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 . 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 1,445 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content and tools 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 recent 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 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 additional information related to our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year endedMay 1, 2021 . 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 FLC, 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 condensed 22 -------------------------------------------------------------------------------- Table of Contents consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis in the prior year. For additional information, see Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories. 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 the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most four year schools have returned to a traditional on-campus environment for learning in the current Fall semester, as well as hosted traditional on campus sporting activities and events, 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 the effect on our ability to source products, including textbooks and general merchandise offerings. 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. For additional information, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year endedMay 1, 2021 . 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". We identify our segments in accordance with the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance. The following summarizes the three segments. For additional information about each segment's operations, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year endedMay 1, 2021 . Retail Segment The Retail Segment operates 1,445 college, university, and K-12 school bookstores, comprised of 794 physical bookstores and 651 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 3,200 physical bookstores (including our Retail Segment's 794 physical bookstores) and sources and distributes new and used textbooks to our 651 virtual bookstores. Additionally, the Wholesale Segment sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 400 college bookstores. DSS Segment The Digital Student Solutions ("DSS") Segment includes direct-to-student products and services to assist students to study more effectively and improve academic performance. The DSS Segment is comprised of the operations ofStudent Brands, LLC , a leading direct-to-student subscription-based writing services business, and bartleby®, a direct-to-student subscription-based offering providing textbook solutions, expert questions and answers, writing and tutoring. 23 -------------------------------------------------------------------------------- Table of Contents 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, Competition and Other Business Conditions Affecting Our Business The market for educational materials is undergoing unprecedented change. As tuition and other costs rise, colleges and universities face increasing pressure to attract and retain students and provide them with innovative, affordable educational content and tools that support their educational development. Current trends, competition and other factors affecting our business include: •Overall Economic Environment, College Enrollment and Consumer Spending Patterns. Our business is affected by the impact of the COVID-19 pandemic, the overall economic environment, funding levels at colleges and universities, by changes in enrollments at colleges and universities, and spending on course materials and general merchandise. •Impact of the COVID-19 Pandemic: The COVID-19 pandemic has materially and adversely impacted certain segments of theU.S. economy, with legislative and regulatory responses including unprecedented monetary and fiscal policy actions across all sectors, and there is significant uncertainty as to timing of stabilization and recovery, including the ability to gain adequate herd-immunity levels through vaccine programs and their resilience to future virus variants. Many colleges and K-12 schools were required to cease in-person classes in an attempt to limit the spread of the COVID-19 virus and ensure the safety of their students. Although many academic institutions have reopened, some are providing alternatives to traditional in-person instruction, including online and hybrid learning options and significantly reduced classroom sizes. Additionally, our business, like many others has been affected by the challenging labor market and the ability to recruit employees. •Economic Environment: Retail general merchandise sales are subject to short-term fluctuations driven by the broader retail environment. The broader macro-economic global supply chain issues may also impact our ability to source school supplies and general merchandise sold in our campus bookstores, including technology-related products and emblematic clothing. •Enrollment Trends: The growth of our business depends on our ability to attract new customers and to increase the level of engagement by our current student customers. We continue to see downward enrollment trends and shrinking resources from state and federal government for colleges and universities. Enrollment trends, specifically at community colleges, generally correlate with changes in the economy and unemployment factors, e.g. low unemployment tends to lead to low enrollment and higher unemployment rates tend to lead to higher enrollment trends, as students generally enroll to obtain skills that are in demand in the workforce. Enrollment trends have been negatively impacted overall by COVID-19 concerns at physical campuses. A significant reduction inU.S. economic activity and increased unemployment could lead to decreased enrollment and consumer spending. Additionally, enrollment trends are impacted by the dip inthe United States birth rate resulting in fewer students at the traditional 18-24 year-old college age. Online degree program enrollments continue to grow, even in the face of declining overall higher education enrollment. •Increased Use of Online and Digital Platforms as Companions or Alternatives to Printed Course Materials. Students and faculty can now choose from a wider variety of educational content and tools than ever before, delivered across both print and digital platforms. •Increasing Costs Associated with Defending Against Security Breaches and Other Data Loss, Including Cyber-Attacks. We are increasingly dependent upon information technology systems, infrastructure and data. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. We continue to invest in data protection and information technology to prevent or minimize these risks and, to date, we have not experienced any material service interruptions and are not aware of any material breaches. 24 -------------------------------------------------------------------------------- Table of Contents •Distribution Network Evolving. The way course materials are distributed and consumed is changing significantly, a trend that is expected to continue. The market for course materials, including textbooks and supplemental materials, is intensely competitive and subject to rapid change. •Disintermediation. We are experiencing growing competition from alternative media and alternative sources of textbooks and other course materials. In addition to the official physical or virtual campus bookstore, course materials are also sold through off-campus bookstores, e-commerce outlets, digital platform companies, publishers, including Cengage, Pearson and McGraw Hill, bypassing the bookstore distribution channel by selling or renting directly to students and educational institutions, and student-to-student transactions over the Internet. •Supply Chain and Inventory. Since the demand for used textbooks has historically been greater than the available supply, our financial results are highly dependent upon Wholesale's ability to build its textbook inventory from suppliers in advance of the selling season. Recently, the impact of fewer students on campus due to COVID-19 has significantly impacted our on-campus buyback programs which supplies Wholesale's used textbook inventory for future selling periods. Some textbook publishers have begun to supply textbooks pursuant to consignment or rental programs which could impact used textbook supplies in the future. Additionally, Wholesale is a national distributor for rental textbooks offered throughMcGraw-Hill Education's and Pearson Education's consignment rental program, both of which are relatively nascent. The broader macro-economic global supply chain issues may also impact our ability to source school supplies and general merchandise sold in our campus bookstores, including technology-related products and emblematic clothing. •Price Competition. In addition to the competition in the services we provide to our customers, our textbook and other course materials business faces significant price competition. Students purchase textbooks and other course materials from multiple providers, are highly price sensitive, and can easily shift spending from one provider or format to another. •A Large Number of Traditional Campus Bookstores Have Yet to be Outsourced. •Outsourcing Trends. We continue to see the trend towards outsourcing in the campus bookstore market and also continue to see a variety of business models being pursued for the provision of course materials (such as inclusive access programs and publisher subscription models) and general merchandise. •New and Existing Bookstore Contracts. We expect awards of new accounts resulting in new physical and virtual store openings will continue to be an important driver of future growth in our business. We also expect that certain less profitable or essential bookstores we operate may close. Such stores could be included in contracts for stores we operate that may be deemed non-essential; and such stores could be operated by others or independently by schools. The scope of any such store closures remains uncertain, although we are not aware, at this time, of any significant volume of stores which we operate that are likely to close or have informed us of upcoming closures. For additional discussion of our trends and other factors affecting our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year endedMay 1, 2021 . Elements of Results of Operations Our condensed consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted inthe United States ("GAAP"). 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. 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. 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 25 -------------------------------------------------------------------------------- Table of Contents 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. Results of Operations - Summary 13 weeks ended 26 weeks ended October 30, October 31, October 30, October 31, Dollars in thousands 2021 2020 2021 2020 Sales: Product sales and other$ 577,329 $
551,832$ 805,099 $ 745,042 Rental income 49,648 43,653 62,672 54,457 Total sales$ 626,977 $ 595,485 $ 867,771 $ 799,499 Net income (loss)$ 22,528 $ 7,515 $ (21,818) $ (39,137)
Adjusted Earnings (non-GAAP) (a)
Adjusted EBITDA (non-GAAP) (a) Retail$ 39,444 $ 18,324 $ 19,822 $ (22,316) Wholesale 1,233 6,568 7,647 19,534 DSS 807 689 2,499 2,353 Corporate Services (6,809) (5,501) (14,253) (10,745) Elimination 4,293 4,455 (1,244) (2,308)
Total Adjusted EBITDA (non-GAAP)
(a)Adjusted Earnings and Adjusted EBITDA are non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.
The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales:
13 weeks ended 26 weeks ended
October 30, October 31, October 30, October 31,
2021 2020 2021 2020
Sales:
Product sales and other 92.1 % 92.7 % 92.8 % 93.2 %
Rental income 7.9 7.3 7.2 6.8
Total sales 100.0 100.0 100.0 100.0
Cost of sales:
Product and other cost of sales (a) 78.5 82.0 77.9 83.0
Rental cost of sales (a) 57.1 63.5 55.8 64.5
Total cost of sales 76.8 80.6 76.3 81.7
Gross margin 23.2 19.4 23.7 18.3
Selling and administrative expenses 17.2 15.4 22.4 20.3
Depreciation and amortization expense 1.9 2.2 2.8 3.4
Restructuring and other charges 0.2 0.6 0.4 1.1
Operating income (loss) 3.9 % 1.2 % (1.9) % (6.5) %
(a)Represents the percentage these costs bear to the related sales, instead of total sales.
26
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Results of Operations - 13 and 26 weeks ended October 30, 2021 compared with the
13 and 26 weeks ended October 31, 2020 13 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 559,304 $ 21,669 $ 8,279 $ - $ (11,923) $ 577,329
Rental income 49,648 - - - - 49,648
Total sales 608,952 21,669 8,279 - (11,923) 626,977
Cost of sales:
Product and other cost of sales 451,779 16,049 1,373 - (16,131) 453,070
Rental cost of sales 28,348 - - - - 28,348
Total cost of sales 480,127 16,049 1,373 - (16,131) 481,418
Gross profit 128,825 5,620 6,906 - 4,208 145,559
Selling and administrative expenses 89,486 4,387 7,305 6,809 (85) 107,902
Depreciation and amortization expense 8,669 1,364 1,902 17 - 11,952
Sub-Total: $ 30,670 $ (131) $ (2,301) $ (6,826) $ 4,293 25,705
Restructuring and other charges 1,116
Operating income $ 24,589
13 weeks ended October 31, 2020
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 532,861 $ 36,387 $ 5,947 $ - $ (23,363) $ 551,832
Rental income 43,653 - - - - 43,653
Total sales 576,514 36,387 5,947 - (23,363) 595,485
Cost of sales:
Product and other cost of sales 453,277 25,673 1,285 - (27,760) 452,475
Rental cost of sales 27,725 - - - - 27,725
Total cost of sales 481,002 25,673 1,285 - (27,760) 480,200
Gross profit 95,512 10,714 4,662 - 4,397 115,285
Selling and administrative expenses 77,380 4,146 5,003 5,501 (58) 91,972
Depreciation and amortization expense 9,985 1,322 1,855 31 - 13,193
Sub-Total: $ 8,147 $ 5,246 $ (2,196) $ (5,532) $ 4,455 10,120
Restructuring and other charges 3,387
Operating income $ 6,733
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26 weeks ended October 30, 2021
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 756,749 $ 66,153 $ 16,582 $ - $ (34,385) $ 805,099
Rental income 62,672 - - - - 62,672
Total sales 819,421 66,153 16,582 - (34,385) 867,771
Cost of sales:
Product and other cost of sales 607,501 50,128 2,646 - (33,044) 627,231
Rental cost of sales 34,952 - - - - 34,952
Total cost of sales 642,453 50,128 2,646 - (33,044) 662,183
Gross profit 176,968 16,025 13,936 - (1,341) 205,588
Selling and administrative expenses 157,851 8,378 13,752 14,253 (97) 194,137
Depreciation and amortization expense 18,076 2,664 3,801 35 - 24,576
Sub-Total: $ 1,041 $ 4,983 $ (3,617) $ (14,288) $ (1,244) (13,125)
Restructuring and other charges 3,739
Operating loss $ (16,864)
26 weeks ended, October 31, 2020
Corporate
Dollars in thousands Retail Wholesale DSS Services Eliminations Total
Sales:
Product sales and other $ 680,833 $ 116,681 $ 11,819 $ - $ (64,291) $ 745,042
Rental income 54,457 - - - - 54,457
Total sales 735,290 116,681 11,819 - (64,291) 799,499
Cost of sales:
Product and other cost of sales 588,531 89,210 2,411 - (61,912) 618,240
Rental cost of sales 35,112 - - - - 35,112
Total cost of sales 623,643 89,210 2,411 - (61,912) 653,352
Gross profit 111,647 27,471 9,408 - (2,379) 146,147
Selling and administrative expenses 134,365 7,937 9,039 10,745 (71) 162,015
Depreciation and amortization expense 20,555 2,617 4,020 64 - 27,256
Sub-Total: $ (43,273) $ 16,917 $ (3,651) $ (10,809) $ (2,308) (43,124)
Restructuring and other charges 9,058
Operating loss $ (52,182)
Sales
The following table summarizes our sales for the 13 and 26 weeks ended
13 weeks ended 26 weeks ended
October 30, October 31, October 30, October 31,
Dollars in thousands 2021 2020 % 2021 2020 %
Product sales and other $ 577,329 $ 551,832 4.6% $ 805,099 $ 745,042 8.1%
Rental income 49,648 43,653 13.7% 62,672 54,457 15.1%
Total Sales $ 626,977 $ 595,485 5.3% $ 867,771 $ 799,499 8.5%
28-------------------------------------------------------------------------------- Table of Contents Sales increased by$31.5 million , or 5.3%, to$627.0 million during the 13 weeks endedOctober 30, 2021 from$595.5 million during the 13 weeks endedOctober 31, 2020 . Sales increased by$68.3 million , or 8.5%, to$867.8 million during the 26 weeks endedOctober 30, 2021 from$799.5 million during the 26 weeks endedOctober 31, 2020 . The sales increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. The components of the variances for the 13 and 26 week periods are reflected in the table below. Sales variances 13 weeks ended 26 weeks ended Dollars in millions October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Retail Sales New stores $ 26.3 $ 27.6 $ 36.6 $ 35.4 Closed stores (7.9) (16.4) (12.5) (21.9) Comparable stores (a) 14.0 (196.5) 58.6 (302.7) Textbook rental deferral 3.2 16.4 3.4 10.1 Service revenue (b) (2.1) 1.0 0.1 (3.7) Other (c) (1.1) 2.7 (2.1) 1.7 Retail sales subtotal: $ 32.4 $ (165.2) $ 84.1 $ (281.1) Wholesale Sales $ (14.7) $ (3.8) $ (50.5) $ 4.2 DSS Sales $ 2.3 $ 0.7 $ 4.8 $ 1.2 Eliminations (d) $ 11.5 $ (8.4) $ 29.9 $ (16.7) Total sales variance: $ 31.5 $ (176.7) $ 68.3 $ (292.4) (a) EffectiveApril 2021 , as contemplated by theFLC Partnership's merchandising agreement, logo and emblematic general merchandise sales were fulfilled by FLC. 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. 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 general merchandise sales on a gross basis in the prior year period. For 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 sales increased by$32.4 million , or 5.6%, to$608.9 million during the 13 weeks endedOctober 30, 2021 from$576.5 million during the 13 weeks endedOctober 31, 2020 . Retail sales increased by$84.1 million , or 11.4%, to$819.4 million during the 26 weeks endedOctober 30, 2021 from$735.3 million during the 26 weeks endedOctober 31, 2020 . Retail added 76 new stores and closed 48 stores during the 26 weeks endedOctober 30, 2021 , ending the period with a total of 1,445 stores. 13 weeks ended 26 weeks endedOctober 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Number of Stores: Physical Virtual Physical Virtual Physical Virtual Physical Virtual Number of stores at beginning of period 784 645 772 670 769 648 772 647 Opened 11 12 5 11 41 35 29 51 Closed 1 6 9 10 16 32 33 27 Number of stores at end of period 794 651 768 671 794 651 768 671 Product and other sales for Retail for the 13 weeks endedOctober 30, 2021 increased by$26.4 million , or 5.0% to$559.3 million from$532.9 million during the 13 weeks endedOctober 31, 2020 . Product and other sales for Retail for the 26 weeks endedOctober 30, 2021 increased by$75.9 million , or 11.2% to$756.7 million from$680.8 million during the 26 weeks endedOctober 31, 2020 . The sales increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. 29 -------------------------------------------------------------------------------- Table of Contents 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. Comparable textbook sales remained essentially flat, as compared to a 19% decline a year ago, as enrollment declines were mitigated by the growth of First Day (our inclusive access program). Revenue for First Day programs grew 80% to$96 million during the quarter. Comparable general merchandise sales increased 78.3%, as compared to a 52.0% decline a year ago, benefiting 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, 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. Sales were impacted by overall enrollment declines in higher education. Although most four year schools have returned to a traditional on-campus environment for learning in the current Fall semester, as well as hosted traditional on campus sporting activities and events, 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. While many big-conferences resumed their sport activities, other on campus events, such as Parent's Weekends or Alumni events, continue to be either eliminated or severely restricted, which further impacted the company's general merchandise business. First Day (our inclusive access program), digital and eTextbook revenue increased, due to a shift to lower cost options and more affordable solutions, including digital offerings. To supplement the Total Sales table presented above in accordance with generally accepted accounting principles ("GAAP"), the Company uses the non-GAAP financial measure of Retail Gross Comparable Store Sales.Retail Gross Comparable Store Sales (non-GAAP) includes sales from physical and virtual stores that have been open for an entire fiscal year period and does not include sales from closed stores for all periods presented. 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 prior year period. For Retail Gross Comparable Store Sales (non-GAAP), sales for logo and emblematic general merchandise fulfilled by FLC, Fanatics and digital agency sales are included on a gross basis. We believe the current Retail Gross Comparable Store Sales (non-GAAP) calculation method reflects the manner in which management views comparable sales, as well as the seasonal nature of our business. Retail Gross Comparable Store Sales (non-GAAP) variances for Retail by category for the 13 and 26 week periods are as follows: Retail Gross Comparable Store Sales (non-GAAP) variances 13 weeks ended 26 weeks ended Dollars in millions October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Textbooks (Course Materials)$ (0.5) (0.1) %$ (101.6) (19.0) %$ 22.9 4.1 %$ (112.5) (17.5) % General Merchandise 72.7 78.3 % (97.2) (52.0) % 121.5 90.6 % (184.8) (58.6) % Trade Books 1.3 33.8 % (6.3) (62.3) % 3.2 60.7 % (14.0) (73.2) % Total Retail Gross Comparable Store Sales (non-GAAP)$ 73.5 13.2 %$ (205.1) (28.1) %$ 147.6 21.0 %$ (311.3) (31.8) % Rental income for Retail for the 13 weeks endedOctober 30, 2021 increased by$6.0 million , or 13.7% to$49.6 million from$43.7 million during the 13 weeks endedOctober 31, 2020 . Rental income for Retail for the 26 weeks endedOctober 30, 2021 increased by$8.2 million , or 15.1% to$62.7 million from$54.5 million during the 26 weeks endedOctober 31, 2020 . Rental income is impacted by comparable store sales, new store openings and store closings. The increase in rental income is primarily due to increased rental activity due to the temporary store closings due the COVID-19 pandemic in the prior year discussed above. Wholesale Wholesale sales decreased by$14.7 million , or 40.5% to$21.7 million during the 13 weeks endedOctober 30, 2021 from$36.4 million during the 13 weeks endedOctober 31, 2020 . Wholesale sales decreased by$50.5 million , or 43.3% to$66.2 million during the 26 weeks endedOctober 30, 2021 from$116.7 million during the 26 weeks endedOctober 31, 2020 . 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 a 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. 30 -------------------------------------------------------------------------------- Table of Contents DSS DSS total sales increased by$2.3 million , or 39.2% to$8.3 million during the 13 weeks endedOctober 30, 2021 from$6.0 million during the 13 weeks endedOctober 31, 2020 . DSS total sales increased by$4.8 million , or 40.3% to$16.6 million during the 26 weeks endedOctober 30, 2021 from$11.8 million during the 26 weeks endedOctober 31, 2020 . Sales increased primarily due to an increase in subscription sales. Cost of Sales and Gross Margin Our cost of sales decreased as a percentage of sales to 76.8% during the 13 weeks endedOctober 30, 2021 compared to 80.6% during the 13 weeks endedOctober 31, 2020 . Our gross margin increased by$30.3 million , or 26.3%, to$145.6 million , or 23.2% of sales, during the 13 weeks endedOctober 30, 2021 from$115.3 million , or 19.4% of sales during the 13 weeks endedOctober 31, 2020 . Our cost of sales decreased as a percentage of sales to 76.3% during the 26 weeks endedOctober 30, 2021 compared to 81.7% during the 26 weeks endedOctober 31, 2020 . Our gross margin increased by$59.4 million , or 40.7%, to$205.6 million , or 23.7% of sales, during the 26 weeks endedOctober 30, 2021 from$146.1 million , or 18.3% of sales during the 26 weeks endedOctober 31, 2020 . During the 26 weeks endedOctober 30, 2021 , we recognized a merchandise inventory loss of$0.4 million in cost of goods sold in the Retail Segment discussed below. For additional information, see Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories. Retail The following table summarizes the Retail cost of sales for the 13 and 26 weeks endedOctober 30, 2021 andOctober 31, 2020 : 13 weeks ended 26 weeks ended October 30, % of October 31, % of October 30, % of October 31, % of Dollars in thousands 2021 Related Sales 2020 Related Sales 2021 Related Sales 2020 Related Sales Product and other cost of sales$ 451,779 80.8%$ 453,277 85.1%$ 607,501 80.3%$ 588,531 86.4% Rental cost of sales 28,348 57.1% 27,725 63.5% 34,952 55.8% 35,112 64.5% Total Cost of Sales$ 480,127 78.8%$ 481,002 83.4%$ 642,453 78.4%$ 623,643 84.8%
The following table summarizes the Retail gross margin for the 13 and 26 weeks
ended
13 weeks ended 26 weeks ended
October 30 , % of % of October 30 , % of October 31 , % of
Dollars in thousands 2021 Related Sales October 31, 2020 Related Sales 2021 Related Sales 2020 Related Sales
Product and other gross margin $ 107,525 19.2% $ 79,584 14.9% $ 149,248 19.7% $ 92,302 13.6%
Rental gross margin 21,300 42.9% 15,928 36.5% 27,720 44.2% 19,345 35.5%
Gross Margin $ 128,825 21.2% $ 95,512 16.6% $ 176,968 21.6% $ 111,647 15.2%
For the 13 weeks ended October 30, 2021 , the Retail gross margin as a percentage
of sales increased as discussed below:
•Product and other gross margin increased (430 basis points), driven primarily
by a favorable sales mix (400 basis points) due to higher general merchandise
sales, lower contract costs as a percentage of sales related to our college and
university contracts (25 basis points) resulting from contract renewals and new
store contracts, and higher margin rates (5 basis points) due to lower inventory
reserves and lower markdowns.
•Rental gross margin increased (640 basis points), driven primarily by higher
rental margin rates (595 basis points) and lower contract costs as a percentage
of sales related to our college and university contracts (285 basis points),
partially offset by an unfavorable rental mix (240 basis points).
For the 26 weeks ended October 30, 2021 , the Retail gross margin as a percentage
of sales increased as discussed below:
•Product and other gross margin increased (610 basis points), driven primarily
by a favorable sales mix (475 basis points) due to higher general merchandise
sales, higher margin rates (130 basis points) due to lower inventory reserves
and lower markdowns, and lower contract costs as a percentage of sales related
to our college and university contracts (5 basis points) resulting from contract
renewals and new store contracts, partially offset by an inventory merchandise
loss of $0.4 million (5 basis points) related to the final sale of our logo and
emblematic general merchandise inventory below
31
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cost to FLC.
•Rental gross margin increased (870 basis points), driven primarily by higher
rental margin rates (590 basis points) and lower contract costs as a percentage
of sales related to our college and university contracts (470 basis points),
partially offset by an unfavorable rental mix (190 basis points).
Wholesale
The cost of sales and gross margin for Wholesale were $16.1 million , or 74.1% of
sales, and $5.6 million , or 25.9% of sales, respectively, during the 13 weeks
ended October 30, 2021 . The cost of sales and gross margin for Wholesale was
$25.7 million or 70.6% of sales and $10.7 million or 29.4% of sales,
respectively, during the 13 weeks ended October 31, 2020 . The gross margin rate
decreased during the 13 weeks ended October 30, 2021 primarily due to higher
markdowns, partially offset by a favorable sales mix.
The cost of sales and gross margin for Wholesale were $50.1 million , or 75.8% of
sales, and $16.0 million , or 24.2% of sales, respectively, during the 26 weeks
ended October 30, 2021 . The cost of sales and gross margin for Wholesale was
$89.2 million or 76.5% of sales and $27.5 million or 23.5% of sales,
respectively, during the 26 weeks ended October 31, 2020 . The gross margin rate
increased during the 26 weeks ended October 30, 2021 primarily due to a
favorable sales mix and lower markdowns, partially offset by the unfavorable
impact of returns and allowances.
DSS
The gross margin for the DSS segment was $6.9 million , or 83.4% of sales, during
the 13 weeks ended October 30, 2021 and $4.7 million , or 78.4% of sales, during
the 13 weeks ended October 31, 2020 . The gross margin for the DSS segment was
$13.9 million , or 84.0% of sales, during the 26 weeks ended October 30, 2021 and
$9.4 million , or 79.6% of sales, during the 26 weeks ended October 31, 2020 . The
high gross margins are driven primarily by high margin subscription service
revenue earned.
Intercompany Eliminations
During the 13 weeks ended October 30, 2021 and October 31, 2020 , our sales
eliminations were $(11.9) million and $(23.4) million , respectively. During the
26 weeks ended October 30, 2021 and October 31, 2020 , our sales eliminations
were $(34.4) million and $(64.3) million , respectively. These sales eliminations
represent the elimination of Wholesale sales and fulfillment service fees to
Retail and the elimination of Retail commissions earned from Wholesale.
During the 13 weeks ended October 30, 2021 and October 31, 2020 , the cost of
sales eliminations were $(16.1) million and $(27.8) million , respectively.
During the 26 weeks ended October 30, 2021 and October 31, 2020 , the cost of
sales eliminations were $(33.0) million and $(61.9) million , respectively. These
cost of sales eliminations represent (i) the recognition of intercompany profit
for Retail inventory that was purchased from Wholesale in a prior period that
was subsequently sold to external customers during the current period and the
elimination of Wholesale service fees charged for fulfillment of inventory for
virtual store sales, net of (ii) the elimination of intercompany profit for
Wholesale inventory purchases by Retail that remain in ending inventory at the
end of the current period.
During the 13 weeks ended October 30, 2021 and October 31, 2020 , the gross
margin eliminations were $4.2 million and $4.4 million , respectively. During the
26 weeks ended October 30, 2021 and October 31, 2020 , the gross margin
eliminations were $(1.3) million and $(2.4) million , respectively. The gross
margin eliminations reflect the net impact of the sales eliminations and cost of
sales eliminations during the above mentioned reporting periods.
Selling and Administrative Expenses
13 weeks ended 26 weeks ended
October 30, % of October 31, % of October 30, % of October 31, % of
Dollars in thousands 2021 Sales 2020 Sales 2021 Sales 2020 Sales
Total Selling and
Administrative Expenses $ 107,902 17.2% $ 91,972 15.4% $ 194,137 22.4% $ 162,015 20.3%
During the 13 weeks endedOctober 30, 2021 , selling and administrative expenses increased by$15.9 million , or 17.3%, to$107.9 million from$92.0 million during the 13 weeks endedOctober 31, 2020 . During the 26 weeks endedOctober 30, 2021 , selling and administrative expenses increased by$32.1 million , or 19.8%, to$194.1 million from$162.0 million during the 26 weeks endedOctober 31, 2020 . The variances by segment are discussed by segment below. The increase in selling and administrative expenses is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. Additionally, during the 13 and 26 weeks endedOctober 30, 2021 , long-term incentive compensation expense increased by$2.5 million and$4.6 million , respectively, primarily related to cash-settled phantom share unit awards which are remeasured at the end of each reporting period to reflect current assumptions, including changes in the our common stock price. 32
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Retail
During the 13 weeks endedOctober 30, 2021 , Retail selling and administrative expenses increased by$12.1 million , or 15.6%, to$89.5 million from$77.4 million during the 13 weeks endedOctober 31, 2020 . This increase was primarily due to a$10.2 million increase in stores payroll and operating expenses including comparable stores, virtual stores and new/closed stores payroll and operating expenses, a$1.3 million increase in corporate payroll, infrastructure and product development costs and$0.6 million increase in incentive plan compensation expense related to phantom share awards as discussed above. The payroll increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. During the 26 weeks endedOctober 30, 2021 , Retail selling and administrative expenses increased by$23.5 million , or 17.5%, to$157.9 million from$134.4 million during the 26 weeks endedOctober 31, 2020 . This increase was primarily due to a$22.3 million increase in stores payroll and operating expenses including comparable stores, virtual stores and new/closed stores payroll and operating expenses, a$1.1 million increase in incentive plan compensation expense related to phantom share awards as discussed above, and a$0.1 million increase in corporate payroll, infrastructure and product development costs. The payroll increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. Wholesale Wholesale selling and administrative expenses increased by$0.3 million , or 5.8%, to$4.4 million from$4.1 million during the 13 weeks endedOctober 31, 2020 . Wholesale selling and administrative expenses increased by$0.5 million , or 5.6%, to$8.4 million from$7.9 million during the 26 weeks endedOctober 31, 2020 . The increase in selling and administrative expenses was primarily driven by higher incentive plan compensation expense related to phantom share awards, as discussed above. DSS During the 13 weeks endedOctober 30, 2021 , DSS selling and administrative expenses increased by$2.3 million , or 46.0%, to$7.3 million from$5.0 million during the 13 weeks endedOctober 31, 2020 . During the 26 weeks endedOctober 30, 2021 , DSS selling and administrative expenses increased by$4.7 million , or 52.1%, to$13.8 million from$9.0 million during the 26 weeks endedOctober 31, 2020 . The increase in costs was primarily driven by higher operating costs invested in the business associated with higher product development and sales costs aimed at increasing revenue, and higher incentive plan compensation expense related to phantom share awards, as discussed above. Corporate Services During the 13 weeks endedOctober 30, 2021 , Corporate Services' selling and administrative expenses increased by$1.3 million , or 23.8%, to$6.8 million from$5.5 million during the 13 weeks endedOctober 31, 2020 . The increase was primarily due to higher incentive plan compensation expense related to phantom share awards of$1.6 million , as discussed above, partially offset by lower operating costs of$0.3 million . During the 26 weeks endedOctober 30, 2021 , Corporate Services' selling and administrative expenses increased by$3.5 million , or 32.6%, to$14.3 million from$10.8 million during the 26 weeks endedOctober 31, 2020 . The increase was primarily due to higher incentive plan compensation expense related to phantom share awards of$3.0 million , as discussed above, and higher operating expenses of$0.5 million . Depreciation and Amortization Expense 13 weeks ended 26 weeks ended October 30, % of October 31, % of October 30, % of October 31, % of Dollars in thousands 2021 Sales 2020 Sales 2021 Sales 2020 Sales Total Depreciation and Amortization Expense$ 11,952 1.9%$ 13,193 2.2%$ 24,576 2.8%$ 27,256 3.4% Depreciation and amortization expense decreased by$1.2 million , or 9.4%, to$12.0 million during the 13 weeks endedOctober 30, 2021 from$13.2 million during the 13 weeks endedOctober 31, 2020 . Depreciation and amortization expense decreased by$2.7 million , or 9.8%, to$24.6 million during the 26 weeks endedOctober 30, 2021 from$27.3 million during the 26 weeks endedOctober 31 , 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. Restructuring and other charges During the 13 and 26 weeks endedOctober 30, 2021 , we recognized restructuring and other charges totaling$1.1 million and$3.7 million , respectively, comprised primarily of$0.4 million and$2.0 million , respectively, for severance and other 33 -------------------------------------------------------------------------------- Table of Contents employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives,$0.7 million and$1.7 million , respectively, 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. During the 13 and 26 weeks endedOctober 31, 2020 , we recognized restructuring and other charges totaling$3.4 million and$9.1 million , respectively, comprised primarily of$1.1 million and$4.5 million , respectively, for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives,$2.3 million and$4.6 million , respectively, for costs associated with professional service costs for restructuring, process improvements, shareholder activist activities, and liabilities for a facility closure. Operating Income (Loss) 13 weeks ended 26 weeks ended Dollars in October 30, % of October 31, % of October 30, % of October 31, % of thousands 2021 Sales 2020 Sales 2021 Sales 2020 Sales Total Operating Income (Loss)$ 24,589 3.9%$ 6,733 1.2%$ (16,864) (1.9)%$ (52,182) (6.5)% Our operating income was$24.6 million during the 13 weeks endedOctober 30, 2021 , compared to operating income of$6.7 million during the 13 weeks endedOctober 31, 2020 . The increase in operating income is due to the matters discussed above. For the 13 weeks endedOctober 30, 2021 , excluding the$1.1 million of restructuring and other charges discussed above, operating income was$25.7 million (or 4.1% of sales). For the 13 weeks endedOctober 31, 2020 , excluding the$3.4 million of restructuring and other charges, discussed above, operating income was$10.1 million (or 1.7% of sales). Our operating loss was$(16.9) million during the 26 weeks endedOctober 30, 2021 , compared to an operating loss of$(52.2) million during the 26 weeks endedOctober 31, 2020 . The decrease in operating loss is due to the matters discussed above. For the 26 weeks endedOctober 30, 2021 , excluding the$0.4 million of merchandise inventory loss and the$3.7 million of restructuring and other charges discussed above, operating loss was$(12.7) million (or (1.5)% of sales). For the 26 weeks endedOctober 31, 2020 , excluding the$9.1 million of restructuring and other charges, discussed above, operating loss was$(43.1) million (or (5.4)% of sales). Interest Expense, Net 13 weeks ended 26 weeks ended Dollars in thousands October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Interest Expense, Net $ 2,264 $ 912 $ 4,758 $ 3,565 Net interest expense increased by$1.4 million , or 148.4%, to$2.3 million during the 13 weeks endedOctober 30, 2021 from$0.9 million during the 13 weeks endedOctober 31, 2020 . Net interest expense increased by$1.2 million , or 33.5%, to$4.8 million during the 13 weeks endedOctober 30, 2021 from$3.6 million during the 13 weeks endedOctober 31, 2020 . The increase was primarily due to higher borrowings compared to the prior year. Income Tax (Benefit) Expense 13 weeks ended 26 weeks ended October 30, October 31, October 30, October 31, Dollars in thousands 2021 Effective Rate 2020 Effective Rate 2021 Effective Rate 2020 Effective Rate Income Tax (Benefit) Expense$ (203) (0.9)%$ (1,694) (29.1)%$ 196 (0.9)%$ (16,610) 29.8% We recorded an income tax benefit of$(0.2) million on pre-tax income of$22.3 million during the 13 weeks endedOctober 30, 2021 , which represented an effective income tax rate of (0.9)% and we recorded an income tax benefit of$(1.7) million on a pre-tax income of$5.8 million during the 13 weeks endedOctober 31, 2020 , which represented an effective income tax rate of (29.1)%. We recorded income tax expense of$0.2 million on a pre-tax loss of$(21.6) million during the 26 weeks endedOctober 30, 2021 , which represented an effective income tax rate of (0.9)% and we recorded an income tax benefit of$(16.6) million on a pre-tax loss of$(55.7) million during the 26 weeks endedOctober 31, 2020 , which represented an effective income tax rate of 29.8%. 34 -------------------------------------------------------------------------------- Table of Contents The effective tax rate for the 26 weeks endedOctober 30, 2021 is lower as compared to the comparable prior year due to the assessment of the realization of deferred tax assets and loss carrybacks recorded in the prior year. Net Income (Loss) 13 weeks ended 26 weeks ended October 30, October 31, Dollars in thousands October 30, 2021 October 31, 2020 2021 2020 Net income (loss) $ 22,528 $
7,515
As a result of the factors discussed above, net income was$22.5 million during the 13 weeks endedOctober 30, 2021 , compared with net income of$7.5 million during the 13 weeks endedOctober 31, 2020 . As a result of the factors discussed above, net loss was$(21.8) million during the 26 weeks endedOctober 30, 2021 , compared with net loss of$(39.1) million during the 26 weeks endedOctober 31, 2020 . Adjusted Earnings (non-GAAP) is$25.0 million during the 13 weeks endedOctober 30, 2021 , compared with$11.1 million during the 13 weeks endedOctober 31, 2020 . Adjusted Earnings (non-GAAP) is$(15.1) million during the 26 weeks endedOctober 30, 2021 , compared with$(30.6) million during the 26 weeks endedOctober 31, 2020 . See Adjusted Earnings (non-GAAP) discussion below. Use of Non-GAAP Measures - Adjusted Earnings, Adjusted EBITDA 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, and Free Cash Flow, which are non-GAAP financial measures underSecurities 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. We define Adjusted EBITDA as net income plus (1) depreciation and amortization; (2) interest expense and (3) income taxes, (4) as adjusted for items that are subtracted from or added to net income. We define Free Cash Flow as Adjusted EBITDA less capital expenditures, cash interest and cash taxes. To properly and prudently evaluate our business, we encourage you to review our condensed consolidated financial statements included elsewhere in this Form 10-K, the reconciliation of Adjusted Earnings to net income and the reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the tables below. All of the items included in the reconciliations below are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. These non-GAAP financial measures are not intended as substitutes for and should not be considered superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of these non-GAAP financial measures may be different from similarly named measures used by other companies, limiting their usefulness for comparison purposes. We review these non-GAAP financial measures as internal measures to evaluate our performance and manage our operations. We believe that these measures are useful performance measures which are used by us to facilitate a comparison of our on-going operating performance on a consistent basis from period-to-period. We believe that these non-GAAP financial measures provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone, as they exclude certain items that do not reflect the ordinary earnings of our operations. Our Board of Directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance, for evaluating on a quarterly and annual basis actual results against such expectations, and as a measure for performance incentive plans. We believe that the inclusion of Adjusted Earnings and Adjusted EBITDA results provides investors useful and important information regarding our operating results. 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. 35 -------------------------------------------------------------------------------- Table of Contents Adjusted Earnings (non-GAAP) 13 weeks ended 26 weeks endedOctober 30 ,
2021 2020 2021 2020
Net income (loss) $ 22,528 $ 7,515 $ (21,818) $ (39,137)
Reconciling items, after-tax (below) 2,427 3,560 6,759 8,496
Adjusted Earnings (non-GAAP) $ 24,955 $
11,075
Reconciling items, pre-tax
Merchandise inventory loss (a) $ - $ - 434 - Content amortization (non-cash) 1,311 1,222 2,586 2,386 Restructuring and other charges (a) 1,116 3,387 3,739 9,058 Reconciling items, pre-tax 2,427 4,609 6,759 11,444 Less: Pro forma income tax impact (a)(b) - 1,049 - 2,948 Reconciling items, after-tax$ 2,427 $ 3,560 $ 6,759 $ 8,496
(a) See Management Discussion and Analysis and Results of Operations discussion above. (b) Represents the income tax effects of the non-GAAP items. Adjusted EBITDA (non-GAAP)
13 weeks ended 26 weeks ended
October 30 ,
2021 2020 2021 2020
Net income (loss) $ 22,528 $ 7,515 $ (21,818) $ (39,137)
Add:
Depreciation and amortization expense 11,952 13,193 24,576 27,256
Interest expense, net 2,264 912 4,758 3,565
Income tax (benefit) expense (203) (1,694) 196 (16,610)
Merchandise inventory loss (a) - - 434 -
Content amortization (non-cash) 1,311 1,222 2,586 2,386
Restructuring and other charges (a) 1,116 3,387 3,739 9,058
Adjusted EBITDA (non-GAAP) (a) $ 38,968 $
24,535
(a) See Management Discussion and Analysis and Results of Operations discussion above. The following is Adjusted EBITDA by segment for the 13 and 26 weeks endedOctober 30, 2021 andOctober 31, 2020 . Adjusted EBITDA - by Segment
13 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 608,952 $ 21,669 $ 8,279 $ - $ (11,923) $ 626,977
Cost of sales (a) 480,022 16,049 167 - (16,131) 480,107
Gross profit 128,930 5,620 8,112 - 4,208 $ 146,870
Selling and administrative
expenses 89,486 4,387 7,305 6,809 (85) 107,902
Adjusted EBITDA (non-GAAP) $ 39,444 $ 1,233 $ 807 $ (6,809) $ 4,293 $ 38,968
36-------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA - by Segment
13 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 576,514 $ 36,387 $ 5,947 $ - $ (23,363) $ 595,485
Cost of sales (a) 480,810 25,673 255 - (27,760) 478,978
Gross profit 95,704 10,714 5,692 - 4,397 116,507
Selling and administrative
expenses 77,380 4,146 5,003 5,501 (58) 91,972
Adjusted EBITDA (non-GAAP) $ 18,324 $ 6,568 $ 689 $ (5,501) $ 4,455 $ 24,535
Adjusted EBITDA - by Segment
26 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 819,421 $ 66,153 $ 16,582 $ - $ (34,385) $ 867,771
Cost of sales (a) 641,748 50,128 331 - (33,044) 659,163
Gross profit 177,673 16,025 16,251 - (1,341) $ 208,608
Selling and administrative
expenses 157,851 8,378 13,752 14,253 (97) 194,137
Adjusted EBITDA (non-GAAP) $ 19,822 $ 7,647 $ 2,499 $ (14,253) $ (1,244) $ 14,471
Adjusted EBITDA - by Segment
26 weeks ended
Corporate
Dollars in thousands Retail Wholesale DSS Services Elimination(b) Total
Sales $ 735,290 $ 116,681 $ 11,819 $ - $ (64,291) $ 799,499
Cost of sales (a) 623,241 89,210 427 - 61,912 774,790
Gross profit 112,049 27,471 11,392 - (2,379) $ 148,533
Selling and administrative
expenses 134,365 7,937 9,039 10,745 (71) 162,015
Adjusted EBITDA (non-GAAP) $ (22,316) $ 19,534 $ 2,353 $ (10,745) $ (2,308) $ (13,482)
(a) For the 13 and 26 weeks ended October 30, 2021 , the Retail Segment gross
margin excludes $0.1 million and $0.3 million , respectively, of amortization
expense (non-cash) related to content development costs. Additionally, for the
26 weeks ended October 30, 2021 , gross margin excludes a merchandise inventory
loss of $0.4 million in the Retail Segment related to the sale of our logo and
emblematic general merchandise inventory below cost to FLC. For the 13 and 26
weeks ended October 31, 2020 , the Retail Segment gross margin excludes $0.2
million and $0.4 million , respectively, of amortization expense (non-cash)
related to content development costs.
For the 13 and 26 weeks ended October 30, 2021 , the DSS Segment gross margin
excludes $1.2 million and $2.3 million , respectively, of amortization expense
(non-cash) related to content development costs. For the 13 and 26 weeks ended
October 31, 2020 , the DSS Segment gross margin excludes $1.0 million and $2.0
million , respectively of amortization expense (non-cash) related to content
development costs.
(b) See Management Discussion and Analysis and Results of Operations discussion
above.
37
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Free Cash Flow (non-GAAP)
13 weeks ended 26 weeks ended
October 31,
Dollars in thousands October 30, 2021 October 31, 2020 October 30, 2021 2020Adjusted EBITDA (non-GAAP) $ 38,968 $ 24,535 $ 14,471$ (13,482) Less: Capital expenditures (a) 9,894 9,142 21,264 16,197 Cash interest 1,980 1,240 3,662 3,200 Cash taxes (8,032) 85 (7,778) 6,022 Free Cash Flow (non-GAAP) $ 35,126 $ 14,068 $ (2,677)$ (38,901) (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 13 weeks ended 26 weeks ended Dollars in thousands October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Physical store capital expenditures $ 3,587 $
2,825 $ 7,480 $ 5,962 Product and system development
3,856 2,901 7,480 5,226
Content development costs 1,865 1,752 4,712 2,828
Other 586 1,664 1,592 2,181
Total Capital Expenditures $ 9,894 $ 9,142 $ 21,264 $ 16,197
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Table of Contents 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 ofOctober 30, 2021 , we had$183.3 million outstanding borrowings under the Credit Agreement. See Financing Arrangements discussion below. 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 the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most four year schools have returned to a traditional on-campus environment for learning in the current Fall semester, as well as hosted traditional on campus sporting activities and events, 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 the effect on our ability to source products, including textbooks and general merchandise offerings. 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. For additional information, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year endedMay 1, 2021 . We believe that our future cash from operations, access to borrowings under the Credit Facility, FILO Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our future capital requirements will depend on many factors, including, but not limited to, the economy and the outlook for and pace of sustainable growth in our markets, the levels at which we maintain inventory, the number and timing of new store openings, and any potential acquisitions of other brands or companies including digital properties. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private financing of debt or equity. Our access to, and the availability of, financing in the future will be impacted by many factors, including the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms.
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