BARNES & NOBLE EDUCATION, INC. Unless the context otherwise indicates, references to "we," "us," "our" and "the Company" refer toBarnes & Noble Education, Inc. or "BNED", aDelaware corporation. References to "Barnes & Noble College " or "BNC" refer to our subsidiaryBarnes & Noble College Booksellers, LLC . References to "MBS" refer to our subsidiaryMBS Textbook Exchange, LLC . Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. "Fiscal 2022" means the 52 weeks endedApril 30, 2022 , "Fiscal 2021" means the 52 weeks endedMay 1, 2021 , and "Fiscal 2020" means the 53 weeks endedMay 2, 2020 . Overview Description of businessBarnes & 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 acrossthe 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 1,427 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content, tools and general merchandise within a dynamic omnichannel 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 academic 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, expand our e-commerce capabilities and accelerate such capabilities through our merchandising partnership withFanatics Retail Group Fulfillment, LLC, Inc. ("Fanatics") andFanatics Lids College, Inc. ("FLC") (collectively referred to herein as the "FLC Partnership "), increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect gross general merchandise sales to increase over the long term, as our product assortments continue to emphasize and reflect changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, which we expect to be further enhanced and accelerated through theFLC Partnership . Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our logo and emblematic general merchandise business. We believe the Barnes & Noble brand (licensed from our former parent) along with our subsidiary brands, BNC and MBS, are synonymous with innovation in bookselling and campus retailing, and are widely recognized and respected brands inthe 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 to our relationship with 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.
For a discussion of our business, see Part I - Item 1. Business.
First Day Inclusive Access Programs
We provide product and service offerings designed to address the most pressing
issues in higher education, including equitable access, enhanced convenience and
improved affordability through innovative course material delivery models
designed to drive improved student experiences and outcomes. We offer our BNC
First Day® inclusive access programs, consisting of First Day and First Day
Complete, in which course materials, including both physical and digital
content, are offered at a reduced price through a course fee or included in
tuition, and delivered to students on or before the first day of class.
•Through First Day, digital course materials are adopted by a faculty member for
a single course, and students receive their materials through their learning
management system.
•First Day Complete is adopted by an institution and includes all classes,
providing students both physical and digital materials. The First Day Complete
model drives substantially greater unit sell-through for the bookstore.
Offering courseware sales through our inclusive access First Day and First Day
Complete models is a key, and increasingly important strategic initiative of
ours to meet the market demands of substantially reduced pricing to students, as
well as the opportunity to improve student outcomes, while, at the same time,
increasing our market share, revenue and relative gross profits of courseware
sales given the higher volumes of units sold in such models as compared to
historical sales models that rely on individual student marketing and sales. We
expect these programs to allow us to ultimately reverse historical long-
34--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
term trends in courseware revenue declines, which has occurred at those schools where such programs have been adopted. During Fiscal 2022, First Day total revenue increased 91% from the prior year period.
Partnership with Fanatics and FLC
InDecember 2020 , we entered into theFLC Partnership . Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our general merchandise business. Fanatics' cutting-edge e-commerce and technology expertise offers our campus stores expanded product selection, a world-class online and mobile experience, and a progressive direct-to-consumer platform. Coupled with Lids (FLC's parent company), the leading standalone brick and mortar retailer focused exclusively on licensed fan and alumni products, our campus stores have improved access to trend and sales performance data on licensees, product styles, and design treatments. We maintain our relationships with campus partners and remain responsible for staffing and managing the day-to-day operations of our campus bookstores. We also work closely with our campus partners to ensure that each campus store maintains unique aspects of in-store merchandising, including localized product assortments and specific styles and designs that reflect each campus's brand. We leverage Fanatics' e-commerce technology and expertise for the operational management of the emblematic merchandise and gift sections of our campus store websites. FLC manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores. InDecember 2020 ,Fanatics, Inc. andLids Holdings, Inc. jointly made a strategic equity investment in BNED. OnApril 4, 2021 , as contemplated by theFLC Partnership's merchandising agreement, we sold our logo and emblematic general merchandise inventory to FLC, which was finalized during the first quarter of Fiscal 2022. As contemplated by theFLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products during the first quarter of Fiscal 2022. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis prior toApril 4, 2021 . For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Note 5. Equity and Earnings Per Share.
COVID-19 Business Impact
Our business experienced an unprecedented and significant negative impact as a result of COVID-19 related campus store closures. Beginning inMarch 2020 , colleges and universities nationwide began to close their campuses in light of safety concerns and as a result of local and state issued stay-at-home orders. By mid-March, during our Fiscal 2020 fourth quarter, we closed the majority of our physical campus stores to protect the health and safety of our customers and employees. While our campus stores were closed, we continued to serve institutions and students through our campus websites, providing free shipping on all orders and an expanded digital content offering to provide immediate access to course materials to students at our campuses that closed due to COVID-19. We developed and implemented plans to safely reopen our campus stores based on national, state and local guidelines, as well as the campus policies set by the school administration. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including variants, on enrollments, campus activities, university budgets, athletics and other areas that directly affect our business operations. Although most four year schools returned to a traditional on-campus environment for learning in the Fall semester, as well as hosted traditional on campus sporting activities, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic, including on enrollments at community colleges and by international students, the continuation of remote and hybrid class offerings, and its effect on our ability to source products, including textbooks and general merchandise offerings. As we entered the Spring rush period in earlyJanuary 2022 , we continued to experience the ongoing effects of COVID-19 with the surge of the Omicron variant further impacting students return to campus and on-campus activities. In early January, while the majority of schools brought students back to campus, some schools chose to conduct classes virtually for the beginning of the semester, while other schools chose to delay their start dates (and some schools both delayed the start of the semester and started classes virtually), thus reducing and/or delaying sales later into the quarter or shifting some sales to our fourth quarter. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine how to operate our bookstores in the safest manner for our employees and customers. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations.
Segments
We have three reportable segments: Retail, Wholesale and DSS. 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 provides information regarding the three
segments.
35--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Retail Segment
The Retail Segment operates 1,427 college, university, and K-12 school bookstores, comprised of 805 physical bookstores and 622 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 independently or along with our merchant partners, 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 are offered at a reduced price through a fee charged by the institution or included in tuition, 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 Segment
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 3,100 physical bookstores (including our Retail Segment's 805 physical bookstores) and sources and distributes new and used textbooks to our 622 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 350 college bookstores.
DSS Segment
The Digital Student Solutions ("DSS") Segment includes 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®,
an institutional and direct-to-student subscription-based offering providing
textbook solutions, expert questions and answers, writing and tutoring.
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.
Seasonality
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. 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 and Other Factors Affecting Our Business
For a discussion of our trends and other factors affecting our business, see Part I - Item 1. Business.
Results of Operations
Elements of Results of Operations
Our consolidated financial statements reflect our consolidated financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in
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 high margin general merchandise, including 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.
Our cost of sales primarily includes 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.
36--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include long-term incentive plan compensation expense 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 as discussed in the Overview - Segments discussion above.
Basis of Consolidation
The results of operations reflected in our consolidated financial statements are presented on a consolidated basis. All material intercompany accounts and transactions have been eliminated in consolidation.
Results of Operations - Summary
Our Fiscal 2022, Fiscal 2021 and Fiscal 2020 results have been significantly
impacted by the ongoing COVID-19 pandemic, as many schools continued to adjust
their learning model and on-campus activities in response to the pandemic. See
"Overview" for more information.
52 weeks ended 52 weeks ended 53 weeks ended
Dollars in thousands April 30, 2022
Restated (a)
Sales: (b)(c)
Product sales and other $ 1,398,046 $ 1,299,740 $ 1,671,200
Rental income 133,354 134,150 179,863
Total sales $ 1,531,400 $ 1,433,890 $ 1,851,063
Net loss $ (68,857) $ (139,810) $ (38,250)
Adjusted Earnings (non-GAAP) (d) $ (55,614) $
(96,523)
Adjusted EBITDA (non-GAAP) (d) Retail $ 8,679$ (66,827) $ 36,227 Wholesale 3,782 18,598 21,567 DSS 5,524 4,491 3,409 Corporate Services (23,002) (22,079) (19,403) Eliminations 225 192 359 Total Adjusted EBITDA (non-GAAP)$ (4,792) $
(65,625)
(a)We identified certain out of period adjustments related primarily to Income tax benefit, as well as Restructuring and other charges, for the 52 weeks endedMay 1, 2021 . The adjustments increased our fiscal year 2021 reported net loss by$8.0 million but did not have an impact on Adjusted EBITDA (non-GAAP), cash flows or liquidity. Refer to Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies for further information. (b)In Fiscal 2022, Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows. (c)EffectiveApril 4, 2021 , as contemplated by theFLC Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo and emblematic general merchandise sales to FLC and Fanatics. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the periods prior toApril 4, 2021 . For Retail Gross Comparable Store Sales details, see below.
(d)Adjusted Earnings and Adjusted EBITDA are a non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.
37--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales:
52 weeks ended 52 weeks ended 53 weeks ended
April 30, 2022 May 1, 2021 May 2, 2020
Sales:
Product sales and other 91.3 % 90.6 % 90.3 %
Rental income 8.7 9.4 9.7
Total sales 100.0 100.0 100.0
Cost of sales (exclusive of depreciation and
amortization expense):
Product and other cost of sales (a) 77.4 84.2 78.0
Rental cost of sales (a) 57.5 65.0 58.3
Total cost of sales 75.7 82.4 76.1
Gross margin 24.3 17.6 23.9
Selling and administrative expenses 25.0 23.6 21.9
Depreciation and amortization expense 3.2 3.7 3.3
Impairment loss (non-cash) 0.4 1.9 -
Restructuring and other charges 0.1 0.7 1.0
Operating loss (4.4) % (12.3) % (2.3) %
(a) Represents the percentage these costs bear to the related sales, instead of total sales.
Results of Operations - 52 weeks ended
52
weeks ended,
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations (b) Total
Sales:
Product sales and other
$ - $ (56,176)$ 1,398,046 Rental income 133,354 - - - - 133,354 Total sales 1,439,664 112,246 35,666 - (56,176) 1,531,400 Cost of sales (exclusive of depreciation and amortization expense): Product and other cost of sales 1,040,022 92,464 5,738 - (56,243) 1,081,981 Rental cost of sales 76,659 - - - - 76,659 Total cost of sales 1,116,681 92,464 5,738 - (56,243) 1,158,640 Gross profit 322,983 19,782 29,928 - 67 372,760 Selling and administrative expenses 315,124 16,000 29,472 23,002 (158) 383,440 Depreciation and amortization expense 36,635 5,418 7,257 71 - 49,381 Sub-Total:$ (28,776) $ (1,636) $ (6,801) $ (23,073) $ 225 (60,061) Impairment loss (non-cash) 6,411 - - - - 6,411 Restructuring and other charges 2,118 (2,131) - 957 - 944 Operating loss$ (37,305) $ 495 $ (6,801) $ (24,030) $ 225$ (67,416) 38
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
52 weeks
ended,
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations (b) Total
Sales:
Product sales and other
$ - $ (89,779) 1,299,740
Rental income 134,150 - - - - 134,150
Total sales 1,330,470 165,825 27,374 - (89,779) 1,433,890
Cost of sales (exclusive
of depreciation and
amortization expense):
Product and other cost of
sales 1,047,613 131,142 5,056 - (89,822) 1,093,989
Rental cost of sales 87,240 - - - - 87,240
Total cost of sales 1,134,853 131,142 5,056 - (89,822) 1,181,229
Gross profit 195,617 34,683 22,318 - 43 252,661
Selling and
administrative expenses 278,149 16,085 22,116 22,079 (149) 338,280
Depreciation and
amortization expense 39,634 5,461 7,763 109 - 52,967
Sub-Total: $ (122,166) $ 13,137 $ (7,561) $ (22,188) $ 192 (138,586)
Impairment loss
(non-cash) 27,630 - - - - 27,630
Restructuring and other
charges 5,514 (1,595) 571 6,188 - 10,678
Operating loss $ (155,310) $ 14,732 $ (8,132) $ (28,376) $ 192 $ (176,894)
(a) In Fiscal 2022 and Fiscal 2021, our business experienced an unprecedented
and significant impact as a result of the COVID-19 pandemic. The impact of which
affects the comparability of our results of operations and cash flows.
(b) For additional information related to the intercompany activities and eliminations, see Part II - Item 8. Financial Statements and Supplementary Data - Note 4. Segment Reporting.
(c) We identified certain out of period adjustments related to Restructuring and other charges for the 52 weeks endedMay 1, 2021 . The adjustments increased our fiscal year 2021 reported net loss by$8.0 million but did not have an impact on Adjusted EBITDA (non-GAAP), cash flows or liquidity. Refer to Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies for further information.
Sales
The following table summarizes our sales:
52 weeks ended
Dollars in thousands April 30, 2022 May 1, 2021 %
Product sales and other 1,398,046 1,299,740 7.6%
Rental income 133,354 134,150 (0.6)%
Total Sales $ 1,531,400 $ 1,433,890 6.8%
Our total sales increased by $97.5 million , or 6.8%, to $1,531.4 million during
the 52 weeks ended April 30, 2022 from $1,433.9 million during the 52 weeks
ended May 1, 2021 . The sales increase is primarily related to re-opening stores
that had temporarily closed due to the COVID-19 pandemic in the prior year. The
increase is offset by the negative impact on sales primarily due to lower
enrollments, primarily at community colleges and by international students, the
continuation of remote and hybrid class offerings and lower logo and emblematic
sales as they are reflected in sales on a net basis in our consolidated
financial statements, as compared to the recognition of logo and emblematic
sales on a gross basis in the periods prior to April 4, 2021 . For additional
information, see Retail Sales discussion below.
39--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
The components of the sales variances for the 52 week period are reflected in the table below. Sales variances 52 weeks ended Dollars in millions April 30, 2022 May 1, 2021 Retail Sales New stores $ 67.2$ 64.2 Closed stores (42.3) (35.4) Comparable stores (a) 83.5 (409.2) Textbook rental deferral (1.8) (3.3) Service revenue (b) (2.4) (0.7) Other (c) 5.0 2.0 Retail Sales subtotal:$ 109.2 $ (382.4) Wholesale Sales$ (53.6) $ (32.5) DSS Sales $ 8.3$ 3.7 Eliminations (d) $ 33.6$ (6.0) Total sales variance: $ 97.5$ (417.2) (a) InDecember 2020 , we entered into merchandising partnership with FanaticsRetail Group Fulfillment, LLC, Inc. ("Fanatics") andFanatics Lids College, Inc. ("FLC") (collectively referred to herein as the "FLC Partnership "). EffectiveApril 4, 2021 , as contemplated by theFLC Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo and emblematic general merchandise sales to FLC and Fanatics. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the periods prior toApril 4, 2021 . For Retail Gross Comparable Store Sales details, see below.
(b) Service revenue includes brand partnerships, shipping and handling, 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, 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 total sales increased by$109.2 million , or 8.2%, to$1,439.7 million during the 52 weeks endedApril 30, 2022 from$1,330.5 million during the 52 weeks endedMay 1, 2021 . Retail added 92 new stores and closed 82 stores during the 52 weeks endedApril 30, 2022 , ending the period with a total of 1,427 stores. Fiscal 2022 Fiscal 2021 Physical Virtual Physical Virtual Number of stores at beginning of period 769 648 772 647 Opened 57 35 40 58 Closed 21 61 43 57 Number of stores at end of period 805 622 769 648 The comparability of Products and other sales, specifically logo and emblematic sales, is impacted by the recognition of logo and emblematic sales on a net basis in our consolidated financial statements during the 52 weeks endedApril 30, 2022 , as compared to on a gross basis prior toApril 4, 2021 . See the Retail Gross Comparable Store Sales discussion below. Additionally, Product and other sales and Rental income are impacted by the growth of First Day Complete, comparable store sales, new store openings and store closings, as well as the impact from the COVID-19 pandemic. Sales were impacted by overall enrollment declines in higher education. Although most four year schools returned to a traditional on-campus environment for learning in the Fall 2021 semester, as well as hosted traditional on campus sporting activities, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic, including on enrollments at community colleges and by international students, and the continuation of remote and hybrid class offerings. While many college athletic conferences resumed their sport activities, other on campus events, such as parent's weekends or alumni events, continue to be 40
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
either eliminated or severely restricted, which further impacted our general merchandise business. As we entered the Spring rush period in earlyJanuary 2022 , we continued to experience the ongoing effects of COVID-19 with the surge of the Omicron variant further impacting students return to campus and on-campus activities. In early January, while the majority of schools brought students back to campus, some schools chose to conduct classes virtually for the beginning of the semester, while other schools chose to delay their start dates (and some schools both delayed the start of the semester and started classes virtually), thus reducing and/or delaying sales. Product and other sales for Retail increased by$110.0 million , or 9.2%, to$1,306.3 million during the 52 weeks endedApril 30, 2022 from$1,196.3 million during the 52 weeks endedMay 1, 2021 . During the 52 weeks endedApril 30, 2022 , course material sales increased by$54.4 million or 8.1% to$710.7 million , and general merchandise sales increased by$59.0 million or 11.8% to$558.8 million , offset by a decrease in service and other revenue of$2.4 million or 6.1% to$36.8 million . Course material rental income for Retail decreased by$0.8 million , or 0.6%, to$133.4 million during the 52 weeks endedApril 30, 2022 from$134.2 million during the 52 weeks endedMay 1, 2021 . The overall Retail sales increase is primarily related to re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. Course material sales were also impacted by lower enrollments, primarily at community colleges and by international students, and the continuation of remote and hybrid class offerings. During the 52 weeks endedApril 30, 2022 ,Retail Gross Comparable Store course material sales increased by 2.3%, as compared to a 15.2% decline a year ago, when the majority of our stores had temporarily closed due to the COVID-19 pandemic. See Retail Gross Comparable Store Sales discussion below. The increase in course material sales was reflective of the growth of First Day inclusive access programs, digital and eTextbook revenue increases, due to a shift to lower cost options and more affordable solutions, including digital offerings. For the 2022 Spring term, First Day Complete was offered through 76 campus bookstores compared to 14 campus bookstores in the prior year, at schools with over 380,000 in total undergraduate enrollment, up from approximately 62,000 in total undergraduate enrollment in the 2021 Spring term. Revenue for both of our First Day models increased to$234.2 million during Fiscal 2022, as compared to$122.7 million in the prior year period. During the 52 weeks endedApril 30, 2022 , logo and emblematic sales are reflected in sales on a net basis in our consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis prior toApril 4, 2021 . See Retail Gross Comparable Store Sales discussion below. During the 52 weeks endedApril 30, 2022 ,Retail Gross Comparable Store general merchandise sales increased by 76.1%, as compared to a 45.9% decline a year ago. Both results during both periods benefited greatly from the return to an on campus learning experience and the resumption of many activities and events. Sales for general merchandise, including on-campus cafe and convenience products, and trade merchandise have increased compared to the prior year, when sales were impacted by the temporary store closings due to the COVID-19 pandemic. However, general merchandise sales are still impacted by fewer students returning to campus, as many schools implemented a remote or hybrid learning model and curtailed on-campus classes and activities.
Retail Gross Comparable Store Sales
To supplement the Total Sales table presented above, the Company uses Retail Gross Comparable Store Sales as a key performance indicator. Retail Gross Comparable Store Sales includes sales from physical and virtual stores that have been open for an entire fiscal year period and does not include sales from permanently closed stores for all periods presented. For Retail Gross Comparable Store Sales, sales for logo and emblematic general merchandise fulfilled by FLC, Fanatics and digital agency sales are included on a gross basis for consistent year-over-year comparison. EffectiveApril 4, 2021 , as contemplated by theFLC Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo and emblematic general merchandise sales to FLC and Fanatics. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the periods prior toApril 4, 2021 . We believe the current Retail Gross Comparable Store Sales calculation method reflects management's view that such comparable store sales are an important measure of the growth in sales when evaluating how established stores have performed over time. We present this metric as additional useful information about the Company's operational and financial performance and to allow greater transparency with respect to important metrics used by management for operating and financial decision-making. Retail Gross Comparable Store Sales are also referred to as "same-store" sales by others within the retail industry and the method of calculating comparable store sales varies across the retail industry. As a result, our calculation of comparable store sales is not necessarily comparable to similarly titled measures reported by other companies and is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP. 41
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Retail Gross Comparable Store Sales variances for Retail by category for the 52 week period are as follows:
Dollars in millions 52
weeks ended
April 30, 2022 May 1, 2021
Textbooks (Course Materials) $ 21.2 2.3 % $ (158.4) (15.2) %
General Merchandise 212.5 76.1 % (235.3) (45.9) %
Trade Books 7.0 63.0 % (20.9) (64.3) %
Total Retail Gross Comparable Store Sales $ 240.7 19.6 % $ (414.6) (26.1) %
Wholesale
Wholesale sales decreased by $53.6 million , or 32.3%, to $112.2 million during
the 52 weeks ended April 30, 2022 from $165.8 million during the 52 weeks ended
May 1, 2021 . The decrease is primarily due to lower gross sales impacted by the
COVID-19 pandemic, including supply constraints resulting from the lack of on
campus textbook buyback opportunities during the prior fiscal year, a decrease
in customer demand resulting from a shift in buying patterns from physical
textbooks to digital products, and lower demand from other third-party clients,
partially offset by lower returns and allowances. During the prior year period,
the Wholesale operations assumed direct-to-student fulfillment of course
material orders for the Retail Segment campus bookstores that were not fully
operational due to COVID-19 campus store closures, whereas the sales shifted
back to the physical bookstores in the current period.
DSS
DSS total sales increased by
Cost of Sales and Gross Margin
Our cost of sales decreased as a percentage of sales to 75.7% during the 52 weeks endedApril 30, 2022 compared to 82.4% during the 52 weeks endedMay 1, 2021 . Our gross margin increased by$120.1 million , or 47.5%, to$372.8 million , or 24.3% of sales, during the 52 weeks endedApril 30, 2022 from$252.7 million , or 17.6% of sales, during the 52 weeks endedMay 1, 2021 . During the 52 weeks endedApril 30, 2022 andMay 1, 2021 , we recognized a merchandise inventory loss and write-off of$0.4 million and$15.0 million , respectively, in cost of goods sold in the Retail Segment discussed below. Excluding the merchandise inventory loss and write-off, cost of goods sold and gross margin was 75.6% and 24.4%, respectively, of sales during the 52 weeks endedApril 30, 2022 compared to 81.3% and 18.7%, respectively, of sales during the 52 weeks endedMay 1, 2021 . For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Organization and Note 2. Summary of Significant Accounting Policies - Merchandise Inventories.
Retail
The following table summarizes the Retail cost of sales:
52 weeks ended 52 weeks ended
% of % of
Dollars in thousands April 30, 2022 Related Sales May 1, 2021 Related Sales
Product and other cost of sales $ 1,040,022 79.6% $ 1,047,613 87.6%
Rental cost of sales 76,659 57.5% 87,240 65.0%
Total Cost of Sales $ 1,116,681 77.6% $ 1,134,853 85.3%
The following table summarizes the Retail gross margin:
52 weeks ended 52 weeks ended
% of % of
Dollars in thousands April 30, 2022 Related Sales May 1, 2021 Related Sales
Product and other gross margin $ 266,288 20.4% $ 148,707 12.4%
Rental gross margin 56,695 42.5% 46,910 35.0%
Gross Margin $ 322,983 22.4% $ 195,617 14.7%
42--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
For the 52 weeks ended
•Product and other gross margin increased (800 basis points), driven primarily by a favorable sales mix (410 basis points) due to higher general merchandise sales and higher margin rates (445 basis points) due to lower inventory reserves and lower markdowns, partially offset by an inventory merchandise loss of$0.4 million related to the finalization of the sale of our logo and emblematic general merchandise inventory below cost to FLC which occurred in the fourth quarter in Fiscal 2021. The increase in margin was also partially offset by higher contract costs as a percentage of sales related to our college and university contracts (60 basis points) resulting from contract renewals and new store contracts. •Rental gross margin increased (750 basis points), driven primarily by lower contract costs as a percentage of sales related to our college and university contracts (750 basis points) and a favorable rental mix (50 basis points), partially offset by lower rental margin rates (50 basis points).
Wholesale
The cost of sales and gross margin for Wholesale were$92.5 million , or 82.4% of sales, and$19.8 million , or 17.6% of sales, respectively, during the 52 weeks endedApril 30, 2022 . The cost of sales and gross margin for Wholesale were$131.1 million , or 79.1% of sales, and$34.7 million , or 20.9% of sales, respectively, during the 52 weeks endedMay 1, 2021 . The gross margin decreased to 17.6% during the 52 weeks endedApril 30, 2022 from 20.9% during the 52 weeks endedMay 1, 2021 . The decrease was primarily due to the unfavorable impact of returns and allowances and higher markdowns, partially offset by a favorable sales mix. DSS Gross margin for the DSS segment was$29.9 million , or 83.9% of sales, during the 52 weeks endedApril 30, 2022 and$22.3 million , or 81.5% of sales, during the 52 weeks endedMay 1, 2021 . The gross margins are driven primarily by high margin subscription service revenue earned.
Intercompany Eliminations
During the 52 weeks endedApril 30, 2022 and 52 weeks endedMay 1, 2021 , sales eliminations were$56.2 million and$89.8 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 52 weeks endedApril 30, 2022 and 52 weeks endedMay 1, 2021 , the cost of sales eliminations were$56.2 million and$89.8 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 both 52 weeks periods ended
Selling and Administrative Expenses
52 weeks ended 52 weeks ended
% of % of
Dollars in thousands April 30, 2022 Sales May 1, 2021 Sales
Selling and Administrative Expenses $ 383,440 25.0% $ 338,280 23.6%
During the 52 weeks endedApril 30, 2022 , selling and administrative expenses increased by$45.2 million , or 13.4%, to$383.4 million from$338.3 million during the 52 weeks endedMay 1, 2021 . The variances by segment are discussed by segment below. The increase in selling and administrative expenses is primarily related to re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. Retail For Retail, selling and administrative expenses increased by$37.0 million , or 13.3%, to$315.1 million during the 52 weeks endedApril 30, 2022 from$278.1 million during the 52 weeks endedMay 1, 2021 . This increase was primarily due to a$34.5 million increase in stores payroll and operating expenses including comparable stores, virtual stores and new/closed stores payroll and operating expenses, and a$2.5 million increase in corporate payroll, infrastructure and product development costs. The payroll increase is primarily related to re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. 43
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Wholesale
For Wholesale, selling and administrative expenses decreased by$0.1 million , or 0.5%, to$16.0 million during the 52 weeks endedApril 30, 2022 from$16.1 million during the 52 weeks endedMay 1, 2021 . The decrease in selling and administrative expenses was primarily driven by lower compensation expense and lower operating costs. DSS For DSS, selling and administrative expenses increased by$7.4 million to$29.5 million during the 52 weeks endedApril 30, 2022 from$22.1 million during the 52 weeks endedMay 1, 2021 . The increase in costs was primarily driven by higher compensation expense, higher operating costs invested in the business associated with product development and sales infrastructure costs aimed at increasing revenue.
Corporate Services
Corporate Services' selling and administrative expenses increased by$0.9 million , or 4.2%, to$23.0 million during the 52 weeks endedApril 30, 2022 from$22.1 million during the 52 weeks endedMay 1, 2021 . The increase was primarily due to higher professional services costs.
Depreciation and Amortization Expense
52 weeks ended 52 weeks ended
April 30, % of % of
Dollars in thousands 2022 Sales May 1, 2021 Sales
Depreciation and Amortization Expense $ 49,381 3.2% $ 52,967 3.7%
Depreciation and amortization expense decreased by$3.6 million , or 6.8%, to$49.4 million during the 52 weeks endedApril 30, 2022 from$53.0 million during the 52 weeks endedMay 1, 2021 . The decrease was primarily attributable to lower depreciable assets and intangibles due to the store impairment loss recognized during Fiscal 2022 and Fiscal 2021. See impairment loss discuss below.
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. For information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Note 6. Fair Value Measurements. During the 52 weeks endedApril 30, 2022 , we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of$6.4 million (both pre-tax and after-tax), comprised of$0.7 million ,$1.8 million ,$3.7 million and$0.2 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively. During the 52 weeks endedMay 1, 2021 , we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of$27.6 million ,$20.5 million after-tax, comprised of$5.1 million ,$13.3 million ,$6.3 million and$2.9 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively.
Restructuring and other charges
During the 52 weeks endedApril 30, 2022 , we recognized restructuring and other charges totaling$1.0 million , comprised primarily of$1.3 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives and$1.8 million for costs associated with professional service costs for restructuring, process improvements, development and integration associated with theFLC Partnership , shareholder activist activities, and liabilities for a facility closure, partially offset by a$2.1 million in an actuarial gain related to a frozen retirement benefit plan (non-cash). During the 52 weeks endedMay 1, 2021 , we recognized restructuring and other charges totaling$10.7 million (Restated), comprised primarily of$6.6 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives,$5.7 million for professional service costs related to restructuring, process improvements, the financial advisor strategic review process, costs related to development and integration associated with Fanatics and FLC partnership agreements and shareholder activist activities, and liabilities for a facility closure, partially offset by a$1.6 million in an actuarial gain related to a frozen retirement benefit plan (non-cash). 44
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Operating Loss
52 weeks ended - Restated
52 weeks ended (a)
% of % of
Dollars in thousands April 30, 2022 Sales May 1, 2021 Sales
Operating Loss $ (67,416) (4.4)% $ (176,894) (12.3)%
(a) We identified certain out of period adjustments related to Restructuring
and other charges for the 52 weeks ended May 1, 2021 . Refer to Item 8. Financial
Statements and Supplementary Data - Note 2. Summary of Significant Accounting
Policies for further information.
Our operating loss was $(67.4) million during the 52 weeks ended April 30, 2022
compared to operating loss of $(176.9) million during the 52 weeks ended May 1,
2021 . This operating loss increase was due to the matters discussed above.
For the 52 weeks ended April 30, 2022 , excluding the $0.4 million of merchandise
inventory loss and write-off, $1.0 million of restructuring and other charges
and the $6.4 million impairment loss (non-cash), all discussed above, operating
loss was $(59.6) million (or (3.9)% of sales).
For the 52 weeks ended May 1, 2021 , excluding the $15.0 million of merchandise
inventory loss and write-off, $10.7 million of restructuring and other charges
and the $27.6 million impairment loss (non-cash), all discussed above, operating
loss was $(123.6) million (or (8.6)% of sales).
Interest Expense, Net
52 weeks ended
Dollars in thousands April 30, 2022 May 1, 2021
Interest Expense, Net $ 10,096 $ 8,087
Net interest expense increased by $2.0 million to $10.1 million during the 52
weeks ended April 30, 2022 from $8.1 million during the 52 weeks ended May 1,
2021 primarily due to higher borrowings compared to the prior year.
Income Tax Benefit
52 weeks ended - Restated
52 weeks ended (a)
Dollars in thousands April 30, 2022 Effective Rate May 1, 2021 Effective Rate
Income Tax Benefit $ (8,655) 11.2% $ (45,171) 24.4%
(a) We identified certain out of period adjustments related primarily to Income
tax benefit for the 52 weeks ended May 1, 2021 . Refer to Item 8. Financial
Statements and Supplementary Data - Note 2. Summary of Significant Accounting
Policies for further information.
We recorded an income tax benefit of $(8.7) million on a pre-tax loss of $(77.5)
million during the 52 weeks ended April 30, 2022 , which represented an effective
income tax rate of 11.2% and an income tax benefit of $(45.2) million on a
pre-tax loss of $(185.0) million during the 52 weeks ended May 1, 2021 , which
represented an effective income tax rate of 24.4%.
The effective tax rate for the 52 weeks ended April 30, 2022 is significantly
lower as compared to the prior year comparable period due to the change in
pre-tax loss and the change in the assessment of the realization of deferred tax
assets as compared to prior year loss carrybacks.
Impact of
OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (The "CARES Act") was enacted. We have analyzed the provisions, which provide for a technical correction to allow for full expensing of qualified leasehold improvements, modifications to charitable contribution and net operating loss limitations ("NOLs"), modifications to the deductibility of business interest expense, as well as Alternative Minimum Tax ("AMT") credit acceleration. The most significant impact of the legislation for the Company was an income tax benefit of$7.2 million for the carryback of NOLs to higher tax rate years, recorded in Fiscal 2021. As ofMay 1, 2021 , we recognized a current income tax receivable for NOL carrybacks of$30.5 million in prepaid and other current assets on the consolidated balance sheet. We received a$7.8 million refund in the second quarter of Fiscal 2022 and expect to receive additional refunds of approximately$22.7 million . 45
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Net Loss
52 weeks ended
Dollars in thousands April 30, 2022 May 1, 2021
Restated (a)
Net Loss $ (68,857) $ (139,810)
(a) We identified certain out of period adjustments related primarily to Income
tax benefit, as well as Restructuring and other charges, for the 52 weeks ended
May 1 , 2021.The adjustments increased our fiscal year 2021 reported net loss by
$8.0 million but did not have an impact on Adjusted EBITDA (non-GAAP), cash
flows or liquidity. Refer to Item 8. Financial Statements and Supplementary Data
- Note 2. Summary of Significant Accounting Policies for further information.
As a result of the factors discussed above, we reported a net loss of $(68.9)
million during the 52 weeks ended April 30, 2022 , compared with a net loss of
$(139.8) million during the 52 weeks ended May 1, 2021 . Adjusted Earnings
(non-GAAP) is $(55.6) million during the 52 weeks ended April 30, 2022 , compared
with $(96.5) million during the 52 weeks ended May 1, 2021 . See Adjusted
Earnings (non-GAAP) discussion below.
Results of Operations - 52 weeks ended
52
weeks ended,
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations (c) Total
Sales:
Product sales and other $ 1,196,320 $ 165,825 $ 27,374 $ - $ (89,779) $ 1,299,740
Rental income 134,150 - - - - 134,150
Total sales 1,330,470 165,825 27,374 - (89,779) 1,433,890
Cost of sales:
Product and other cost of sales 1,047,613 131,142 5,056 - (89,822) 1,093,989
Rental cost of sales 87,240 - - - - 87,240
Total cost of sales 1,134,853 131,142 5,056 - (89,822) 1,181,229
Gross profit 195,617 34,683 22,318 - 43 252,661
Selling and administrative
expenses 278,149 16,085 22,116 22,079 (149) 338,280
Depreciation and amortization
expense 39,634 5,461 7,763 109 - 52,967
Sub-Total: $ (122,166) $ 13,137 $ (7,561) $ (22,188) $ 192 (138,586)
Impairment loss (non-cash) 27,630
Restructuring and other charges 10,678
Operating loss $ (176,894)
46--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
53 weeks ended,
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations (c) Total
Sales:
Product sales and other $ 1,533,029 $ 198,353 $ 23,661 $ - $ (83,843) 1,671,200
Rental income 179,863 - - - - 179,863
Total sales 1,712,892 198,353 23,661 - (83,843) 1,851,063
Cost of sales:
Product and other cost of sales 1,224,798 158,548 4,348 - (83,992) 1,303,702
Rental cost of sales 104,812 - - - - 104,812
Total cost of sales 1,329,610 158,548 4,348 - (83,992) 1,408,514
Gross profit 383,282 39,805 19,313 - 149 442,549
Selling and administrative
expenses 347,869 18,238 19,172 19,403 (210) 404,472
Depreciation and amortization
expense 47,099 5,963 8,670 128 - 61,860
Sub-Total: $ (11,686) $ 15,604 $ (8,529) $ (19,531) $ 359 (23,783)
Impairment loss (non-cash) 433
Restructuring and other charges 18,567
Operating loss $ (42,783)
(a) We identified certain out of period adjustments related to Restructuring
and other charges for the 52 weeks ended May 1, 2021 . The adjustments increased
our fiscal year 2021 reported net loss by $8.0 million but did not have an
impact on Adjusted EBITDA (non-GAAP), cash flows or liquidity. Refer to Item 8.
Financial Statements and Supplementary Data - Note 2. Summary of Significant
Accounting Policies for further information.
(b) In Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented
and significant impact as a result of the COVID-19 pandemic. The impact of which
affects the comparability of our results of operations and cash flows.
(c) For additional information related to the intercompany activities and eliminations, see Part II - Item 8. Financial Statements and Supplementary Data - Note 5. Segment Reporting.
Sales
The following table summarizes our sales:
52 weeks ended 53 weeks ended
Dollars in thousands May 1, 2021 May 2, 2020 %
Product sales and other 1,299,740 1,671,200 (22.2)%
Rental income 134,150 179,863 (25.4)%
Total Sales $ 1,433,890 $ 1,851,063 (22.5)%
Our total sales decreased by $417.2 million , or 22.5%, to $1,433.9 million
during the 52 weeks ended May 1, 2021 from $1,851.1 million during the 53 weeks
ended May 2, 2020 . The sales decrease is primarily related to the impact of the
additional week for Fiscal 2020, the impact from temporary store closings
related to COVID-19 earlier in the fiscal year, as well as lower in store foot
traffic, lower enrollments and fewer on-campus events due to COVID-19. The
components of the variances are reflected in the table below.
47--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Sales variances 52 weeks ended
May 1,
Dollars in millions 2021
Retail Sales
New stores $ 64.2
Closed stores (35.4)
Comparable stores (a) (409.2)
Textbook rental deferral (3.3)
Service revenue (b) (0.7)
Other (c) 2.0
Retail Sales subtotal: $ (382.4)
Wholesale Sales $ (32.5)
DSS Sales $ 3.7
Eliminations (d) $ (6.0)
Total sales variance $ (417.2)
(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. Sales for
logo and emblematic general merchandise fulfilled by FLC inventory and digital
agency sales are included on a gross basis.
(b) Service revenue includes brand partnerships, shipping and handling, 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, 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 total sales decreased by$382.4 million , or 22.3%, to$1,330.5 million during the 52 weeks endedMay 1, 2021 from$1,712.9 million during the 53 weeks endedMay 2, 2020 . Retail added 98 new stores and closed 100 stores (not including temporary store closings due to COVID-19) during the 52 weeks endedMay 1, 2021 , ending the period with a total of 1,417 stores. Fiscal 2021 Fiscal 2020 Physical Virtual Physical Virtual Number of stores at beginning of period 772 647 772 676 Opened 40 58 50 71 Closed 43 57 50 100 Number of stores at end of period 769 648 772 647 Product and other sales for Retail decreased by$336.7 million , or 22.0%, to$1,196.3 million during the 52 weeks endedMay 1, 2021 from$1,533.0 million during the 53 weeks endedMay 2, 2020 . Product and other sales are impacted by comparable store sales (as noted in the chart below), new store openings and store closings, as well as the impact from the COVID-19 pandemic. Sales were impacted by the temporary store closings due to COVID-19 earlier in the fiscal year, as well as the impact of fewer students returning to campus, as many schools implemented a remote learning model and curtailed on-campus classes and activities. While many big-conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company's high-margin general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. Textbook (Course Materials) revenue for Retail decreased primarily due to lower new and used textbook and other course materials sales, while First Day (our inclusive access program), digital and eTextbook revenue increased. EffectiveApril 4, 2021 , as per the FLC merchandising partnership agreement, logo and emblematic general merchandise sales were fulfilled by FLC and we recognized commission revenue earned for these sales on a net basis. Additionally, general merchandise sales for Retail decreased primarily due to lower emblematic apparel sales (as many athletic events were canceled due to COVID-19), lower supply product sales and lower graduation product sales (primarily due to COVID-19 related campus 48
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
closures). We have made continued progress in the development of our next generation e-commerce platform, which launched in Fiscal 2021 to deliver increased high-margin general merchandise sales.
Rental income for Retail decreased by$45.7 million , or 25.4%, to$134.2 million during the 52 weeks endedMay 1, 2021 from$179.9 million during the 53 weeks endedMay 2, 2020 . Rental income is impacted by comparable store sales, new store openings and store closings. The decrease in rental income is primarily due to decreased rental activity due to the COVID-19 pandemic as discussed above and the impact of increased digital offerings. Comparable store sales for Retail decreased for the 52 week sales period. Comparable store sales were impacted primarily by COVID-19 related campus temporary store closures, lower enrollment and on-campus events (all discussed above), a shift to lower cost options and more affordable solutions, including digital offerings, increased consumer purchases directly from publishers and other online providers, lower general merchandise sales (including graduation products and logo products for athletic events). These decreases were partially offset by increased First Day, digital and eTextbook revenue. Comparable store sales variances for Retail by category for the 52 week period is as follows: Comparable Store Sales variances for Retail (a) 52 weeks ended Dollars in millions May 1, 2021 Textbooks (Course Materials)$ (158.4) (15.2) % General Merchandise (235.3) (45.9) % Trade Books (20.9) (64.3) % Total Comparable Store Sales$ (414.6) (26.1) % (a) Comparable sales data exclude the impact of the additional week for Fiscal 2020. 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. Sales for logo and emblematic general merchandise fulfilled by FLC inventory and digital agency sales are included on a gross basis. We believe the current comparable store sales calculation method reflects the manner in which management views comparable sales, as well as the seasonal nature of our business.
Wholesale
Wholesale sales decreased by$32.5 million , or 16.4%, to$165.8 million during the 52 weeks endedMay 1, 2021 from$198.3 million during the 53 weeks endedMay 2, 2020 . The decrease is primarily due to decreased gross sales impacted by the COVID-19 pandemic, a decrease in customer demand resulting from a shift in buying patterns from physical textbooks to digital products, and lower demand from other third-party clients, partially offset by a lower returns and allowances.
DSS
DSS total sales increased by$3.7 million , or 15.7%, to$27.4 million during the 52 weeks endedMay 1, 2021 from$23.7 million during the 53 weeks endedMay 2, 2020 , primarily due to higher bartleby subscription sales, which were partially offset by lower Student Brands sales.
Cost of Sales and Gross Margin
Our cost of sales increased as a percentage of sales to 82.4% during the 52 weeks endedMay 1, 2021 compared to 76.1% during the 53 weeks endedMay 2, 2020 . Our gross margin decreased by$189.9 million , or 42.9%, to$252.7 million , or 17.6% of sales, during the 52 weeks endedMay 1, 2021 from$442.5 million , or 23.9% of sales, during the 53 weeks endedMay 2, 2020 . During the 52 weeks endedMay 1, 2021 , we recognized a merchandise inventory loss and write-off of$15.0 million in cost of goods sold in the Retail Segment discussed below. Excluding the merchandise inventory loss and write-off, cost of goods sold and gross margin was 81.3% and 18.7%, respectively, of sales during the 52 weeks endedMay 1, 2021 compared to 76.1% and 23.9%, respectively, of sales during the 53 weeks endedMay 2, 2020 . For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Organization and Note 2. Summary of Significant Accounting Policies - Merchandise Inventories. 49
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Retail
The following table summarizes the Retail cost of sales:
52 weeks ended 53 weeks ended
May 1, % of May 2, % of
Dollars in thousands 2021 Related Sales 2020 Related Sales
Product and other cost of sales $ 1,047,612 87.6% $ 1,224,798 79.9%
Rental cost of sales 87,240 65.0% 104,812 58.3%
Total Cost of Sales $ 1,134,852 85.3% $ 1,329,610 77.6%
The following table summarizes the Retail gross margin:
52 weeks ended 53 weeks ended
May 1, % of May 2, % of
Dollars in thousands 2021 Related Sales 2020 Related Sales
Product and other gross margin $ 148,708 12.4% $ 308,231 20.1%
Rental gross margin 46,910 35.0% 75,051 41.7%
Gross Margin $ 195,618 14.7% $ 383,282 22.4%
For the 52 weeks ended
•Product and other gross margin decreased (770 basis points), driven primarily by lower margin rates (435 basis points) due to higher markdowns, an unfavorable sales mix (370 basis points) due to lower high-margin general merchandise sales of approximately$231.2 million and the shift to lower margin digital courseware, and a merchandise inventory loss and write-off (100 basis points) of$15.0 million , comprised of a loss of$10.3 million related to the sale of our logo and emblematic general merchandise inventory below cost to FLC and an inventory write-off of$4.7 million related to our initiative to exit certain product offerings and streamline/rationalize our overall non-logo general merchandise product assortment resulting from the centralization of our merchandising decision-making during the year, partially offset by higher contract costs as a percentage of sales related to our college and university contracts (130 basis points) resulting from contract renewals and new store contracts. •Rental gross margin decreased (670 basis points), driven primarily by higher contract costs as a percentage of sales related to our college and university contracts (620 basis points) and unfavorable rental mix (80 basis points), partially offset by higher rental margin rates (30 basis points).
Wholesale
The cost of sales and gross margin for Wholesale were$131.1 million , or 79.1% of sales, and$34.7 million , or 20.9% of sales, respectively, during the 52 weeks endedMay 1, 2021 . The cost of sales and gross margin for Wholesale were$158.5 million , or 79.9% of sales, and$39.8 million , or 20.1% of sales, respectively, during the 53 weeks endedMay 2, 2020 . The gross margin increased to 20.9% during the 52 weeks endedMay 1, 2021 from 20.1% during the 53 weeks endedMay 2, 2020 . The increase was primarily due to the favorable impact of returns and allowances and lower markdowns, partially offset by an unfavorable sales mix. DSS Gross margin for the DSS segment was$22.3 million , or 81.5% of sales, during the 52 weeks endedMay 1, 2021 and$19.3 million , or 81.6% of sales, during the 53 weeks endedMay 2, 2020 . The increase in gross margin was primarily due to higher bartleby subscription sales.
Intercompany Eliminations
During the 52 weeks endedMay 1, 2021 and 53 weeks endedMay 2, 2020 , sales eliminations were$89.8 million and$83.9 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 52 weeks endedMay 1, 2021 and 53 weeks endedMay 2, 2020 , the cost of sales eliminations were$89.8 million and$84.0 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. 50
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
The$0.1 million of gross margin elimination reflects the net impact of the sales eliminations and cost of sales eliminations during both the 52 weeks endedMay 1, 2021 and 53 weeks endedMay 2, 2020 , 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
52 weeks ended 53 weeks ended
May 1, % of May 2, % of
Dollars in thousands 2021 Sales 2020 Sales
Selling and Administrative Expenses $ 338,280 23.6% $ 404,472 21.9%
During the 52 weeks ended
Retail
For Retail, selling and administrative expenses decreased by$69.7 million , or 20.0%, to$278.2 million during the 52 weeks endedMay 1, 2021 from$347.9 million during the 53 weeks endedMay 2, 2020 . This decrease was primarily due to a$59.3 million decrease in stores payroll and operating expenses, including comparable stores, primarily due to temporary furloughed store employees, lower virtual stores and new/closed stores payroll and operating expenses, and a decrease of$10.4 million in corporate payroll, infrastructure costs, product development costs and digital operations costs.
Wholesale
For Wholesale, selling and administrative expenses decreased by$2.1 million , or 11.8%, to$16.1 million during the 52 weeks endedMay 1, 2021 from$18.2 million during the 53 weeks endedMay 2, 2020 . The decrease in selling and administrative expenses was primarily driven by lower payroll and operating costs.
DSS
For DSS, selling and administrative expenses increased by$2.9 million to$22.1 million during the 52 weeks endedMay 1, 2021 from$19.2 million during the 53 weeks endedMay 2, 2020 . The increase in costs was primarily driven by an increase in payroll costs, higher professional services and advertising costs.
Corporate Services
Corporate Services' selling and administrative expenses increased by$2.7 million , or 13.8%, to$22.1 million during the 52 weeks endedMay 1, 2021 from$19.4 million during the 53 weeks endedMay 2, 2020 . The increase was primarily due to higher compensation-related expenses and higher operating expenses.
Depreciation and Amortization Expense
52 weeks ended 53 weeks ended
May 1, % of May 2, % of
Dollars in thousands 2021 Sales 2020 Sales
Depreciation and Amortization Expense $ 52,967 3.7% $ 61,860 3.3%
Depreciation and amortization expense decreased by $8.9 million , or 14.4%, to
$53.0 million during the 52 weeks ended May 1, 2021 from $61.9 million during
the 53 weeks ended May 2, 2020 . The decrease was primarily attributable to lower
depreciable assets and intangibles due to the store impairment loss recognized
during the third quarter of Fiscal 2021. See impairment loss discuss below.
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. For information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Note 7. Fair Value Measurements. During the 52 weeks endedMay 1, 2021 , we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of$27.6 million ,$20.5 million after-tax, comprised of$5.1 million ,$13.3 million ,$6.3 million and$2.9 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively.
During the 53 weeks ended
51--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Restructuring and other charges
During the 52 weeks endedMay 1, 2021 , we recognized restructuring and other charges totaling$10.7 million (Restated), comprised primarily of$6.6 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives,$5.7 million for professional service costs related to restructuring, process improvements, the financial advisor strategic review process, costs related to development and integration associated with Fanatics and FLC partnership agreements and shareholder activist activities, and liabilities for a facility closure, partially offset by a$1.6 million in an actuarial gain related to a frozen retirement benefit plan (non-cash). During the 53 weeks endedMay 2, 2020 , we recognized restructuring and other charges totaling$18.6 million comprised primarily of$12.7 million for severance and other employee termination and benefit costs associated with several management changes, the elimination of various positions as part of cost reduction objectives, and professional service costs for process improvements,$2.8 million for professional service costs for shareholder activist activities,$2.7 million in an actuarial loss related to a frozen retirement benefit plan (non-cash), and$0.6 million for a store level asset impairment charge, offset by$0.2 million related to reduction of liabilities for a facility closure. Operating Loss 52 weeks ended - Restated (a) 53 weeks ended May 1, % of May 2, % of Dollars in thousands 2021 Sales 2020 Sales Operating Loss$ (176,894) (12.3)%$ (42,783) (2.3)% (a) We identified certain out of period adjustments related to Restructuring and other charges for the 52 weeks endedMay 1, 2021 . Refer to Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies for further information. Our operating loss was$(176.9) million during the 53 weeks endedMay 1, 2021 compared to operating loss of$(42.8) million during the 53 weeks endedMay 2, 2020 . This operating loss increase was due to the matters discussed above. For the 52 weeks endedMay 1, 2021 , excluding the$15.0 million of merchandise inventory loss and write-off,$10.7 million of restructuring and other charges and the$27.6 million impairment loss (non-cash), all discussed above, operating loss was$(123.6) million (or (8.6)% of sales). For the 53 weeks endedMay 2, 2020 , excluding the$18.6 million of restructuring and other charges and the$0.4 million impairment loss, all discussed above, operating loss was$(23.8) million (or (1.3)% of sales). Interest Expense, Net 52 weeks ended 53 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 Interest Expense, Net$ 8,087 $ 7,445 Net interest expense increased by$0.6 million to$8.1 million during the 52 weeks endedMay 1, 2021 from$7.4 million during the 53 weeks endedMay 2, 2020 primarily due to higher average borrowings. Income Tax Benefit 52 weeks ended - Restated (a) 53 weeks ended May 1, May 2, Dollars in thousands 2021 Effective Rate 2020 Effective Rate Income Tax Benefit$ (45,171) 24.4%$ (11,978) 23.8% (a) We identified certain out of period adjustments related to Restructuring and other charges for the 52 weeks endedMay 1, 2021 . Refer to Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies for further information. We recorded an income tax benefit of$(45.2) million on a pre-tax loss of$(185.0) million during the 52 weeks endedMay 1, 2021 , which represented an effective income tax rate of 24.4% and an income tax benefit of$(12.0) million on a pre-tax loss of$(50.2) million during the 53 weeks endedMay 2, 2020 , which represented an effective income tax rate of 23.8%. The effective tax rate for the 52 weeks endedMay 1, 2021 is higher as compared to the comparable prior year period due to various permanent differences and the impact of the CARES Act. 52
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Impact of
The Tax Cuts and Jobs Act (the "Act") was enacted onDecember 22, 2017 . The Act reduces theU.S. federal corporate income tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, among other provisions. In accordance withSAB 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118), we completed our accounting for the tax effects of the enactment of the Act within the provisional period as ofApril 27, 2019 . We recorded measurement period adjustments during Fiscal 2019 to reduce our net deferred tax liability by$3.9 million , which primarily relates to the acceleration of certain deductions as permitted by theU.S. tax code. The most significant impact of the legislation for the Company was a$20.4 million reduction of the value of our net deferred (which represents future tax liabilities) and long-term tax liabilities as a result of lowering theU.S. corporate income tax rate from 35% to 21%, which was recorded in Fiscal 2018. We also recorded a liability associated with the one-time transition tax. This amount is not material. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (The "CARES Act") was enacted. We have analyzed the provisions, which provide for a technical correction to allow for full expensing of qualified leasehold improvements, modifications to charitable contribution and net operating loss limitations ("NOLs"), modifications to the deductibility of business interest expense, as well as Alternative Minimum Tax ("AMT") credit acceleration. The most significant impact of the legislation for the Company was an income tax benefit of$7.2 million for the carryback of NOLs to higher tax rate years, recorded in Fiscal 2021. As ofMay 1, 2021 , we recognized a current income tax receivable for NOL carrybacks of$30.5 million in prepaid and other current assets on the consolidated balance sheet. Net Loss 52 weeks ended 53 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 Restated (a) Net Loss$ (139,810) $ (38,250) (a) We identified certain out of period adjustments related primarily to Income tax benefit, as well as Restructuring and other charges, for the 52 weeks endedMay 1 , 2021.The adjustments increased our fiscal year 2021 reported net loss by$8.0 million but did not have an impact on Adjusted EBITDA (non-GAAP), cash flows or liquidity. Refer to Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies for further information. As a result of the factors discussed above, we reported a net loss of$(139.8) million during the 52 weeks endedMay 1, 2021 , compared with a net loss of$(38.3) million during the 53 weeks endedMay 2, 2020 . Adjusted Earnings (non-GAAP) is $() million during the 52 weeks endedMay 1, 2021 , compared with$(21.1) million during the 53 weeks endedMay 2, 2020 . See Adjusted Earnings (non-GAAP) discussion below. 53
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Use of Non-GAAP Measures - Adjusted Earnings, Adjusted EBITDA, Adjusted EBITDA by Segment, and Free Cash Flow
To supplement our results prepared in accordance with generally accepted
accounting principles ("GAAP"), we use the measure of Adjusted Earnings,
Adjusted EBITDA, Adjusted EBITDA by Segment, and Free Cash Flow, which are
non-GAAP financial measures under Securities and Exchange Commission (the "SEC")
regulations. We define Adjusted Earnings as net income adjusted for certain
reconciling items that are subtracted from or added to net income (loss). We
define Adjusted EBITDA as net income (loss) 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 (loss). We define Free
Cash Flow as Cash Flows from Operating Activities less capital expenditures,
cash interest and cash taxes.
To properly and prudently evaluate our business, we encourage you to review our
consolidated financial statements included elsewhere in this Form 10-K, the
reconciliation of Adjusted Earnings to net income (loss), the reconciliation of
consolidated Adjusted EBITDA to consolidated net income (loss), and the
reconciliation of Adjusted EBITDA by Segment to net income (loss) by segment,
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 at a consolidated level and at a segment level 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 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 management believes do not reflect the ordinary
performance of our operations in a particular period. Our Board of Directors and
management also use Adjusted EBITDA and Adjusted EBITDA by Segment, at a
consolidated and at a segment level, as one of the primary methods for planning
and forecasting expected performance, for evaluating on a quarterly and annual
basis actual results against such expectations, and as a measure for performance
incentive plans. Management also uses Adjusted EBITDA by Segment to determine
segment capital allocations. We believe that the inclusion of Adjusted Earnings,
Adjusted EBITDA, and Adjusted EBITDA by Segment results provides investors
useful and important information regarding our operating results, in a manner
that is consistent with management's evaluation of business performance. We
believe that Free Cash Flow provides useful additional information concerning
cash flow available to meet future debt service obligations and working capital
requirements and assists investors in their understanding of our operating
profitability and liquidity as we manage the business to maximize margin and
cash flow.
Consolidated Adjusted Earnings (non-GAAP)
52 weeks ended 52 weeks ended 53 weeks ended
Dollars in thousands April 30, 2022 May 1, 2021 May 2, 2020
Restated (a)
Net loss (b) $
(68,857)
13,243 43,287 17,124
Adjusted Earnings (non-GAAP) $
(55,614)
Reconciling items, pre-tax Impairment loss (non-cash) (c) $ 6,411$ 27,630 $ 433 Merchandise inventory loss and write-off (c) 434 14,960 - Content amortization (non-cash) (d) 5,454 5,034 4,082 Restructuring and other charges (c) 944 10,678 18,567 Reconciling items, pre-tax 13,243 58,302 23,082 Less: Pro forma income tax impact (c)(e) - 15,015 5,958 Reconciling items, after-tax $
13,243
54--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Consolidated Adjusted EBITDA (non-GAAP)
52 weeks ended 52 weeks ended 53 weeks ended
Dollars in thousands April 30, 2022 May 1, 2021 May 2, 2020
Restated (a)
Net loss (b) $ (68,857) $ (139,810) $ (38,250)
Add:
Depreciation and amortization expense 49,381 52,967 61,860
Interest expense, net 10,096 8,087 7,445
Income tax benefit (8,655) (45,171) (11,978)
Impairment loss (non-cash) (c) 6,411 27,630 433
Merchandise inventory loss and write-off (c) 434 14,960 -
Content amortization (non-cash) (d) 5,454 5,034 4,082
Restructuring and other charges (c) 944 10,678 18,567
Adjusted EBITDA (non-GAAP) $ (4,792) (a) We identified certain out of period adjustments related primarily to Income tax benefit, as well as Restructuring and other charges, for the 52 weeks endedMay 1, 2021 . The adjustments increased our fiscal year 2021 reported net loss by$8.0 million but did not have an impact on Adjusted EBITDA (non-GAAP), cash flows or liquidity. Refer to Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies for further information. (b) In Fiscal 2022, 2021 and Fiscal 2020, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows.
(c) See Management Discussion and Analysis - Results of Operations discussion above.
(d) Earnings are adjusted for amortization expense (non-cash) related to content development costs which are included in cost of goods sold.
(e) Represents the income tax effects of the non-GAAP items.
The following is Adjusted EBITDA by segment for Fiscal 2022, Fiscal 2021, and Fiscal 2020:
Adjusted EBITDA - by Segment
52 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services(b) Eliminations Total
Net (loss) income $ (37,305) $ 495 $ (6,801) $ (25,471) $ 225 $ (68,857)
Add:
Depreciation and
amortization expense 36,635 5,418 7,257 71 - 49,381
Interest expense, net - - - 10,096 - 10,096
Income tax benefit - - - (8,655) - (8,655)
Impairment loss (non-cash)
(c) 6,411 - - - - 6,411
Merchandise inventory loss
and write-off (b) 434 - - - - 434
Content amortization
(non-cash) (d) 386 - 5,068 - - 5,454
Restructuring and other
charges (c) 2,118 (2,131) - 957 - 944
Adjusted EBITDA (non-GAAP)
5,524
55--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Adjusted EBITDA - by Segment 52
weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services(a) Eliminations Total
Net (loss) income $ (155,310) $ 14,732 $ (8,132) $ 8,708 $ 192 $ (139,810)
Add:
Depreciation and
amortization expense 39,634 5,461 7,763 109 - 52,967
Interest expense, net - - - 8,087 - 8,087
Income tax benefit - - - (45,171) - (45,171)
Impairment loss (non-cash)
(c) 27,630 - - - - 27,630
Merchandise inventory loss
and write-off (b) 14,960 - - - - 14,960
Content amortization
(non-cash) (d) 745 - 4,289 - - 5,034
Restructuring and other
charges (c) 5,514 (1,595) 571 6,188 - 10,678
Adjusted EBITDA (non-GAAP)
4,491
Adjusted EBITDA - by Segment
53 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services(a) Eliminations Total
Net (loss) income $ (24,445) $ 12,909 $ (8,529) $ (18,544) $ 359 $ (38,250)
Add:
Depreciation and
amortization expense 47,099 5,963 8,670 128 - 61,860
Interest expense, net - - - 7,445 - 7,445
Income tax benefit - - - (11,978) - (11,978)
Impairment loss (non-cash)
(c) 433 - - - - 433
Merchandise inventory loss
and write-off (b) - - - - - -
Content amortization
(non-cash) (d) 814 - 3,268 - - 4,082
Restructuring and other
charges (c) 12,326 2,695 - 3,546 - 18,567
Adjusted EBITDA (non-GAAP)
(a) In Fiscal 2022, 2021 and Fiscal 2020, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows. (b) Interest expense is reflected in Corporate Services as it is primarily related to our Credit Agreement which funds our operating and financing needs across the organization. Income taxes are reflected in Corporate Services as we record our income tax provision on a consolidated basis.
(c) See Management Discussion and Analysis - Results of Operations discussion above.
(d) Earnings are adjusted for amortization expense (non-cash) related to content development costs which are included in cost of goods sold.
(e) We identified certain out of period adjustments related primarily to Income tax benefit, as well as Restructuring and other charges, for the 52 weeks endedMay 1, 2021 . The adjustments increased our fiscal year 2021 reported net loss by$8.0 million but did not have an impact on Adjusted EBITDA (non-GAAP), cash flows or liquidity. Refer to Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies for further information. 56
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Free Cash Flow (non-GAAP)
52 weeks ended 52 weeks ended 53 weeks ended
Dollars in thousands April 30, 2022 May 1, 2021 May 2, 2020
Net cash flows provided by (used in) operating
activities $ 2,060 $ 32,895 $ (8,676)
Less:
Capital expenditures (a) 43,533 37,223 36,192
Cash interest 8,166 6,778 6,796
Cash taxes (8,007) 6,008 (4,141)
Free Cash Flow (non-GAAP) $ (41,632)
(a) Purchases of property and equipment are also referred to as capital
expenditures. 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. The following table provides the components
of total purchases of property and equipment:
Capital Expenditures
52 weeks ended 52 weeks ended 53 weeks ended
Dollars in thousands April 30, 2022 May 1, 2021 May 2, 2020
Physical store capital expenditures $ 16,206 $ 10,382 $ 13,926
Product and system development 15,453 11,747 15,710
Content development costs 9,340 8,741 4,335
Other 2,534 6,353 2,221
Total Capital Expenditures $ 43,533 $ 37,223 $ 36,192 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 ofApril 30, 2022 , we had$225.7 million of borrowings outstanding under the Credit Agreement. See Financing Arrangements discussion below. We believe that our future cash from operations, access to borrowings under the Credit Facility, FILO Facility and short-term financings 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.
COVID-19 Business Impact
During Fiscal 2022, our business continued to be significantly negatively impacted by the COVID-19 pandemic. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including variants, on enrollments, campus activities, university budgets, athletics and other areas that directly affect our business operations. Although most four year schools returned to a traditional on-campus environment for learning in the Fall semester, as well as hosted traditional on campus sporting activities, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic, including on enrollments at community colleges and by international students, the continuation of remote and hybrid class offerings, and its effect on our ability to source products, including textbooks and general merchandise offerings. As we entered the Spring rush period in earlyJanuary 2022 , we continued to experience the ongoing effects of COVID-19 with the surge of the Omicron variant further impacting students return to campus and on-campus activities. In early January, while the majority of schools brought students back to campus, some schools chose to conduct classes virtually for the beginning of the semester, while other schools chose to delay their start dates (and some schools both delayed the start of the semester and started classes virtually), thus reducing and/or delaying sales later into the quarter or shifting some sales to our fourth quarter. We will continue to assess our operations and will continue to consider the guidance of local governments and 57
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
our campus partners to determine how to operate our bookstores in the safest manner for our employees and customers. Please see our Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview for further discussion.
We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine how to operate our bookstores in the safest manner for our employees and customers. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations.
Sources and Uses of Cash Flow
Dollars in thousands Fiscal 2022 Fiscal 2021 Fiscal 2020 Cash, cash equivalents, and restricted cash at beginning of period$ 16,814 $ 9,008 $ 14,768 Net cash flows provided by (used in) operating activities 2,060 32,895 (8,676) Net cash flows used in investing activities (42,661) (36,888) (37,019) Net cash flows provided by financing activities 45,721 11,799 39,935
Cash, cash equivalents, and restricted cash at end of period
$ 21,934
As ofApril 30, 2022 andMay 1, 2021 , we had restricted cash of$11.5 million and$8.8 million , respectively, comprised of$10.6 million and$7.9 million , respectively, in prepaid and other current assets in the consolidated balance sheet related to segregated funds for commission due to FLC for logo merchandise sales as per theFLC Partnership's merchandising agreement and$0.9 million as of the end of both periods in other noncurrent assets in the consolidated balance sheet related to amounts held in trust for future distributions related to employee benefit plans.
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. When a school adopts our First Day inclusive access offerings, cash collection from the school generally occurs after the student drop/add dates, which is later in the working capital cycle, as compared to direct-to-student point-of-sale transactions where cash is generally collected during the point-of-sale transaction or within a few days from the credit card processor. 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 Fiscal 2022 were$2.1 million compared to$32.9 million during Fiscal 2021. This decrease in cash provided by operating activities of$30.8 million was primarily due to$41.8 million of proceeds received in Fiscal 2021 for the sale of logo merchandise inventory to FLC and changes in working capital, including higher accounts receivables outstanding and higher inventory purchases, partially offset by improved earnings in the current year period compared to the prior year period and lower tax payments of$14.0 million compared to the prior year period. Our operations were highly impacted by COVID-19 related campus store closures in the prior year period, resulting in lower operating costs and lower inventory purchases in the prior year. Cash flows provided by operating activities during Fiscal 2021 were$32.9 million compared to cash flow used in operating activities of$(8.7) million during Fiscal 2020. This increase in cash provided by operating activities of$41.6 million was primarily due to proceeds from the sale of logo merchandise inventory to FLC of$41.8 million , partially offset by lower net income, an increase in other long-term liabilities due to sale of treasury shares at a premium (discussed above), and changes in working capital. As discussed above, our operations were highly impacted by the COVID-19 pandemic in Fiscal 2021.
Cash Flow from Investing Activities
Cash flows used in investing activities during Fiscal 2022 were$(42.7) million compared to$(36.9) million during Fiscal 2021. The increase in cash used in investing activities is primarily due to higher capital expenditures and contractual capital investments associated with content development, digital initiatives, enhancements to internal systems and websites, renewing 58
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
existing contracts and new store construction. Capital expenditures totaled
Cash flows used in investing activities during Fiscal 2021 were$(36.9) million compared to$(37.0) million during Fiscal 2020. Cash used in investing activities is primarily for capital expenditures and contractual capital investments associated with content development, digital initiatives, enhancements to internal systems and websites, renewing existing contracts and new store construction and lower payments to acquire businesses and the change in other noncurrent assets for contractual obligations. Capital expenditures totaled$37.2 million and$36.2 million during Fiscal 2021 and Fiscal 2020, respectively.
Cash Flow from Financing Activities
Cash flows provided by financing activities during Fiscal 2022 were$45.7 million compared to$11.8 million during Fiscal 2021. The net change of$33.9 million is primarily due to higher net borrowings under the credit agreement, offset by proceeds from the sale of treasury shares of$10.9 million during Fiscal 2021. Cash flows provided by financing activities during Fiscal 2021 were$11.8 million compared to$39.9 million during Fiscal 2020. This net change of$28.1 million is primarily due to higher net borrowings under the credit agreement and the sale of treasury shares of$10.9 million (discussed above), partially offset by the payment of deferred financing costs of$1.1 million .
Financing Arrangements
We have a credit agreement (the "Credit Agreement"), amendedMarch 31, 2021 andMarch 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 . OnMarch 4, 2022 , we were granted a waiver to the condition to the upcoming draw under the FILO Facility, scheduled forApril 2022 , that Consolidated EBITDA (as defined in the Credit Agreement) minus Restricted Payments (as defined in the Credit Agreement) equal at least$110.0 million . Under the waiver amendment, the commitment under the FILO Facility of$25.0 million was increased to$40.0 million , with all remaining terms unchanged.
On
OnJune 28, 2022 , we obtained limited waivers with respect to the Credit Agreement and the Term Loan Credit Agreement, pursuant to which the requisite lenders thereunder waived any potential default or event of default under such agreements solely to the extent arising from the restatement of Fiscal 2021 consolidated financial statements as described in Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies. During the 52 weeks endedApril 30, 2022 , we borrowed$632.2 million and repaid$584.1 million under the Credit Agreement, with$225.7 million of outstanding borrowings as ofApril 30, 2022 . During the 52 weeks endedMay 1, 2021 , we borrowed$722.6 million and repaid$719.7 million under the Credit Agreement, with$177.6 million of outstanding borrowings as ofMay 1, 2021 . During the 53 weeks endedMay 2, 2020 , we borrowed$600.9 million and repaid$559.7 million under the Credit Agreement, with$174.7 million of outstanding borrowings as ofMay 2, 2020 . As of bothApril 30, 2022 andMay 1, 2021 , we have issued$4.8 million in letters of credit under the Credit Facility. During the 52 weeks endedApril 30, 2022 andMay 1, 2021 , we incurred debt issuance costs totaling$0.3 million and$1.1 million related to theMarch 4, 2022 waiver andMarch 31, 2021 Credit Facility amendment. The debt issuance costs have been deferred and are presented as prepaid and other current assets and other noncurrent assets in the consolidated balance sheets, and subsequently amortized ratably over the term of the credit agreement. The Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the Credit Facility. This is considered an all asset lien (inclusive of proceeds from tax refunds payable to the Company and a pledge of equity from subsidiaries, exclusive of real estate). Interest under the Credit Facility accrues, at our election, at a Secured Overnight Financing Rate ("SOFR") or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the Credit Facility. Loans will initially bear interest at SOFR plus 2.00% per annum, in the case of SOFR borrowings, or at the alternate base rate plus 1.00% per annum, in the alternative, and thereafter the interest rate will fluctuate between SOFR plus 2.00% per annum and SOFR plus 1.50% per annum (or between the alternate base rate plus 1.000% per 59
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
annum and the alternate base rate plus 0.50% per annum), based upon the excess availability under the Credit Facility at such time.
Loans under the FILO Facility will bear interest at a rate equal to the SOFR rate, plus 3.750%. In connection with the waiver, the applicable margin for credit extensions made under the FILO Facility afterMarch 31, 2021 through the end of 2021 was increased by 0.50% (to 3.75% per annum for SOFR rate loans and 2.75% for base rate loans). The FILO Facility will be available solely during the draw period each year, fromApril 1 through July 31 . We are required to borrow 100% of the aggregate commitments under the FILO Facility onApril 1 of each year, and the loans must be repaid in full (including interest and fees) onJuly 31 of each year. The commitments under the FILO Facility decreased from$50.0 million to$25.0 million onAugust 1, 2021 . We will pay a commitment fee of 0.375% on the daily unused portion of the FILO Facility. The Credit Facility contains customary negative covenants, which limit the Company's ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements and a minimum excess availability of the greater of 10% of the Loan Cap and$25.0 million when the FILO is funded) would be triggered, and the lenders would have the right to assume dominion and control over the Company's cash. The Credit Facility includes an anti-cash hoarding provision, which limits maximum excess cash allowed to$50.0 million when the FILO is funded. The Credit Facility contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Facility also contains customary affirmative covenants and representations and warranties. We are in compliance with all covenants, representations and warranties under the Credit Facility as ofApril 30, 2022 .
Income Tax Implications on Liquidity
For the fiscal year endedApril 30, 2022 , the Company intends to file an application to change its tax year from January to April under the automatic consent provisions. As a result of the tax year-end change, there is no longer a long-term tax payable associated with the LIFO reserve in other long-term liabilities. We have filed our federal income tax returns for the tax year endedJanuary 2021 , as well claims for refunds for cash taxes paid in prior years. We received a$7.8 million refund in the second quarter of Fiscal 2022 and expect to receive additional refunds of approximately$22.6 million .
Share Repurchases
OnDecember 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 Fiscal 2022, Fiscal 2021, and Fiscal 2020, we did not purchase shares under the stock repurchase program. As ofApril 30, 2022 , approximately$26.7 million remains available under the stock repurchase program. During Fiscal 2022, Fiscal 2021, and Fiscal 2020, we also repurchased 239,751 shares, 414,174 shares, and 374,733 shares of our common stock, respectively, in connection with employee tax withholding obligations for vested stock awards. 60
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
Contractual Obligations
The following table sets forth our contractual obligations (in millions):
Payments Due by Period
Less Than 1-3 3-5 More Than
Total 1 Year Years Years 5 Years
Credit Facility (a) $ 185.7 $ 185.7 $ - $ - $ -
FILO Facility (a) 40.0 40.0 - - -
Term Loans (a) 30.0 - 30.0 - -
Lease obligations (excluding imputed
interest) (b) 367.7 104.7 104.6 67.2 91.2
Purchase obligations (c) 22.3 11.6 10.2 0.5 -
Other long-term liabilities reflected
on the balance sheet under GAAP (d) - - - - -
Total $ 645.7 $ 342.0 $ 144.8 $ 67.7 $ 91.2
(a)As of April 30, 2022 , we had a total of $225.7 million of outstanding
borrowings under the Credit Facility and FILO Facility. See Financing
Arrangements discussion above for information about future borrowings and
payments under the FILO Credit Facility. On June 7, 2022 , subsequent to the end
of Fiscal 2022, we entered into a Term Loan Credit Agreement and we entered an
amendment to the Credit Agreement. Part II - Item 8. Financial Statements and
Supplementary Data - Note 16. Subsequent Event for details.
(b)Our contracts for physical bookstores with colleges and universities are
typically five years with renewal options, but can range from one to 15 years,
and are typically cancelable by either party without penalty with 90 to 120
days' notice. Annual projections are based on current minimum guarantee amounts.
In approximately 50% of our contracts with colleges and universities that
include minimum guarantees, the minimum guaranteed amounts adjust annually to
equal less than the prior year's commission earned. Excludes obligations under
store leases for property insurance and real estate taxes, which totaled
approximately 2.4% of the minimum rent payments under those leases.
(c)Includes information technology contracts.
(d)Other long-term liabilities excludes expected payments related to employee
benefit plans. See Part II - Item 8. Financial Statements and Supplementary
Data - Note 11. Employee Benefit Plans.
Certain Relationships and Related Party Transactions
See Part II - Item 8. Financial Statements and Supplementary Data - Note 10. Related Party Transactions.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in accordance with GAAP, we are required to use judgment in making estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. In preparing these financial statements, management has made its best estimates and judgments with respect to certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Revenue Recognition and Deferred Revenue
Product sales and rentals
The majority of our revenue is derived from the sale of products through our
bookstore locations, including virtual bookstores, and our bookstore affiliated
e-commerce 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 Part II - Item 8. Financial Statements and
Supplementary Data - Note 3. 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.
61--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
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. EffectiveApril 4, 2021 , as contemplated by theFLC Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo and emblematic general merchandise sales to FLC and Fanatics. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the periods prior toApril 4, 2021 .
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 is primarily derived from DSS segment 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.
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.
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. There were no LIFO adjustments in Fiscal
2022, Fiscal 2021, and Fiscal 2020.
Reserves for non-returnable inventory are based on our history of liquidating
non-returnable inventory. Reserve calculations are sensitive to certain
significant assumptions, including markdowns, sales below cost, inventory aging
and expected demand. We do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or assumptions used to
calculate the non-returnable inventory reserve. However, if assumptions based on
our history of liquidating non-returnable inventory are incorrect, we may be
exposed to losses or gains that could be material. A 10% change
62--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
in actual non-returnable inventory would have affected pre-tax earnings by
approximately
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. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate shortage rates. However, if our estimates regarding shortage rates are incorrect, we may be exposed to losses or gains that could be material. A 10 basis point change in actual shortage rates would have affected pre-tax earnings by approximately$0.05 million in Fiscal 2022.
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. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate rental cost of goods sold. However, if our estimates regarding residual value are incorrect, we may be exposed to losses or gains that could be material. A 1% change in rental cost of goods sold would have affected pre-tax earnings by approximately$0.4 million in Fiscal 2022.
Long-Term Incentive Compensation
The assumptions used in calculating the fair value of long-term incentive compensation payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. See Part II - Item 8. Financial Statements and Supplementary Data - Note 12. Long-Term Incentive Compensation Expense for a further discussion of our stock-based incentive plan. We are required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If their actual forfeiture rate is materially different from their estimate, our long-term incentive compensation expense could be significantly different from what we recorded in the current period. For stock options granted with an "at market" exercise price, we determined the grant fair value using the Black-Scholes model and for stock options granted with "a premium" exercise price, we determined the grant date fair value using the Monte Carlo simulation model. The fair value models for stock options use assumptions that include the risk-free interest rate, expected volatility, expected dividend yield and expected term of the options. Phantom shares will be settled in cash based on the fair market value of a share of common stock at each vesting date in an amount not to exceed a specific price per share. The fair value of the phantom shares was determined using the closing stock price on the date of the award less the fair value of the call option which was estimated using the Black-Scholes model. The fair value of the liability for the cash-settled phantom share unit awards will be remeasured at the end of each reporting period through settlement to reflect current risk-free rate and volatility assumptions. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to determine long-term incentive compensation expense. If actual results are not consistent with the assumptions used, the long-term incentive compensation expense reported in our financial statements may not be representative of the actual economic cost of the long-term incentive compensation. A 10% change in our long-term incentive compensation expense would have affected pre-tax earnings by approximately$1.1 million in Fiscal 2022.
Evaluation of Other Long-Lived Assets Impairment
As ofApril 30, 2022 , our other long-lived assets include property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets of$94.1 million ,$286.6 million ,$129.6 million , and$24.0 million , respectively, on our 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 and consider market participants in accordance with Accounting Standards Codification ("ASC") 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate the long-lived assets of the reporting units for impairment at the lowest asset group level for which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, we first compared the carrying amount of the asset group to the estimated future undiscounted cash flows. The impairment loss calculation compares the carrying amount of the assets to the fair value based on estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset's carrying value in excess of fair value. Our business has been significantly negatively impacted by the ongoing COVID-19 pandemic, as many schools continued to adjust their learning models and on-campus activities. Many of the trends observed during the Fall 2021 semester continued into the Spring 2022 semester, as fewer students have returned to campus for the Spring semester. As we entered the Spring rush period in earlyJanuary 2022 , we continued to experience the ongoing effects of COVID-19 with the surge of the Omicron 63
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
variant further impacting students return to campus and on-campus activities. In early January, while the majority of schools brought students back to campus, some schools chose to conduct classes virtually for the beginning of the semester, while other schools chose to delay their start dates (and some schools both delayed the start of the semester and started classes virtually), thus reducing and/or delaying sales. These combined events continue to impact the Company's course materials and general merchandise business. During the third quarter of Fiscal 2022, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of$6.4 million (both pre-tax and after-tax), comprised of$0.7 million ,$1.8 million ,$3.7 million and$0.2 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the consolidated statement of operations. During the third quarter of Fiscal 2021, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of$27.6 million ,$20.5 million after-tax, comprised of$5.1 million ,$13.3 million ,$6.3 million and$2.9 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, The fair value of the impaired long-lived assets were determined using an income approach (Level 3 input), using the Company's best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 6. Fair Value Measurements. In the first quarter of Fiscal 2020, we recorded 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. During the fourth quarter of Fiscal 2020, in conjunction with COVID-19 related campus store closures, we evaluated certain of our long-lived assets associated with our Retail and Wholesale segments for impairment. Based on the results of the tests, for the Retail segment, we recognized an impairment loss of$0.6 million related to store-level assets in restructuring and other charges. These long-lived assets were not recoverable and had a de minimis fair value, as determined using an income approach (Level 3 input), resulting in a non-cash impairment charge for the full carrying value of those long-lived assets. The impairment analysis process requires significant estimation to determine recoverability of each asset group and to determine the fair value of asset groups that were not recoverable, as well as the fair values of certain operating right-of-use assets included within the asset groups that were not recoverable. The significant assumptions used included annual revenue growth rates, gross margin rates and the estimated relationship of selling and administrative costs to revenue used to estimate the projected cash-flow directly related to the future operation of the stores as well as the weighted average cost of capital used to calculate the fair value. Significant assumptions used to determine the fair values of certain operating right-of-use assets included the current market rent and discount rate. These assumptions are subjective in nature and are affected by expectations about future market or economic conditions (including the effects of the global pandemic). We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate long-lived asset impairment losses. However, if actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. A 10% decrease in our estimated discounted cash flows would not have materially affected the results of our operations in Fiscal 2022.
Evaluation of Goodwill Impairment
The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets. 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. As of bothMay 1, 2021 andMay 2, 2020 , we had$0 ,$0 and$4,700 million of goodwill on our consolidated balance sheets related to our Retail, Wholesale, and DSS reporting units, respectively. During the third quarter of both Fiscal 2022 and Fiscal 2021, we completed our annual goodwill impairment test and concluded that the fair value of the DSS reporting unit was determined to exceed the carrying value of the reporting unit; therefore, no goodwill impairment was recognized. Application of the goodwill impairment test requires judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; assignment of goodwill to reporting units; and the determination of the fair value of each reporting unit. In performing the valuation, we used cash flows that reflected management's forecasts and discount rates that included risk adjustments consistent with the current market conditions. We estimated the fair value of our reporting units using a weighting of fair values derived from the income approach and the market approach for our annual impairment testing and using the income approach for our interim impairment test. Under the income approach, we calculate the fair value of the reporting unit based on the present value of estimated future cash flows. Inherent in our preparation of cash flow projections are assumptions and estimates derived from a review of our operating 64
--------------------------------------------------------------------------------
Index to Form 10-K Index to FS
results, business plans, expected growth rates, cost of capital and tax rates. We also make certain forecasts about future economic conditions, interest rates, market data, and other observable trends, such as comparable store sales trends, recent changes in publisher relationships, and development of innovative digital products and services in the rapidly changing education landscape. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. Under the market approach, we estimate the fair value based on market multiples of cash flows and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit and considering a reasonable control premium. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Changes in assumptions or estimates could materially affect the estimate of the fair value, and therefore could affect the likelihood and amount of potential impairment. The following assumptions are significant to our evaluation process: Business Projections- We make assumptions about the level of revenues, gross profit, operating expenses, as well as capital expenditures and net working capital requirements. These assumptions drive our planning assumptions and represent key inputs for developing our cash flow projections. These projections are developed using our internal business plans over a five-year planning period that are updated at least annually; Long-term Growth Rates- We also utilize an assumed long-term growth rate representing the expected rate at which our cash flow stream is projected to grow. These rates are used to calculate the terminal value and are added to the cash flows projected during our five-year planning period; and Discount Rates- The estimated future cash flows are then discounted at a rate that is consistent with a weighted-average cost of capital that is likely to be expected by market participants. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. FASB guidance on accounting for income taxes requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience and expectations of future taxable income by taxing jurisdiction, the carryforward periods available to us for tax reporting purposes and other relevant factors. The actual realization of deferred tax assets may differ significantly from the amounts we have recorded. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if available evidence indicates it is more likely than not that the tax position will be fully sustained upon review by taxing authorities, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount with a greater than 50 percent likelihood of being realized upon ultimate settlement. For tax positions that are 50 percent or less likely of being sustained upon audit, we do not recognize any portion of that benefit in the financial statements. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Our actual results could differ materially from our current estimates.
© Edgar Online, source
