Update from Barnes & Noble

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Following are excerpts from Barnes & Noble 4th quarter earnings call from a bit earlier today.

Demos Paneros is the President

From Seeking Alpha:

Demos Parneros

Thanks, Andy, and good morning, everyone. I’ll begin with a brief review of our results and then turn to our fiscal 2019 plans and outlook. Fiscal 2018 proved to be a challenging year for Barnes & Noble as retail dynamics continue to present headwinds for our business.

That said, the actions we’ve undertaken regarding our strategic turnaround plan have laid the groundwork for the future and we are beginning to see modest improvement in some areas.

Our comp sales declined 5.4% in fiscal ’18, and we generated EBITDA of $145 million excluding nonrecurring charges. To put these results in context, you’ll recall that in fiscal ’18, we created an aggressive long-term strategic turnaround plan, which we have already begun to execute.

Turnaround plans take time; and while our performance has been somewhat disappointing, we began to make steady progress in fiscal ’18.

. . . .

Now turning to fiscal ’19, we expect our comp sales trends to improve over the prior year. To improve our sales trends, we’re focused on enhancing the customer experience, better curation, increasing the value for our members and also investing in marketing to drive traffic. We’re also innovating for the future through newly designed stores, focusing on existing high-potential businesses and developing a pipeline of new businesses.

. . . .

To enhance the customer experience and to reassert our leadership as a bookseller, we’re creating new programs such as the Barnes & Noble Book Club, which debuted in May. I’m really excited about this program, which builds on Barnes & Nobles’ unique heritage to bring together and engage readers in a national conversation about books.

This is core to what we do at Barnes & Noble, connecting readers and communities through engaging content and programs. We’re featuring a new title every quarter and partnering with authors and publishers to create exclusive content. Our inaugural selection was Meg Wolitzer’s The Female Persuasion and we have thousands of customers participate in our book club discussion.

Our Chief Marketing Officer, Tim Mantel, joined the company earlier this year and has been focused on opportunities to improve the customer experience and to drive the business. Our goal is to be relevant during key holidays and to be a destination for unique and thoughtful gifts.

A great example of this is our Exclusive and Signed Editions program. This program resonates very well with our customers during the Black Friday holiday period, and we plan to grow sales by extending this program to other holidays, such as Mother’s Day, Father’s Day, when customers are looking for great one-of-a-kind gift. Additionally, we see opportunities to expand our toys and games business and are revamping our gift business.

Over the course of the past year, we established a business development team that is responsible for creating a pipeline of fresh new concepts to engage our customers. This team is responsible for the introduction of some new back-to-school products that we’ll be selling in our stores in July. This product including pens, notebooks, backpacks and water bottles is very complementary to our summer reading program.

. . . .

Allen Lindstrom

In fiscal ’18, we transitioned to our new, more efficient store labor model that resulted in a $40 million cost reduction and we’re continuing to review costs throughout the organization including indirect procurement, supply chain efficiencies and we also plan to reduce cost further in fiscal ’19.

. . . .

Consolidated sales were $786 million for the quarter and $3.7 billion for the year. Retail sales decreased 3.9% to $765 million for the fourth quarter and 5.5% to $3.6 billion for the full year. Comps decreased 4.1% during the fourth quarter on lower store traffic.

. . . .

Book comps decreased 3.4% for the quarter, continuing to outpace the balance of the store. Non-book comps decreased 4.5% for the quarter. Our Gift, Music and DVD businesses all experienced double-digit declines, partially offset by favorable trends in our café and toys and games categories. Overall, members continue to outperform non-members.

Comparable store sales decreased 5.4% for the full fiscal year on lower traffic. Online sales declined 9.6% for the full year on lower conversion rates. Fourth quarter consolidated gross margins decreased $13.5 million, primarily due to the lower sales volume. Rates declined 40 basis points for the quarter and 80 basis points for the full year, both due primarily to occupancy de-leverage and higher markdowns to clear-up non-returnable merchandise.

. . . .

Fourth quarter operating losses were $25.5 million including $7.7 million of non-recurring or unusual items, primarily severance. Excluding these items, adjusted fourth quarter EBITDA was $6.7 million. The full-year operating loss was $128 million inclusive of $167 million of nonrecurring or unusual items.

The $176 million is comprised of four items; $136 million of non-cash asset impairment charges, mostly goodwill; $16 million of nonrecurring severance costs primarily resulting from the implementation of the new store labor model; $5 million of strategic consulting as we transform our business; and $10 million of markdowns declared non-returnable merchandise.

. . . .

The consolidated fourth quarter net loss was $21.1 million or $0.29 a share compared to a loss of $13.4 million or $0.19 a share in the prior year. The consolidated full-year net loss was $125.5 million or $1.73 a share compared to net earnings of $22 million or $0.30 a share in the prior year. In fiscal ’18, we opened three new stores while closing six, ending the year with 630 stores.

. . . .

During fiscal ’18, the company returned $44 million in cash to its shareholders through Board-approved dividend policy. On June 13, the Board declared a quarterly cash dividend of $0.15 a share, payable on July 27 to stockholders of record at the close of business on July 6.

. . . .

David Schick

Hi. Good morning. Thanks for taking my question. I just have a couple. First on NOOK, you mentioned in the year and congrats on moving that to the positive. 2019, anything you could share about thoughts on EBITDA for NOOK?

Allen Lindstrom

Hey David, it’s Al. We aren’t specifically providing guidance on the NOOK segment, but I’ll tell you that we expect to continue topline pressures in our NOOK business and continued cost rationalization in that area.

It’s going to be tough to repeat some of the improvements you’ve seen, just given the top line pressures, but we’re going to work — continue to work hard on rationalizing costs between our digital segments, which include both NOOK and e-commerce.

. . . .

David Schick

You guys are being so efficient with the call and the answers, I’m going to try to sneak in one other. We’ve been in your new pilot stores, and they are different and feel different. Anything you can share, I think you mentioned it briefly, but anything you can share on metrics, whether it’s time spent per customer? I think you’ve talked in the past about mix of cafe, but any metrics that folks on the call could think about around those? I know it’s a limited number, but the new concept stores.

Demos Parneros

Tough to talk about those because the food part of the business is so disproportionately high due to the full restaurant concept in those stores. I mean, they really don’t look like our other stores. But with that said, we’ve learned a lot from those stores. They’ve been great for us in terms of teaching us how to present product differently.

Our displays are different. Some of the adjacencies in the stores are different. We use different signage and colorways. So we’ve taken a lot of weight.

I don’t have a specific kind of dwell time figure. It’s kind of funny. In other businesses, we measure checkout time, which everybody wants to be efficient with checkout time, but in our case, we really want customers to stay as long as they want and browse and discover and buy books and other things.

So, unfortunately, we don’t have that. But I think good takeaways on the book side of the business, and there’s less of the non-books in those stores. So there’s not as much to really take or conclude from that.

. . . .

Ryan Vaughan

Hi. Thanks for taking my questions. Just a follow-up on the challenging categories of Music and DVD. I mean, at what point in time do you start to make some adjustments to the square footage allocation? We’ve seen it with other retailers that have also gone through kind of turnaround operational changes like at Best Buy, for example.

Just trying to think you expect continued pressure this year, 2019. I mean, how are you thinking about that if you’ve made really good strides? You’re down three in Books, and you’re positive in Café, but you have this drag. I mean, at what point in time do you just continue to make adjustments here, maybe bigger adjustments?

Demos Parneros

I think that’s a question that we’ve spent quite a bit of time on. Our entire management team has been focused on that and actually we have begun to make changes in those areas. The clear takeaway is to reduce its space as quickly as we can.

At the same time, we want to replace that product with something that is productive and relevant and makes sense and is on brand for us. So a couple of ways that we’re doing that. The first thing is that we’ve designed smaller stores and as we come to end-of-life on — end-of-lease rather, on stores which we’ve talked about in the past is over 100 stores a year, come up for lease renewal.

We can’t downsize all of those stores, but where we can, we will downsize those stores and when we do, we will give much less space, if any, to those categories. So that’s one approach.

Secondly, we talked about some new businesses that we have been testing and experimenting with to go along with our already strong Gift and Toys & Games businesses. Those can have a little bit more space. So it’s little bit re-allocation game that we’re going to be looking at. And that, along with new businesses, are some of the ways that we intend to use the space currently occupied by Music, DVDs.

So, it’s a little bit of a slower process that we’d like. We’d love to do it overnight, but trying to be prudent with usage of our capital and our expense dollars where we’re moving and where we’ve reallocated space, we’ve seen the results.

. . . .

Demos Parneros

Yeah. So, our target size for the new stores is 14,000 square feet. Obviously, it doesn’t work out perfectly every time. If it’s 13,000 or 15,000, we can work with that. Our designs are flexible enough to handle that. We are excited to be launching early fall with the first one of these stores and we intend to get great learning and takeaways from these.

I think the punch line is simple for us. It’s just about store productivity and the first part of the question about music DVD, we know that’s unproductive, but there’s some demand for the product. We certainly don’t need as much space as it has and we can reallocate space and also introduce some new businesses.

So we’re very focused on the customer experience. Customers love our store experience. So we want to keep that, but at the same time, we want to reduce where appropriate. So we want to keep the great experience, but make the stores more productive and make the P&L better at the same time.

Link to the rest at Seeking Alpha

PG notes hot new initiatives like a book club plus gifts, toys and games (which PG thinks he remembers being downsized substantially last year).

And smaller stores – about 14,000 square feet, down from 25,000 to 45,000 square feed during Barnes & Noble’s glory days. 14,000 square feet is about the size of a typical Walgreens, Rite Aid or CVS store.

41 thoughts on “Update from Barnes & Noble”

  1. As the kids say, OMG …

    The band is playing an upbeat tune as the stewards rearrange the deckchairs so those sitting in them won’t see how much closer the water is to coming over the side …

    And those new bookstores sound like they have room for everything – except books.

  2. 14,000 square feet is still too big by a factor of two to three. They still don’t get it.

    This is the model they need to implement on the B&M side as they beef up online: a back to the future return to the B. Dalton model they bought up and killed.

    “B. Dalton Bookseller was founded in 1966 by Dayton Co., an expanding retailer best known for its Minneapolis department store. Company president Bruce Dayton later explained the decision to enter the fragmented retail book trade in this way: “Sears, Roebuck, and Penney’s, our typical competitors, weren’t strong on books. And on the other hand, we saw nonpublishers like General Electric and Xerox making books and saw no reason why a previously non-bookseller like Dayton’s couldn’t sell them.” He went on to add, “We felt that what the book business needed was merchandising knowhow, the kind of selling that ‘mom-and-pop’ stores don’t do. Naturally, our emphasis was on salesmanship rather than bookmanship.”

    Accordingly, Dayton had no qualms about hiring Richard N. Hagen, a former department store buyer specializing in women’s hosiery, as the first president of B. Dalton. Hagen targeted well-educated, middle-class suburbanites 20 to 35 years of age, the customers whom market research indicated spent the most money on books. The first B. Dalton store opened in a shopping center in Edina, a suburb of Minneapolis. By April 1968 there were nine B. Daltons, all in suburban shopping centers.

    These outlets of 4,000 to 7,000 square feet were uncluttered, with parquet flooring, wide aisles, and an unrestricted approach to the book displays so customers did not have to squint or stand on tiptoe to read titles. The average store carried 20,000 titles, including a hardcover list of 8,000 adult books and 3,000 to 4,000 juveniles, with the rest in paperback. Their stock was 85 percent books; stores also carried greeting cards, adult games, phonograph records, den decorations, and various novelty items. A furniture section displayed Bank of England chairs and Williamsburg decks, and a $1,200 world globe was featured in the window. ”

    Note:

    “By the end of fiscal 1978 there were 357 B. Dalton outlets in 43 states, with combined annual sales of $174 million, making the chain the largest in sales in the country and second only to Waldenbooks in store number. During that year the company sold 47 million books, including about one-tenth of all hardcover books published. Some of its stores offered such services as reproducing out-of-print books and ordering from foreign publishers. The centralized computer system enabled Dalton’s 20-odd buyers to spot popular books early and restock the best-selling ones quickly. ”

    http://www.company-histories.com/B-Dalton-Bookseller-Inc-Company-History.html

    Walden Books was bigger but B. Dalton was more efficient.

    Then they moved the focus to big stores and central planning and blew it.

    Those that ignore the past…

    • That is really a slipshod corp history; it missed important details, including the last 20 years as well as the fact that Dayton Co is also the parent company for Target.

      Yes, Target owned a bookstore chain until they sold it off to B&N

      • The point is that B.Dalton prospered while it used small size and “advanced technology” and faded when they went with big stores and lost focus. Note tbat their glory days were when they focused on salesmanship, not “book culture”.

        B&M bookselling always has been pareto-like and never more than now. Backlist belongs online and in digital; front list and bandwagon sales, especially to casual readers, can support a storefront. But without online sales support, expanding the physical footprint increases costs faster than it increases sales.

        All present day evidence is that the sweetspot for B&M-only sales is closer to the 4000 sqft size of the early B. Daltons than the B&N warehouses. Which is why they struggle to find ways to justify their floorspace with non-book merchandise. Like toys and coffee and food and liquor…

        Instead of looking at the optimum size for their core business and traffic level first, they are setting the store size upfront and then trying to squeeze more revenue out of it.

        That is Backwards.

        Draw distances for all forms of retail are down. Faced with long-ish trips to a venue, shoppers will rather stay home and go online. That reality needs to be factored in. Especially for books.

        Treating online as an afterthought to prop up B&M isn’t helping B&N any.

        • Backlist belongs online and in digital; front list and bandwagon sales, especially to casual readers, can support a storefront.

          I don’t think frontlist can support a bookstore unless it has very cheap rent and doesn’t make much of a profit. Frontlist & Bandwagon are served just fine by Target, Walmart &tc which have a more compelling mix of merchandise. My local Target has the frontlist on 3 or 4 shelves and end-caps, next to electronics, across from toys, and down the aisle from camping gear and non-perishable groceries. That’s all the frontlist you need. Why would that sort of buyer bother driving an hour to (my nearest) B&N when they’re already in what is effectively a department store, there to pick up shampoo and diapers? Why would they even bother leaving the store and walking down the strip to some smaller storefront?

        • Backlist belongs online and in digital; front list and bandwagon sales, especially to casual readers, can support a storefront.

          I don’t think frontlist can support a bookstore unless it either has very cheap rent and doesn’t make much of a profit, or it is doing an exemplary job of virtue-signalling.

          In most suburban / ex-urban communities, frontlist & bandwagon are served just fine by Target, Walmart &tc, which have a more compelling mix of merchandise.

          My local Target has the frontlist on 3 or 4 shelves and end-caps, next to electronics, across from toys, and down the aisle from camping gear and non-perishable groceries. That’s all the frontlist you need. Why would that sort of buyer bother driving an hour to (my nearest) B&N when they’re already in what is effectively a department store, there to pick up shampoo and diapers? A quick stroll past the video games takes them to a book they’ve heard of and they’re happy.

          I just don’t see it. Frankly, I’m surprised that B&N sells any books at all.

        • The point is that B.Dalton prospered while it used small size and “advanced technology” and faded when they went with big stores and lost focus.

          That ‘advanced technology’ was not advanced even in the 1970s. B. Dalton’s business model was already failing in the 1990s, which is why they went with big stores. Losing focus was what happened in the last decade when online shopping took away the raison d’etre of the big stores.

          Anyway, they can’t possibly go back to small stores in malls now, because the malls are being torn down and the customers they need don’t go there anymore.

          • The local B.Dalton went away in the early-mid-90s, before Amazon. I’d visited the store regularly before then, but had bought nothing for years. Their entire stock consisted on cookbooks, travel books, romances, “literary fiction”, and “How To Run Your Pirate Copy Of…” computer books.

            I wasn’t much interested, and I guess few other people were, either.

          • Anyway, they can’t possibly go back to small stores in malls now, because the malls are being torn down and the customers they need don’t go there anymore.

            When consumers don’t have to go to malls for clothes, they sure don’t need to go there for books.

          • If B&N doesn’t do it, Amazon or Indigo will.

            The market is what the market is.
            And the market for big box bookstores isn’t there for 600 locations. Big box stores relied on avid readers looking for backlist. Those readers aren’t turning out anymore. Not in anywhere the numbers needed to support the big stores.

            Six, sure.
            Sixty, maybe.
            Six hundred? Nope. Need to go back to the future if you really want to go that wide. And even there I doubt there’s room for more than 200.

          • Amazon can offer something nobody else can. They can curate their collection based on consumer satisfaction. That satisfaction is based on how many pages consumers read. Page and download data comes from the Kindles.

            Note how Amazon only tells authors how many pages have been read, not how many books have been downloaded. Each figure is necessary for curation. Both are sufficient. Only Amazon has both.

    • I have a lot of fond memories of book shopping in B. Dalton’s. The ones I knew were small and always inside malls, back when malls were actually fun to go to. After you went to your movie at the mall theater over by the mall’s indoor ice-skating rink, you bought books in B. Daltons, and if you wanted some other Barnes & Noble-type non-book crap, you went to the toy store next door to BD, or over to the food court if you wanted coffee or a cookie. B. Daltons was part of the whole mall experience, so book shopping was fun, like going to an amusement park or something. Now it’s just an annoying experience to go to a huge standalone big box bookstore like Barnes & Noble.

  3. In the excerpt, read what Allen has to say, not what Demos has to say or the Q&A.

    They are sucking hard.

    • I clicked through to the source and found a few notable things. Like, they cut costs (by reducing the work force) by $50M…and gave out $44M in dividends. And they expect to repeat the exercise this year: another $50m in “cost savings”.

      Also, despite multi-year declines in traffic they are projecting increases this year? Leading to a 25% growth in EDITDA? The economy is not *that* good.

        • The lumber import catfights have been ongoing for decades and paper/print products haven’t been targeted. But…

          Hmm..
          Considering the war between big media and the administration, they might go that way as a two-fer…

          That could get interesting.

    • At this rate their stock will soon be cheaper than wallpaper (and I’ve been meaning to redo the bathrooms for a while now – maybe this year … 😉 )

      • Yeah, I suppose B & N is probably one of the few companies so out of date that they actually still have paper stock certificates.

        The only wallpaper you can make with Amazon shares is a JPEG for your desktop.

    • Time to get a pool going, a buck marks the day you think they’ll announce they’re done … 😉

        • January 19th, 2020? The day before the next Presidential inaugural?

          Is there a connection in your mind here? IMWTK! 🙂

          • Is it?
            I just figured they would need about six weeks to prep the Chapter 11 filing and the first week in december would be when they finally accepted xmas 19 was not going to save them, just as 18, 17, 16, 15…

            The graffiti has been in place since 2012.

        • I’m putting my marker down on June 30, 2019.

          When it happens, we’re going to see another big shift in the industry.

          Today, B&N stores move about 20% of US print sales.

          When B&N implodes, a quarter of those print sales (=5% of US total) will shift to independent and local bookstores, Walmart, etc.

          The other three quarters (=15% of US total print sales) will immediately move online to Amazon, putting Amazon at something crazy like 60% of all US print sales.

          Then Amazon will stop reporting their print sales to Bookscan, because the terms of Amazon’s contract with Nielsen allow Amazon to pull out of the agreement once Amazon alone accounts for 50%+ of Nielsen’s monthly total. Nobody will have any idea how many print books are selling each year — kind of like ebooks today.

          Trad media will lose their minds, and hilarity will ensue.

          I’m buying a tub of popcorn — even thinking about it makes me smile right now.

          • One more fiscal year?
            Could be.

            Interesting thought about Bookscan.

            On the other hand, the big publishers are reportedly basing their print runs on Amazon pre orders and since Amazon doesn’t do much in the way of returns, a bigger Amazon market share might actually reduce their returns and remainders.

            What would really lead to a scramble is if they stopped accepting returns like comics did ages ago.

            • You’re right on both counts.

              In the short term, the death of B&N will actually help big-publisher profitability, after they take the massive one-time write down of liquidated/returned B&N inventory. Then Amazon will tighten the screws on them just enough that they’ll be roughly back where they were, profitability-wise.

              Longer term, big publishers will be forced to change their acquisition and marketing strategy. They’ll be far less able to artificially inflate a handful of “big books” each year, and thus more reliant on keeping their midlist healthy. We’ll see a die-off/merge-off among those publishers who fail at that, while the ones that re-orient their business primarily around online sales, with brick-and-mortar as an afterthought, will thrive. The biggest publishers have a great and currently underexploited catalog of name-brand IP that can carry them for decades if they are smart.

              • They’ll thrive. At least the competent ones will.

                Good independent bookstores already know what their local customers want to buy, which books to stock, and how many copies of each they are likely to sell in a given time period.

                Y’know, like most retail businesses do. Instead of letting a handful of their biggest suppliers dictate to them which particular “hot” books they need to over-order in bulk this month and stack on their front table, regardless of whether their customers will buy even half of those copies or not.

              • The really smart ones will demand 40-50% discounts since they will be non-returnable. And because shelf space will be at a premium.

  4. Bezos started with books because they were perfect for online sales. They still are. The large market for B&M bookstores is history. Nothing will revive it. It has no future.

    Many may want bookstores to survive as they did in the past. They won’t. Consumers are voting with their feet.

    And enhanced customer experience? Consumers’ experience is enhanced sitting in front of the TV with a laptop ordering books online.

  5. “and $10 million of markdowns declared non-returnable merchandise”
    Is this tied into the signed copies program they were touting earlier?
    I seem to recall hearing they couldn’t return signed copies.

  6. Not all malls are dying.
    And neither are all shopping districts.
    What made B. Dalton’s early success work was “drive-by” shoppers. The same tactic used by Target, Walmart, and Costco; relying on casual buyers instead of relying on avid readers, a good portion of which have moved to online and digital.

    The reality of today is that the B&M book market has shrunk to 60’s, maybe 70’s size. Sales will be low so the store size will need to be small.

    I don’t think I’m alone in thinking the format can work given that not only is Amazon following that playbook but so is Indigo (for their planned foray south) who plan to make books a small part of their “cultural dept store” opening in a New Jersey mall.

    • Sure the smaller format will work, with greatly reduced aggregate shelf space and sales. As this happens, people will count the number of outlets and tell us how well B&M bookstores are doing, and how that indicates a rejection of eBooks by just about every group.

      • Yup.
        And nobody on the establishment side will dare point out that the number of *titles* featured at B&M is a tiny fraction of the total market.

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