BKS
#Good morning, and thank you for joining us on our fiscal 2017 fourth quarter earnings call.
With us today are <UNK> <UNK>, <UNK> <UNK> and other members of our senior management team.
Before we begin, I'd like to remind you that this call is covered by the safe harbor disclaimer contained in our press release and public documents and is the property of Barnes & Noble.
It is not for rebroadcast or use by any other party without the prior written consent of Barnes & Noble.
During this call, we will issue forward-looking statements, which are predictions, projections or other statements about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release.
The company disclaims any obligation to update any forward-looking statements that may be discussed during this call.
And now I'll turn the call over to <UNK>.
Thanks, <UNK>, and good morning, everyone.
Let me start by expressing how excited I am to be here today.
Today, I'll share some of my observations and insights since joining 6 months ago.
Over the past 6 months, I've spent a lot of time visiting stores and meeting with our booksellers and customers.
During those visits, I've heard a lot of valuable feedback on the things that we do well, along with some areas that we can do better.
Most importantly, I learned that customers love and trust the Barnes & Noble brand, it all begins with this premise which provides a solid foundation to build from.
We are well aware of the challenges that the company and the industry are facing.
We view these challenges as great opportunities.
There's no question retail is changing and customers are shopping differently.
We don't view this as a winning or losing proposition, it's just simply changing.
Barnes & Noble has a rich history of evolution beginning with the transition from small format mall stores to large superstores, to competing online and launching our own digital platform.
As a company, we have and continue to evolve, providing customers the ability to shop however they choose.
There's no doubt the customers have a love affair with their bookstores, and more specifically, with their local Barnes & Noble store.
They want their bookstore to be there for them.
We just need to continue to evolve the experience and make it better for them.
There are a lot of areas to examine within the store to stay current with today's market and today's shopping behaviors.
Today's consumer wants to shop their way, whether it's in a store, online or using their mobile device.
Our goal is to deliver a great shopping experience regardless of which experience they choose.
To accomplish this, we're examining every aspect of the business and our customer value proposition.
And value proposition for us does not just mean price, it includes our membership, convenience, the fact that we have physical stores, service and, at the heart of it all, our dedicated booksellers.
As we continue to pursue the next stage of growth, we're examining everything with an open-minded view.
Our new test stores are a good example of this.
We launched 3 test stores over the past year and continue to receive great feedback from our customers and booksellers.
These test stores are smaller than our average store and feature a more intuitive store layout.
They have better adjacencies and expanded food and hospitality offering and more omni-integration, including an app that can help guide customers to the location of a specific book, mobile checkout and advanced digital kiosk to help service customers.
We are learning a lot from the new test stores.
This will help inform us as we reimagine our store of the future.
We've already announced 2 more tests stores opening in Plano, Texas and Loudoun, Virginia, later this year.
We'll continue to test and learn from these new stores, and our goal is to develop new format that we can test, pilot and roll.
We'll use the learnings to modify and enhance our existing store base as well.
In addition to new store formats, we are focused on growing sales in existing stores through a series of sales initiatives.
Our team believes strongly in launching a series of tests that can help inform the future direction of the company.
Currently, we have multiple tests in flight, including changing layouts to reflect today's trends, rightsizing space allocated to underperforming businesses, including NOOK and Music & DVD, while expanding space dedicated to children's books.
We also see a big opportunity aligning our stores and digital offerings closer together.
Our goal is to provide customers with any book, anywhere, anytime and in any format they choose.
BN.com is an important component of our omnichannel offering to serve the customer.
In our experience, a multichannel customer is a more engaged customer that shops all channels and our goal is to continue to improve the BN.com experience, including the redesign of our desktop and mobile sites, which will be a phased rollout over the current fiscal year.
The goal of these redesigns is to create a better user experience, make discovery easier for our customers and increase conversion.
NOOK is also an important component of our omnichannel offering to offer any book in any format.
We worked hard to reduce NOOK losses by $47 million to $17 million in fiscal '17, and we remain committed to reducing them further in fiscal '18.
Fiscal '17 proved to be a very challenging year for the company.
Our comp store sales declined 6.3%, largely driven by weaker traffic to stores.
As we turn to fiscal 2018, we are examining every possible way to ignite sales, including greater efforts to increase conversion, new store layout, enhancements to our membership program and creative marketing offers.
In addition to looking for top line opportunities, we're doing everything we can to reduce costs throughout the organization through efficiencies and simplification.
As Al will discuss momentarily, the team managed expenses carefully in fiscal '17, which enables us to somewhat mitigate the impact of the sales decline on earnings.
In fiscal '18, we're taking a deep dive into all base expense lines, looking for opportunities to reduce cost within our supply chain, our labor model and COGS, to name a few.
Our goal for this year is to maintain our current level of profitability, while planting the seeds for future growth.
I look forward to updating you on our progress going forward.
Now I'll turn it over to Al for a review of the financials.
Thanks, <UNK>.
This morning, we released our fourth quarter and full year results for fiscal '17, which ended on April 29.
Comparisons are to prior year periods unless otherwise noted.
Consolidated sales were $821 million for the quarter and $3.9 billion for the year.
Retail sales decreased 6.3% to $796 million for the quarter and 6.1% to $3.8 billion for the year.
Comps decreased 6.3% for both the quarter and the full year, primarily on lower traffic, the challenging retail environment and comparisons to the prior year coloring book phenomenon.
Whereas nonbook sales lifted overall comps in the prior year, they declined in the current year.
Online sales increased 2.9% for the quarter and 3.7% for the year, benefiting from site improvements and increased promotion.
NOOK sales decreased approximately 24% for both the quarter and the full year on lower content volume as well as lower device sales.
Both digital content and eCommerce sales benefited in the current year from the eBook settlement.
The consolidated gross margin rate decreased 80 basis points for both the quarter and the full year.
Retail margins decreased 50 basis points for the quarter, primarily on occupancy deleverage.
Retail margins decreased 90 basis points for the full year due to occupancy deleverage as well as higher markdowns to clear nonreturnable merchandise.
Turning to expenses.
The company reduced its SG&A cost by $53.2 million for the fourth quarter and $136.8 million for the full year.
Fourth quarter retail cost declined $39 million as the prior year included a $21 million pension settlement charge in conjunction with the plan's termination.
The balance of the fourth quarter decline was primarily due to lower eCommerce expenses.
For the full year, retail cost declined 60 basis points, driven by the prior year pension settlement charge, reduced advertising and lower eCommerce expenses.
NOOK expenses declined $14.2 million for the fourth quarter and $52.6 million for the full year on continued cost rationalization efforts and the lower sales volume.
Fourth quarter operating losses were $23.8 million, an improvement of $34.1 million over the prior year.
Full year operating profit of $54.3 million exceeded the prior year by $39.7 million.
Excluding previously disclosed nonrecurring items, consolidated EBITDA was $187.2 million in fiscal '17, in line with our recent guidance and slightly higher than last year's $185.7 million.
Despite the sales declines, the company has been able to sustain overall profit levels on cost reductions.
The company's full year effective tax rate was 52.9%.
The effective tax rate differed from the statutory rate due to changes in uncertain tax positions, adjustments to current and deferred taxes and recurring permanent items.
The consolidated fourth quarter net loss was $13.4 million or $0.19 a share compared to a loss of $30.6 million or $0.42 a share in the prior year.
Fiscal '17 consolidated net earnings from continuing operations were $22 million or $0.30 a share compared to net earnings from continuing operations of $14.7 million or $0.05 a share in the prior year.
Turning to our balance sheet.
The company ended the fiscal year with $64.9 million of debt under its $750 million credit facility.
During fiscal '17, the company returned $67 million in cash to its shareholders, including $44 million of dividends and $23 million through share repurchases.
Inventories remain well controlled despite the sales shortfall.
In fiscal '17, we opened 3 new stores while closing 10, ending the year with 633 retail stores.
Looking ahead to fiscal '18, we expect comparable store sales to decline in the low single digits as we cycle against last year's headwinds and also expect lifts from merchandising initiatives.
Plans are focused on increasing the number of value offerings, improving SKU productivity, testing changes to existing store layout and remerchandising select business units in our stores.
We believe there's an opportunity to increase conversion by improving navigation and discovery throughout the store.
The company continues to test programs to grow sales, increase membership, improve price perception and enhance its overall customer value proposition.
In terms of trajectory, we expect comps to remain soft earlier in the year and improve in the back half of the year.
Our fiscal '18 consolidated EBITDA forecast is $180 million as we expect to mitigate the sales decline through a continued cost reduction.
The company remains committed to rightsizing its cost structure and is focused on increasing store and supply chain productivity, streamlining operations and eliminating nonproductive spend.
Retail EBITDA is forecasted at $190 million, with NOOK losses reduced to approximately $10 million next year.
Turning to capital expenditures.
In fiscal '18, we expect to invest approximately $100 million in our business as compared to $96 million in fiscal '17.
This includes investments to support merchandising initiatives, new stores, system enhancements and existing store maintenance.
In fiscal '18, we expect to open and close approximately the same amount of stores as in the prior year.
With that, we will open the call for questions.
Operator, please provide the instructions for those interested in asking a question.
Operator, we're ready to begin the Q&A session.
Yes, I would love to share a little bit.
First, let me talk about our approach.
So the thing that the team that is excited about is the idea that we are getting a lot of tests in play right now.
So we are doing a number of things with store layouts, starting with space productivity.
Obviously, we have stores that are quite large and we have categories that are both in decline as well as some that are growing.
And so getting the puzzle right is an important part for us.
And the best way to do that is to actually go out and do some and then measure them for a while, and then choose the winners and hopefully roll those.
So that's sort of the basic approach of the space tests that we're doing.
With respect to product, we've got a great business in Toys & Games as well as Gift.
And in those areas, we're taking a hard look at the productivity there, the freshness, the relevance of the product.
And I'd say, the team is doing a real nice job at examining the types of items that we have both reached across the ---+ nationally across the chain as well as locally.
Too soon to tell on results honestly.
I mean, we're in early days.
But hopefully, at the next call, we can talk about both the winners and things that didn't work that we just kind of moved on from.
There's no new sort of breakthrough category that we're launching.
It's basically businesses that really reflect our customer base and really makes sense for the brand and the types of products that we're selling.
Hey, <UNK>, it's Al.
So as you know, we have a policy that the board's approved of dividends at an annual rate of $0.60 a share or $0.15 a quarter.
And they're declared on a quarterly basis by the board.
We expect to continue to pay the dividend under that program.
But ultimately, that's a board decision.
I think you've seen, over the last few years, that we've managed our balance sheet very well given the sales declines that we've had.
And we can expect to be able to continue to pay the dividend as long as the free cash flows would support it.
Great.
Thank you, all, for joining us on today's call and for your interest in Barnes & Noble.
Our next release is scheduled to be issued on or about September 7.
We hope everyone has a great day.
