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Barnes & Noble’s CEO Demos Parneros on Q3 2018 Results

Following are excerpts from Barnes & Noble’s latest earnings call following the release of third quarter (4th calendar quarter) results which were the subject of several negative news stories. PG will also remind visitors to TPV of recent Barnes & Noble layoffs that impacted some of their most seasoned store employees.

The speaker in these excerpts is Demos Parneros, the latest CEO of the company.

PG also notes that it appears only two securities analysts participated in the conference call. This is a smaller number than PG recalls on prior earnings calls. PG suspects this reflects very little confidence by shareholders and prospective shareholders that the company has much upside.

From Seeking Alpha:

Entering the holiday period, we were encouraged by the trends that developed during the second quarter and continued into November. Our traffic and conversion trends were improving while book sales were strengthening. Unfortunately, December sales softened primarily due to lower traffic. However, comp store sales improved in January, declining 3.5% for the month. As a result, the third quarter comp sales declined 5.8%, improving 60 basis points as compared to the nine week holiday period.

Our book business continued to outperform the overall comp sales trend, declining 4.1% while double-digit declines in gift, music and DVD categories weighed on the overall performance. This was somewhat offset by growth in toys and games and café businesses.

. . . .

To position our business for growth, the foundation of our strategic plan is built on four pillars. One, strengthening the core. Two, improving profitability. Three, accelerating execution. And finally, number four, innovating for the future.

Let me walk you through each of these. Books are a heritage and centerpiece of everything we do. So the first pillar of our strategic plan is to strengthen the core. As we highlighted last quarter, we are reasserting our book leadership by placing a greater emphasis on books while taking a much more pointed view of our non-book products.

We know that customers value Barnes & Noble for our expansive assortment, the expertise of our booksellers and the experience we provide. Our customer value proposition is a distinct competitive advantage for B&N and we are working to further improve our merchandise mix and hence, the overall shopping experience, increase the value of our membership program and improve our omnichannel capabilities.

To enhance the overall shopping experience, we are evaluating each of our customer touch points and engaging more directly with our customers. This includes evolving our labor model to ensure that booksellers are focused on helping customers first and performing tasks second.

Beyond the in-store experience, Barnes & Noble has tremendous multichannel assets to deliver any book anytime anywhere in any format. Over the course of the past year, we have begun to utilize these assets to improve our omnichannel capabilities and better fulfill our customers’ needs.

. . . .

The second pillar is to improve profitability. We need to return to growing profits and are looking at a series of actions to accomplish this goal. We recently launched an aggressive expense management program that will reduce expenses and redeploy dollars towards our growth initiatives. This includes our recent action to transition to a new, more efficient store labor model that provides greater flexibility and better customer service by eliminating tasks and allowing booksellers to focus more on customers. Making this organizational change was difficult but necessary decision. In addition to improving labor efficiency, our team is focused on doing a thorough review of all areas of the business, with a goal of reducing expenses in other areas such as logistics and direct procurement, to name a few. Our plan is to realize additional expense savings in 2019.

. . . .

To support these efforts, we are focused on attracting, retaining and developing top talent throughout the organization. Over this past year, we have attracted new talent to our senior management team and recently have made another key hire to support our strategic plan. In mid-February, Tim Mantel joined the company as Chief Merchant who will be responsible for overseeing all of the company’s merchandising initiatives.

I am very proud of the work that our team has done. In my first year on the job, I am thrilled to say that we have added eight new executives to our team.

. . . .

Lastly, to support our longer term growth, we need to innovate for the future, which is our fourth pillar. Innovations are our greatest growth accelerator and we are putting tremendous effort behind it. We are excited to announce that later this year we will open five new prototype stores that feature a smaller format and new design. This rightsized format will have a new look and merchandise focused on books and other categories that are more reflective of today’s business model.

. . . .

We anticipate a multiyear process to implement the changes that we have outlined in our strategic plan.

Here are the first two substantive paragraphs from Barnes & Noble’s current CFO:

Consolidated sales decreased $69 million or 5.3% to $1.2 billion. Retail sales decreased $66 million or 5.1% to $1.2 billion for the quarter. Comparable store sales decreased 5.8% while online sales declined 5.2%. The company’s book business declined 4.1%, outperforming the overall comps. Non-book comps declined 7.5% as declines in gift, music and DVD categories accounted for nearly half of the overall comp sales decrease.

Consolidated gross margin decreased $37 million primarily due to the lower sales volume. Rates declined 110 basis points on expense deleverage, increased promotional activity, member discounts and markdowns to clear certain non-returnable inventories.

In a comment to an earlier Barnes & Noble post on TPV, Felix pointed out that BN pays a very large dividend given it’s current operational problems. Here’s a question from an analyst about the size of the dividend and the CEO’s response (both excerpted for reduced length):

ANALYST: [Y]ou have, call it, $100 million of free cash flow at your disposal here. And obviously, you are touching on some of these growth initiatives. And you did say in March, you will evaluate the dividend. I mean, how do you think about that? If there is $100 million of available capital as you are going through your turnaround, you have a ton of time here to get the business rightsized and back on a positive trajectory, how do you think about it, Demos or Allen or Andy? Just it would be great to get your thoughts kind of balancing out growth? I mean, I will tell you, I don’t think you get rewarded whatsoever for your dividend. It’s now almost 15% of your market cap. Just kind of balancing those things out, like investing for the future or even buying back a ton of your stock at the same token?

PARNEROS: [W]e have outlined our 4Q growth strategic initiatives to help us stabilize the business and get back to growth. I would say that we start with relentless focus on customers and really paying attention to what our customers are telling us and I think our team has done a nice job with that.

We have talked about the expense reductions to help stabilize the P&L and also give us more of an opportunity to invest in growth. So I would say that we are moving at a very quick pace but a careful pace. I think we are putting a lot of rigor and analytic view on everything we do.

Our team’s talking a lot, we are testing a lot and we, as we have shared with many of the examples, are doing a lot of different things, whether it be the ship from store and some of the omnichannel initiatives to really speak to how customers want to shop today to developing a smaller but I would say, more intimate and more size-appropriate store that allows us to be very competitive and to be able to fulfill end-of-lease opportunity. So it’s quite a few things happening at once, but I would say there’s a lot of focus and a lot of careful planning.

Perhaps PG missed it, but he didn’t see the word, “dividend”, in any part of the CEO’s response or any reply to the analyst’s observation that the dividend equals about 15% of the company’s market cap.

Link to the rest at Seeking Alpha


11 Comments to “Barnes & Noble’s CEO Demos Parneros on Q3 2018 Results”

  1. Felix J. Torres

    T’wasn’t me that noticed just how big that dividend is but I do think *any* dividend on a tanking, er, restructuring business is too much.

    If they really wanted to save the business and had any sense of urgency they would be putting all their resources into the Back To The Future “we really shouldn’t have killed B. Dalton” scheme.

    As is, not only are they belatedly tiptoeing (5 stores? Really?) into things they should have been doing ten years ago (as Nate points out at his place: https://the-digital-reader.com/2018/03/04/parneros-bn-will-go-bankrupt-can-turned-around/) they are draining resources that would be best applied to the last ditch bailing effort.

    And it really does look like they’re on their last gasp: having tried everything but what really needed doing, they are only going at it half-heartedly.

    Five stores? Seriously?
    They have five hundred leaky barges and they expect five speedboats to save the day? Do they really think they have ten years to fix twenty years of ignoring the obvious?

    They aren’t a startup; they already have the backend systems and contracts. Unless they burned them, they have the layouts and specsheets of their older stores and the B. Dalton Mall stores. And with Malls all over at record low occupancy there’s plenty of affordable retail space.

    They don’t even have to fret cannibalization: they can start with the places they’ve already abandoned like tbe Bronx.

    I don’t think they really buy into “the plan”.

    So why should consumers?

    • If they really wanted to save the business and had any sense of urgency

      Observation indicates they aren’t really trying to save the business. They see exactly the same stuff we do, but they know lots more than we do. The best option for the owners is to take as much cash as they can on the way out.
      And consumers? They don’t care. They don’t listen to this stuff. They will just flow to whatever outlet meets their demand.

      • I’m a fan of the “don’t attribute to malice what can be explained by simple incompetence” school of armchair analysis. For varied values of “malice”.

        (They’ve wasted too much money running down blind alleys to be that smart. They could’ve extracted more value by not doing the Samsung deal, the “lifestyle” merchandise, the restaurants… If they saw the obvious they never would’ve wasted time with the restaurants. They’re going to miss that wasted year-plus. For that matter,they would’ve extracted massive amounts of money if they’d spun off and IPO’ed Nook at its peak, when it controlled a quarter of the ebook market yet lost a quarter billion under their oh-so-smart leadership. Indigo is clearly smarter. They sold off Kobo at what turned out to be its peak and made the “lifestyle” merchandise thing work. They’re also well positioned to pick over the corpse of B&N when all is said and done.)

        It is the nature of market disruptions that they make previously smart people do stupid things and look foolish.

        • Terrence OBrien

          I’m a fan of the “don’t attribute to malice what can be explained by simple incompetence” school of armchair analysis. For varied values of “malice”.

          There is no malice. It is a reasonable response to the economic situation they face.

          Taking as much cash as possible from the company, while managing its decline, is a reasonable path. It’s their company, not ours.

          Look for others in the book business to do the same thing.

          • Felix J. Torres

            And how does committing to selling a million expensive Samsung tablets extract money from their property? They took massive write-offs. They just reported that over half the losses came from the tchotchkes: those losses were on purpose?
            The restaurants, was Riggio the contractor getting paid to set them up? Cause the only profit went to the contractor.

            The dividends are extracting cash but the ballyhooed silver bullets have all resulted in wasted money. Your “everything they do is cold calculation” would only make more sense if they did nothing else. As is they have wasted more money in their fumbling and CEO merry-go-round than they’ve managed to extract. If the intent is loot-n-dump they’re pretty incompetent looters.

            • Terrence OBrien

              Your “everything they do is cold calculation”

              I didn’t say that. Don’t use quotes and attribute to me.

  2. They’re talking about ordering new chairs for the deck of the Titanic once they reach port.

  3. >comp store sales improved in January, declining 3.5% for the month.

    Notice how they find a way to slip in the word “improved” every time they say “declined”? That’s a neat trick, although my first reaction was, “I don’t think that word means what you think it does.” 😉

  4. Smart Debut Author

    Deimos /ˈdaɪˌmɒs/ (Ancient Greek: Δεῖμος, pronounced [dêːmos], meaning “dread”), is the Greek god of terror.

    For B&N shareholders, Mr. Parneros has certainly lived up to his given name. 😉

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