to-student subscription-based writing services business, and bartleby^®, a direct-to-student subscription-based offering providing textbook solutions, expert questions and answers, tutoring and test prep services.

Corporate Services

Corporate Services represent unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources.

Intercompany Eliminations

The eliminations are primarily related to the following intercompany activities:


•	The sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale, and

•

These cost of sales eliminations represent (i) the recognition of intercompany profit for Retail inventory that was purchased from Wholesale in a prior period that was subsequently sold to external customers during the current period and the elimination of Wholesale service fees charged for fulfillment of inventory for virtual store sales, net of (ii) the elimination of intercompany profit for Wholesale inventory purchases by Retail that remain in ending inventory at the end of the current period.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

Our international operations are not material and the majority of the revenue and total assets are within the United States. Summarized financial information for our reportable segments is reported below:



	13 weeks ended						26 weeks ended
	October 26, 2019			October 27, 2018			October 26, 2019			October 27, 2018
Sales:
Retail	$	741,769		$	783,906		$	1,016,425		$	1,070,991
Wholesale	40,210			40,830			112,519			130,774
DSS	5,215			4,934			10,589			10,611
Elimination	(14,966		)	(14,904		)	(47,648		)	(60,126		)
Total Sales	$	772,228		$	814,766		$	1,091,885		$	1,152,250

Gross Profit
Retail	$	160,940		$	178,701		$	223,079		$	235,222
Wholesale	12,535			14,275			27,453			33,820
DSS	4,141			4,789			8,555			10,343
Elimination	9,334			12,995			(480		)	(2,015		)
Total Gross Profit	$	186,950		$	210,760		$	258,607		$	277,370

Depreciation and Amortization
Retail	$	11,696		$	12,967		$	23,673		$	26,292
Wholesale	1,483			1,499			3,048			2,959
DSS	2,335			1,917			4,639			3,626
Corporate Services	32			38			65			82
Total Depreciation and Amortization	$	15,546		$	16,421		$	31,425		$	32,959

Operating Income (loss)
Retail	$	50,267		$	65,139		$	15,225		$	23,100
Wholesale	6,459			7,412			15,053			19,858
DSS	(2,809		)	(1,015		)	(4,812		)	51
Corporate Services	(6,870		)	(6,091		)	(12,420		)	(11,628		)
Elimination	9,384			13,034			(427		)	(1,974		)
Total Operating Income	$	56,431		$	78,479		$	12,619		$	29,407



	13 weeks ended				26 weeks ended
	October 26, 2019		October 27, 2018		October 26, 2019		October 27, 2018
The following is a reconciliation of segment Operating Income to consolidated Income Before Income Taxes:
Total Operating Income	$	56,431	$	78,479	$	12,619	$	29,407
Interest Expense, net	1,446		1,836		3,978		5,358
Income Before Income Taxes	$	54,985	$	76,643	$	8,641	$	24,049

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

Note 7. Equity and Earnings Per Share

Equity

Share Repurchases

On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $50,000, in the aggregate, of our outstanding Common Stock. The stock repurchase program is carried out at the direction of management (which may include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). 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. During the and 26 weeks ended October 26, 2019, we did not repurchase shares of our Common Stock under the program and as of October 26, 2019, approximately $26,669 remains available under the stock repurchase program.

During the 26 weeks ended October 26, 2019, we repurchased 374,733 shares of our Common Stock outside of the stock repurchase program in connection with employee tax withholding obligations for vested stock awards.

Earnings Per Share

Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of unvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. During the 13 weeks ended October 26, 2019 and October 27, 2018 average shares of 1,218,994 and 472,748 were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive, respectively. During the 26 weeks ended October 26, 2019 and October 27, 2018, average shares of 1,529,877 and 918,177, respectively, were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

The following is a reconciliation of the basic and diluted earnings (loss) per share calculation:



	13 weeks ended						26 weeks ended
(shares in thousands)	October 26, 2019			October 27, 2018			October 26, 2019			October 27, 2018
Numerator for basic and diluted earnings per share:
Net income available to common shareholders	$	35,931		$	59,697		$	3,776		$	21,075
Less allocation of earnings to participating securities	(21		)	(24		)	(2		)	(9		)
Net income available to common shareholders	$	35,910		$	59,673		$	3,774		$	21,066

Numerator for diluted earnings per share:
Net income available to common shareholders	$	35,910		$	59,673		$	3,774		$	21,066
Allocation of earnings to participating securities	21			24			2			9
Less diluted allocation of earnings to participating securities	(20		)	(24		)	(2		)	(9		)
Net income available to common shareholders	$	35,911		$	59,673		$	3,774		$	21,066

Denominator for basic earnings per share:
Basic weighted average shares of Common Stock	47,853			47,184			47,717			47,050

Denominator for diluted earnings per share:
Basic weighted average shares of Common Stock	47,853			47,184			47,717			47,050
Average dilutive restricted stock units	444			463			334			516
Average dilutive performance shares	—			42			14			38
Average dilutive restricted shares	12			11			11			13
Average dilutive performance share units	449			124			336			72
Diluted weighted average shares of Common Stock	48,758			47,824			48,412			47,689

Earnings per share of Common Stock:
Basic	$	0.75		$	1.26		$	0.08		$	0.45
Diluted	$	0.74		$	1.25		$	0.08		$	0.44

Note 8. Fair Values of Financial Instruments

In accordance with ASC No. 820, Fair Value Measurements and Disclosures, the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Level 1—Observable inputs that reflect quoted prices in active markets

Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable

Level 3—Unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions

Our financial instruments include cash and cash equivalents, receivables, accrued liabilities and accounts payable. The fair values of cash and cash equivalents, receivables, accrued liabilities and accounts payable approximates their carrying values because of the short-term nature of these instruments, which are all considered Level 1. The fair value of short-term and long-term debt approximates its carrying value.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

Note 9. Credit Facility

We have a credit agreement (the “Credit Agreement”), amended March 1, 2019, under which the lenders committed to provide us with a 5-year asset-backed revolving credit facility in an aggregate committed principal amount of $400,000 (the “Credit Facility”). We have the option to request an increase in commitments under the Credit Facility of up to $100,000, subject to certain restrictions. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. The agreement includes an incremental first in, last out seasonal loan facility (the “FILO Facility”) for a $100,000 incremental facility maintaining the maximum availability under the Credit Agreement at $500,000.

For additional information including interest terms and covenant requirements related to the Credit Facility, refer to Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity in our Annual Report on Form 10-K for the year ended April 27, 2019.

During the 26 weeks ended October 26, 2019, we borrowed $150,000 and repaid $283,500 under the Credit Agreement. There were no outstanding borrowings under the Credit Facility or FILO Facility as of October 26, 2019. During the 26 weeks ended October 27, 2018, we borrowed $119,900 and repaid $316,300 under the Credit Agreement. There were no outstanding borrowings under both the Credit Facility or FILO Facility as of October 26, 2019 and October 27, 2018. As of both October 26, 2019 and October 27, 2018, we have issued $4,759 in letters of credit under the Credit Facility.

Note 10. Supplementary Information

Impairment Loss (non-cash)

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. During the 26 weeks ended October 26, 2019, we recognized an impairment loss (non-cash) of $433 in the Retail segment related to net capitalized development costs for a project which are not recoverable.

Restructuring and other charges

During the 13 and 26 weeks ended October 26, 2019, we recognized expenses totaling $1,569 and $3,035, respectively, comprised primarily of $88 and $819, respectively, for severance and other employee termination and benefit costs associated with several management changes and the elimination of various positions as part of cost reduction objectives, and $1,481 and $2,216, respectively, for professional service costs related to restructuring, process improvements, and shareholder activist activities.

Note 11. Employee Benefit Plans

We sponsor defined contribution plans for the benefit of substantially all of the employees of BNC and DSS. MBS maintains a profit sharing plan covering substantially all full-time employees of MBS. For all plans, we are responsible to fund the employer contributions directly. Total employee benefit expense for these plans was $1,301 and $1,384 during the 13 weeks ended October 26, 2019 and October 27, 2018, respectively. Total employee benefit expense for these plans was $2,839 and $3,469 for the 26 weeks ended October 26, 2019 and October 27, 2018, respectively.

Note 12. Stock-Based Compensation

We recognize compensation expense for awards ratably over the requisite service period of the award, which is generally three years. We recognize compensation expense based on the number of awards expected to vest using an estimated average forfeiture rate. We calculate the fair value of stock-based awards based on the closing price on the date the award was granted for those awards with only service or performance conditions. For those awards with market conditions, we have determined the grant date fair value using the Monte Carlo simulation model.

During the 26 weeks ended October 26, 2019, we granted the following awards under the Equity Incentive Plan:


•	190,480 RSU awards and 38,096 restricted stock ("RS") awards with a one year vesting period to the current Board of Directors ("BOD") members for annual compensation.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the 13 and 26 weeks ended October 26, 2019 and October 27, 2018

(Thousands of dollars, except share and per share data)

(unaudited)

•

709,517 performance share unit ("PSU") awards to employees that will vest based upon the achievement of pre-established performance goals related to absolute total shareholder returns ("TSR") determined by the Company's common stock price and Company Adjusted EBITDA measured over a two year performance period (Fiscal 2020 - Fiscal 2021) with one additional year of time-based vesting. The number of PSU awards that will vest range from 0%-150% of the target award based on actual performance.


•	1,317,116 restricted stock units ("RSU") awards to employees with a three year vesting period.

We recognized stock-based compensation expense for equity-based awards in selling and administrative expenses as follows:



	13 weeks ended				26 weeks ended
	October 26, 2019		October 27, 2018		October 26, 2019		October 27, 2018
Restricted stock expense	$	30	$	20	$	60	$	50
Restricted stock units expense ^(a)	1,722		1,952		3,712		4,150
Performance shares expense^{(a) (b)}	—		57		12		114
Performance share units expense ^{(a) (b)}	108		603		397		659
Stock-based compensation expense	$	1,860	$	2,632	$	4,181	$	4,973

(a)

For the 13 and 26 weeks ended October 26, 2019, the restricted stock units expense, performance shares expense and performance share units expense reflects a forfeiture adjustment for unvested shares related to management changes in Fiscal 2019 and Fiscal 2020, and incremental expense for the Fiscal 2020 grant discussed above, compared to Fiscal 2019 grant which occurred in the second quarter of Fiscal 2019.


(b)	The performance shares and performance share units expense reflect catch-up adjustments for changes in the expected level of achievement of the respective grants for both Fiscal 2018 and Fiscal 2019, and incremental expense for the Fiscal 2020 grant discussed above.

Total unrecognized compensation cost related to unvested awards as of October 26, 2019 was $11,881 and is expected to be recognized over a weighted-average period of 2.0 years. Approximately $2,134 of the unrecognized compensation cost is related to performance shares and performance share units, which is subject to attaining the stated performance metrics.

Note 13. Income Taxes

We recorded income tax expense of $19,054 on a pre-tax income of $54,985 during the 13 weeks ended October 26, 2019, which represented an effective income tax rate of 34.7% and income tax expense of $16,946 on pre-tax income of $76,643 during the 13 weeks ended October 27, 2018, which represented an effective income tax rate of 22.1%. The effective tax rate for the 13 weeks ended October 26, 2019 is higher as compared to the prior year comparable period due to permanent differences.

We recorded income tax expense of $4,865 on a pre-tax income of $8,641 during the 26 weeks ended October 26, 2019, which represented an effective income tax rate of 56.3% and income tax expense of $2,974 on pre-tax income of $24,049 during the 26 weeks ended October 27, 2018, which represented an effective income tax rate of 12.4%. The effective tax rate for the 26 weeks ended October 26, 2019 is higher as compared to the prior year comparable period due to permanent differences.

Note 14. Legal Proceedings

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

Unless the context otherwise indicates, references to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc. or “BNED”, a Delaware corporation. References to “Barnes & Noble College” or “BNC” refer to our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our subsidiary MBS Textbook Exchange, LLC. References to “Student Brands” refer to our subsidiary Student Brands, LLC.

Overview

Description of Business

The BNC and MBS brands are virtually synonymous with innovation in bookselling and campus retail, and, we believe, are widely recognized and respected brands in the United States. Our large college footprint, reputation, and credibility in the marketplace not only support our marketing efforts to universities, students, and faculty, but are also important for leading publishers who rely on us as one of their primary distribution channels, and for being a trusted source for students in our direct-to-student digital solutions business.

The strengths of our business include our ability to compete by developing new products and solutions to meet market needs, our large operating footprint with direct access to students and faculty, our well-established, deep relationships with partners and stable, long-term contracts and our well-recognized brands. We expect to continue to introduce scalable and advanced digital solutions focused largely on the student, increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships.

We offer our BNC First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students on or before the first day of class. In August 2019, we announced a new agreement with VitalSource^®, part of Ingram Content Group, to use their technology to power our First Day inclusive access platform, allowing us to increase penetration rates for course material sales, as well as accelerate and optimize First Day implementations. During the first half of Fiscal 2020, First Day total revenue increased 93% from the prior year comparative period.

For additional information related to our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year ended April 27, 2019.

Segments

Prior to the fourth quarter of Fiscal 2019, we had three reportable segments: BNC, MBS, and Digital Student Solutions (“DSS”). During the fourth quarter of fiscal year 2019, in an effort to streamline our retail go-to-market strategy, reinforce our company branding, and more efficiently focus our product development efforts, we realigned our business and sales organization into the following three reportable segments: Retail, Wholesale and DSS. The Retail Segment combines the operations of the former BNC segment with MBS Direct (from the former MBS segment), the Wholesale Segment is comprised of the MBS wholesale business (from the former MBS segment), and the DSS Segment remains unchanged. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, continue to be presented as “Corporate Services”. The following discussion summarizes the three segments:

Retail Segment

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Wholesale Segment

DSS Segment

The DSS Segment includes direct-to-student products and services to assist students to study more effectively and improve academic performance. The DSS Segment is comprised of the operations of Student Brands, LLC, a leading direct-to-student subscription-based writing services business, and bartleby, a direct-to-student subscription-based offering providing textbook solutions, expert questions and answers, tutoring and test prep services.

Corporate Services represents unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources.

For additional information about the Retail, Wholesale and DSS segment operations, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year ended April 27, 2019.

Seasonality

For our retail operations, sales are generally highest in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials, and lowest in the first and fourth fiscal quarters. Sales attributable to our wholesale business are generally highest in our first, second and third quarter, as it sells textbooks and other course materials for retail distribution. For our DSS segment, or direct-to-student business, sales and operating profit are realized relatively consistently throughout the year.

Trends, Competition and Other Business Conditions Affecting Our Business

The market for educational materials is undergoing unprecedented change. As tuition and other costs rise, colleges and universities face increasing pressure to attract and retain students and provide them with innovative, affordable educational content and tools that support their educational development. Current trends, competition and other factors affecting our business include:


•	Increased Use of Online and Digital Platforms as Companions or Alternatives to Printed Course Materials. Students and faculty can now choose from a wider variety of educational content and tools than ever before, delivered across both print and digital platforms.


•	Distribution Network Evolving. The way course materials are distributed and consumed is changing significantly, a trend that is expected to continue. The market for course materials, including textbooks and supplemental materials, is intensely competitive and subject to rapid change.

•

Disintermediation. We are experiencing growing competition from alternative media and alternative sources of textbooks and other course materials. In addition to the official physical or virtual campus bookstore, course materials are also sold through off-campus bookstores, e-commerce outlets, digital platform companies, publishers, including Cengage, Pearson and McGraw Hill, bypassing the bookstore distribution channel by selling or renting directly to students and educational institutions, and student-to-student transactions over the Internet.

•

Supply Chain and Inventory. Since the demand for used textbooks has historically been greater than the available supply, our financial results are highly dependent upon Wholesale’s ability to build its textbook inventory from suppliers in advance of the selling season. Some textbook publishers have begun to supply textbooks pursuant to consignment or rental programs which could impact used textbook supplies in the future. Additionally, Wholesale is a national distributor for rental textbooks offered through McGraw-Hill Education's and Pearson Education’s consignment rental program.


•	Price Competition. In addition to the competition in the services we provide to our customers, our textbook and other course materials business faces significant price competition. Students purchase textbooks and other course materials from multiple providers, are highly price sensitive, and can easily shift spending from one provider or format to another.

•

Competition. In addition to the competition we face from alternative distribution sources, we also have competition from other college bookstore operators, textbook wholesalers and educational content providers. We also compete with competitors offering products utilizing open educational resources ("OER") and other expert sources and enhanced with digital content. Competitors that provide online bookstore solutions to colleges and universities not only compete with our physical bookstore

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operations, but also compete with Retail's virtual stores. We also compete with other companies that offer college themed and other general merchandise. Our DSS segment faces competition from other digital student solutions providers, including Chegg.


•	A Large Number of Traditional Campus Bookstores Have Yet to be Outsourced.


•	Outsourcing Trends. We continue to see the trend towards outsourcing in the campus bookstore market, including virtual bookstores and online marketplace websites, and we also continue to see a variety of business models being pursued for the provision of textbooks and other course materials, such as inclusive access and publisher subscription models, and general merchandise.


•	New and Existing Bookstore Contracts. We expect awards of new accounts resulting in new physical and virtual store openings will continue to be an important driver of future growth in our business.


•	Overall Economic Environment, College Enrollment and Consumer Spending Patterns. Our business is affected by the overall economic environment, funding levels at colleges and universities, by changes in enrollments at colleges and universities, and spending on course materials and general merchandise.


•	Economic Environment: Retail general merchandise sales are subject to short-term fluctuations driven by the broader retail environment. We expect general merchandise sales to continue to increase over the long term, as our product assortments continue to emphasize and reflect the changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online.

•

Enrollment Trends. The growth of our business depends on our ability to attract new students and to increase the level of engagement by our current student customers. We continue to see downward enrollment trends and shrinking resources from state and federal government for colleges and universities. Enrollment trends, specifically at community colleges, continue to decline, led primarily by an improved economy and a dip in the United States birth rate resulting in fewer students at the traditional 18-24 year old college age. However, online degree program enrollments continue to grow, even in the face of declining overall higher education enrollment, and consistent with projections from the National Center for Education Statistics, we expect undergraduate enrollment to increase in the long-term.

For additional discussion of our trends and other factors affecting our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year ended April 27, 2019.

Elements of Results of Operations

Our condensed consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”).

Our sales are primarily derived from the sale of course materials, which include new, used and digital textbooks, and at college and university bookstores which we operate, we sell emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. Our rental income is primarily derived from the rental of physical textbooks. We also derive revenue from other sources, such as sales of inventory management, hardware and point-of-sale software, direct-to-student subscription-based services, and other services.

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Results of Operations - Summary



	13 weeks ended						26 weeks ended
Dollars in thousands	October 26, 2019			October 27, 2018			October 26, 2019			October 27, 2018
Sales:
Product sales and other	$	718,543		$	756,173		$	1,020,770		$	1,074,018
Rental income	53,685			58,593			71,115			78,232
Total sales	$	772,228		$	814,766		$	1,091,885		$	1,152,250

Net income	$	35,931		$	59,697		$	3,776		$	21,075

Adjusted Earnings (non-GAAP) ^(a)	$	37,834		$	60,210		$	7,759		$	21,621

Adjusted EBITDA (non-GAAP) ^(a)
Retail	$	62,572		$	78,210		$	41,080		$	49,540
Wholesale	7,942			8,911			18,101			22,817
DSS	314			1,402			1,342			4,177
Corporate Services	(5,668		)	(6,016		)	(10,675		)	(11,509		)
Elimination	9,384			13,034			(427		)	(1,974		)
Total Adjusted EBITDA (non-GAAP)	$	74,544		$	95,541		$	49,421		$	63,051


(a)	Adjusted Earnings and Adjusted EBITDA are non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.

The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales:



	13 weeks ended				26 weeks ended
	October 26, 2019		October 27, 2018		October 26, 2019		October 27, 2018
Sales:
Product sales and other	93.0	%	92.8	%	93.5	%	93.2	%
Rental income	7.0		7.2		6.5		6.8
Total sales	100.0		100.0		100.0		100.0
Cost of sales:
Product and other cost of sales ^(a)	77.0		75.2		77.5		77.1
Rental cost of sales ^(a)	60.0		59.8		58.9		60.3
Total cost of sales	75.8		74.1		76.3		75.9
Gross margin	24.2		25.9		23.7		24.1
Selling and administrative expenses	14.7		14.2		19.3		18.6
Depreciation and amortization expense	2.0		2.0		2.9		2.9
Impairment loss (non-cash)	—		—		—		—
Restructuring and other charges	0.2		—		0.3		—
Transaction costs	—		0.1		—		—
Operating income	7.3	%	9.6	%	1.2	%	2.6	%


(a)	Represents the percentage these costs bear to the related sales, instead of total sales.

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Results of Operations - 13 and 26 weeks ended October 26, 2019 compared with the 13 and 26 weeks ended October 27, 2018



	13 weeks ended, October 26, 2019
Dollars in thousands	Retail		Wholesale		DSS			Corporate Services			Eliminations			Total
Sales:
Product sales and other	$	688,084	$	40,210	$	5,215		$	—		$	(14,966	)	$	718,543
Rental income	53,685		—		—			—			—			53,685
Total sales	741,769		40,210		5,215			—			(14,966		)	772,228
Cost of sales:
Product and other cost of sales	548,621		27,675		1,074			—			(24,300		)	553,070
Rental cost of sales	32,208		—		—			—			—			32,208
Total cost of sales	580,829		27,675		1,074			—			(24,300		)	585,278
Gross profit	160,940		12,535		4,141			—			9,334			186,950
Selling and administrative expenses	98,578		4,593		4,615			5,668			(50		)	113,404
Depreciation and amortization expense	11,696		1,483		2,335			32			—			15,546
Sub-Total:	$	50,666	$	6,459	$	(2,809	)	$	(5,700	)	$	9,384		58,000
Restructuring and other charges														1,569
Operating income														$	56,431



	13 weeks ended, October 27, 2018
Dollars in thousands	Retail		Wholesale		DSS			Corporate Services			Eliminations			Total
Sales:
Product sales and other	$	725,313	$	40,830	$	4,934		$	—		$	(14,904	)	$	756,173
Rental income	58,593		—		—			—			—			58,593
Total sales	783,906		40,830		4,934			—			(14,904		)	814,766
Cost of sales:
Product and other cost of sales	570,170		26,555		145			—			(27,899		)	568,971
Rental cost of sales	35,035		—		—			—			—			35,035
Total cost of sales	605,205		26,555		145			—			(27,899		)	604,006
Gross profit	178,701		14,275		4,789			—			12,995			210,760
Selling and administrative expenses	100,595		5,364		3,387			6,016			(39		)	115,323
Depreciation and amortization expense	12,967		1,499		1,917			38			—			16,421
Sub-Total:	$	65,139	$	7,412	$	(515	)	$	(6,054	)	$	13,034		79,016
Transaction costs														537
Operating income														$	78,479

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	26 weeks ended, October 26, 2019
Dollars in thousands	Retail		Wholesale		DSS			Corporate Services			Eliminations			Total
Sales:
Product sales and other	$	945,310	$	112,519	$	10,589		$	—		$	(47,648	)	$	1,020,770
Rental income	71,115		—		—			—			—			71,115
Total sales	1,016,425		112,519		10,589			—			(47,648		)	1,091,885
Cost of sales:
Product and other cost of sales	751,469		85,066		2,034			—			(47,168		)	791,401
Rental cost of sales	41,877		—		—			—			—			41,877
Total cost of sales	793,346		85,066		2,034			—			(47,168		)	833,278
Gross profit	223,079		27,453		8,555			—			(480		)	258,607
Selling and administrative expenses	182,393		9,352		8,728			10,675			(53		)	211,095
Depreciation and amortization expense	23,673		3,048		4,639			65			—			31,425
Sub-Total:	$	17,013	$	15,053	$	(4,812	)	$	(10,740	)	$	(427	)	16,087
Impairment loss (non-cash)														433
Restructuring and other charges														3,035
Operating income														$	12,619



	26 weeks ended, October 27, 2018
Dollars in thousands	Retail		Wholesale		DSS		Corporate Services			Eliminations			Total
Sales:
Product sales and other	$	992,759	$	130,774	$	10,611	$	—		$	(60,126	)	$	1,074,018
Rental income	78,232		—		—		—			—			78,232
Total sales	1,070,991		130,774		10,611		—			(60,126		)	1,152,250
Cost of sales:
Product and other cost of sales	788,612		96,954		268		—			(58,111		)	827,723
Rental cost of sales	47,157		—		—		—						47,157
Total cost of sales	835,769		96,954		268		—			(58,111		)	874,880
Gross profit	235,222		33,820		10,343		—			(2,015		)	277,370
Selling and administrative expenses	185,830		11,003		6,166		11,509			(41		)	214,467
Depreciation and amortization expense	26,292		2,959		3,626		82			—			32,959
Operating loss:	$	23,100	$	19,858	$	551	$	(11,591	)	$	(1,974	)	29,944
Transaction costs													537
Operating income													$	29,407

Sales

The following table summarizes our sales for the 13 and 26 weeks ended October 26, 2019 and October 27, 2018:



	13 weeks ended					26 weeks ended
Dollars in thousands	October 26, 2019		October 27, 2018		%	October 26, 2019		October 27, 2018		%
Product sales and other	$	718,543	$	756,173	(5.0)%	$	1,020,770	$	1,074,018	(5.0)%
Rental income	53,685		58,593		(8.4)%	71,115		78,232		(9.1)%
Total Sales	$	772,228	$	814,766	(5.2)%	$	1,091,885	$	1,152,250	(5.2)%

Our sales decreased by $42.5 million, or 5.2%, to $772.2 million during the 13 weeks ended October 26, 2019 from $814.8 million during the 13 weeks ended October 27, 2018.

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Our sales decreased by $60.4 million, or 5.2%, to $1,091.9 million during the 26 weeks ended October 26, 2019 from $1,152.3 million during the 26 weeks ended October 27, 2018.

The components of the variances for the 13 and 26 week periods are reflected in the table below.



Sales variances	13 weeks ended						26 weeks ended
Dollars in millions	October 26, 2019			October 27, 2018			October 26, 2019			October 27, 2018
Retail Sales
New stores	$	39.3		$	22.5		$	46.7		$	30.3
Closed stores	(24.5		)	(39.6		)	(32.9		)	(48.6		)
Comparable stores ^(a)	(45.5		)	(46.8		)	(52.3		)	(53.0		)
Textbook rental deferral	1.5			3.8			2.3			3.6
Service revenue ^(b)	(2.0		)	(0.8		)	(2.5		)	(0.9		)
Other ^(c)	(10.9		)	0.2			(15.9		)	(2.3		)
Retail sales subtotal:	$	(42.1	)	$	(60.7	)	$	(54.6	)	$	(70.9	)
Wholesale Sales	$	(0.6	)	$	(6.7	)	$	(18.3	)	$	(9.2	)
DSS Sales	$	0.3		$	0.4		$	—		$	6.1
Eliminations ^(d)	$	(0.1	)	$	(5.1	)	$	12.5		$	(16.3	)
Total sales variance:	$	(42.5	)	$	(72.1	)	$	(60.4	)	$	(90.3	)


(a)	Comparable store sales includes sales from physical stores that have been open for an entire fiscal year period and virtual store sales for the period, does not include sales from closed stores for all periods presented, and digital agency sales are included on a gross basis.


(b)	Service revenue includes Promoversity, brand partnerships, shipping and handling, digital content, software, services, and revenue from other programs.


(c)	Other includes inventory liquidation sales to third parties, marketplace sales and certain accounting adjusting items related to return reserves, agency sales and other deferred items.


(d)	Eliminates Wholesale sales and service fees to Retail and Retail commissions earned from Wholesale. See discussion of intercompany activities and eliminations below.

Retail

Retail sales decreased $42.1 million, or 5.4%, to $741.8 million during the 13 weeks ended October 26, 2019 from $783.9 million during the 13 weeks ended October 27, 2018. Retail sales decreased $54.6 million, or 5.1%, to $1,016.4 million during the 26 weeks ended October 26, 2019 from $1,071.0 million during the 26 weeks ended October 27, 2018. Retail added 95 new stores and closed 107 stores during the 26 weeks ended October 26, 2019, ending the period with a total of 1,436 stores.



	13 weeks ended				26 weeks ended
	October 26, 2019		October 27, 2018		October 26, 2019		October 27, 2018
Number of Stores:	Physical	Virtual	Physical	Virtual	Physical	Virtual	Physical	Virtual
Number of stores at beginning of period	777	714	753	684	772	676	768	676
Opened	2	9	21	9	40	55	34	26
Closed	7	59	1	16	40	67	29	25
Number of stores at end of period	772	664	773	677	772	664	773	677

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Product and other sales for Retail for the 13 weeks ended October 26, 2019 decreased by $37.2 million, or 5.1% to $688.1 million from $725.3 million during the 13 weeks ended October 27, 2018. Product and other sales for Retail for the 26 weeks ended October 26, 2019 decreased by $47.5 million, or 4.8% to $945.3 million from $992.8 million during the 26 weeks ended October 27, 2018. Product and other sales are impacted by comparable store sales (as noted in the chart below), new store openings and store closings. Textbook (Course Materials) revenue for Retail for the 13 and 26 weeks ended October 26, 2019 decreased primarily due to lower new and used textbook and other course materials sales, while First Day, digital and eTextbook revenue increased. General merchandise sales for Retail increased for the 13 and 26 weeks ended October 26, 2019 primarily due to higher emblematic apparel. General merchandise sales for Retail also increased during the 26 weeks ended October 26, 2019 due to higher graduation product sales.

Rental income for Retail for the 13 weeks ended October 26, 2019 decreased by $4.9 million, or 8.4% to $53.7 million from $58.6 million during the 13 weeks ended October 27, 2018. Rental income for Retail for the 26 weeks ended October 26, 2019 decreased by $7.1 million, or 9.1% to $71.1 million from $78.2 million. Rental income is impacted by comparable store sales, new store openings and store closings. The decrease in rental income is primarily due to decreased rental activity impacted by increased digital offerings.

Comparable store sales for Retail decreased for the 13 and 26 week sales periods. Comparable store sales were impacted primarily by a shift to lower cost options and more affordable solutions, including digital offerings, increased consumer purchases directly from publishers and other online providers, and lower student enrollment, specifically in two-year community colleges. These decreases were partially offset by increased First Day, digital and eTextbook revenue, and general merchandise sales. Comparable store sales variances for Retail by category for the 13 and 26 week periods are as follows:



Comparable Store Sales variances - Retail	13 weeks ended										26 weeks ended
Dollars in millions	October 26, 2019					October 27, 2018					October 26, 2019					October 27, 2018
Textbooks (Course Materials)	$	(43.9	)	(7.7	)%	$	(49.4	)	(8.0	)%	$	(55.4	)	(8.0	)%	$	(55.2	)	(7.4	)%
General Merchandise	(0.2		)	(0.1	)%	3.2			1.8	%	5.7			1.9	%	4.4			1.5	%
Trade Books	(1.4		)	(12.1	)%	(0.6		)	(4.7	)%	(2.6		)	(11.9	)%	(2.2		)	(8.8	)%
Total Comparable Store Sales	$	(45.5	)	(5.9	)%	$	(46.8	)	(5.8	)%	$	(52.3	)	(5.1	)%	$	(53.0	)	(5.0	)%

Wholesale

Wholesale sales decreased by $0.6 million, or 1.5%, to $40.2 million during the 13 weeks ended October 26, 2019 from $40.8 million during the 13 weeks ended October 27, 2018. Wholesale sales decreased by $18.3 million, or 14.0%, to $112.5 million during the 26 weeks ended October 26, 2019 from $130.8 million during the 26 weeks ended October 27, 2018. The decrease is driven primarily due to a shift in buying patterns from physical textbooks to digital products, a decrease in supply, and a decrease in customer demand (including sales to our Retail Segment).

DSS

DSS total sales increased by $0.3 million or 5.7% to $5.2 million during the 13 weeks ended October 26, 2019 from $4.9 million during the 13 weeks ended October 27, 2018. DSS total sales were $10.6 million for each of the 26 weeks ended October 26, 2019 and October 27, 2018. For both periods, bartleby subscription sales increased and were offset by lower Student Brands sales.

Cost of Sales and Gross Margin

Our cost of sales increased as a percentage of sales to 75.8% during the 13 weeks ended October 26, 2019 compared to 74.1% during the 13 weeks ended October 27, 2018. Our gross margin decreased by $23.8 million, or 11.3%, to $187.0 million, or 24.2% of sales, during the 13 weeks ended October 26, 2019 from $210.8 million, or 25.9% of sales during the 13 weeks ended October 27, 2018.

Our cost of sales increased as a percentage of sales to 76.3% during the 26 weeks ended October 26, 2019 compared to 75.9% during the 26 weeks ended October 27, 2018. Our gross margin decreased by $18.8 million, or 6.8%, to $258.6 million, or 23.7% of sales, during the 26 weeks ended October 26, 2019 from $277.4 million, or 24.1% of sales during the 26 weeks ended October 27, 2018.

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Retail

The following table summarizes the Retail cost of sales for the 13 and 26 weeks ended October 26, 2019 and October 27, 2018:



	13 weeks ended						26 weeks ended
Dollars in thousands	October 26, 2019		% of Related Sales	October 27, 2018		% of Related Sales	October 26, 2019		% of Related Sales	October 27, 2018		% of Related Sales
Product and other cost of sales	$	548,621	79.7%	$	570,170	78.6%	$	751,469	79.5%	$	788,612	79.4%
Rental cost of sales	32,208		60.0%	35,035		59.8%	41,877		58.9%	47,157		60.3%
Total Cost of Sales	$	580,829	78.3%	$	605,205	77.2%	$	793,346	78.1%	$	835,769	78.0%

The following table summarizes the Retail gross margin for the 13 and 26 weeks ended October 26, 2019 and October 27, 2018:



	13 weeks ended						26 weeks ended
Dollars in thousands	October 26, 2019		% of Related Sales	October 27, 2018		% of Related Sales	October 26, 2019		% of Related Sales	October 27, 2018		% of Related Sales
Product and other gross margin	$	139,463	20.3%	$	155,143	21.4%	$	193,841	20.5%	$	204,147	20.6%
Rental gross margin	21,477		40.0%	23,558		40.2%	29,238		41.1%	31,075		39.7%
Gross Margin	$	160,940	21.7%	$	178,701	22.8%	$	223,079	21.9%	$	235,222	22.0%

For the 13 weeks ended October 26, 2019, the Retail gross margin as a percentage of sales decreased as discussed below:

•

Product and other gross margin decreased (110 basis points), driven primarily by lower margin rates (95 basis points) due to a shift to lower margin digital products and higher markdowns, and higher costs related to our college and university contracts (70 basis points) resulting from contract renewals and new store contracts, partially offset by a favorable sales mix (55 basis points) due to increased sales of higher margin general merchandise.


•	Rental gross margin decreased (20 basis points), driven primarily by higher costs related to our college and university contracts (135 basis points) resulting from contract renewals and new store contracts, partially offset by higher rental margin rates (95 basis points) and favorable rental mix (20 basis points).

For the 26 weeks ended October 26, 2019, the Retail gross margin as a percentage of sales decreased as discussed below:


•	Product and other gross margin decreased (5 basis points), driven primarily by lower margin rates (85 basis points) due to a shift to lower margin digital products and higher markdowns, partially offset by a favorable sales mix (80 basis points) due to increased sales of higher margin general merchandise.


•	Rental gross margin increased (140 basis points), driven primarily by favorable rental mix (80 basis points), higher rental margin rates (30 basis points), and lower costs related to our college and university contracts (30 basis points) resulting from contract renewals and new store contracts.

Wholesale

The cost of sales and gross margin for Wholesale were $27.7 million, or 68.8% of sales, and $12.5 million, or 31.2% of sales, respectively, during the 13 weeks ended October 26, 2019. The cost of sales and gross margin for Wholesale was $26.6 million or 65.0% of sales and $14.3 million or 35.0% of sales, respectively, during the 13 weeks ended October 27, 2018.

The cost of sales and gross margin for Wholesale were $85.1 million, or 75.6% of sales, and $27.5 million, or 24.4% of sales, respectively, during the 26 weeks ended October 26, 2019. The cost of sales and gross margin for Wholesale was $97.0 million or 74.1% of sales and $33.8 million or 25.9% of sales, respectively, during the 26 weeks ended October 27, 2018.

The gross margin decreased during the 13 and 26 weeks ended October 26, 2019 primarily due to an unfavorable sales mix and inventory markdowns.

DSS

The gross margin for the DSS segment was $4.1 million, or 79.4% of sales, during the 13 weeks ended October 26, 2019 and $4.8 million, or 97.1% of sales, during the 13 weeks ended October 27, 2018. The gross margin for the DSS segment was $8.6 million, or 80.8% of sales, during the 26 weeks ended October 26, 2019 and $10.3 million, or 97.5% of sales, during the 26 weeks ended October 27, 2018. The high gross margins are driven primarily by high margin subscription service revenue

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earned. The decrease in gross margin for the 13 and 26 weeks ended was primarily due to the amortization of content development costs of $0.8 million and $1.5 million for bartleby textbook solutions which was launched in the latter half of Fiscal 2019.

Intercompany Eliminations

During the 13 weeks ended October 26, 2019 and October 27, 2018, our sales eliminations were $(15.0) million and $(14.9) million, respectively. During the 26 weeks ended October 26, 2019 and October 27, 2018, our sales eliminations were $(47.6) million and $(60.1) million, respectively. These sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale.

During the 13 weeks ended October 26, 2019 and October 27, 2018, the cost of sales eliminations were $(24.3) million and $(27.9) million, respectively. During the 26 weeks ended October 26, 2019 and October 27, 2018, the cost of sales eliminations were $(47.2) million and $(58.1) million, respectively. These cost of sales eliminations represent (i) the recognition of intercompany profit for Retail inventory that was purchased from Wholesale in a prior period that was subsequently sold to external customers during the current period and the elimination of Wholesale service fees charged for fulfillment of inventory for virtual store sales, net of (ii) the elimination of intercompany profit for Wholesale inventory purchases by Retail that remain in ending inventory at the end of the current period.

During the 13 weeks ended October 26, 2019 and October 27, 2018, the gross margin eliminations were $9.3 million and $13.0 million, respectively. During the 26 weeks ended October 26, 2019 and October 27, 2018, the gross margin eliminations were $(0.5) million and $(2.0) million, respectively. The gross margin eliminations reflect the net impact of the sales eliminations and cost of sales eliminations during the above mentioned reporting periods.

Selling and Administrative Expenses



	13 weeks ended						26 weeks ended
Dollars in thousands	October 26, 2019		% of Sales	October 27, 2018		% of Sales	October 26, 2019		% of Sales	October 27, 2018		% of Sales
Total Selling and Administrative Expenses	$	113,404	14.7%	$	115,323	14.2%	$	211,095	19.3%	$	214,467	18.6%

During the 13 weeks ended October 26, 2019, selling and administrative expenses decreased by $1.9 million, or 1.7%, to $113.4 million from $115.3 million during the 13 weeks ended October 27, 2018. During the 26 weeks ended October 26, 2019, selling and administrative expenses decreased by $3.4 million, or 1.6%, to $211.1 million from $214.5 million during the 26 weeks ended October 27, 2018.

The variances by segment are as follows:

Retail

During the 13 weeks ended October 26, 2019, Retail selling and administrative expenses decreased by $2.0 million, or 2.0%, to $98.6 million from $100.6 million during the 13 weeks ended October 27, 2018. This decrease was primarily due to a $1.9 million decrease in stores payroll and operating expenses, including comparable stores, virtual stores and new/closed stores payroll and operating expenses, and a decrease of $0.3 million in corporate payroll and infrastructure costs, partially offset by an increase of $0.2 million increase in product development costs and digital operations costs.

During the 26 weeks ended October 26, 2019, Retail selling and administrative expenses decreased by $3.4 million, or 1.8%, to $182.4 million from $185.8 million during the 26 weeks ended October 27, 2018. This decrease was primarily due to a $4.3 million decrease in stores payroll and operating expenses, including comparable stores, virtual stores and new/closed stores payroll and operating expenses, partially offset by an increase of $0.7 million in corporate payroll and infrastructure costs and a $0.2 million increase in product development costs and digital operations costs.

Wholesale

During the 13 weeks ended October 26, 2019, Wholesale selling and administrative expenses decreased by $0.8 million or 14.4% to $4.6 million from $5.4 million during the 13 weeks ended October 27, 2018. During the 26 weeks ended October 26, 2019, Wholesale selling and administrative expenses decreased by $1.7 million or 15.0% to $9.4 million from $11.0 million during the 26 weeks ended October 27, 2018. The decrease in selling and administrative expenses was primarily driven by lower payroll and operating costs.

DSS

During the 13 weeks ended October 26, 2019, DSS selling and administrative expenses increased by $1.2 million to $4.6 million from $3.4 million during the 13 weeks ended October 27, 2018. During the 26 weeks ended October 26, 2019, DSS selling and administrative expenses increased by $2.6 million to $8.7 million from $6.2 million during the 26 weeks ended

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October 27, 2018. The increase in costs was primarily driven by higher payroll and professional fees related to developing, marketing and selling our student success hub on bartleby which launched during the latter half of Fiscal 2019.

Corporate Services

During the 13 weeks ended October 26, 2019, Corporate Services' selling and administrative expenses decreased by $0.3 million or 5.8% to $5.7 million from $6.0 million during the 13 weeks ended October 27, 2018. During the 26 weeks ended October 26, 2019, Corporate Services' selling and administrative expenses decreased by $0.8 million or 7.2% to $10.7 million from $11.5 million during the 26 weeks ended October 27, 2018. The decrease was primarily due to lower compensation-related expense and lower operating expenses.

Depreciation and Amortization Expense



	13 weeks ended						26 weeks ended
Dollars in thousands	October 26, 2019		% of Sales	October 27, 2018		% of Sales	October 26, 2019		% of Sales	October 27, 2018		% of Sales
Total Depreciation and Amortization Expense	$	15,546	2.0%	$	16,421	2.0%	$	31,425	2.9%	$	32,959	2.9%

Depreciation and amortization expense decreased by $0.9 million, or 5.3%, to $15.5 million during the 13 weeks ended October 26, 2019 from $16.4 million during the 13 weeks ended October 27, 2018. Depreciation and amortization expense decreased by $1.5 million, or 4.7%, to $31.4 million during the 26 weeks ended October 26, 2019 from $32.9 million during the 26 weeks ended October 27, 2018. The decrease was primarily attributable to lower depreciation related to closed stores and lower capital expenditures.

Impairment loss (non-cash)

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. During the 26 weeks ended October 26, 2019, we recognized an impairment loss (non-cash) of $0.4 million in the Retail segment related to net capitalized development costs for a project which are not recoverable.

Restructuring and other charges

During the 13 and 26 weeks ended October 26, 2019, we recognized restructuring and other charges totaling $1.6 million and $3.0 million, respectively, comprised primarily of $0.1 million and $0.8 million, respectively, for severance and other employee termination and benefit costs associated with several management changes and the elimination of various positions as part of cost reduction objectives, and $1.5 million and $2.2 million, respectively for professional service costs for restructuring, process improvements, and shareholder activist activities.

Transaction Costs

Transaction costs were $0.5 million during the 13 and 26 weeks ended October 27, 2018. We incur transaction costs for business development and acquisitions.

Operating Income



	13 weeks ended						26 weeks ended
Dollars in thousands	October 26, 2019		% of Sales	October 27, 2018		% of Sales	October 26, 2019		% of Sales	October 27, 2018		% of Sales
Total Operating Income	$	56,431	7.3%	$	78,479	9.6%	$	12,619	1.2%	$	29,407	2.6%

Our operating income was $56.4 million during the 13 weeks ended October 26, 2019, compared to operating income of $78.5 million during the 13 weeks ended October 27, 2018. The decrease is due to the matters discussed above. For the 13 weeks ended October 26, 2019, excluding the $1.6 million of restructuring and other charges, discussed above, operating income was $58.0 million (or 7.5% of sales). For the 13 weeks ended October 27, 2018, excluding the transaction costs of $0.5 million, discussed above, operating income was $79.0 million (or 9.7% of sales).

Our operating income was $12.6 million during the 26 weeks ended October 26, 2019, compared to operating income of $29.4 million during the 26 weeks ended October 27, 2018. The decrease is due to the matters discussed above. For the 26 weeks ended October 26, 2019, excluding the $3.0 million of restructuring and other charges and impairment loss (non-cash) of $0.4 million, discussed above, operating income was $16.1 million (or 1.5% of sales). For the 26 weeks ended October 27, 2018, excluding the transaction costs of $0.5 million, discussed above, operating income was $29.9 million (or 2.6% of sales).

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Interest Expense, Net



	13 weeks ended				26 weeks ended
Dollars in thousands	October 26, 2019		October 27, 2018		October 26, 2019		October 27, 2018
Interest Expense, Net	$	1,446	$	1,836	$	3,978	$	5,358

Net interest expense decreased by $0.4 million, or 21.3%, to $1.4 million during the 13 weeks ended October 26, 2019 from $1.8 million during the 13 weeks ended October 27, 2018. Net interest expense decreased by $1.4 million, or 25.8%, to $4.0 million during the 26 weeks ended October 26, 2019 from $5.4 million during the 26 weeks ended October 27, 2018. The decrease was primarily due to lower borrowings compared to the prior year.

Income Tax Expense



	13 weeks ended						26 weeks ended
Dollars in thousands	October 26, 2019		Effective Rate	October 27, 2018		Effective Rate	October 26, 2019		Effective Rate	October 27, 2018		Effective Rate
Income Tax Expense	$	19,054	34.7%	$	16,946	22.1%	$	4,865	56.3%	$	2,974	12.4%

We recorded income tax expense of $19.1 million on pre-tax income of $55.0 million of during the 13 weeks ended October 26, 2019, which represented an effective income tax rate of 34.7% and we recorded income tax expense of $16.9 million on pre-tax income of $76.6 million during the 13 weeks ended October 27, 2018, which represented an effective income tax rate of 22.1%.

We recorded income tax expense of $4.9 million on pre-tax income of $8.6 million of during the 26 weeks ended October 26, 2019, which represented an effective income tax rate of 56.3% and we recorded income tax expense of $3.0 million on pre-tax income of $24.0 million during the 26 weeks ended October 27, 2018, which represented an effective income tax rate of 12.4%.

The effective tax rate for the 13 and 26 weeks ended October 26, 2019 is higher as compared to the comparable prior year due to permanent differences.

Net Income



	13 weeks ended				26 weeks ended
Dollars in thousands	October 26, 2019		October 27, 2018		October 26, 2019		October 27, 2018
Net income	$	35,931	$	59,697	$	3,776	$	21,075

As a result of the factors discussed above, net income was $35.9 million during the 13 weeks ended October 26, 2019, compared with net income of $59.7 million during the 13 weeks ended October 27, 2018 and net income was $3.8 million during the 26 weeks ended October 26, 2019 compared with net income of $21.1 million during the 26 weeks ended October 27, 2018.

Adjusted Earnings (non-GAAP) is $37.8 million during the 13 weeks ended October 26, 2019, compared with $60.2 million during the 13 weeks ended October 27, 2018 and Adjusted Earnings (non-GAAP) is $7.8 million during the 26 weeks ended October 26, 2019 compared with $21.6 million during the 26 weeks ended October 27, 2018. See Adjusted Earnings (non-GAAP) discussion below.

Use of Non-GAAP Measures - Adjusted Earnings and Adjusted EBITDA

To supplement our results prepared in accordance with GAAP, we use the measure of Adjusted Earnings and Adjusted EBITDA, which are non-GAAP financial measures under Securities and Exchange Commission (the “SEC”) regulations. We define Adjusted Earnings as net income as adjusted for items that are subtracted from or added to net income. We define Adjusted EBITDA as net income plus (1) depreciation and amortization; (2) interest expense and (3) income taxes, (4) as adjusted for items that are subtracted from or added to net income.

To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in the Form 10-K for the year ended April 27, 2019, the reconciliation of Adjusted Earnings to net income and the reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the tables below. All of the items included in the reconciliations below are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance.

These non-GAAP financial measures are not intended as substitutes for and should not be considered superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of these non-GAAP financial measures may be different from similarly named measures used by other companies, limiting their usefulness for comparison purposes.

We review these non-GAAP financial measures as internal measures to evaluate our performance and manage our operations. We believe that these measures are useful performance measures which are used by us to facilitate a comparison of our on-going operating performance on a consistent basis from period-to-period. We believe that these non-GAAP financial measures provide

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for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone, as they exclude certain items that do not reflect the ordinary earnings of our operations. Our Board of Directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance, for evaluating on a quarterly and annual basis actual results against such expectations, and as a measure for performance incentive plans. We believe that the inclusion of Adjusted Earnings and Adjusted EBITDA results provides investors useful and important information regarding our operating results.

Adjusted Earnings (non-GAAP)



	13 weeks ended				26 weeks ended
Dollars in thousands	October 26, 2019		October 27, 2018		October 26, 2019		October 27, 2018
Net income	$	35,931	$	59,697	$	3,776	$	21,075
Reconciling items, after-tax (below)	1,903		513		3,983		546
Adjusted Earnings (non-GAAP)	$	37,834	$	60,210	$	7,759	$	21,621

Reconciling items, pre-tax
Impairment loss (non-cash) ^(a)	$	—	$	—	$	433	$	—
Content amortization (non-cash)^(b)	998		104		1,909		148
Restructuring and other charges ^(a)	1,569		—		3,035		—
Transaction costs ^(a)	—		537		—		537
Reconciling items, pre-tax	2,567		641		5,377		685
Less: Pro forma income tax impact ^(b)	664		128		1,394		139
Reconciling items, after-tax	$	1,903	$	513	$	3,983	$	546


(a)	See Management Discussion and Analysis and Results of Operations discussion above.


(b)	For the 13 and 26 weeks ended October 26, 2019, earnings are adjusted for amortization expense (non-cash) related to content development costs which are included in cost of goods sold.


(c)	Represents the income tax effects of the non-GAAP items.

Adjusted EBITDA (non-GAAP)



	13 weeks ended				26 weeks ended
Dollars in thousands	October 26, 2019		October 27, 2018		October 26, 2019		October 27, 2018
Net income	$	35,931	$	59,697	$	3,776	$	21,075
Add:
Depreciation and amortization expense	15,546		16,421		31,425		32,959
Content amortization (non-cash)^(a)	998		104		1,909		148
Interest expense, net	1,446		1,836		3,978		5,358
Income tax expense	19,054		16,946		4,865		2,974
Impairment loss (non-cash) ^(b)	—		—		433		—
Restructuring and other charges ^(b)	1,569		—		3,035		—
Transaction costs ^(b)	—		537		—		537
Adjusted EBITDA (non-GAAP) ^(b)	$	74,544	$	95,541	$	49,421	$	63,051


(a)	For the 13 and 26 weeks ended October 26, 2019, earnings are adjusted for amortization expense (non-cash) related to content development costs which are included in cost of goods sold.


(b)	See Management Discussion and Analysis and Results of Operations discussion above.

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The following is Adjusted EBITDA by segment for the 13 and 26 weeks ended October 26, 2019 and October 27, 2018.



Adjusted EBITDA - by Segment	13 weeks ended, October 26, 2019
Dollars in thousands	Retail		Wholesale		DSS		Corporate Services			Elimination^(b)			Total
Sales	$	741,769	$	40,210	$	5,215	$	—		$	(14,966	)	$	772,228
Cost of sales ^(a)	580,619		27,675		286		—			(24,300		)	584,280
Gross profit	161,150		12,535		4,929		—			9,334			187,948
Selling and administrative expenses	98,578		4,593		4,615		5,668			(50		)	113,404
Adjusted EBITDA (non-GAAP)	$	62,572	$	7,942	$	314	$	(5,668	)	$	9,384		$	74,544



Adjusted EBITDA - by Segment	13 weeks ended, October 27, 2018
Dollars in thousands	Retail		Wholesale		DSS		Corporate Services			Elimination^(b)			Total
Sales	$	783,906	$	40,830	$	4,934	$	—		$	(14,904	)	$	814,766
Cost of sales ^(a)	605,101		26,555		145		—			(27,899		)	603,902
Gross profit	178,805		14,275		4,789		—			12,995			210,864
Selling and administrative expenses	100,595		5,364		3,387		6,016			(39		)	115,323
Adjusted EBITDA (non-GAAP)	$	78,210	$	8,911	$	1,402	$	(6,016	)	$	13,034		$	95,541



Adjusted EBITDA - by Segment	26 weeks ended, October 26, 2019
Dollars in thousands	Retail		Wholesale		DSS		Corporate Services			Elimination^(b)			Total
Sales	$	1,016,425	$	112,519	$	10,589	$	—		$	(47,648	)	$	1,091,885
Cost of sales^(a)	792,952		85,066		519		—			(47,168		)	831,369
Gross profit	223,473		27,453		10,070		—			(480		)	260,516
Selling and administrative expenses	182,393		9,352		8,728		10,675			(53		)	211,095
Adjusted EBITDA (non-GAAP)	$	41,080	$	18,101	$	1,342	$	(10,675	)	$	(427	)	$	49,421



Adjusted EBITDA - by Segment	26 weeks ended, October 27, 2018
Dollars in thousands	Retail		Wholesale		DSS		Corporate Services			Elimination^(b)			Total
Sales	$	1,070,991	$	130,774	$	10,611	$	—		$	(60,126	)	$	1,152,250
Cost of sales (a)	835,621		96,954		268		—			(58,111		)	874,732
Gross profit	235,370		33,820		10,343		—			(2,015		)	277,518
Selling and administrative expenses	185,830		11,003		6,166		11,509			(41		)	214,467
Adjusted EBITDA (non-GAAP)	$	49,540	$	22,817	$	4,177	$	(11,509	)	$	(1,974	)	$	63,051

(a) For the 13 weeks ended October 26, 2019, gross margin excludes $0.2 million and $0.8 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. For the 26 weeks ended October 26, 2019, gross margin excludes $0.4 million and $1.5 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. For the 13 weeks ended October 27, 2018, gross margin excludes $0.1 million of amortization expense (non-cash) related to content development costs in the Retail Segment. For the 26 weeks ended October 27, 2018, gross margin excludes $0.2 million of amortization expense (non-cash) related to content development costs in the Retail Segment.


(b)	See Management Discussion and Analysis and Results of Operations discussion above.

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Liquidity and Capital Resources

Our primary sources of cash are net cash flows from operating activities, funds available under our credit agreement and short-term vendor financing. As of October 26, 2019, we had no outstanding borrowings under the Credit Agreement. See Financing Arrangements discussion below.

Sources and Uses of Cash Flow



	26 weeks ended
Dollars in thousands	October 26, 2019			October 27, 2018
Cash, cash equivalents, and restricted cash at beginning of period	$	14,768		$	16,869
Net cash flows provided by operating activities	161,449			236,571
Net cash flows used in investing activities	(16,096		)	(34,279		)
Net cash flows used in financing activities	(134,765		)	(198,371		)
Cash, cash equivalents, and restricted cash at end of period	$	25,356		$	20,790

Cash Flow from Operating Activities

Our business is highly seasonal. For our retail operations, cash flows from operating activities are typically a source of cash in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials for the upcoming semesters based on the typical academic semester. For our wholesale operations, cash flows from operating activities are typically a source of cash in the second and fourth fiscal quarters, as payments are received from the summer and winter selling season when they sell textbooks and other course materials for retail distribution. For both retail and wholesale, cash flows from operating activities are typically a use of cash in the fourth fiscal quarter, when sales volumes are materially lower than the other quarters. For our DSS segment, cash flows are not seasonal as cash flows from operating activities are typically consistent throughout the year. Our quarterly cash flows also may fluctuate depending on the timing of the start of the various school’s semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods.

Cash flows provided by operating activities during the 26 weeks ended October 26, 2019 were $161.4 million compared to $236.6 million during the 26 weeks ended October 27, 2018. This decrease of $75.2 million was primarily due to changes in working capital, the change in operating lease right-of-use assets and lease liabilities, lower net income compared to prior year, and the change in deferred taxes. See Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies and Note 5. Leases for information regarding the impact of adopting FASB ASC 842, Leases (Topic 842) effective April 28, 2019.

Cash Flow from Investing Activities

Cash flows used in investing activities during the 26 weeks ended October 26, 2019 were $(16.1) million compared to $(34.3) million during the 26 weeks ended October 27, 2018. The decrease is primarily due to the change in other noncurrent assets for contractual obligations and the acquisition of PaperRater.com in Fiscal 2019.

Our investing activities consist principally of capital expenditures for contractual capital investments associated with renewing existing contracts, new store construction, digital initiatives and enhancements to internal systems and our website. Capital expenditures totaled $19.3 million and $23.2 million during the 26 weeks ended October 26, 2019 and October 27, 2018, respectively.

Cash Flow from Financing Activities

Cash flows used in financing activities during the 26 weeks ended October 26, 2019 were $(134.8) million compared to $(198.4) million during the 26 weeks ended October 27, 2018. This net change of $63.6 million is primarily due to lower net borrowings under the credit agreement.

Financing Arrangements

We have a credit agreement (the “Credit Agreement”), amended March 1, 2019, under which the lenders committed to provide us with a five-year asset-backed revolving credit facility in an aggregate committed principal amount of $400 million (the “Credit Facility”). We have the option to request an increase in commitments under the Credit Facility of up to $100 million, subject to certain restrictions. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. The agreement includes an incremental first in, last out seasonal loan facility (the “FILO Facility”) for a $100 million incremental facility maintaining the maximum availability under the Credit Agreement at $500 million.

During the 26 weeks ended October 26, 2019, we borrowed $150.0 million and repaid $283.5 million under the Credit Agreement. There were no outstanding borrowings as of October 26, 2019 under the Credit Facility or FILO Facility. During the 26 weeks ended October 27, 2018, we borrowed $119.9 million and repaid $316.3 million under the Credit Agreement. There

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were no outstanding borrowings as of October 26, 2019 and October 27, 2018 under both the Credit Facility and FILO Facility. As of both October 26, 2019 and October 27, 2018, we have issued $4.8 million in letters of credit under the Credit Facility.

For additional information including interest terms and covenant requirements related to the Credit Facility and FILO Facility, refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the year ended April 27, 2019.

We believe that our future cash from operations, access to borrowings under the Credit Facility, FILO Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our future capital requirements will depend on many factors, including, but not limited to, the economy and the outlook for and pace of sustainable growth in our markets, the levels at which we maintain inventory, the number and timing of new store openings, and any potential acquisitions of other brands or companies including digital properties. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private financing of debt or equity. Our access to, and the availability of, financing in the future will be impacted by many factors, including the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms.

Income Tax Implications on Liquidity

As of October 26, 2019, other long-term liabilities includes $32.8 million related to the long-term tax payable associated with the LIFO reserve. The LIFO reserve is impacted by changes in the consumer price index ("CPI") and is dependent on the inventory levels at the end of our tax year (on or about January 31st) which is in the middle of our second largest selling cycle. At the end of the most recent tax year, inventory levels declined as compared to the prior year resulting in approximately $7.3 million of the income taxes associated with the LIFO reserve becoming currently payable. Given recent trends relating to the pricing and rental of textbooks, management believes that an additional portion of the remaining long-term tax payable associated with the LIFO reserve could become payable within the next twelve months. We are unable to predict future trends for CPI and inventory levels, therefore it is difficult to project with reasonable certainty how much of this liability will become payable within the next twelve months.

Share Repurchases

On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $50 million, in the aggregate, of our outstanding Common Stock. The stock repurchase program is carried out at the direction of management (which may include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). 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. During the 26 weeks ended October 26, 2019, we did not repurchase any of our Common Stock under the stock repurchase program. As of October 26, 2019, approximately $26.7 million remains available under the stock repurchase program.

Contractual Obligations

Our projected contractual obligations are consistent with amounts disclosed in Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the year ended April 27, 2019.

Off-Balance Sheet Arrangements

As of October 26, 2019, we have no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Critical Accounting Policies

Our policies regarding the use of estimates and other critical accounting policies are consistent with the disclosures in Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended April 27, 2019.

Recent Accounting Pronouncements

See Item 1. Financial Statements — Note 3. Recent Accounting Pronouncements of this Form 10-Q for information related to new accounting pronouncements.

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Disclosure Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and information relating to us and our business that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to us or our management, identify forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our 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 we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Such statements reflect our current views with respect to future events, the outcome of which is subject to certain risks, including, among others:


•	general competitive conditions, including actions our competitors and content providers may take to grow their businesses;


•	a decline in college enrollment or decreased funding available for students;


•	decisions by colleges and universities to outsource their physical and/or online bookstore operations or change the operation of their bookstores;


•	implementation of our digital strategy may not result in the expected growth in our digital sales and/or profitability;


•	risk that digital sales growth does not exceed the rate of investment spend;


•	the performance of our online, digital and other initiatives, integration of and deployment of, additional products and services including new digital channels, and enhancements to higher education digital products, and the inability to achieve the expected cost savings;


•	the risk of price reduction or change in format of course materials by publishers, which could negatively impact revenues and margin;


•	the general economic environment and consumer spending patterns;


•	decreased consumer demand for our products, low growth or declining sales;


•	the strategic objectives, successful integration, anticipated synergies, and/or other expected potential benefits of various acquisitions, may not be fully realized or may take longer than expected;


•	the integration of the operations of various acquisitions into our own may also increase the risk of our internal controls being found ineffective;


•	changes to purchase or rental terms, payment terms, return policies, the discount or margin on products or other terms with our suppliers;


•	our ability to successfully implement our strategic initiatives including our ability to identify, compete for and execute upon additional acquisitions and strategic investments;


•	risks associated with operation or performance of MBS Textbook Exchange, LLC’s point-of-sales systems that are sold to college bookstore customers;


•	technological changes;


•	risks associated with counterfeit and piracy of digital and print materials;


•	our international operations could result in additional risks;


•	our ability to attract and retain employees;


•	risks associated with data privacy, information security and intellectual property;


•	trends and challenges to our business and in the locations in which we have stores;


•	non-renewal of managed bookstore, physical and/or online store contracts and higher-than-anticipated store closings;


•	disruptions to our information technology systems, infrastructure and data due to computer malware, viruses, hacking and phishing attacks, resulting in harm to our business and results of operations;


•	disruption of or interference with third party web service providers and our own proprietary technology;


•	work stoppages or increases in labor costs;


•	possible increases in shipping rates or interruptions in shipping service;

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•	product shortages, including decreases in the used textbook inventory supply associated with the implementation of publishers’ direct to student textbook consignment rental programs, as well as risks associated with merchandise sourced indirectly from outside the United States;


•	changes in domestic and international laws or regulations, including U.S. tax reform, changes in tax rates, laws and regulations, as well as related guidance;


•	enactment of laws or changes in enforcement practices which may restrict or prohibit our use of texts, emails, interest based online advertising, recurring billing or similar marketing and sales activities;


•	the amount of our indebtedness and ability to comply with covenants applicable to any future debt financing;


•	our ability to satisfy future capital and liquidity requirements;


•	our 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, tax-related proceedings, or audits;


•	changes in accounting standards; and


•	the other risks and uncertainties detailed in the section titled “Risk Factors” in Part I - Item 1A in our Annual Report on Form 10-K for the year ended April 27, 2019.

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 us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Form 10-Q.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the items discussed in Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended April 27, 2019.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Exchange Act) was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

We implemented internal controls in connection with our adoption of the new lease accounting guidance in the first quarter of Fiscal 2020. Management has not identified any other changes in the Company’s internal control over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, personal injuries and other matters. We record a liability when we believe that it is both probable that a loss has been incurred and the amount of loss can be reasonably estimated. Based on our current knowledge, we do not believe that there is a reasonable possibility that the final outcome of any pending or threatened legal proceedings to which we or any of our subsidiaries are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect our business, financial condition, results of operations or cash flows.

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Item 1A. Risk Factors

There have been no material changes during the 26 weeks ended October 26, 2019 to the risk factors discussed in Part I - Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended April 27, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table provides information as of October 26, 2019 with respect to shares of Common Stock we purchased during the second quarter of Fiscal 2020:



Period	Total Number of Shares Purchased	Average Price Paid per Share (a)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
July 28, 2019 - August 24, 2019	—	$	—	—	$	26,669,324
August 25, 2019 - September 28, 2019	—	$	—	—	$	26,669,324
September 29, 2019 - October 26, 2019	—	$	—	—	$	26,669,324
	—	$	—	—


(a)	This amount represents the average price paid per common share. This price includes a per share commission paid for all repurchases.

Item 5. Other Information

None.

Item 6. Exhibits



31.1		Certification by the Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by the Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



BARNES & NOBLE EDUCATION, INC.
(Registrant)

By:		/S/ THOMAS D. DONOHUE
		Thomas D. Donohue
		Chief Financial Officer
		(principal financial officer)

By:		/S/ SEEMA C. PAUL
		Seema C. Paul
		Chief Accounting Officer
		(principal accounting officer)

December 4, 2019