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Exhibit 13.1

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data of Barnes & Noble, Inc. and its subsidiaries (collectively, the Company) set forth on the following pages should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The Statement of Operations Data for the 52 weeks ended April 28, 2018 (fiscal 2018), 52 weeks ended April 29, 2017 (fiscal 2017) and 52 weeks ended April 30, 2016 (fiscal 2016), and the Balance Sheet Data as of April 28, 2018 and April 29, 2017 are derived from, and are incorporated by reference to, audited consolidated financial statements which are included elsewhere in this report. The Statement of Operations Data for the 52 weeks ended May 2, 2015 (fiscal 2015) and 53 weeks ended May 3, 2014 (fiscal 2014), the Balance Sheet Data as of April 30, 2016, May 2, 2015 and May 3, 2014 are derived from audited consolidated financial statements not included elsewhere in this report.

 

Fiscal Year

(In thousands, except per share data)

   Fiscal
2018
    Fiscal
2017
    Fiscal
2016
    Fiscal
2015
    Fiscal
2014
 

STATEMENT OF OPERATIONS DATA:

          

Sales

          

Barnes & Noble Retail

   $ 3,575,614       3,784,655       4,028,614       4,108,243       4,295,140  

NOOK

     111,487       146,514       191,520       263,833       505,862  

Elimination (a)

     (24,821     (36,611     (56,290     (74,968     (167,657
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

     3,662,280       3,894,558       4,163,844       4,297,108       4,633,345  

Cost of sales and occupancy

     2,551,077       2,682,356       2,836,547       2,871,184       3,214,396  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,111,203       1,212,202       1,327,297       1,425,924       1,418,949  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling and administrative expenses

     999,109       1,040,007       1,176,778       1,192,065       1,287,163  

Depreciation and amortization

     106,340       117,887       135,863       143,665       168,793  

Goodwill impairment

     133,612       —         _—         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (127,858     54,308       14,656       90,194       (37,007

Interest expense, net and amortization of deferred financing fees (b)

     9,837       7,509       8,770       17,678       29,122  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     (137,695     46,799       5,886       72,516       (66,129

Income tax provision (benefit)

     (12,215     24,776       (8,814     39,644       13,011  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (125,480     22,023       14,700       32,872       (79,140

Net income (loss) from discontinued operations

     —         —         (39,146     3,724       31,872  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (125,480     22,023       (24,446     36,596       (47,268
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per common share:

          

Income (loss) from continuing operations

   $ (1.73     0.30       0.05       0.15       (1.67

Income (loss) from discontinued operations

     —         —         (0.54     0.06       0.54  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per common share

   $ (1.73     0.30       (0.49     0.21       (1.12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income (loss) per common share:

          

Income (loss) from continuing operations

   $ (1.73     0.30       0.05       0.15       (1.67

Income (loss) from discontinued operations

     —         —         (0.54     0.06       0.54  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income (loss) per common share

   $ (1.73     0.30       (0.49     0.21       (1.12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

          

Basic

     72,588       72,188       72,410       60,842       58,971  

Diluted

     72,588       72,328       72,542       60,928       58,971  

Dividends declared per common share

   $ 0.60       0.60       0.60       —         —    

 

F-1


(In thousands of dollars, except per share data)

   Fiscal
2018
    Fiscal
2017
    Fiscal
2016
    Fiscal
2015
    Fiscal
2014
 

OTHER OPERATING DATA:

          

Number of Barnes & Noble Retail stores

     630       633       640       648       661  

Comparable sales increase (decrease):

          

Barnes & Noble Retail store sales (c)

     (5.4 )%      (6.3 )%      0.0     (1.9 )%      (5.8 )% 

Capital expenditures

   $ 87,651       96,258       94,274       94,805       96,728  

BALANCE SHEET DATA:

          

Total assets – continuing operations

   $ 1,749,568       1,932,921       2,012,782       2,045,104       2,270,649  

Total assets – discontinued operations

   $ —         —         —         1,067,327       1,122,071  

Total liabilities – continuing operations

   $ 1,337,585       1,358,610       1,409,272       1,347,384       1,798,649  

Total liabilities – discontinued operations

   $ —         —         —         379,630       357,180  

Long-term debt

   $ 158,700       64,900       47,200       —         —    

Shareholders’ equity

   $ 411,983       574,311       603,510       1,189,358       658,696  

 

(a) Represents sales from NOOK to B&N Retail on a sell-through basis.

 

(b) Amounts for fiscal 2018, fiscal 2017, fiscal 2016, fiscal 2015 and fiscal 2014 are net of interest income of $0, $0, $0, $58 and $190, respectively.

 

(c) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with Accounting Standards Codification 605-25, Revenue Recognition, Multiple-Element Arrangements, and does not include sales from closed or relocated stores.

 

F-2


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Barnes & Noble, Inc.’s (Barnes & Noble or the Company) fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. As used in this section, “fiscal 2018” represents the 52 weeks ended April 28, 2018, “fiscal 2017” represents the 52 weeks ended April 29, 2017 and “fiscal 2016” represents the 52 weeks ended April 30, 2016.

General

Barnes & Noble, Inc., one of the nation’s largest booksellers,1 provides customers a unique experience across its multi-channel distribution platform. As of April 28, 2018, the Company operates 630 bookstores in 50 states, maintains an eCommerce site, develops digital reading products and operates NOOK, one of the largest digital bookstores. Barnes & Noble is utilizing the strength of its retail footprint in combination with its online and digital businesses to provide an omni-channel experience for its customers, fulfilling its commitment to offer customers any book, anytime, anywhere and in any format.

Barnes & Noble Retail (B&N Retail) operates 630 retail bookstores, primarily under the Barnes & Noble Booksellers® trade name, and includes the Company’s eCommerce site. B&N Retail also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Company’s digital business, offering digital books and magazines for sale and consumption online, NOOK®2 reading devices, co-branded NOOK® tablets and reading software for iOS, Android and Windows. As of April 28, 2018, the Company employed approximately 23,000 employees (8,000 full-time and 15,000 part-time employees).

The Company’s principal business is the sale of trade books (generally, hardcover and paperback titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, NOOK® and related accessories, bargain books, magazines, gifts, café products and services, educational toys & games, music and movies direct to customers through its bookstores or on www.barnesandnoble.com. The Company offers its customers a full suite of textbook options (new, used, digital and rental).

Segments

The Company identifies its operating segments based on the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management and makes decisions on the allocation of resources. The Company’s two operating segments are B&N Retail and NOOK.

B&N Retail

This segment includes 630 bookstores as of April 28, 2018, primarily under the Barnes & Noble Booksellers trade name. These Barnes & Noble stores generally offer a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toys & Games, DVDs, Music & Vinyl, Gift, Magazine, Bargain products and a dedicated NOOK® area. The stores also offer a calendar of ongoing events, including author appearances and children’s activities. The B&N Retail segment also includes the Company’s eCommerce website, www.barnesandnoble.com, and its publishing operation, Sterling Publishing.

 

1  Based upon sales reported in trade publications and public filings.
2 

Any references to NOOK® include the Company’s NOOK® Tablet, Samsung Galaxy Tab® A NOOK®, Samsung Galaxy Tab® S2 NOOK®, Samsung Galaxy Tab® E NOOK® and NOOK GlowLightTM 3 devices, each of which includes the trademark symbol (® or ™, as applicable) even if a trademark symbol is not included.

 

F-3


Barnes & Noble stores range in size from 3,000 to 60,000 square feet depending upon market size, with an overall average store size of 26,000 square feet. In fiscal 2018, the Company reduced the Barnes & Noble store base by approximately 135,000 square feet, bringing the total square footage to 16.6 million square feet, a net reduction of 0.8% from fiscal 2017.

Each Barnes & Noble store features an authoritative selection of books, ranging from 19,000 to 143,000 titles. The comprehensive title selection is diverse and reflects local interests and regional titles and authors’ works. Bestsellers typically represent between approximately 4% and 6% of Barnes & Noble store sales. Product Master, the Company’s proprietary inventory management database, has approximately 19.6 million titles. It includes approximately 7.2 million active titles and provides each store with comprehensive title selections. By enhancing the Company’s existing merchandise replenishment systems, Product Master allows the Company to achieve higher in-stock positions and better productivity at the bookstore level through efficiencies in receiving, cashiering and returns processing. Complementing this extensive on-site selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers at www.barnesandnoble.com by offering an option to have the book sent to the store or shipped directly to the customer.

Sterling Publishing    

Sterling Publishing is a leading publisher of non-fiction trade titles. Founded in 1949, Sterling publishes a wide range of non-fiction and illustrated books and kits across a variety of imprints, in categories such as health & wellness, music & popular culture, food & wine, crafts, puzzles & games and history & current affairs, as well as a large children’s line. Sterling, with a solid backlist and robust value publishing program, has a title base of approximately 15,000 print books and eBooks. In addition, Sterling also distributes approximately 1,300 titles on behalf of client publishers.

NOOK

This segment represents the Company’s digital business, including the development and support of the Company’s NOOK® product offerings. The digital business includes digital content such as eBooks, digital newsstand and sales of NOOK® devices and accessories to B&N Retail. The underlying strategy of the NOOK business is to offer customers any digital book, newspaper or magazine, anytime, on any device. The Company remains committed to delivering to customers the best digital bookstore experience, providing easy access to Barnes & Noble’s expansive digital collection of over three million eBooks, digital magazines and newspapers, while rationalizing its existing cost structure. As part of this commitment, the Company partners with Samsung to develop co-branded NOOK® tablets that feature the award-winning Barnes & Noble digital reading experience, while continuing to develop and offer its own black-and-white NOOK® eReaders and NOOK® Tablet.

 

F-4


Results of Operations

 

Fiscal Year

   Fiscal 2018     Fiscal 2017     Fiscal 2016  

Sales (in thousands)

   $ 3,662,280       3,894,558       4,163,844  

Net Income (Loss) From Continuing Operations (in thousands)

   $ (125,480     22,023       14,700  

Net Loss From Discontinued Operations (in thousands)

   $ —         —         (39,146
  

 

 

   

 

 

   

 

 

 

Net Income (Loss) (in thousands)

   $ (125,480     22,023       (24,446

Diluted Income (Loss) Per Common Share From Continuing Operations

   $ (1.73     0.30       0.05  

Diluted Loss Per Common Share From Discontinued Operations

   $ —         —         (0.54
  

 

 

   

 

 

   

 

 

 

Diluted Income (Loss) Per Common Share

   $ (1.73   $ 0.30     $ (0.49

Comparable Sales Increase (Decrease)

      

Barnes & Noble Retail store sales (a)

     (5.4 )%      (6.3 )%      0.0

Stores Opened

      

Barnes & Noble Retail stores

     3       3       0  

Stores Closed

      

Barnes & Noble Retail stores

     6       10       8  

Number of Stores Open at Year End

      

Barnes & Noble Retail stores

     630       633       640  

Square Feet of Selling Space at Year End (in millions)

      

Barnes & Noble Retail stores

     16.6       16.7       16.9  

 

(a) Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with Accounting Standards Codification (ASC) 605-25, Revenue Recognition, Multiple-Element Arrangements, and does not include sales from closed or relocated stores.

The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company:

 

Fiscal Year

   Fiscal 2018     Fiscal 2017     Fiscal 2016  

Sales

     100.0     100.0     100.0

Cost of sales and occupancy

     69.7       68.9       68.1  
  

 

 

   

 

 

   

 

 

 

Gross profit

     30.3       31.1       31.9  

Selling and administrative expenses

     27.3       26.7       28.3  

Depreciation and amortization

     2.9       3.0       3.3  

Goodwill impairment

     3.6       0.0       0.0  
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3.5     1.4       0.4  

Interest expense, net and amortization of deferred financing fees

     0.3       0.2       0.2  
  

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     (3.8     1.2       0.1  

Income tax provision (benefit)

     (0.3     0.6       (0.2
  

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (3.4     0.6       0.4  

Net loss from discontinued operations

     —         —         (0.9
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     (3.4 )%      0.6     (0.6 )% 

 

F-5


Business Overview

Barnes & Noble has been experiencing declining sales trends primarily due to lower store traffic. The Company has been able to offset some of the traffic decline through its efforts to increase conversion through higher customer engagement. Additionally, the Company has been able to partially mitigate the impact of the sales decline on profit levels through cost reductions. While the Company believes it has lost share on its recent sales performance, it sees opportunities in an industry that has become more stable.

To improve its performance, the Company has initiated a strategic turnaround plan, focused on strengthening the core business by enhancing the customer value proposition; improving profitability through an aggressive expense management program, which will be used to fund growth initiatives; accelerating execution through simplification; and innovating for the future, which will position the Company for long-term growth.

To strengthen its core business, the Company is enhancing this customer value proposition by improving its merchandise mix, enhancing the overall shopping experience, increasing the value of its Membership Program and improving its omni-channel capabilities. The Company will leverage the strength of its Barnes & Noble brand, knowledgeable booksellers, vast book selection and retail footprint to attract customers and grow sales.

Merchandising initiatives are focused on increasing the impact of promotional activities, narrowing product assortments, improving SKU productivity, improving inventory management processes, testing changes to existing store layouts and remerchandising select business units in stores. Additionally, the Company has created a new business development team, which will introduce new business categories that are complementary to its existing businesses. The Company believes there is opportunity to increase conversion through higher customer engagement and by improving navigation and discovery throughout the store, including a customer friendly and more intuitive organization of books and improved signage for easier browsing within and across sections.    

In-store events also drive traffic, reinforcing Barnes & Noble as a destination where customers can meet, browse and discover. The Company is also utilizing social media, where booksellers communicate events, promotions and new product offerings with customers at the local level in order to drive traffic.

The Company’s Membership Program provides the Company with valuable data and insights into its customer base, enabling the Company to better understand and market to its customers. Members are more productive than non-members, as they spend more and visit more often. The Company continues to test programs to grow sales to both members and non-members, increase membership, improve price perception and enhance its overall customer value proposition.

The Company is focused on simplification throughout its organization to create efficiencies and reinvest resources to support sales growth. The Company is also committed to right sizing its cost structure. At B&N Retail, the Company has implemented a new labor model for its stores, which allows Store Managers to adjust staff up or down based on the needs of the business, increase store productivity and streamline store operations. This action resulted in the elimination of certain store positions. At NOOK, the Company exited non-core businesses and outsourced certain functions. NOOK expects to continue to re-calibrate its cost structure commensurate with sales.

 

F-6


In addition to initiatives focused on growing sales through its existing store base, the Company is innovating for the future and is expecting to open smaller, newly designed prototype stores later this year, which it believes could foster sales growth in the future. The Company has also created a Test & Learn pipeline process, through which it is testing a number of new initiatives to improve future performance.

52 Weeks Ended April 28, 2018 Compared with 52 Weeks Ended April 29, 2017

The following tables summarize the Company’s results of operations for the 52 weeks ended April 28, 2018 and 52 weeks ended April 29, 2017.

Sales

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 28,
2018
    %
Total
    April 29,
2017
    %
Total
 

B&N Retail

   $ 3,575,614       97.6   $ 3,784,655       97.2

NOOK

     111,487       3.0     146,514       3.8

Elimination

     (24,821     (0.7 )%      (36,611     (0.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Sales

   $ 3,662,280       100.0   $ 3,894,558       100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s sales decreased $232.3 million, or 6.0%, during fiscal 2018 to $3.662 billion from $3.895 billion during fiscal 2017. The changes by segment are as follows:

 

   

B&N Retail sales decreased $209.0 million, or 5.5%, to $3.576 billion from $3.785 billion during the same period one year ago, and accounted for 97.6% of total Company sales. Comparable store sales decreased $172.4 million, or 5.4%, as compared to the prior year on lower store traffic and comparisons to the prior year release of Harry Potter and the Cursed Child. Closed stores decreased sales by $31.3 million, while new stores increased sales by $11.2 million. Online sales decreased $29.5 million, or 9.6%, on lower conversion rates, which were impacted by reduced promotional activity and comparisons to the prior year eBook settlement. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc., which increased by $3.8 million, or 10.6%, versus the prior year. Gift card breakage increased $8.4 million as redemptions continue to run lower than historical patterns.

Of the $172.4 million decrease in comparable store sales, book categories decreased sales by $83.0 million, or 4.0%, due primarily to declines in Juvenile, Trade and Bargain titles, while non-book categories decreased sales by $77.0 million, or 7.0%, primarily on Gift, Music and DVD, partially offset by increases in Toys & Games. Comparable sales of NOOK® products at B&N Retail stores decreased $12.4 million, or 33.6%, primarily on lower device unit volume and lower average selling prices.

 

   

NOOK sales decreased $35.0 million, or 23.9%, to $111.5 million from $146.5 million during the same period one year ago, and accounted for 3.0% of total Company sales. Digital content sales decreased $21.4 million, or 20.1%, compared to the prior year primarily on lower unit sales. Device and accessories sales decreased $13.6 million, or 34.0%, primarily on lower average selling prices and lower unit sales.

 

   

Elimination sales, which represent sales from NOOK to B&N Retail on a sell-through basis, decreased $11.8 million, or 32.2%, versus the prior year. NOOK sales, net of elimination, accounted for 2.4% of total Company sales.

 

F-7


In fiscal 2018, the Company opened three and closed six Barnes & Noble stores, bringing its total number of B&N Retail stores to 630, with 16.6 million square feet, in the 50 states.

Cost of Sales and Occupancy

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 28,
2018
    % Sales     April 29,
2017
    % Sales  

B&N Retail

   $ 2,521,419       70.5   $ 2,636,113       69.7

NOOK

     54,479       48.9     82,854       56.6

Elimination

     (24,821     (22.3 )%      (36,611     (25.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Sales and

Occupancy

   $ 2,551,077       69.7   $ 2,682,356       68.9
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies and other operating expenses), rental expense, common area maintenance and real estate taxes, partially offset by landlord tenant allowances amortized over the life of the lease.

Cost of sales and occupancy decreased $131.3 million, or 4.9%, to $2.551 billion in fiscal 2018 from $2.682 billion in fiscal 2017. Cost of sales and occupancy increased as a percentage of sales to 69.7% in fiscal 2018 from 68.9% in fiscal 2017. The changes by segment are as follows:

 

   

B&N Retail cost of sales and occupancy increased as a percentage of sales to 70.5% from 69.7%, or 85 basis points, during the same period one year ago primarily due to occupancy deleverage (60 basis points) and higher markdowns to clear non-returnable merchandise (30 basis points). The remaining variance was attributable to sales mix and the general timing of expenses.

 

   

NOOK cost of sales and occupancy decreased as a percentage of sales to 48.9% from 56.6% during the same period one year ago primarily on lower occupancy and sales mix.

Gross Profit

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 28,
2018
     % Sales     April 29,
2017
     % Sales  

B&N Retail

   $ 1,054,195        29.5   $ 1,148,542        30.3

NOOK

     57,008        65.8     63,660        57.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Gross Profit

   $ 1,111,203        30.3   $ 1,212,202        31.1
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s consolidated gross profit decreased $101.0 million, or 8.3%, to $1.111 billion in fiscal 2018 from $1.212 billion in fiscal 2017. This change was due to the matters discussed above.

 

F-8


Selling and Administrative Expenses

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 28,
2018
     % Sales     April 29,
2017
     % Sales  

B&N Retail

   $ 945,643        26.4   $ 959,002        25.3

NOOK

     53,466        61.7     81,005        73.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Selling and Administrative

Expenses

   $ 999,109        27.3   $ 1,040,007        26.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling and administrative expenses decreased $40.9 million, or 3.9%, to $999.1 million in fiscal 2018 from $1.040 billion in fiscal 2017. Selling and administrative expenses increased as a percentage of sales to 27.3% in fiscal 2018 from 26.7% in fiscal 2017. The changes by segment are as follows:

 

   

B&N Retail selling and administrative expenses decreased $13.4 million as compared to prior year, while increasing 110 basis points as a percentage of sales to 26.4% from 25.3% for the year. The current year included severance costs of $16.2 million (45 basis points). The Company implemented a new labor model for its stores, resulting in the elimination of certain store positions. Unfavorable variances to the prior year also included higher store payroll (25 basis points on store sales) as sales deleverage and wage increases outpaced productivity gains, higher employee benefit costs (20 basis points) on increased medical claims and strategic consulting costs (20 basis points). The remaining variance was attributable to sales deleverage and the general timing of expenses.

 

   

NOOK selling and administrative expenses decreased $27.5 million as compared to the prior year, decreasing as a percentage of sales to 61.7% from 73.7% during the same period a year ago. The prior year included severance and transitional costs of $10.7 million related to the outsourcing of certain services and the closure of NOOK’s California and Taiwan offices. Excluding these costs, the decrease in dollars was primarily attributable to continued cost rationalization efforts, as well as lower variable costs on the sales decline. The current year also includes a favorable expense impact from a channel partner settlement.

Goodwill Impairment

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 28,
2018
     % Sales     April 29,
2017
     % Sales  

B&N Retail

   $ 133,612        3.7   $ —          0.0

NOOK

     —          0.0     —          0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Goodwill Impairment

   $ 133,612        3.6   $ —          0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets. ASC 350-30, Goodwill and Other Intangible Assets, requires that goodwill and other unamortizable intangible assets be tested for impairment at least annually or earlier if there are impairment indicators.

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (ASU) 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment.

 

F-9


Following the announcement on January 4, 2018 of the Company’s holiday sales results and its revised outlook, the market price of the Company’s common stock sharply declined. Due to these new impairment indicators, the Company performed an interim goodwill impairment test as of December 30, 2017. As a result of this interim testing, the Company recognized an impairment of its B&N Retail reporting unit goodwill of $133.6 million during the third quarter of fiscal 2018.

Depreciation and Amortization

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 28,
2018
     % Sales     April 29,
2017
     % Sales  

B&N Retail

   $ 94,334        2.6   $ 98,877        2.6

NOOK

     12,006        13.9     19,010        17.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Depreciation and Amortization

   $ 106,340        2.9   $ 117,887        3.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Depreciation and amortization decreased $11.5 million, or 9.8%, to $106.3 million in fiscal 2018 from $117.9 million in fiscal 2017. This decrease was primarily attributable to fully depreciated assets, partially offset by additional capital expenditures.

Operating Income (Loss)

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 28,
2018
    % Sales     April 29,
2017
    % Sales  

B&N Retail

   $ (119,394     (3.3 )%    $ 90,663       2.4

NOOK

     (8,464     (9.8 )%      (36,355     (33.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Income (Loss)

   $ (127,858     (3.5 )%    $ 54,308       1.4
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s consolidated operating income decreased $182.2 million, or 335.4%, to an operating loss of $127.9 million in fiscal 2018 from an operating income of $54.3 million in fiscal 2017. This change was due to the matters discussed above.

Interest Expense, Net and Amortization of Deferred Financing Fees

 

     52 Weeks Ended      52 Weeks Ended         

Dollars in thousands

   April 28, 2018      April 29, 2017      % of Change  

Interest Expense, Net and Amortization of Deferred Financing Fees

   $ 9,837      $ 7,509        31.0
  

 

 

    

 

 

    

 

 

 

Net interest expense and amortization of deferred financing fees increased $2.3 million, or 31.0%, to $9.8 million in fiscal 2018 from $7.5 million in fiscal 2017 primarily on higher average borrowings.

 

F-10


Income Tax Provision (Benefit)

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 28,
2018
    Effective
Rate
    April 29,
2017
     Effective
Rate
 

Income Tax Provision (Benefit)

   $ (12,215     8.9   $ 24,776        52.9
  

 

 

   

 

 

   

 

 

    

 

 

 

The Company recorded an income tax benefit of $12.2 million in fiscal 2018 compared with an income tax provision of $24.8 million in fiscal 2017. The Company’s effective tax rate was 8.9% and 52.9% in fiscal 2018 and fiscal 2017, respectively. The Company’s effective tax rate differs from the statutory rate due to the impact of the remeasurement of deferred taxes resulting from the Tax Cuts and Jobs Act, the impact of return to provision adjustments, the establishment of valuation allowance on definite lived NOLs, and state tax provision, net of federal benefit. The prior year rate was impacted primarily by changes in uncertain tax positions and changes in deferred taxes and payables.

In accordance with accounting principles generally accepted in the United States (GAAP) rules on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a particular deferred tax asset will not be realized. As part of this evaluation, the Company reviews all evidence, both positive and negative, to determine if a valuation allowance is needed. The Company’s review of positive evidence included the review of historic profitability, projected profitability, feasible tax planning strategies that may be implemented and the reversal of temporary items. The Company determined that there was sufficient negative evidence to establish valuation allowances against certain deferred tax assets, totaling $36.7 million. The Company will monitor the need for additional valuation allowances at each quarter in the future and adjust the valuation allowance as necessary.

Net Income (Loss)

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 28,
2018
    Diluted
EPS
    April 29,
2017
     Diluted
EPS
 

Net Income (Loss)

   $ (125,480   $ (1.73   $ 22,023      $ 0.30  
  

 

 

   

 

 

   

 

 

    

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net loss of $125.5 million (or $1.73 per diluted share) during fiscal 2018, compared with consolidated net income of $22.0 million (or $0.30 per diluted share) during fiscal 2017.

 

F-11


52 Weeks Ended April 29, 2017 Compared with 52 Weeks Ended April 30, 2016

The following tables summarize the Company’s results of operations for the 52 weeks ended April 29, 2017 and 52 weeks ended April 30, 2016.

Sales

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
    % Total     April 30,
2016
    % Total  

B&N Retail

   $ 3,784,655       97.2   $ 4,028,614       96.8

NOOK

     146,514       3.8     191,520       4.6

Elimination

     (36,611     (0.9 )%      (56,290     (1.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Sales

   $ 3,894,558       100.0   $ 4,163,844       100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s sales decreased $269.3 million, or 6.5%, during fiscal 2017 to $3.895 billion from $4.164 billion during fiscal 2016. The changes by segment are as follows:

 

   

B&N Retail sales decreased $244.0 million, or 6.1%, to $3.785 billion from $4.029 billion during the same period one year ago, and accounted for 97.2% of total Company sales. Comparable store sales decreased $216.5 million, or 6.3%, as compared to the prior year. Closed stores decreased sales by $46.7 million. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc., which decreased by $13.4 million, or 27.3%, versus the prior year on lower coloring book sales. Online sales increased $10.8 million, or 3.7%, versus the prior year period on benefits from an eBook settlement, site improvements and increased promotional activity. New stores increased sales by $7.7 million. Gift card breakage increased $6.5 million as redemptions continue to run lower than historical patterns.

Of the $216.5 million decrease in comparable store sales, core comparable store sales, which exclude sales of NOOK® products, decreased $194.2 million, or 5.7%, as compared to the prior year due in large part to lower traffic, comparisons to last year’s coloring book and artist supplies phenomenon and the challenging retail environment. Book categories decreased sales by $134.5 million, or 6.0%, on lower sales of Trade, Bargain (primarily coloring books) and Juvenile titles, while non-book core categories decreased sales by $59.7 million, or 5.1%, on declines in the DVD, Café, Newsstand and Gift businesses. Comparable sales of NOOK® products at B&N Retail stores decreased $22.3 million, or 37.5%, primarily on lower device unit volume and lower average selling prices.

 

   

NOOK sales decreased $45.0 million, or 23.5%, to $146.5 million from $191.5 million during the same period one year ago, and accounted for 3.8% of total Company sales. Digital content sales decreased $23.6 million, or 18.1%, compared to prior year on lower unit sales, partially offset by higher average selling prices. Current year content volume benefited from an eBook settlement. Device and accessories sales decreased $21.4 million, or 34.9%, primarily on lower unit sales and lower average selling prices.

 

   

Elimination sales, which represent sales from NOOK to B&N Retail on a sell-through basis, decreased $19.7 million, or 35.0%, versus the prior year. NOOK sales, net of elimination, accounted for 2.8% of total Company sales.

 

F-12


In fiscal 2017, the Company opened three and closed ten Barnes & Noble stores, bringing its total number of B&N Retail stores to 633, with 16.7 million square feet, in the 50 states.

Cost of Sales and Occupancy

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
    % Sales     April 30,
2016
    % Sales  

B&N Retail

   $ 2,636,113       69.7   $ 2,770,209       68.8

NOOK

     82,854       56.6     122,628       64.0

Elimination

     (36,611     (25.0 )%      (56,290     (29.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Sales and Occupancy

   $ 2,682,356       68.9   $ 2,836,547       68.1
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies and other operating expenses), rental expense, common area maintenance and real estate taxes, partially offset by landlord tenant allowances amortized over the life of the lease.

Cost of sales and occupancy decreased $154.2 million, or 5.4%, to $2.682 billion in fiscal 2017 from $2.837 billion in fiscal 2016. Cost of sales and occupancy increased as a percentage of sales to 68.9% in fiscal 2017 from 68.1% in fiscal 2016. The changes by segment are as follows:

 

   

B&N Retail cost of sales and occupancy increased as a percentage of sales to 69.7% from 68.8%, or 90 basis points, during the same period one year ago primarily on occupancy deleverage (60 basis points), higher markdowns (50 basis points) from promotional activity, including Harry Potter and the Cursed Child, as well as markdowns to clear non-returnable merchandise resulting from the holiday sales shortfall. The remaining variance included product mix, sales deleverage and general timing differences.

 

   

NOOK cost of sales and occupancy decreased as a percentage of sales to 56.6% from 64.0% during the same period one year ago. This decrease was primarily due to sales mix, improved device margins and a favorable channel partner settlement.

Gross Profit

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     % Sales     April 30,
2016
     % Sales  

B&N Retail

   $ 1,148,542        30.3   $ 1,258,405        31.2

NOOK

     63,660        57.9     68,892        50.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Gross Profit

   $ 1,212,202        31.1   $ 1,327,297        31.9
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s consolidated gross profit decreased $115.1 million, or 8.7%, to $1.212 billion in fiscal 2017 from $1.327 billion in fiscal 2016. This decrease was due to the matters discussed above.

 

F-13


Selling and Administrative Expenses

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     % Sales     April 30,
2016
     % Sales  

B&N Retail

   $ 959,002        25.3   $ 1,043,221        25.9

NOOK

     81,005        73.7     133,557        98.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Selling and Administrative Expenses

   $ 1,040,007        26.7   $ 1,176,778        28.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling and administrative expenses decreased $136.8 million, or 11.6%, to $1.040 billion in fiscal 2017 from $1.177 billion in fiscal 2016. Selling and administrative expenses decreased as a percentage of sales to 26.7% in fiscal 2017 from 28.3% in fiscal 2016. The changes by segment are as follows:

 

   

B&N Retail selling and administrative expenses decreased $84.2 million as compared to prior year, decreasing 60 basis points as a percentage of sales to 25.3% from 25.9% for the year. Favorable variances to the prior year include lower pension expense (60 basis points) on the prior year pension settlement charge, lower holiday advertising (45 basis points) and lower website expenses (25 basis points) as the prior year included investments to stabilize the site and improve traffic and customer experience. The prior year also included a net CEO separation-related severance charge of $10.5 million (25 basis points). Unfavorable variances to the prior year include higher store payroll (65 basis points on store sales) as sales deleverage and wage increases offset productivity gains, higher non-CEO severance costs (25 basis points) primarily resulting from a cost reduction program and a severance charge (net of reversal of expense relating to equity awards) of $3.0 million resulting from the current year CEO departure (10 basis points). The remaining variance included the general timing of expenses.

 

   

NOOK selling and administrative expenses decreased $52.6 million as compared to the prior year, decreasing as a percentage of sales to 73.7% from 98.8% during the same period a year ago. Current year expenses include severance and transitional costs of $10.7 million related to the outsourcing of certain services and the closure of its California and Taiwan offices. Excluding these costs, the decrease in dollars was primarily attributable to continued cost rationalization efforts, including lower compensation, as well as lower variable costs on the sales decline.

Depreciation and Amortization

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     % Sales     April 30,
2016
     % Sales  

B&N Retail

   $ 98,877        2.6   $ 101,888        2.5

NOOK

     19,010        17.3     33,975        25.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Depreciation and Amortization

   $ 117,887        3.0   $ 135,863        3.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Depreciation and amortization decreased $18.0 million, or 13.2%, to $117.9 million in fiscal 2017 from $135.9 million in fiscal 2016. This decrease was primarily attributable to fully depreciated assets, partially offset by additional capital expenditures.

 

F-14


Operating Income (Loss)

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
    % Sales     April 30,
2016
    % Sales  

B&N Retail

   $ 90,663       2.4   $ 113,296       2.8

NOOK

     (36,355     (33.1 )%      (98,640     (72.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Income

   $ 54,308       1.4   $ 14,656       0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s consolidated operating income increased $39.7 million, or 270.6%, to an operating income of $54.3 million in fiscal 2017 from an operating income of $14.7 million in fiscal 2016. This increase was due to the matters discussed above.

Interest Expense, Net and Amortization of Deferred Financing Fees

 

     52 Weeks Ended      52 Weeks Ended         

Dollars in thousands

   April 29,
2017
     April 30,
2016
     % of Change  

Interest Expense, Net and Amortization of Deferred Financing Fees

   $ 7,509      $ 8,770        (14.4 )% 
  

 

 

    

 

 

    

 

 

 

Net interest expense and amortization of deferred financing fees decreased $1.3 million, or 14.4%, to $7.5 million in fiscal 2017 from $8.8 million in fiscal 2016. This decrease was primarily due to lower deferred financing fees in conjunction with the refinancing of the credit facility in August 2015.

Income Tax Provision (Benefit)

 

     52 Weeks Ended     52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     Effective
Rate
    April 30,
2016
    Effective
Rate
 

Income Tax Provision (Benefit)

   $ 24,776        52.9   $ (8,814     (149.7 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

The Company recorded an income tax provision of $24.8 million in fiscal 2017 compared with an income tax benefit of $8.8 million in fiscal 2016. The Company’s effective tax rate was 52.9% and (149.7)% in fiscal 2017 and fiscal 2016, respectively. The Company’s effective tax rate differs from the statutory rate due to the impact of permanent items such as meals and entertainment, non-deductible executive compensation, tax credits, changes in uncertain tax positions and the impact of return to provision adjustments and state tax provision, net of federal benefit. The Company continues to maintain a valuation allowance against certain state items. The prior year rate was impacted by uncertain tax positions, finalization of the federal income tax audit covering the 2008 through 2012 tax years, the closure of many state taxing jurisdiction statutes, the impact of new legislation enacted by Congress permanently reinstating the research and development credit and the impact of filing the income tax returns.

 

F-15


In accordance with United States GAAP rules on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a particular deferred tax asset will not be realized. As part of this evaluation, the Company reviews all evidence, both positive and negative, to determine if a valuation allowance is needed. The Company’s review of positive evidence included the review of historic profitability, projected profitability, feasible tax planning strategies that may be implemented and the reversal of temporary items. The Company determined that there was sufficient negative evidence to establish valuation allowances against certain deferred tax assets, totaling $7.6 million. The Company will monitor the need for additional valuation allowances at each quarter in the future and adjust the valuation allowance as necessary.

Net Income from Continuing Operations

 

     52 Weeks Ended      52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     Diluted EPS      April 30,
2016
     Diluted EPS  

Net Income from Continuing

Operations

   $ 22,023      $ 0.30      $ 14,700      $ 0.05  
  

 

 

    

 

 

    

 

 

    

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net income from continuing operations of $22.0 million (or $0.30 per diluted share) during fiscal 2017, compared with consolidated net income from continuing operations of $14.7 million (or $0.05 per diluted share) during fiscal 2016.

Net Loss from Discontinued Operations

 

     52 Weeks Ended      52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     Diluted EPS      April 30,
2016
    Diluted EPS  

Net Loss from Discontinued Operations

   $ —        $ —        $ (39,146   $ (0.54
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company has recognized the separation of Barnes & Noble Education, Inc. (B&N Education) (the Spin-Off) in accordance with ASC 205-20, Discontinued Operations. As such, the historical results of B&N Education have been classified as discontinued operations. See Note 16 to the Consolidated Financial Statements for a further discussion on the separation of B&N Education.

Discontinued operations for fiscal 2016 primarily consisted of pre-spin B&N Education results, investment banking fees (as they directly related to the Spin-Off) and separation-related costs, and excluded corporate allocation adjustments with B&N Retail.

Net Income (Loss)

 

     52 Weeks Ended      52 Weeks Ended  

Dollars in thousands

   April 29,
2017
     Diluted EPS      April 30,
2016
    Diluted EPS  

Net Income (Loss)

   $ 22,023      $ 0.30      $ (24,446   $ (0.49
  

 

 

    

 

 

    

 

 

   

 

 

 

As a result of the factors discussed above, the Company reported a consolidated net income of $22.0 million (or $0.30 per diluted share) during fiscal 2017, compared with consolidated net loss of $24.4 million (or $0.49 per diluted share) during fiscal 2016.

 

F-16


Seasonality

The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating income typically realized during its third fiscal quarter, which includes the holiday selling season.

The NOOK business, like that of many technology companies, is impacted by the launch of new products and the promotional efforts to support those new products, as well as the traditional retail holiday selling seasonality.

Liquidity and Capital Resources

The primary sources of the Company’s cash are net cash flows from operating activities, funds available under its credit facility and short-term vendor financing.

Cash Flows

The Company’s cash and cash equivalents were $10.8 million as of April 28, 2018, compared with $12.0 million as of April 29, 2017. The decrease in cash and cash equivalents of $1.2 million versus the prior year period was due to the earnings decline, changes in working capital and cash flows as outlined below.

Net cash flows provided by operating activities for fiscal 2018 were $37.1 million, as compared to net cash flows provided by operating activities of $146.8 million for fiscal 2017. The unfavorable year-over-year comparison was primarily attributable to changes in working capital and the earnings decline.

Net cash flows used in investing activities for fiscal 2018 were $87.7 million, as compared to net cash flows used in investing activities of $96.3 million for fiscal 2017. The Company’s investing activities primarily consisted of capital expenditures for the maintenance of existing stores, merchandising initiatives, new store construction and enhancements to systems and the website.

Net cash flows provided by financing activities for fiscal 2018 were $49.3 million, as compared to net cash flows used in financing activities of $52.4 million for fiscal 2017. The Company’s financing activities during fiscal 2018 consisted primarily of net proceeds on its credit facility, offset by common dividends. Financing activities during fiscal 2017 consisted primarily of common dividends and share repurchases, partially offset by net proceeds on its credit facility.

Over the past 12 months, the Company has returned $43.6 million in cash to its shareholders through dividends.

Additional year-over-year balance sheet changes include the following:

 

   

Receivables, net decreased $2.7 million, or 4.1%, to $64.6 million as of April 28, 2018, compared to $67.3 million as of April 29, 2017.

 

   

Merchandise inventories, net increased $11.3 million, or 1.2%, to $958.2 million as of April 28, 2018, compared to $946.9 million as of April 29, 2017 due in part to the timing of merchandise returns.

 

F-17


   

Prepaid expenses and other current assets decreased $36.7 million, or 36.0%, to $65.2 million as of April 28, 2018, compared to $101.8 million as of April 29, 2017, primarily related to income taxes.

 

   

Property and equipment, net decreased $20.6 million, or 7.5%, to $255.5 million as of April 28, 2018, compared to $276.1 million as of April 29, 2017, as depreciation outpaced capital expenditures.

 

   

Goodwill decreased $135.8 million, or 65.5%, to $71.6 million as of April 28, 2018, compared to $207.4 million as of April 29, 2017, due to a $133.6 million impairment charge recorded during the third quarter of fiscal 2018.

 

   

Intangible assets, net decreased $0.6 million, or 0.2%, to $309.6 million as of April 28, 2018, compared to $310.2 million as of April 29, 2017, on additional amortization.

 

   

Other non-current assets increased $2.9 million, or 26.1%, to $14.1 million as of April 28, 2018, compared to $11.2 million as of April 29, 2017, primarily related to income taxes, partially offset by amortization of deferred financing fees.

 

   

Accounts payable decreased $14.8 million, or 3.1%, to $458.9 million as of April 28, 2018, compared to $473.7 million as of April 29, 2017. Accounts payable represented 47.9% and 50.0% of merchandise inventories as of April 28, 2018 and April 29, 2017, respectively. This ratio is subject to changes in product mix and the timing of purchases, payments and returns.

 

   

Accrued liabilities decreased $22.9 million, or 8.1%, to $260.2 million as of April 28, 2018, compared to $283.2 million as of April 29, 2017. Accrued liabilities include deferred income, compensation, occupancy related, legal and other selling and administrative miscellaneous accruals.

 

   

Gift card liabilities decreased $28.0 million, or 8.0%, to $323.5 million as of April 28, 2018, compared to $351.4 million as of April 29, 2017. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company recognized gift card breakage of $43.9 million and $35.5 million during fiscal 2018 and fiscal 2017, respectively. Gift card breakage increased over last year as redemptions continue to run lower than historical patterns. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.

 

   

Deferred taxes decreased $34.1 million, or 39.6%, to $52.0 million as of April 28, 2018, compared to $86.1 million as of April 29, 2017 due to the remeasurement of deferred taxes as a result of the Tax Cuts and Jobs Act and the deferred tax impact of the goodwill impairment charge, partially offset by the valuation allowance recorded.

 

   

Other long-term liabilities decreased $15.0 million, or 15.1%, to $84.3 million as of April 28, 2018, compared to $99.3 million as of April 29, 2017, primarily due to lower deferred rent.

The Company has arrangements with third-party manufacturers to produce certain NOOK® products. These manufacturers procure and assemble unfinished parts and components from third-party suppliers based on forecasts provided by the Company. Given production lead times, commitments are generally made far in advance of finished product delivery. Based on current purchase commitments and product development plans, the Company did not record any provision for purchase commitments. Future charges may be required based on changes in forecasted sales or strategic direction.

Capital Structure

Credit Facility

On August 3, 2015, the Company and certain of its subsidiaries entered into a credit agreement (Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of up to $700.0 million (Revolving Credit Facility). On September 30, 2016, the Company amended the

 

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Credit Agreement to provide for a new “first-in, last-out” revolving credit facility (the FILO Credit Facility and, together with the Revolving Credit Facility, the Credit Facility) in an aggregate principal amount of up to $50.0 million, which supplements availability under the Revolving Credit Facility. The Company generally must draw down the FILO Credit Facility before making any borrowings under the Revolving Credit Facility.

Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the Credit Facility. The Credit Facility replaced the prior credit facility. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs.

The Company and certain of its subsidiaries are permitted to borrow under the Credit Facility. The Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the Credit Facility (collectively, the Loan Parties), but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. Borrowings under the Credit Facility are limited to a specified percentage of eligible collateral. The Company has the option to request an increase in commitments under the Credit Facility of up to $250.0 million, subject to certain restrictions.

The Credit Facility allows the Company to declare and pay up to $70.0 million in dividends annually to its stockholders without compliance with any availability or ratio-based limitations.

Interest under the Revolving Credit Facility accrues, at the election of the Company, at a LIBOR 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 Revolving Credit Facility. Through the end of the fiscal quarter during which the closing of the Revolving Credit Facility occurred, loans under the Revolving Credit Facility bore interest at LIBOR plus 1.750% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.750% per annum, in the alternative, and thereafter the interest rate began to fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.500% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.500% per annum), based upon the average daily availability under the Revolving Credit Facility for the immediately preceding fiscal quarter. Interest under the FILO Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is also determined by reference to the level of excess availability under the Revolving Credit Facility. Loans under the FILO Credit Facility bear interest at 1.000% per annum more than loans under the Revolving Credit Facility.

The Credit Agreement 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) would be triggered, and the lenders would assume dominion and control over the Loan Parties’ cash.

The Credit Agreement 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 Agreement also contains customary affirmative covenants and representations and warranties.

 

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The following table presents selected information related to the Company’s credit facilities (in thousands):

 

     Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Credit facility at period end

   $ 158,700       64,900       47,200  

Average balance outstanding during the period

   $ 141,478       96,297       66,948  

Maximum borrowings outstanding during the period

   $ 287,933       285,278       293,200  

Weighted average interest rate during the period (a)

     5.55     5.77     8.21

Interest rate at end of period

     3.92     3.73     2.69

 

(a) Includes commitment fees.

The Company wrote off $0.5 million of deferred financing fees related to the prior credit facility during fiscal 2016 and the remaining unamortized deferred financing fees of $3.5 million were deferred and are being amortized over the five-year term of the Credit Facility. The Company also incurred $5.7 million of fees to secure the Credit Facility, which are being amortized over the five-year term accordingly. During fiscal 2017, the Company incurred $0.5 million of fees to secure the FILO Credit Facility, which are being amortized over the same term as the Credit Facility.

Fees expensed with respect to the unused portion of the credit facilities were $2.2 million, $2.2 million and $2.8 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

The Company had $158.7 million and $64.9 million of outstanding debt under the Credit Facility as of April 28, 2018 and April 29, 2017, respectively. The Company had $34.2 million and $38.8 million of outstanding letters of credit under the Credit Facility as of April 28, 2018 and April 29, 2017, respectively.

The Company has no agreements to maintain compensating balances.

Capital Investment

The Company’s investing activities consist principally of capital expenditures for the maintenance of existing stores, merchandising initiatives, new store construction and enhancements to systems and the website. Capital expenditures totaled $87.7 million, $96.3 million and $94.3 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Fiscal 2019 capital expenditure levels are expected to be approximately $100.0 million, although commitment to many such expenditures has not yet been made. Capital expenditures planned for fiscal 2019 primarily include new store development, merchandising initiatives, maintenance of existing stores, enhancements to systems and the website.

Based upon the Company’s current operating levels and capital expenditures for fiscal 2019, management believes cash and cash equivalents on hand, funds available under its credit facility and short-term vendor financing will be sufficient to meet the Company’s normal working capital and debt service requirements for at least the next 12 months. The Company regularly evaluates its capital structure and conditions in the financing markets to ensure it maintains adequate flexibility to successfully execute its business plan.

 

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On October 20, 2015, the Company’s Board of Directors authorized a stock repurchase program (prior repurchase plan) of up to $50.0 million of its common shares. During fiscal 2016, the Company repurchased 2,763,142 shares at a cost of $26.7 million under the prior repurchase plan. During fiscal 2017, the Company repurchased 2,019,798 shares at a cost of $23.3 million under the prior repurchase plan. On March 15, 2017, subsequent to completing the prior repurchase plan, the Company’s Board of Directors authorized a new stock repurchase program of up to $50.0 million of its common shares. Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. The new stock repurchase program has no expiration date and may be suspended or discontinued at any time. The Company’s repurchase plan is intended to comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934. The Company did not repurchase shares under this plan in fiscal 2018 and fiscal 2017. The Company has remaining capacity of $50.0 million under the new repurchase program as of April 28, 2018.

As of April 28, 2018, the Company has repurchased 39,584,907 shares at a cost of approximately $1.1 billion since the inception of the Company’s stock repurchase programs. The repurchased shares are held in treasury.

Contractual Obligations

The following table sets forth the Company’s contractual obligations as of April 28, 2018 (in millions):

 

Contractual Obligations

   Payments Due by Period  
     Total      Less Than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 

Operating lease obligations (a)

   $ 1,112.5      $ 316.3      $ 467.6      $ 240.1      $ 88.5  

Purchase obligations (b)

     72.6        56.9        15.7        —          —    

Interest obligations (c)

     7.8        3.3        4.5        —          —    

Other long-term liabilities reflected on the Company’s balance sheet under U.S. GAAP (d)

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,192.9      $ 376.5      $ 487.8      $ 240.1      $ 88.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Excludes obligations under store leases for insurance, taxes and other maintenance costs, which totaled approximately 21.1% of the minimum rent payments under those leases.

 

(b) Includes hardware and software maintenance contracts and inventory purchase commitments.

 

(c) Represents commitment fees related to the Company’s Credit Facility.

 

(d) Excludes $6.8 million of unrecognized tax benefits for which the Company cannot make a reasonably reliable estimate of the amount and period of payment. See Note 9 to the Notes to Consolidated Financial Statements.

See also Note 8 to the Notes to Consolidated Financial Statements for information concerning the Company’s pension and postretirement plans.

Off-Balance Sheet Arrangements

As of April 28, 2018, the Company had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

 

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Impact of Inflation

The Company does not believe that inflation has had a material effect on its net sales or results of operations.

Certain Relationships and Related Transactions

See Note 18 to the Notes to Consolidated Financial Statements.

Critical Accounting Policies

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. 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. The Company does 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

Revenue from sales of the Company’s products is recognized at the time of sale or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience. ECommerce revenue from sales of products ordered through the Company’s websites is recognized upon estimated delivery and receipt of the shipment by its customers. Freight costs are included within the Company’s cost of sales and occupancy. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.

In accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements, and ASU 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK® device revenue is recognized at the segment point of sale.

The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis with the purchase of a NOOK® from the Company. Using the relative selling-price method described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or

 

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third-party evidence exists for any of the elements. Revenue allocated to NOOK® and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK® device.

The average percentage of a NOOK®’s sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 0% and 5%, depending on the type of device sold. The amount of NOOK®-related deferred revenue as of April 28, 2018 and April 29, 2017 was $0.1 million and $0.2 million, respectively. These amounts are classified on the Company’s balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.

The Company also pays certain vendors who distributed NOOK® a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK® based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent, on a net basis. All other revenue is recognized on a gross basis.

The Company rents physical textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.

NOOK acquires the rights to distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model, in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Company’s eBooks sold are under the agency model.

The Barnes & Noble Membership Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions via e-mail or direct mail, for an annual fee of $25.00, which is non-refundable after the first 30 days. Revenue is recognized over the 12-month period based upon historical spending patterns for Barnes & Noble members.

Merchandise Inventories

Merchandise inventories, except NOOK merchandise inventories, are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under the first-in, first-out (FIFO) basis. NOOK merchandise inventories are recorded based on the average cost method and are valued at the lower of cost and net realizable value.

Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory. The Company does not believe there is a reasonable likelihood that there will be a

 

F-23


material change in the future estimates or assumptions used to calculate the non-returnable inventory reserve. However, if assumptions based on the Company’s history of liquidating non-returnable inventory are incorrect, it may be exposed to losses or gains that could be material. A 10% change in actual non-returnable inventory reserve would have affected pre-tax earnings by approximately $4.4 million in fiscal 2018.

The Company also estimates and accrues 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. The Company does 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 the Company’s estimates regarding shortage rates are incorrect, it 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 $0.7 million in fiscal 2018.

Internal-Use Software and Website Development Costs

Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized over an estimated useful life of three to seven years. During fiscal 2018 and fiscal 2017, the Company capitalized costs, primarily related to labor, consulting, hardware and software, of $17.6 million and $18.5 million, respectively. Amortization of previously capitalized amounts was $21.8 million, $23.6 million and $30.5 million for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Costs related to the design or maintenance of internal-use software and website development are expensed as incurred.

Research and Development Costs for Software Products

The Company follows the guidance in ASC 985-20, Cost of Software to be Sold, Leased or Marketed, regarding research and development costs for software products to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as for the ongoing assessment of the recoverability of capitalized costs. The Company’s products reach technological feasibility shortly before the products are released and, therefore, research and development costs are generally expensed as incurred.

Property and Equipment and Other Long-Lived Assets

The Company’s long-lived assets include property and equipment and amortizable intangibles. At April 28, 2018, the Company had $255.5 million of property and equipment, net of accumulated depreciation, and $0.4 million of amortizable intangible assets, net of amortization, accounting for approximately 14.6% of the Company’s total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and considers market participants in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company evaluates its stores’ long-lived assets and its other long-lived assets for impairment at the individual Barnes & Noble store level and at the reporting unit level, respectively, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the

 

F-24


assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its 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. Impairment losses included in selling and administrative expenses related to amortizable assets totaled $1.8 million, $0.3 million and $0.2 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The Company does 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 the Company is subject to further risk of impairment if comparable store sales continue to decline, the Company’s cost reduction plans do not materialize, the assumed long-term discount rate increases or in general the Company does not achieve its forecasted strategic turnaround plan. A 10% decrease in the Company’s estimated discounted cash flows would not have resulted in a material impairment charge on the Company’s results of operations in fiscal 2018.

Goodwill and Unamortizable Intangible Assets

The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets.

At April 28, 2018, the Company had $71.6 million of goodwill (on its Retail reporting unit) and $309.3 million of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 21.8% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets (ASC 350-30), requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators.

In January 2017, the FASB issued ASU 2017-04, which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. The Company has early adopted ASU 2017-04 on October 29, 2017, the first day of the third quarter of fiscal 2018.

The Company compares the fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment loss as required by ASU 2017-04. Fair value was determined using the combination of a discounted cash flow method (income approach) and the guideline public company method (market comparable approach), weighted equally in determining the fair value of the Company. The market comparable approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies. In performing the valuations, significant assumptions utilized include unobservable Level 3 inputs including cash flows and long-term growth rates reflective of management’s forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. Discount rates are based on the development of a weighted average cost of capital using guideline public company data, factoring in current market data and any company specific risk factors.

 

F-25


The Company completed its annual goodwill impairment test as of the first day of the third quarter of fiscal 2018 (October 29, 2017). The fair value of the B&N Retail reporting unit had been in excess of carrying value as of the first day of the third quarter of fiscal 2017 (October 30, 2016) and fiscal 2018 (October 29, 2017) based on the annual goodwill impairment test performed as of those dates. In addition, no impairment indicators had arisen after that test to signal that an interim impairment test should be performed prior to the next annual test. Although no impairment resulted from the Company’s next annual goodwill impairment test as of October 29, 2017, the fair value of the B&N Retail reporting unit (for which $207.4 million of goodwill was allocated as of such date) only exceeded its carrying value by approximately $26.8 million or 5%.

Subsequent to the annual goodwill impairment test as of October 29, 2017, sales trends unexpectedly softened during the holiday selling season. Given these lower than expected sales results, the Company revised its forecasted outlook. Following the announcement on January 4, 2018 of the Company’s holiday sales results and its revised outlook, the market price of the Company’s common stock sharply declined. Due to these new impairment indicators, the Company performed an interim goodwill impairment test as of December 30, 2017. As a result of this interim testing, the Company recognized an impairment of its B&N Retail reporting unit goodwill of $133.6 million. While the Company has initiated a strategic turnaround plan focused on stabilizing sales, improving productivity and reducing expenses, achievement of its long-term goals requires a significant multi-year transformation. The interim test incorporated revised discounted cash flow projections given the Company’s holiday sales performance and the early stage of its turnaround efforts. The fair value of the B&N Retail reporting unit had declined from the prior test primarily as a result of the revised forecast and an increased discount rate to account for risk in the Company’s plan. The goodwill of the B&N Retail reporting unit is subject to further risk of impairment if B&N Retail comparable store sales continue to decline, the Company’s cost reduction plans do not materialize, store closings accelerate, the assumed long-term discount rate increases or in general the Company does not achieve its forecasted strategic turnaround plan. A 50 basis point decline in its expected long-term growth rates would result in an approximate $10.1 million incremental goodwill impairment charge, or a 100 basis point increase in the Company’s discount rate would result in an approximate $23.5 million incremental goodwill impairment charge. There were no indicators of impairment identified subsequent to the December 30, 2017 impairment test.

There were no impairment losses related to goodwill during fiscal 2017 and fiscal 2016.

In addition to goodwill, the Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets. Based on the results of the Company’s tests, it recorded impairment losses included in selling and administrative expenses related to unamortizable intangible assets totaled $0, $0 and $3.8 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

With regard to valuing its trade name, the Company uses the relief from royalty method (income approach). The estimated fair value of the Company’s trade name exceeded its carrying value by approximately $17.1 million, or 5%, as of October 29, 2017. Based on the impairment indicators noted above, the Company performed an interim impairment test of its trade name as of December 30, 2017 and the estimated fair value exceeded its carrying value by approximately $23.5 million, or 8%, as of that date. Significant assumptions used to determine fair value under the relief from royalty method include future trends in sales, a royalty rate and an appropriate discount rate inclusive of risk adjustments consistent with market conditions and company specific risk factors. The fair value of the Company’s trade name had declined from the prior year primarily as a result of declining sales and an increased discount rate to account for risk in the Company’s revised forecast. Although the Company determined that no impairment charge was necessary, the Company’s trade name is at risk of impairment if B&N Retail comparable store sales continue to decline, forecasted sales expectations are not met, store closings

 

F-26


accelerate, the assumed long-term discount rate increases, or in general the Company does not achieve its forecasted strategic turnaround plan. For example, an 800 basis point decline in expected sales would result in an approximate $1.9 million trade name impairment charge or a 200 basis point increase in the Company’s discount rate would result in an approximate $29.3 million trade name impairment charge. There were no indicators of impairment identified subsequent to the December 30, 2017 impairment test.

The fair value of the Company’s publishing contracts was determined using the discounted cash flow method (income approach). Based on this test, the estimated fair value of the Company’s publishing contracts exceeded its carrying value by approximately $4.2 million or 26%. The Company’s publishing contracts are subject to risk of impairment if forecasted sales expectations are not met, the assumed long-term discount rate increases, or in general the Company does not achieve its forecasted strategic turnaround. Such publishing contracts were tested for impairment and the Company determined that no impairment charge was necessary for fiscal 2018 and fiscal 2017. During fiscal 2016, the Company impaired one of its publishing contracts due to a significant drop in business with that publisher, driven by lower title offerings, product quality and the loss of a distribution partner. As a result, the Company recorded an impairment charge of $3.8 million in selling and administrative expenses. The publishing contracts include the value of long-standing relationships with authors, agents and publishers established upon the Company’s acquisition of Sterling in 2003. Given Sterling’s strong history of maintaining such relationships, the Company believes they produce value indefinitely without an identifiable remaining useful life.

A 10% decrease in the Company’s estimated discounted cash flows would have no impact on the Company’s evaluation of publishing contracts in fiscal 2018.

Gift Cards

The Company sells gift cards, which can be used in its stores, on www.barnesandnoble.com, on NOOK® devices and at B&N Education stores. The Company does not charge administrative or dormancy fees on gift cards and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Gift cards redeemed at B&N Education are funded by the gift card liability at the Company. Over time, a portion of the gift cards issued is typically not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in revenue on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.

The Company recognized gift card breakage of $43.9 million, $35.5 million and $29.1 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The Company had gift card liabilities of $323.5 million and $351.4 million as of April 28, 2018 and April 29, 2017, respectively. Gift card breakage increased over last year as redemptions continue to run lower than historical patterns. If estimates regarding the Company’s history of gift card breakage are incorrect, it may be exposed to losses or gains that could be material. A 25 basis point change in the Company’s gift card breakage rate at April 28, 2018 would have affected pre-tax earnings by approximately $11.7 million in fiscal 2018.

 

F-27


Income Taxes

Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, tax issues may arise where the ultimate outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various tax authorities. Consequently, changes in the Company’s estimates for contingent tax liabilities may materially impact the Company’s results of operations or financial position. A 1% variance in the Company’s effective tax rate would have affected the Company’s results of operations in fiscal 2018 by $1.4 million.

Disclosure Regarding Forward-Looking Statements

This report contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information relating to Barnes & Noble that are based on the beliefs of the management of Barnes & Noble as well as assumptions made by and information currently available to the management of Barnes & Noble. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to Barnes & Noble or the management of Barnes & Noble, identify forward-looking statements.

Such statements reflect the current views of Barnes & Noble with respect to future events, the outcome of which is subject to certain risks, including, among others, the general economic environment and consumer spending patterns, decreased consumer demand for Barnes & Noble’s products, low growth or declining sales and net income due to various factors, including store closings, higher-than-anticipated or increasing costs, including with respect to store closings, relocation, occupancy (including in connection with lease renewals) and labor costs, the effects of competition, the risk of insufficient access to financing to implement future business initiatives, risks associated with data privacy and information security, risks associated with Barnes & Noble’s supply chain, including possible delays and disruptions and increases in shipping rates, various risks associated with the digital business, including the possible loss of customers, declines in digital content sales, risks and costs associated with ongoing efforts to rationalize the digital business, risks associated with the eCommerce business, including the possible loss of eCommerce customers and declines in eCommerce sales, the risk that financial and operational forecasts and projections are not achieved, the performance of Barnes & Noble’s initiatives including but not limited to new store concepts and eCommerce initiatives, unanticipated adverse litigation results or effects, potential infringement of Barnes & Noble’s intellectual property by third parties or by Barnes & Noble of the intellectual property of third parties, and other factors, including those factors discussed in detail in Item 1A, “Risk Factors,” and in Barnes & Noble’s other filings made hereafter from time to time with the SEC.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to Barnes & Noble or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Barnes & Noble undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Annual Report.

 

F-28


CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share data)

   Fiscal 2018     Fiscal 2017      Fiscal 2016  

Sales

   $ 3,662,280     $ 3,894,558      $ 4,163,844  

Cost of sales and occupancy

     2,551,077       2,682,356        2,836,547  
  

 

 

   

 

 

    

 

 

 

Gross profit

     1,111,203       1,212,202        1,327,297  

Selling and administrative expenses

     999,109       1,040,007        1,176,778  

Depreciation and amortization

     106,340       117,887        135,863  

Goodwill impairment

     133,612       —          —    
  

 

 

   

 

 

    

 

 

 

Operating income (loss)

     (127,858     54,308        14,656  

Interest expense, net and amortization of deferred financing fees

     9,837       7,509        8,770  
  

 

 

   

 

 

    

 

 

 

Income (loss) before income taxes

     (137,695     46,799        5,886  

Income tax provision (benefit)

     (12,215     24,776        (8,814
  

 

 

   

 

 

    

 

 

 

Net income (loss) from continuing operations

   $ (125,480   $ 22,023      $ 14,700  

Net loss from discontinued operations

     —         —          (39,146
  

 

 

   

 

 

    

 

 

 

Net income (loss)

   $ (125,480   $ 22,023      $ (24,446
  

 

 

   

 

 

    

 

 

 

Basic income (loss) per common share:

       

Income (loss) from continuing operations

   $ (1.73   $ 0.30      $ 0.05  

Loss from discontinued operations

     —         —          (0.54
  

 

 

   

 

 

    

 

 

 

Basic income (loss) per common share

   $ (1.73   $ 0.30      $ (0.49
  

 

 

   

 

 

    

 

 

 

Diluted income (loss) per common share:

       

Income (loss) from continuing operations

   $ (1.73   $ 0.30      $ 0.05  

Loss from discontinued operations

     —         —          (0.54
  

 

 

   

 

 

    

 

 

 

Diluted income (loss) per common share

   $ (1.73   $ 0.30      $ (0.49
  

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding:

       

Basic

     72,588       72,188        72,410  

Diluted

Dividends declared per common share

    

$

72,588

0.60

 

 

   

$

72,328

0.60

 

 

    

$

72,542

0.60

 

 

See accompanying notes to consolidated financial statements.

 

F-29


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(In thousands)

   Fiscal 2018     Fiscal 2017      Fiscal 2016  

Net income (loss)

   $ (125,480   $ 22,023      $ (24,446

Other comprehensive income (loss), net of tax:

       

(Increase) decrease in minimum pension/post-retirement liability (net of deferred tax benefit (expense) of $15, $(107) and $(2,188), respectively)

     (39     164        3,662  

Pension reclassification (net of deferred tax expense of $0, $0 and $7,780, respectively) (see Note 8)

     —         —          13,022  
  

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss)

   $ (125,519   $ 22,187      $ (7,762
  

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

F-30


CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share data)

   April 28, 2018     April 29, 2017  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 10,769     $ 11,993  

Receivables, net

     64,562       67,294  

Merchandise inventories, net

     958,196       946,909  

Prepaid expenses and other current assets

     65,153       101,816  
  

 

 

   

 

 

 

Total current assets

     1,098,680       1,128,012  
  

 

 

   

 

 

 

Property and equipment:

    

Land and land improvements

     2,541       2,541  

Buildings and leasehold improvements

     1,080,952       1,072,007  

Fixtures and equipment

     1,523,485       1,608,433  
  

 

 

   

 

 

 
     2,606,978       2,682,981  

Less accumulated depreciation and amortization

     2,351,454       2,406,859  
  

 

 

   

 

 

 

Net property and equipment

     255,524       276,122  
  

 

 

   

 

 

 

Goodwill

     71,593       207,381  

Intangible assets, net

     309,649       310,205  

Other non-current assets

     14,122       11,201  
  

 

 

   

 

 

 

Total assets

   $ 1,749,568     $ 1,932,921  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 458,896     $ 473,686  

Accrued liabilities

     260,209       283,157  

Gift card liabilities

     323,465       351,424  
  

 

 

   

 

 

 

Total current liabilities

     1,042,570       1,108,267  
  

 

 

   

 

 

 

Long-term debt

     158,700       64,900  

Deferred taxes

     52,044       86,132  

Other long-term liabilities

     84,271       99,311  

Shareholders’ equity:

    

Common stock; $0.001 par value; 300,000 shares authorized; 112,238 and 111,933 shares issued, respectively

     112       112  

Additional paid-in capital

     1,749,555       1,741,380  

Accumulated other comprehensive income

     276       315  

Retained earnings

     (216,236     (46,425

Treasury stock, at cost, 39,585 and 39,497 shares, respectively

     (1,121,724     (1,121,071
  

 

 

   

 

 

 

Total shareholders’ equity

     411,983       574,311  
  

 

 

   

 

 

 

Commitments and contingencies

     —         —    
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,749,568     $ 1,932,921  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-31


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

                                        

(In thousands)

   Common
Stock
     Additional
Paid-In
Capital
    Accumlated
Other
Comprehensive
Gains (Losses)
    Retained
Earnings
    Treasury
Stock at Cost
    Total  

Balance at May 2, 2015

   $ 98        1,927,997       (16,533     357,512       (1,079,716   $ 1,189,358  

Net loss

     —          —         —         (24,446     —         (24,446

Minimum pension liability, net of tax

     —          —         3,662       —         —         3,662  

Pension reclassification (see Note 8)

     —          —         13,022       —         —         13,022  

Exercise of 111 common stock options

     2        1,301       —         —         —         1,303  

Stock options and restricted stock tax benefits

     —          1,094       —         —         —         1,094  

Stock-based compensation expense

     —          14,889       —         —         —         14,889  

Accretive dividend on preferred stockholders and membership interests

     —          —         —         (4,204     —         (4,204

Inducement fee paid upon conversion of Series J preferred stock

     —          —         —         (3,657     —         (3,657

Cash dividends declared

     —          —         —         (46,056     —         (46,056

Accrued dividends for long-term incentive awards

     —          —         —         (451     —         (451

Purchase of treasury stock related to stock-based compensation, 337 shares

     —          —         —         —         (4,004     (4,004

Treasury stock repurchase plan, 2,763 shares

     —          —         —         —         (26,718     (26,718

Dividend to preferred shareholders paid in shares

     —          1,783       —         (1,783     —         —    

Common shares issued upon conversion of Series J preferred stock

     12        200,250       —         —         —         200,262  

Cash settlement of equity award

     —          (8,022     —         —         —         (8,022

Separation of B&N Education, Inc.

     —          (401,258     —         (301,264     —         (702,522
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 30, 2016

   $ 112        1,738,034       151       (24,349     (1,110,438   $ 603,510  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-32


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)

 

(In thousands)

   Common
Stock
     Additional
Paid-In
Capital
    Accumlated
Other
Comprehensive
Gains (Losses)
    Retained
Earnings
    Treasury
Stock at Cost
    Total  

Balance at April 30, 2016

   $ 112        1,738,034       151       (24,349     (1,110,438   $ 603,510  

Net income

     —          —         —         22,023       —         22,023  

Postretirement plan liability, net of tax

     —          —         164       —         —         164  

Exercise of 31 common stock options

     —          312       —         —         —         312  

Stock options and restricted stock tax benefit

     —          1,110       —         —         —         1,110  

Stock-based compensation expense

     —          6,299       —         —         —         6,299  

Cash dividends declared

     —          —         —         (43,887     —         (43,887

Accrued dividends for long-term incentive awards

     —          —         —         (212     —         (212

Purchase of treasury stock related to stock-based compensation, 248 shares

     —          —         —         —         (2,694     (2,694

Treasury stock repurchase plan, 2,020 shares

     —          —         —         —         (23,281     (23,281

Distribution of Rabbi Trust shares (see Note 3)

     —          (15,342     —         —         15,342       —    

Tax benefit from distribution of Rabbi Trust

     —          10,967       —         —         —         10,967  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 29, 2017

   $ 112        1,741,380       315       (46,425     (1,121,071   $ 574,311  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adoption of ASU 2016-09 (see Note 1)

     —          1,310       —         155       —         1,465  

Net loss

     —          —         —         (125,480     —         (125,480

Postretirement plan liability, net of tax

     —          —         (39     —         —         (39

Stock-based compensation expense

     —          6,865       —         —         —         6,865  

Cash dividends declared

     —          —         —         (43,638     —         (43,638

Accrued dividends for long-term incentive awards

     —          —         —         (848     —         (848

Purchase of treasury stock related to stock-based compensation, 88 shares

     —          —         —         —         (653     (653
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 28, 2018

   $ 112        1,749,555       276       (216,236     (1,121,724   $ 411,983  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-33


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Fiscal Year    Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

(In thousands)

                  

Cash flows from operating activities:

      

Net income (loss)

   $ (125,480   $ 22,023     $ (24,446

Net loss from discontinued operations

     —         —         (39,146
  

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

   $ (125,480   $ 22,023     $ 14,700  

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

      

Depreciation and amortization (including amortization of deferred financing fees)

     108,293       119,837       139,138  

Stock-based compensation expense

     6,865       6,299       14,201  

Impairment charges

     135,435       349       3,991  

Deferred taxes

     (30,865     28,534       34,604  

Loss on disposal of property and equipment

     730       1,262       2,428  

Net decrease in other long-term liabilities

     (15,094     (14,602     (48,025

Pension contributions

     —         —         (12,707

Pension reclassification

     —         —         20,802  

Net (increase) decrease in other non-current assets

     (4,962     872       (3,405

Changes in operating assets and liabilities, net

     (37,816     (17,752     31,798  
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by operating activities

   $ 37,106     $ 146,822     $ 197,525  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property and equipment

     (87,651     (96,258     (94,274
  

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities

   $ (87,651   $ (96,258   $ (94,274
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from credit facility

     1,173,317       1,140,178       929,500  

Payments on credit facility

     (1,079,517     (1,122,478     (882,300

Cash dividends paid

     (43,638     (43,887     (46,056

Treasury stock repurchase plan

     —         (23,281     (26,718

Purchase of treasury stock related to stock-based compensation

     (653     (2,694     (4,004

Payment of credit facility related fees

     —         (474     (5,701

Proceeds from exercise of common stock options

     —         312       1,303  

Cash dividends paid for long-term incentive awards

     (188     (85     —    

Cash settlement of equity award

     —         —         (8,022

Cash dividends paid to preferred shareholders

     —         —         (3,941

Inducement fee paid upon conversion of Series J preferred stock

     —         —         (3,657
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

   $ 49,321     $ (52,409   $ (49,596
  

 

 

   

 

 

   

 

 

 

Cash flows from discontinued operations:

      

Operating cash flows

     —         —         (86,384

Investing cash flows

     —         —         (11,764

Financing cash flows (including cash at date of Spin-Off)

     —         —         (16,029
  

 

 

   

 

 

   

 

 

 

Net cash flows used in discontinued operations

   $ —       $ —       $ (114,177
  

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,224     (1,845     (60,522

Cash and cash equivalents at beginning of period

     11,993       13,838       74,360  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 10,769     $ 11,993     $ 13,838  
  

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities, net:

      

Receivables, net

   $ 2,732     $ 57,623     $ (64,652

Merchandise inventories, net

     (11,287     (13,186     62,015  

Prepaid expenses and other current assets

     37,096       4,096       (11,947

Accounts payable, accrued liabilities and gift card liabilities

     (66,357     (66,285     46,382  
  

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities, net

   $ (37,816   $ (17,752   $ 31,798  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-34


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

Fiscal Year    Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

(In thousands)

                  

Supplemental cash flow information

      

Cash paid during the period for:

      

Interest

   $ 7,611     $ 5,487     $ 12,217  

Income taxes (net of refunds)

   $ (3,145   $ (16,859   $ 16,107  

Non-cash financing activity:

      

Accrued dividends for long-term incentive awards

   $ 1,237     $ 577     $ 451  

Dividends to preferred stockholders paid in shares

   $ —       $ —       $ 1,783  

Issuance of common stock upon conversion of Series J preferred stock

   $ —       $ —       $ 200,262  

See accompanying notes to consolidated financial statements.

 

F-35


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars, except per share data)

For the 52 weeks ended April 28, 2018 (fiscal 2018), 52 weeks ended April 29, 2017 (fiscal 2017) and 52 weeks ended April 30, 2016 (fiscal 2016).

 

  1. Summary of Significant Accounting Policies

Business

Barnes & Noble, Inc. (Barnes & Noble or the Company), one of the nation’s largest booksellers,3 provides customers a unique experience across its multi-channel distribution platform. As of April 28, 2018, the Company operates 630 bookstores in 50 states, maintains an eCommerce site, develops digital reading products and operates NOOK, one of the largest digital bookstores. Barnes & Noble is utilizing the strength of its retail footprint in combination with its online and digital businesses to provide an omni-channel experience for its customers, fulfilling its commitment to offer customers any book, anytime, anywhere and in any format.

Barnes & Noble Retail (B&N Retail) operates 630 retail bookstores, primarily under the Barnes & Noble Booksellers® trade name, and includes the Company’s eCommerce site. B&N Retail also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Company’s digital business, offering digital books and magazines for sale and consumption online, NOOK®4 reading devices, co-branded NOOK® tablets and reading software for iOS, Android and Windows.

The Company’s principal business is the sale of trade books (generally, hardcover and paperback titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, NOOK® and related accessories, bargain books, magazines, gifts, café products and services, educational toys & games, music and movies direct to customers through its bookstores or on www.barnesandnoble.com. The Company offers its customers a full suite of textbook options (new, used, digital and rental).

The Company identifies its operating segments based on the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management, and makes decisions on the allocation of resources. The Company’s two operating segments are B&N Retail and NOOK.

Consolidation

The consolidated financial statements include the accounts of Barnes & Noble, Inc. and its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

3  Based upon sales reported in trade publications and public filings.
4 

Any references to NOOK® include the Company’s NOOK® Tablet, Samsung Galaxy Tab® A NOOK®, Samsung Galaxy Tab® S2 NOOK®, Samsung Galaxy Tab® E NOOK® and NOOK GlowLightTM 3 devices, each of which includes the trademark symbol (® or ™, as applicable) even if a trademark symbol is not included.

 

F-36


Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.

Merchandise Inventories

Merchandise inventories, except NOOK merchandise inventories, are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under the first-in, first-out (FIFO) basis. NOOK merchandise inventories are recorded based on the average cost method and are valued at the lower of cost and net realizable value.

Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory.

The Company also estimates and accrues 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.

Property and Equipment and Other Long-Lived Assets

Property and equipment are carried at cost, less accumulated depreciation and amortization. For financial reporting purposes, depreciation is computed using the straight-line method over estimated useful lives. Maintenance and repairs are expensed as incurred, while major maintenance and remodeling costs are capitalized if they extend the useful life of the asset. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases. Fixtures and equipment are capitalized and amortized over the shorter of their estimated useful lives or 10 years. Capitalized lease acquisition costs are being amortized over the lease terms of the underlying leases. System costs are capitalized and included in property and equipment. These costs are depreciated over their estimated useful lives from the date the systems become operational. The Company had $255,524 and $276,122 of property and equipment, net of accumulated depreciation, at April 28, 2018 and April 29, 2017, respectively, and $105,696, $117,105 and $134,850 of depreciation expense for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Capitalized software costs of $72,462 and $75,893 for fiscal 2018 and fiscal 2017, respectively, are included in property and equipment.

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and considers market participants in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10). The Company evaluates its stores’ long-lived assets and its other long-lived assets for impairment at the individual Barnes & Noble store level and at the reporting unit level, respectively, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its 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. Impairment losses included in selling and administrative expenses related to amortizable assets totaled $1,823, $349 and $150 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

 

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Goodwill and Unamortizable Intangible Assets

The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets.

At April 28, 2018, the Company had $71,593 of goodwill (on its Retail reporting unit) and $309,294 of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 21.8% of the Company’s total assets. ASC 350-30 requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators.

In January 2017, the FASB issued ASU 2017-04, which simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. The Company has early adopted ASU 2017-04 on October 29, 2017, the first day of the third quarter of fiscal 2018.

The Company compares the fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment loss as required by ASU 2017-04. Fair value was determined using the combination of a discounted cash flow method (income approach) and the guideline public company method (market comparable approach), weighted equally in determining the fair value of the reporting units. The market comparable approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies. In performing the valuations, significant assumptions utilized include unobservable Level 3 inputs including cash flows and long-term growth rates reflective of management’s forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. Discount rates are based on the development of a weighted average cost of capital using guideline public company data, factoring in current market data and any company specific risk factors.

The Company completed its annual goodwill impairment test as of the first day of the third quarter of fiscal 2018 (October 29, 2017). The fair value of the B&N Retail reporting unit had been in excess of carrying value as of the first day of the third quarter of fiscal 2017 (October 30, 2016) and fiscal 2018 (October 29, 2017) based on the annual goodwill impairment test performed as of those dates. In addition, no impairment indicators had arisen after that test to signal that an interim impairment test should be performed prior to the next annual test. Although no impairment resulted from the Company’s next annual goodwill impairment test as of October 29, 2017, the fair value of the B&N Retail reporting unit (for which $207,381 of goodwill was allocated as of such date) only exceeded its carrying value by approximately $26,800 or 5%.

Subsequent to the annual goodwill impairment test as of October 29, 2017, sales trends unexpectedly softened during the holiday selling season. Given these lower than expected sales results, the Company revised its forecasted outlook. Following the announcement on January 4, 2018 of the Company’s holiday sales results and its revised outlook, the market price of the Company’s common stock sharply declined. Due to these new impairment indicators, the Company performed an interim goodwill impairment test as of December 30, 2017. As a result of this interim testing, the Company recognized an impairment of its B&N Retail reporting unit goodwill of $133,612. While the

 

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Company has initiated a strategic turnaround plan focused on stabilizing sales, improving productivity and reducing expenses, achievement of its long-term goals requires a significant multi-year transformation. The interim test incorporated revised discounted cash flow projections given the Company’s holiday sales performance and the early stage of its turnaround efforts. The fair value of the B&N Retail reporting unit had declined from the prior test primarily as a result of the revised forecast and an increased discount rate to account for risk in the Company’s plan. The goodwill of the B&N Retail reporting unit is subject to further risk of impairment if B&N Retail comparable store sales continue to decline, the Company’s cost reduction plans do not materialize, store closings accelerate, the assumed long-term discount rate increases or in general the Company does not achieve its forecasted strategic turnaround plan. There were no indicators of impairment identified subsequent to the December 30, 2017 impairment test.

There were no impairment losses related to goodwill during fiscal 2017 and fiscal 2016.

In addition to goodwill, the Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets. Based on the results of the Company’s tests, it recorded impairment losses included in selling and administrative expenses related to unamortizable intangible assets totaling $0, $0 and $3,840 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

With regard to valuing its trade name, the Company uses the relief from royalty method (income approach). The estimated fair value of the Company’s trade name exceeded its carrying value by approximately $17,100, or 5%, as of October 29, 2017. Based on the impairment indicators noted above, the Company performed an interim impairment test of its trade name as of December 30, 2017 and the estimated fair value exceeded its carrying value by approximately $23,500, or 8%, as of that date. Significant assumptions used to determine fair value under the relief from royalty method include future trends in sales, a royalty rate and an appropriate discount rate inclusive of risk adjustments consistent with market conditions and company specific risk factors. The fair value of the Company’s trade name had declined from the prior year primarily as a result of declining sales and an increased discount rate to account for risk in the Company’s revised forecast. Although the Company determined that no impairment charge was necessary, the Company’s trade name is at risk of impairment if B&N Retail comparable store sales continue to decline, forecasted sales expectations are not met, store closings accelerate, the assumed long-term discount rate increases, or in general the Company does not achieve its forecasted strategic turnaround plan. There were no indicators of impairment identified subsequent to the December 30, 2017 impairment test.

The fair value of the Company’s publishing contracts was determined using the discounted cash flow method (income approach). Based on this test, the estimated fair value of the Company’s publishing contracts exceeded its carrying value by approximately $4,200, or 26%. The Company’s publishing contracts are subject to risk of impairment if forecasted sales expectations are not met, the assumed long-term discount rate increases, or in general the Company does not achieve its forecasted strategic turnaround. Such publishing contracts were tested for impairment and the Company determined that no impairment charge was necessary for fiscal 2018 and fiscal 2017. During fiscal 2016, the Company impaired one of its publishing contracts due to a significant drop in business with that publisher, driven by lower title offerings, product quality and the loss of a distribution partner. As a result, the Company recorded an impairment charge of $3,840 in selling and administrative expenses. The publishing contracts include the value of long-standing relationships with authors, agents and publishers established upon the Company’s acquisition of Sterling in 2003. Given Sterling’s strong history of maintaining such relationships, the Company believes they produce value indefinitely without an identifiable remaining useful life.

 

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Deferred Charges

Costs incurred to obtain long-term financing are amortized over the terms of the respective debt agreements using the straight-line method, which approximates the effective interest method. Unamortized costs included in other non-current assets as of April 28, 2018 and April 29, 2017 were $4,393 and $6,346, respectively. Amortization expense included in interest and amortization of deferred financing fees was $1,953, $1,950 and $3,276 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

Revenue Recognition

Revenue from sales of the Company’s products is recognized at the time of sale or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience. ECommerce revenue from sales of products ordered through the Company’s websites is recognized upon estimated delivery and receipt of the shipment by its customers. Freight costs are included within the Company’s cost of sales and occupancy. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.

In accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements, and Accounting Standards Updates (ASU) 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK® device revenue is recognized at the segment point of sale.

The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis with the purchase of a NOOK® from the Company. Using the relative selling-price method described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK® and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK® device.

The average percentage of a NOOK®’s sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 0% and 5%, depending on the type of device sold. The amount of NOOK®-related deferred revenue as of April 28, 2018 and April 29, 2017 was $61 and $226, respectively. These amounts are classified on the Company’s balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.

The Company also pays certain vendors who distributed NOOK® a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK® based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes

 

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revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent, on a net basis. All other revenue is recognized on a gross basis.

The Company rents physical textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.

NOOK acquires the rights to distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK® devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model, in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Company’s eBooks sold are under the agency model.

The Barnes & Noble Membership Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions via e-mail or direct mail, for an annual fee of $25.00, which is non-refundable after the first 30 days. Revenue is recognized over the 12-month period based upon historical spending patterns for Barnes & Noble members.

Research and Development Costs for Software Products

The Company follows the guidance in ASC 985-20, Cost of Software to Be Sold, Leased or Marketed, regarding research and development costs for software products to be sold, leased, or otherwise marketed. Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. The Company’s products reach technological feasibility shortly before the products are released and, therefore, research and development costs are generally expensed as incurred.

Internal-Use Software and Website Development Costs

Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized over an estimated useful life of three to seven years. During fiscal 2018 and fiscal 2017, the Company capitalized costs, primarily related to labor, consulting, hardware and software, of $17,572 and $18,450, respectively. Amortization of previously capitalized amounts was $21,807, $23,584 and $30,461 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Costs related to the design or maintenance of internal-use software and website development are expensed as incurred.

Advertising Costs

The costs of advertising are expensed as incurred during the year pursuant to ASC 720-35, Advertising Costs. Advertising costs charged to selling and administrative expenses were $27,553, $36,420 and $53,569 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

The Company receives payments and credits from vendors pursuant to co-operative advertising and other programs, including payments for product placement in stores, catalogs and online. In accordance with ASC 605-50-25-10, Customer’s Accounting for Certain Consideration Received from a Vendor, the Company classifies certain co-op advertising received as a reduction in costs of sales and occupancy. Allowances received from vendors exceeded gross advertising costs in each of the fiscal years noted above.

 

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Closed Store Expenses

When the Company closes or relocates a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements and, when a store is closed prior to the expiration of the lease, a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $474, $1,434 and $744 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations.

Net Earnings (Loss) per Share

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, unvested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s unvested restricted shares and unvested restricted stock units granted prior to July 15, 2015 and shares issuable under the Company’s deferred compensation plan were considered participating securities. Cash dividends to restricted stock units and performance-based stock units granted on or after July 15, 2015 are not distributed until and except to the extent that the restricted stock units vest, and in the case of performance-based stock units, until and except to the extent that the performance metrics are achieved or are otherwise deemed satisfied. Stock options do not receive cash dividends. As such, these awards are not considered participating securities.

Basic earnings per common share is calculated by dividing the net income, adjusted for preferred dividends and income allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the dilution that would occur if any potentially dilutive instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method or two-class method. Other potentially dilutive securities include preferred stock, stock options, restricted stock units granted after July 15, 2015, and performance-based stock units and are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. See Note 7 to the Consolidated Financial Statements for further information regarding the calculation of basic and diluted earnings (loss) per common share.

Income Taxes

The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance, if determined to be necessary. The Company establishes a reserve for uncertain tax positions. If the Company considers that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the largest amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. A reserve for an uncertain income tax position will be recognized if it has less than a 50% likelihood of being sustained. The tax positions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments for those positions. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.

 

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Gift Cards

The Company sells gift cards, which can be used in its stores, on www.barnesandnoble.com, on NOOK® devices and at B&N Education stores. The Company does not charge administrative or dormancy fees on gift cards and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Gift cards redeemed at B&N Education are funded by the gift card liability at the Company. Over time, a portion of the gift cards issued is typically not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in revenue on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.

The Company recognized gift card breakage of $43,922, $35,524 and $29,074 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The Company had gift card liabilities of $323,465 and $351,424 as of April 28, 2018 and April 29, 2017, respectively.

Accounts Receivable

Accounts receivable, as presented on the Company’s Consolidated Balance Sheets, is net of allowances. An allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable and assessments of collectability based on historic trends, the financial condition of the Company’s customers and an evaluation of economic conditions. The Company writes off uncollectible trade receivables once collection efforts have been exhausted. Costs associated with allowable customer markdowns and operational chargebacks, net of the expected recoveries, are part of the provision for allowances included in accounts receivable. These provisions result from seasonal negotiations, as well as historic deduction trends net of expected recoveries, and the evaluation of current market conditions.

Reclassifications

Certain prior period amounts have been reclassified for comparative purposes to conform with the fiscal 2018 presentation.

Recent Accounting Pronouncements

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects as a result of the newly enacted federal corporate income tax rate under the Tax Cuts and Jobs Act. This guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. Two transition methods are available: at the beginning of the period of adoption, or retrospective to each period in which the income tax effects of the Tax Cuts and Jobs Act related to items remaining in accumulated other comprehensive income are recognized. The Company is evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.

 

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In January 2017, the FASB issued ASU 2017-04. The standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. The Company has early adopted ASU 2017-04 on October 29, 2017, the first day of the third quarter of fiscal 2018.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). This update clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. ASU 2016-15 is effective for the Company beginning April 29, 2018 under a retrospective approach. The Company does not expect adoption will have a material impact on its consolidated statement of cash flows.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 includes provisions to simplify certain aspects related to the accounting for share-based awards and the related financial statement presentation. ASU 2016-09 provides for changes to accounting for stock compensation, including: 1) excess tax benefits and tax deficiencies related to share based payment awards to be recognized as income tax benefit or expense when the awards vest or are settled (previously such amounts were recognized in additional paid-in capital); entities must apply the new guidance on accounting for excess tax benefits and tax deficiencies prospectively, except for excess tax benefits that were identified from previous transactions that had not been previously recognized because the related tax deduction did not reduce income taxes payable; entities must use a modified retrospective transition method to recognize such excess tax benefits as a credit to retained earnings; any deferred tax assets recorded in connection with the modified retrospective recognition of excess tax benefits must be assessed for realizability, and, if necessary, a valuation allowance must be recognized through a cumulative-effect adjustment to retained earnings; 2) excess tax benefits will be classified as an operating activity in the statement of cash flows; 3) the option to elect to estimate forfeitures or account for them when they occur; 4) classification of cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity in the statements of cash flows; and 5) eliminating the requirement to delay the recognition of excess tax benefits until it reduces current taxes payable.

The Company adopted ASU 2016-09 during the first quarter ended July 29, 2017. Accordingly, the primary effects of the adoption are as follows: 1) excess tax expense of $915 was recorded during fiscal 2018 related to the prospective application of excess tax benefits and tax deficiencies related to stock-based compensation settlements; 2) using a modified retrospective application, the Company recorded unrecognized excess tax benefits of $1,235 as a cumulative-effect adjustment, which increased retained earnings, and reduced deferred taxes by the same; 3) using a modified retrospective application, the Company has elected to recognize forfeitures as they occur and recorded a $1,310 increase to additional paid-in capital, a $1,079 reduction to retained earnings, and a $231 reduction to deferred taxes to reflect the incremental stock-based compensation expense, net of the related tax impacts, that would have been recognized in prior years under the modified guidance; and 4) $1,579 and $1,838 in excess tax benefits from stock-based compensation was reclassified from cash flows from financing activities to cash flows from operating activities for fiscal 2017 and fiscal 2016, respectively, in the Consolidated Statements of Cash Flows.

 

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous Generally Accepted Accounting Principles. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 requires expanded disclosures about the nature and terms of lease agreements and is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company plans to adopt ASU 2016-02 effective April 28, 2019. The Company remains on schedule and has implemented key system functionality to enable the preparation of restated financial information. The Company is currently evaluating the provisions of this standard and assessing its existing lease portfolio in order to determine the impact on its accounting systems, processes and internal controls over financial reporting. The Company expects the adoption of this standard will result in a significant increase to its long-term assets and liabilities on its consolidated balance sheet. However, the Company does not expect adoption will have a material impact on its consolidated statement of operations and cash flows.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), modifying the accounting for inventory. Under ASU 2015-11, the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. ASU 2015-11 defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is applicable to inventory that is accounted for under the first-in, first-out method and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-11 effective April 30, 2017. The majority of the Company’s merchandise inventories are valued using the retail inventory method, which is outside the scope of ASU 2015-11. The remaining inventory of the Company’s merchandise inventories are valued at the lower of cost and net realizable value using the average cost method. The Company applied the amendments in this update prospectively to the measurement of inventory after the date of adoption with no material impact to the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which was further amended in 2015 and 2016 (Topic 606). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. Topic 606 was effective for the Company on April 29, 2018. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented (full retrospective method), or apply the requirements in the year of adoption, through a cumulative adjustment (modified retrospective method). The Company will adopt Topic 606 in the first quarter of fiscal 2019 using the modified retrospective method. The new standard primarily impacts the Company’s accounting for gift card breakage. Under Topic 606, the Company will recognize gift card breakage proportionately as redemptions occur. The changes in accounting policies related to the adoption of Topic 606 will result in a cumulative adjustment net of income taxes to increase retained earnings of approximately $65,000 to $80,000. The Company is in the process of implementing changes to its processes, controls and systems in support of the adoption of this ASU.

 

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Reporting Period

The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The reporting periods ended April 28, 2018, April 29, 2017 and April 30, 2016 each contained 52 weeks.

 

  2. Credit Facility

On August 3, 2015, the Company and certain of its subsidiaries entered into a credit agreement (Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders from time to time party thereto, under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of up to $700,000 (Revolving Credit Facility). On September 30, 2016, the Company amended the Credit Agreement to provide for a new “first-in, last-out” revolving credit facility (the FILO Credit Facility and, together with the Revolving Credit Facility, the Credit Facility) in an aggregate principal amount of up to $50,000, which supplements availability under the Revolving Credit Facility. The Company generally must draw down the FILO Credit Facility before making any borrowings under the Revolving Credit Facility.

Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the Credit Facility. The Credit Facility replaced the prior credit facility. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs.

The Company and certain of its subsidiaries are permitted to borrow under the Credit Facility. The Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the Credit Facility (collectively, the Loan Parties), but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. Borrowings under the Credit Facility are limited to a specified percentage of eligible collateral. The Company has the option to request an increase in commitments under the Credit Facility of up to $250,000, subject to certain restrictions.

The Credit Facility allows the Company to declare and pay up to $70,000 in dividends annually to its stockholders without compliance with any availability or ratio-based limitations.

Interest under the Revolving Credit Facility accrues, at the election of the Company, at a LIBOR 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 Revolving Credit Facility. Through the end of the fiscal quarter during which the closing of the Revolving Credit Facility occurred, loans under the Revolving Credit Facility bore interest at LIBOR plus 1.750% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.750% per annum, in the alternative, and thereafter the interest rate began to fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.500% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.500% per annum), based upon the average daily availability under the Revolving Credit Facility for the immediately preceding fiscal quarter. Interest under the FILO Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is also determined by reference to the level of excess availability under the Revolving Credit Facility. Loans under the FILO Credit Facility bear interest at 1.000% per annum more than loans under the Revolving Credit Facility.

 

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The Credit Agreement 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) would be triggered, and the lenders would assume dominion and control over the Loan Parties’ cash.

The Credit Agreement 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 Agreement also contains customary affirmative covenants and representations and warranties.

The Company wrote off $460 of deferred financing fees related to the prior credit facility during fiscal 2016 and the remaining unamortized deferred financing fees of $3,542 were deferred and are being amortized over the five-year term of the Credit Facility. The Company also incurred $5,701 of fees to secure the Credit Facility, which are being amortized over the five-year term accordingly. During fiscal 2017, the Company incurred $474 of fees to secure the FILO Credit Facility, which are being amortized over the same term as the Credit Facility.

The Company had $158,700 and $64,900 of outstanding debt under the Credit Facility as of April 28, 2018 and April 29, 2017, respectively. The Company had $34,213 and $38,833 of outstanding letters of credit under its Credit Facility as of April 28, 2018 and April 29, 2017, respectively.

The following table presents selected information related to the Company’s credit facilities:

 

     Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Credit facility at period end

   $ 158,700       64,900       47,200  

Average balance outstanding during the period

   $ 141,478       96,297       66,948  

Maximum borrowings outstanding during the period

   $ 287,933       285,278       293,200  

Weighted average interest rate during the period (a)

     5.55     5.77     8.21

Interest rate at end of period

     3.92     3.73     2.69

 

(a) Includes commitment fees.

Fees expensed with respect to the unused portion of the credit facilities were $2,235, $2,235 and $2,781 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

The Company has no agreements to maintain compensating balances.

 

  3. Stock-Based Compensation

The Company maintains one active share-based incentive plan: the Amended and Restated 2009 Incentive Plan. Prior to June 2, 2009, the Company issued restricted stock and stock options under the 1996 and 2004 Incentive Plans. On June 2, 2009, the Company’s shareholders approved the 2009 Incentive Plan. Under the 2009 Incentive Plan, the Company has issued restricted stock units, restricted stock and stock options. On September 11, 2012, the Company’s shareholders approved the Amended and Restated 2009 Incentive Plan. Under the Amended and Restated 2009 Incentive Plan, the Company has issued performance-based stock units, restricted stock units, restricted stock and stock options. At April 28, 2018, there were approximately 5,689,643 shares of common stock available for future grants under the Amended and Restated 2009 Incentive Plan.

 

F-47


A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of unvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company’s restricted stock awards vest over a period of one to four years. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company’s common stock on the grant date.

A restricted stock unit is a grant valued in terms of the Company’s common stock, but no stock is issued at the time of grant. The restricted stock units may be redeemed for one share of common stock each once vested. Restricted stock units are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the units except in very limited circumstances and with the consent of the compensation committee. Shares of unvested restricted stock units have no voting rights but are entitled to receive dividends and other distributions thereon. Cash dividends to restricted stock units granted on or after July 15, 2015 are not distributed until the restricted stock units vest. The Company’s restricted stock units vest over a period of one to four years. The Company expenses the cost of the restricted stock units, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock unit is determined based on the closing price of the Company’s common stock on the grant date.

A performance-based stock unit is a grant valued in terms of the Company’s common stock, but no stock is issued at the time of grant. Each performance-based stock unit may be redeemed for one share of common stock once vested. In general, upon the achievement of a minimum threshold, 50% to 150% of these awards vest at the end of a three year performance period from the date of grant based upon achievement of the performance goal specified in the performance-based stock unit agreement. Performance-based stock units are generally subject to forfeiture if employment terminates prior to the settlement of the award. The grantee cannot transfer the units except in very limited circumstances and with the consent of the compensation committee. Shares of unvested performance-based stock units have no voting rights but are entitled to receive dividends and other distributions thereon. Cash dividends to performance-based stock units are not distributed until the award is settled. The Company expenses the cost of the performance-based stock units, which is determined to be the fair market value of the shares at the date of grant, ratably over the requisite service period, based on the probability of achieving the performance goal, with changes in expectations recognized as an adjustment to earnings in the period of the change. If the performance goal is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.

The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for each stock option award. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards, which are generally subject to pro-rata vesting annually over four years, is expensed on a straight-line basis over the vesting period of the stock options. The expected volatility assumption is based on traded options volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The expected term assumption incorporates the contractual term of an option grant, which is ten years, as well as the vesting period of an award, which is generally pro-rata vesting annually over four years. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted.

 

F-48


No stock options were granted during fiscal 2018, fiscal 2017 or fiscal 2016.

The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award and recognizes forfeitures as they occur.

In September 2003, Leonard Riggio, the Company’s Executive Chairman, exercised 1,318,750 stock options by tendering in payment of the exercise price of the stock options 606,277 shares that he held in the Company’s stock. Mr. Riggio elected to defer receipt of the balance of the shares (712,473) due from the exercise pursuant to the Company’s Executive Deferred Compensation Plan (Plan). In accordance therewith, the Company established a rabbi trust (Rabbi Trust) under the Plan for the benefit of Mr. Riggio, which holds 712,473 shares of the Company’s common stock. The shares held by the Rabbi Trust were treated as treasury stock. Due to the deferred compensation arrangement, these shares were included in the denominator of the earnings per share calculation in accordance with ASC 260, Earnings Per Share, when the impact was not antidilutive.

On March 15, 2017, the Board of Directors of the Company approved the termination of the Plan and the Rabbi Trust. As part of the termination of the Plan, all amounts deferred under the Plan and held in the Rabbi Trust were distributed in March 2017 to Mr. Riggio, who was the sole participant in the Plan.

Stock-Based Compensation Activity

The following table presents a summary of the Company’s stock option activity:

 

     Number of Shares
(in thousands)
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value (in
thousands)
 

Balance, May 2, 2015

     455     $ 16.62       6.27 years      $ 3,114  

Granted

     —         0.00 (a)      

Exercised

     (111     11.71 (a)      

Forfeited

     (239     10.89 (a)      

Adjustment due to the Spin-Off of B&N Education

     219         
  

 

 

        

Balance, April 30, 2016

     324     $ 11.29       5.09 years      $ 516  

Granted

     —         0.00       

Exercised

     (31     9.91       

Forfeited

     (38     21.14       
  

 

 

        

Balance, April 29, 2017

     255     $ 9.99       4.62 years      $ 11  

Granted

     —         0.00       

Exercised

     —         0.00       

Forfeited

     (79     10.08       
  

 

 

        

Balance, April 28, 2018

     176     $ 9.95       3.63 years      $ 0  
  

 

 

        

Vested and expected to vest in the future at April 28, 2018

     176     $ 9.95       3.63 years      $ 0  

Exercisable at April 28, 2018

     176     $ 9.95       3.63 years      $ 0  

Available for grant at April 28, 2018

     5,690         

 

(a)

Weighted average exercise price is calculated using exercise price prior to the Spin-Off and after the Spin-Off.

 

F-49


The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the related fiscal year and the exercise price, multiplied by the related in-the-money options) that would have been received by the option holders had they exercised their options at the end of the fiscal year. This amount changes based on the market value of the Company’s common stock. Total intrinsic value of options exercised for fiscal 2018, fiscal 2017 and fiscal 2016 (based on the difference between the Company’s stock price on the exercise date and the respective exercise price, multiplied by the number of options exercised) was $0, $99 and $546, respectively.

As of April 28, 2018, there was no unrecognized compensation expense related to unvested stock options granted under the Company’s share-based compensation plans.

The following table presents a summary of the Company’s restricted stock activity:

 

     Number of Shares
(in thousands)
     Weighted
Average Grant
Date Fair Value
 

Balance, May 2, 2015

     43      $ 22.24  

Granted

     64        13.04  

Vested

     (43      22.24  

Forfeited

     —          0.00  
  

 

 

    

Balance, April 30, 2016

     64      $ 13.04  

Granted

     77        10.95  

Vested

     (64      13.04  

Forfeited

     —          0.00  
  

 

 

    

Balance, April 29, 2017

     77      $ 10.95  

Granted

     141        7.10  

Vested

     (77      10.95  

Forfeited

     —          0.00  
  

 

 

    

Balance, April 28, 2018

     141      $ 7.10  
  

 

 

    

Total fair value of shares of restricted stock that vested during fiscal 2018, fiscal 2017 and fiscal 2016 was $548, $680 and $637, respectively. As of April 28, 2018, there was $333 of unrecognized stock-based compensation expense related to non-vested restricted stock awards. That cost is expected to be recognized over a weighted average period of 0.40 years.

 

F-50


The following table presents a summary of the Company’s restricted stock unit activity:

 

     Number of Shares
(in thousands)
     Weighted
Average Grant
Date Fair Value
 

Balance, May 2, 2015

     2,055      $ 15.62  

Granted

     692        18.82 (a) 

Vested

     (1,312      10.68 (a) 

Forfeited

     (1,054      10.74 (a) 

Adjustment due to the Spin-Off of B&N Education

     1,057     
  

 

 

    

Balance, April 30, 2016

     1,438      $ 13.76  

Granted

     547        12.42  

Vested

     (609      11.75  

Forfeited

     (826      14.22  
  

 

 

    

Balance, April 29, 2017

     550      $ 13.96  

Granted

     813        7.17  

Vested

     (228      14.10  

Forfeited

     (99      11.39  
  

 

 

    

Balance, April 28, 2018

     1,036      $ 8.85  
  

 

 

    

 

(a)

Weighted average grant date fair value is calculated using the grant price prior to the Spin-Off and after the Spin-Off.

Total fair value of shares of restricted stock units that vested during fiscal 2018, fiscal 2017 and fiscal 2016 were $1,694, $6,612 and $18,047, respectively. As of April 28, 2018, there was $5,685 of unrecognized stock-based compensation expense related to non-vested restricted stock units. That cost is expected to be recognized over a weighted average period of 1.93 years.

 

F-51


The following table presents a summary of the Company’s performance-based stock unit activity:

 

     Number of Shares
(in thousands)
     Weighted
Average Grant
Date Fair Value
 

Balance, May 2, 2015

     —        $ 0.00  

Granted

     110        28.08 (a) 

Vested

     —          0.00 (a) 

Forfeited

     (17      18.46 (a) 

Adjustment due to the Spin-Off of B&N Education

     58     
  

 

 

    

Balance, April 30, 2016

     151      $ 18.41  

Granted

     507        12.48  

Vested

     —          0.00  

Forfeited

     (238      13.55  
  

 

 

    

Balance, April 29, 2017

     420      $ 14.00  

Granted

     706        7.35  

Vested

     —          0.00  

Forfeited

     (117      12.01  
  

 

 

    

Balance, April 28, 2018

     1,009      $ 9.58  
  

 

 

    

 

(a)

Weighted average grant date fair value is calculated using the grant price prior to the Spin-Off and after the Spin-Off.

There were no vesting of performance-based stock units during fiscal 2018, fiscal 2017 and fiscal 2016. As of April 28, 2018, there was $4,069 of unrecognized stock-based compensation expense related to non-vested performance-based stock units. That cost is expected to be recognized over a weighted average period of 1.80 years.

For fiscal 2018, fiscal 2017 and fiscal 2016, stock-based compensation expense of $6,865, $6,299 and $14,201, respectively, is included in selling and administrative expenses.

 

F-52


  4. Receivables, Net

Receivables represent customer, private and public institutional and government billings, credit/debit card, advertising, landlord and other receivables due within one year as follows:

 

     April 28,
2018
     April 29,
2017
 

Trade accounts

   $ 19,446      $ 16,189  

Credit/debit card receivables

     22,564        25,136  

eBook settlement receivable (see Note 21)

     452        2,478  

Other receivables

     22,100        23,491  
  

 

 

    

 

 

 

Total receivables, net

   $ 64,562      $ 67,294  
  

 

 

    

 

 

 

 

  5. Other Long-Term Liabilities

Other long-term liabilities consist primarily of deferred rent, long-term insurance liabilities, asset retirement obligations and tax liabilities and reserves. The Company provides for minimum rent expense over the lease terms (including the build-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of tenant allowances) is classified as deferred rent. Other long-term liabilities also include store closing expenses, long-term deferred revenues and a health care and life insurance plan for certain retired employees. The Company had the following other long-term liabilities at April 28, 2018 and April 29, 2017:

 

     April 28,
2018
     April 29,
2017
 

Deferred rent

   $ 50,720      $ 59,142  

Insurance liabilities

     12,589        14,225  

Asset retirement obligations

     11,629        11,482  

Tax liabilities and reserves

     5,124        8,711  

Other

     4,209        5,751  
  

 

 

    

 

 

 

Total other long-term liabilities

   $ 84,271      $ 99,311  
  

 

 

    

 

 

 

 

  6. Fair Values of Financial Instruments

In accordance with ASC 820, Fair Value Measurements and Disclosures (ASC 820), the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

Level 1 –    Observable inputs that reflect quoted prices in active markets
Level 2 –    Inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3 –    Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions

 

F-53


The Company’s financial instruments include cash, receivables, gift cards, accrued liabilities, accounts payable and its credit facility. The fair values of cash, receivables, gift cards, accrued liabilities and accounts payable approximate carrying values because of the short-term nature of these instruments. The Company believes that its credit facility approximates fair value since interest rates are adjusted to reflect current rates.

The Company compares the fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment loss as required by ASU 2017-04. During fiscal 2018, the Company recognized an impairment of its B&N Retail reporting unit goodwill of $133,612 as a result of lower than expected holiday season sales, which resulted in a revised forecast outlook and lower market price of the Company’s common stock. Fair value was determined using the combination of a discounted cash flow method (income approach) and the guideline public company method (market comparable approach), weighted equally in determining the fair value of the Company. The market comparable approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies. In performing the valuations, significant assumptions utilized include unobservable Level 3 inputs including cash flows and long-term growth rates reflective of management’s forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. Discount rates are based on the development of a weighted average cost of capital using guideline public company data, factoring in current market data and any company specific risk factors. See Note 1 for further discussion on goodwill impairment.

During fiscal 2018, the Company impaired long-lived asset at B&N Retail stores due to lower than expected holiday season. As a result, the Company recorded an impairment charge of $1,823 in selling and administrative expenses. In determining whether the carrying value of long-lived assets is less than its estimated fair value, a discounted cash flow approach to value was used, which was based on Level 3 inputs as defined by ASC 820.

During fiscal 2016, the Company impaired one of its publishing contracts due to a significant drop in business with that publisher, driven by lower title offerings, product quality and the loss of a distribution partner. As a result, the Company recorded an impairment charge of $3,840 in selling and administrative expenses. In determining whether the carrying value of unamortizable intangible assets is less than its estimated fair value, a discounted cash flow approach to value was used, which was based on Level 3 inputs as defined by ASC 820.

 

  7. Net Earnings (Loss) per Share

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, unvested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s unvested restricted shares and unvested restricted stock units granted prior to July 15, 2015 and shares issuable under the Company’s deferred compensation plan were considered participating securities. Cash dividends to restricted stock units and performance-based stock units granted on or after July 15, 2015 are not distributed until and except to the extent that the restricted stock units vest, and in the case of performance-based stock units, until and except to the extent that the performance metrics are achieved or are otherwise deemed satisfied. Stock options do not receive cash dividends. As such, these awards are not considered participating securities.

Basic earnings per common share are calculated by dividing the net income, adjusted for preferred dividends and income allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the dilution that would occur if any potentially dilutive instruments were exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method or two-class method. Other potentially dilutive securities include preferred stock, stock options, restricted stock units granted after July 15, 2015, and performance-based stock units and are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods.

 

F-54


During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. Due to the net loss during fiscal 2018 and fiscal 2016, participating securities in the amounts of 127,509 and 2,163,190, respectively, were excluded from the calculation of loss per share using the two-class method because the effect would be antidilutive. The Company’s outstanding non-participating securities consisting of dilutive stock options and restricted stock units of 38,584, 140,341 and 129,450 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively, and accretion/payments of dividends on preferred shares in fiscal 2006 were also excluded from the calculation of loss per share using the two-class method because the effect would be antidilutive.

The following is a reconciliation of the Company’s basic and diluted income (loss) per share calculation:

 

     Fiscal
2018
    Fiscal
2017
    Fiscal
2016
 

Numerator for basic income (loss) per share:

      

Net income (loss) from continuing operations

   $ (125,480     22,023       14,700  

Inducement fee paid upon conversion of Series J preferred stock

     —         —         (3,657

Preferred stock dividends paid in shares

     —         —         (1,783

Accretion of dividends on preferred stock

     —         —         (4,204

Less allocation of dividends to participating securities

     (80     (576     (1,219
  

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations available to common shareholders

     (125,560     21,447       3,837  

Net loss from discontinued operations available to common shareholders

     —         —         (39,146
  

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ (125,560     21,447       (35,309
  

 

 

   

 

 

   

 

 

 

Numerator for diluted income (loss) per share:

      

Net income (loss) from continuing operations available to common shareholders

   $ (125,560     21,447       3,837  

Accretion of dividends on preferred stock (a)

     —         —         —    

Allocation of undistributed earnings to participating securities

     —         —         —    

Less diluted allocation of undistributed earnings to participating securities

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations available to common shareholders

     (125,560     21,447       3,837  

Net loss from discontinued operations available to common shareholders

     —         —         (39,146
  

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ (125,560     21,447       (35,309
  

 

 

   

 

 

   

 

 

 

Denominator for basic income (loss) per share:

      

Basic weighted average common shares

     72,588       72,188       72,410  

Denominator for diluted income (loss) per share:

      

Basic weighted average shares

     72,588       72,188       72,410  

Average dilutive options

     —         63       118  

Average dilutive non-participating securities

     —         77       14  
  

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares

     72,588       72,328       72,542  
  

 

 

   

 

 

   

 

 

 

Basic income (loss) per common share:

      

Income (loss) from continuing operations

   $ (1.73     0.30       0.05  

Loss from discontinued operations

     —         —         (0.54
  

 

 

   

 

 

   

 

 

 

Basic income (loss) per common share

   $ (1.73     0.30       (0.49
  

 

 

   

 

 

   

 

 

 

Diluted income (loss) per common share:

      

Income (loss) from continuing operations

   $ (1.73     0.30       0.05  

Loss from discontinued operations

     —         —         (0.54
  

 

 

   

 

 

   

 

 

 

Diluted income (loss) per common share

   $ (1.73     0.30       (0.49
  

 

 

   

 

 

   

 

 

 

 

(a) 

Although the Company was in a net income position during fiscal 2016, the dilutive effect of the Company’s convertible preferred shares was excluded from the calculation of income per share using the two-class method because the effect would be antidilutive.

 

F-55


  8. Pension and Other Postretirement Benefit Plans

The Company previously maintained a non-contributory defined benefit pension plan (the Pension Plan). On June 18, 2014, the Company’s Board of Directors approved a resolution to terminate the Pension Plan. The Pension Plan termination was effective November 1, 2014 and the accrued benefit for active participants was vested as of such date.

In fiscal 2016, there was a final Pension Plan termination lump-sum opportunity offered to 2,300 active and terminated vested participants at the final Pension Plan termination distribution date. As a result, lump-sum payments of approximately $18,100 were distributed in March 2016 to about 1,800 participants who elected to receive an immediate distribution of their benefit as part of the plan termination lump-sum window. Benefits for the remaining plan population were transferred to Massachusetts Mutual Life Insurance Company for an annuity purchase premium of $34,300. Further, in October 2016, a payment was made by the Company to the Pension Benefit Guaranty Corporation to transfer the liability for benefits payable to 28 missing participants. A final distribution of remaining assets from the trust was made on November 8, 2016.

Pension expense was $3, $276 and $25,330 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. For fiscal 2016, regular annual expense was $4,433, with pension settlement charge of $20,897 from the plan liquidation, for a total pension expense for fiscal 2016 of $25,330.

The Company maintains a defined contribution plan (the Savings Plan) for the benefit of substantially all employees. Total Company contributions charged to employee benefit expenses for the Savings Plan were $11,275, $11,815 and $12,251 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

 

F-56


  9. Income Taxes

Income (loss) before income taxes for fiscal 2018, fiscal 2017 and fiscal 2016 are as follows:

 

     Fiscal 2018     Fiscal 2017     Fiscal 2016  

Domestic operations

   $ (137,693     47,127       6,827  

Foreign operations

     (2     (328     (941
  

 

 

   

 

 

   

 

 

 

Total income (loss) before taxes

     (137,695     46,799       5,886  
  

 

 

   

 

 

   

 

 

 

Income tax provisions (benefits) for fiscal 2018, fiscal 2017 and fiscal 2016 are as follows:

 

     Fiscal 2018      Fiscal 2017      Fiscal 2016  

Current:

        

Federal

   $ 19,990        3,722        (47,053

State

     (1,340      (7,480      3,908  

Foreign

     —          —          (273
  

 

 

    

 

 

    

 

 

 

Total current

     18,650        (3,758      (43,418
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal

     (52,831      25,724        21,570  

State

     21,966        2,810        13,018  

Foreign

     —          —          16  
  

 

 

    

 

 

    

 

 

 

Total deferred

     (30,865      28,534        34,604  
  

 

 

    

 

 

    

 

 

 

Total

   $ (12,215      24,776        (8,814
  

 

 

    

 

 

    

 

 

 

Reconciliation between the effective income tax rate and the federal statutory income tax rate is as follows:

 

     Fiscal 2018     Fiscal 2017     Fiscal 2016  

Federal statutory income tax rate

     30.3     35.0     35.0

State income taxes, net of federal income tax benefit

     3.0       10.0       8.3  

Changes to unrecognized tax benefits

     1.8       (5.9     (111.3

Excess executive compensation

     (0.1     0.3       8.0  

Meals and entertainment disallowance

     (0.2     0.5       5.1  

Tax credits

     0.6       —         (76.3

Changes in valuation allowance

     (26.7     (1.2     108.6  

Changes in deferred taxes and payables

     (3.7     7.0       (134.8

Amounts not deductible for tax

     0.1       1.9       —    

State law changes

     1.5       3.1       4.7  

Impact of Tax Cuts and Jobs Act

     4.1       —         —    

Goodwill impairment

     (1.8     —         —    

Other, net

     —         2.2       3.0  
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     8.9     52.9     (149.7 )% 
  

 

 

   

 

 

   

 

 

 

The Company recorded an income tax benefit of $12,215 in fiscal 2018 compared with an income tax provision of $24,776 and income tax benefit of $8,814 in fiscal 2017 and fiscal 2016, respectively. The current federal tax expense of $19,990 is primarily due to certain reclassifications recorded as a result of the Company changing its tax year during fiscal 2018, with a corresponding deferred tax benefit. The net impact of the tax year-end change on total tax expense was nominal. The Company’s effective tax rate was 8.9%, 52.9% and (149.7)% in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The primary drivers of the effective tax rate in fiscal 2018 include the impact of remeasurement of deferred taxes as a result of the Tax Cuts and Jobs Act, changes in

 

F-57


deferred taxes and payables and the establishment of valuation allowance against federal and certain state net operating losses. Due to the change in the federal tax rate from 35% to 21%, fiscal year filers are required to use a blended rate for their fiscal year that includes the date of enactment. Accordingly, the federal statutory rate for the Company is 30.3% for fiscal 2018.

The primary drivers of the effective tax rate in fiscal 2017 included changes in uncertain tax positions and changes in deferred taxes and payables. In fiscal 2016, as shown above in the changes in deferred taxes and payables, changes to unrecognized tax benefits and changes in valuation allowance, certain adjustments to earnings were recorded to correct immaterial errors attributable to prior fiscal years. The Company has evaluated the effects of these errors, both qualitatively and quantitatively, and concluded that the correction of these errors in prior period amounts was not material to fiscal 2016 or any previously reported periods, including quarterly reporting.

Effects of the Tax Cuts and Jobs Act

New tax legislation, commonly referred to as the Tax Cuts and Jobs Act or Tax Reform, was enacted on December 22, 2017. Certain aspects of the new law, including the federal corporate tax rate change, had an impact recorded in the Company’s financial statements.

Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.

SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act.

Items for which a reasonable estimate was determined include the impact of the change in the corporate tax rate from 35% to 21% and the changes to the non-deductible executive compensation provisions. The Company recorded a benefit of $27,128 on the remeasurement of its deferred tax assets and liabilities during fiscal 2018. During fiscal 2018, the Company also recorded a net tax detriment as a result of the changes to the non-deductible executive compensation provisions. As the Company awaits further guidance regarding the transition rules, the tax impact recorded during fiscal 2018 represents a provisional amount based on the guidance that is available. As no additional guidance on the transition rules has been released, the amount recorded remains provisional.

Other significant provisions that did not have an impact on the fiscal 2018 provision but may impact the Company’s income taxes for future fiscal years include: limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable income, a limitation of net operating losses generated after fiscal 2018 to 80% of taxable income, and entertainment and other expense deduction limitation.

The Company continues to not be subject to any transition tax as there are no untaxed foreign earnings.

 

F-58


The Company accounts for income taxes using the asset and liability method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. At April 28, 2018 and April 29, 2017, the significant components of the Company’s deferred taxes consisted of the following:

 

     April 28, 2018      April 29, 2017  

Deferred tax assets:

     

Accrued liabilities

   $ 70,891      $ 110,029  

Insurance liability

     4,830        7,973  

Loss and credit carryovers

     43,704        31,221  

Lease transactions

     93        7,131  

Pension and post-retirement healthcare

     340        581  

Stock-based compensation

     2,237        3,182  

Other

     1,542        1,379  
  

 

 

    

 

 

 

Gross deferred tax assets

     123,637        161,496  
  

 

 

    

 

 

 

Valuation allowance

     (45,861      (7,644
  

 

 

    

 

 

 

Net deferred tax assets

     77,776        153,852  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Prepaid expenses

     (2,779      (4,670

Goodwill and intangible asset amortization

     (65,910      (140,270

Inventory

     (1,440      (2,608

Investment in Barnes & Noble.com

     (53,304      (78,756

Depreciation

     (6,387      (13,680
  

 

 

    

 

 

 

Gross deferred tax liabilities

     (129,820      (239,984
  

 

 

    

 

 

 

Net deferred tax liabilities

   $ (52,044    $ (86,132
  

 

 

    

 

 

 

The change in deferred tax asset balance during fiscal 2018 is primarily due to the reduction of the corporate tax rate from 35% to 21% under the Tax Cuts and Jobs Act.

In assessing the realizability of the deferred tax assets, management considered whether it is more likely than not that some or all of the deferred tax assets would be realized. In evaluating the Company’s ability to utilize its deferred tax assets, it considered all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. The Company has recorded a valuation allowance of $45,861 and $7,644 at April 28, 2018 and April 29, 2017, respectively. The increase in the valuation allowance during fiscal 2018 is due principally to additional allowance being established against any non-indefinite lived net operating losses.

At April 28, 2018, the Company had federal net operating loss carryforwards (NOLs) of approximately $128,414 and state net operating loss carryforwards of $212,192 that are available to offset taxable income in its respective taxing jurisdictions. The federal net operating losses begin to expire in 2019 through 2024. The utilization of $54,880 of the federal NOLs are subject to IRC Section 382 and are limited to approximately $6,653 on an annual basis. NOLs not used during a particular period may be carried forward to future years, though not beyond the expiration years. Additionally, the Company had approximately $73,533 and $211,356 of federal and state NOLs, respectively, that have no annual limitation. The Company had state tax credits totaling $10,168, which have an indefinite life.

As of April 28, 2018, the Company had $6,849 of unrecognized tax benefits, all of which, if recognized, would affect the Company’s effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal 2018, fiscal 2017 and fiscal 2016 is as follows:

 

F-59


Balance at May 2, 2015

   $ 18,382  

Additions for tax positions of the current period

     238  

Additions for tax positions of prior periods

     7,433  

Reductions due to settlements

     (5,980

Reductions for tax positions of prior periods

     (5,501
  

 

 

 

Balance at April 30, 2016

   $ 14,572  

Additions for tax positions of the current period

     337  

Additions for tax positions of prior periods

     1,644  

Reductions due to settlements

     —    

Reductions for tax positions of prior periods

     (7,134
  

 

 

 

Balance at April 29, 2017

   $ 9,419  

Additions for tax positions of the current period

     —    

Additions for tax positions of prior periods

     —    

Reductions due to settlements

     (22

Reductions for tax positions of prior periods

     (2,548
  

 

 

 

Balance at April 28, 2018

   $ 6,849  

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company recorded net interest and penalties (benefit) expense of approximately $587, $(2,860), and $(7,774) during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. As of April 28, 2018 and April 29, 2017, the Company had net accrued interest and penalties of $974 and $1,561 respectively.

The amount of unrecognized tax benefits decreased primarily due to the expiration of various state statutes. Further, we believe that it is reasonably possible that the total amount of unrecognized tax benefits at April 28, 2018 could decrease by approximately $1,162 within the next 12 months as a result of settlement of certain tax audits or lapses of statutes of limitations, which could impact the effective tax rate.

The Company is subject to U.S. federal income tax as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are primarily from fiscal 2014 and forward.

 

  10. Intangible Assets and Goodwill

 

Amortizable intangible assets

   Useful
Life
     As of April 28, 2018  
      Gross Carrying
Amount
     Accumulated
Amortization
    Total  

Technology

     5-10      $ 10,710      $ (10,404   $ 306  

Other

     3-10        6,546        (6,497     49  
     

 

 

    

 

 

   

 

 

 
      $ 17,256      $ (16,901   $ 355  
     

 

 

    

 

 

   

 

 

 

Unamortizable intangible assets

                          

Trade name

           $ 293,400  

Publishing contracts

             15,894  
          

 

 

 
           $ 309,294  
          

 

 

 

Total amortizable and unamortizable intangible assets as of April 28, 2018

           $ 309,649  
          

 

 

 

 

F-60


Amortizable intangible assets

   Useful
Life
     As of April 29, 2017  
      Gross Carrying
Amount
     Accumulated
Amortization
    Total  

Technology

     5-10      $ 10,710      $ (9,997   $ 713  

Distribution contracts

     10        8,325        (8,201     124  

Other

     3-10        6,458        (6,384     74  
     

 

 

    

 

 

   

 

 

 
      $ 25,493      $ (24,582   $ 911  
     

 

 

    

 

 

   

 

 

 

Unamortizable intangible assets

                          

Trade name

           $ 293,400  

Publishing contracts

             15,894  
          

 

 

 
           $ 309,294  
          

 

 

 

Total amortizable and unamortizable intangible assets as of April 29, 2017

           $ 310,205  
          

 

 

 

All amortizable intangible assets are being amortized over their useful life on a straight-line basis.

 

Aggregate Amortization Expense

      

For the 52 weeks ended April 28, 2018

   $ 644  

For the 52 weeks ended April 29, 2017

   $ 782  

For the 52 weeks ended April 30, 2016

   $ 1,012  

Estimated Amortization Expense

      

(12 months ending on or about April 30)

  

2019

   $ 355  

See Note 1 for discussion on impairment testing of unamortizable intangible assets.

The changes in the carrying amount of goodwill, which relate to the B&N Retail reporting unit, for fiscal 2018 and fiscal 2017, are as follows:

 

     Total
Company
 

Balance as of April 30, 2016

   $ 211,276  

Benefit of excess tax amortization (a)

     (3,895
  

 

 

 

Balance as of April 29, 2017

   $ 207,381  

Benefit of excess tax amortization (a)

     (2,176

Goodwill impairment (b)

     (133,612
  

 

 

 

Balance as of April 28, 2018

   $ 71,593  

 

(a)

The tax basis of goodwill arising from an acquisition during the 52 weeks ended January 29, 2005 exceeded the related basis for financial reporting purposes by approximately $96,576. In accordance with ASC 740-10-30, Accounting for Income Taxes, the Company is recognizing the tax benefits of amortizing such excess as a reduction of goodwill as it is realized on the Company’s income tax return.

(b)

See Note 1 for discussion on goodwill impairment testing.

 

  11. Series J Preferred Stock

On August 18, 2011, the Company entered into an investment agreement between the Company and Liberty GIC, Inc. (Liberty), pursuant to which the Company issued and sold to Liberty, and Liberty purchased, 204,000 shares of the Company’s Series J Preferred Stock, par value $0.001 per share (Preferred Stock), for an aggregate purchase price of $204,000 in a private placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock were

 

F-61


convertible, at the option of the holders, into shares of Common Stock representing 16.6% of the Common Stock outstanding as of August 29, 2011 (after giving pro forma effect to the issuance of the Preferred Stock) based on the initial conversion rate. The initial conversion rate reflected an initial conversion price of $17.00 and was subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock was equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock paid quarterly and subject to adjustment in certain circumstances.

On April 8, 2014, Liberty sold the majority of its shares to qualified institutional buyers in reliance on Rule 144A under the Securities Act and had retained an approximate 10% stake of its initial investment. As a result, Liberty no longer had the right to elect two preferred stock directors to the Company’s Board. Additionally, the consent rights and pre-emptive rights, to which Liberty was previously entitled, ceased to apply.

On June 5, 2015, the Company entered into conversion agreements with five beneficial owners (Series J Holders) of its Preferred Stock, pursuant to which each of the Series J Holders had agreed to convert (Conversion) shares of Preferred Stock it beneficially owned into shares of the Company’s common stock, par value $0.001 per share (Company Common Stock), and additionally received a cash payment from the Company in connection with the Conversion.

On July 9, 2015, the Company completed the Conversion. Pursuant to the terms of the Conversion Agreements, the Series J Holders converted an aggregate of 103,995 shares of Preferred Stock into 6,117,342 shares of Company Common Stock, and made an aggregate cash payment to the Series J Holders of $3,657 plus cash in lieu of fractional shares in connection with the Conversion.

The number of shares of Company Common Stock issued was determined based on a conversion ratio of 58.8235 shares of Company Common Stock per share of Preferred Stock converted, which was the conversion rate in the Certificate of the Designations with respect to the Preferred Stock, dated as of August 18, 2011.

On July 10, 2015, the Company gave notice of its exercise of the right to force conversion of all outstanding shares of its Senior Convertible Redeemable Series J Preferred Stock into Company Common Stock pursuant to Section 9 of the Certificate of Designations, Preferences and Relative Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions of Series J Preferred Stock, dated as of August 18, 2011 (the Forced Conversion). The effective date of the Forced Conversion was July 24, 2015. On the date of the Forced Conversion, each share of Series J Preferred Stock was automatically converted into 59.8727 shares of Company Common Stock, which included shares of Company Common Stock reflecting accrued and unpaid dividends on Series J Preferred Stock. Each holder of Series J Preferred Stock received whole shares of Company Common Stock and a cash amount in lieu of fractional shares of Company Common Stock.

As a result of the transactions described above, all shares of Series J Preferred Stock were retired by the Company and are no longer outstanding.

 

  12. Shareholders’ Equity

On October 20, 2015, the Company’s Board of Directors authorized a stock repurchase program (prior repurchase plan) of up to $50,000 of its common shares. During fiscal 2016, the Company repurchased 2,763,142 shares at a cost of $26,718 under the prior repurchase plan. During fiscal 2017, the Company repurchased 2,019,798 shares at a cost of $23,281 under the prior repurchase plan. On March 15, 2017, subsequent to completing the prior repurchase plan, the Company’s Board of Directors authorized a new stock repurchase program of up to $50,000 of its common shares. Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. The new stock repurchase program has no expiration date and may be suspended or discontinued at any time. The Company’s repurchase plan is intended to comply with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934. The Company did not repurchase shares under this plan in fiscal 2018 and fiscal 2017. The Company has remaining capacity of $50,000 under the new repurchase program as of April 28, 2018.

 

F-62


As of April 28, 2018, the Company has repurchased 39,584,907 shares at a cost of approximately $1,087,067 since the inception of the Company’s stock repurchase programs. The repurchased shares are held in treasury.

 

  13. Commitments and Contingencies

The Company leases retail stores, warehouse facilities, office space and equipment. Substantially all of the B&N Retail stores are leased under non-cancelable agreements, which expire at various dates through 2029 with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for both minimum and percentage rentals and require the Company to pay insurance, taxes and other maintenance costs. Percentage rentals are based on sales performance in excess of specified minimums at various stores.

The Company leases office space in New York, New York and Santa Clara, California for its NOOK operations.

Rental expense under operating leases is as follows:

 

      Fiscal 2018      Fiscal 2017      Fiscal 2016  

Minimum rentals

   $ 301,057        302,784        297,322  

Percentage rentals

     1,076        1,353        1,821  
  

 

 

    

 

 

    

 

 

 
   $ 302,133        304,137        299,143  
  

 

 

    

 

 

    

 

 

 

Future minimum annual rentals, excluding percentage rentals, required under B&N Retail leases that had initial, non-cancelable lease terms greater than one year, and NOOK leases as of April 28, 2018 are:

 

Fiscal Year

      

2019

   $ 316,329  

2020

     267,494  

2021

     200,147  

2022

     151,424  

2023

     88,626  

After 2023

     88,498  
  

 

 

 
   $ 1,112,518  
  

 

 

 

The Company provides for minimum rent expense over the lease terms (including the build-out period) on a straight-line basis. The excess of such rent expense over actual lease payments (net of tenant allowances) is reflected in other long-term liabilities and accrued liabilities in the accompanying balance sheets.

Purchase obligations, which include hardware and software maintenance contracts and inventory purchase commitments, as of April 28, 2018 are as follows:

 

Less Than 1 Year

   $ 56,929  

1-3 Years

     15,721  

3-5 Years

     11  

More Than 5 Years

     —    
  

 

 

 

Total

   $ 72,661  
  

 

 

 

 

F-63


  14. Segment Reporting

The Company’s two operating segments are B&N Retail and NOOK.

B&N Retail

This segment includes 630 bookstores as of April 28, 2018, primarily under the Barnes & Noble Booksellers trade name. These Barnes & Noble stores generally offer a comprehensive trade book title base, a café, and departments dedicated to Juvenile, Toys & Games, DVDs, Music & Vinyl, Gift, Magazine, Bargain products and a dedicated NOOK® area. The stores also offer a calendar of ongoing events, including author appearances and children’s activities. The B&N Retail segment also includes the Company’s eCommerce website, www.barnesandnoble.com, and its publishing operation, Sterling Publishing Co., Inc.

NOOK

This segment includes the Company’s digital business, including the development and support of the Company’s NOOK® product offerings. The digital business includes digital content such as eBooks, digital newsstand and sales of NOOK® devices and accessories to B&N Retail.

Summarized financial information concerning the Company’s reportable segments is presented below:

 

Sales by Segment

   52 weeks ended
April  28,

2018
    52 weeks ended
April  29,

2017
    52 weeks ended
April  30,

2016
 

B&N Retail

   $ 3,575,614     $ 3,784,655     $ 4,028,614  

NOOK

     111,487       146,514       191,520  

Elimination(a)

     (24,821     (36,611     (56,290
  

 

 

   

 

 

   

 

 

 

Total

   $ 3,662,280     $ 3,894,558     $ 4,163,844  
  

 

 

   

 

 

   

 

 

 

Sales by Product Line

   52 weeks ended
April 28,

2018
    52 weeks ended
April 29,

2017
    52 weeks ended
April 30,

2016
 

Media (b)

     69     70     70

Digital (c)

     3     3     5

Other (d)

     28     27     25
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Depreciation and Amortization

   52 weeks ended
April 28,

2018
    52 weeks ended
April 29,

2017
    52 weeks ended
April 30,

2016
 

B&N Retail

   $ 94,334     $ 98,877     $ 101,888  

NOOK

     12,006       19,010       33,975  
  

 

 

   

 

 

   

 

 

 

Total

   $ 106,340     $ 117,887     $ 135,863  
  

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

   52 weeks ended
April 28,

2018
    52 weeks ended
April 29,

2017
    52 weeks ended
April 30,

2016
 

B&N Retail

   $ (119,394   $ 90,663     $ 113,296  

NOOK

     (8,464     (36,355     (98,640
  

 

 

   

 

 

   

 

 

 

Total

   $ (127,858   $ 54,308     $ 14,656  
  

 

 

   

 

 

   

 

 

 

 

F-64


Capital Expenditures

   52 weeks ended
April  28,

2018
     52 weeks ended
April  29,

2017
     52 weeks ended
April  30,

2016
 

B&N Retail

   $ 80,670      $ 89,706      $ 81,277  

NOOK

     6,981        6,552        12,997  
  

 

 

    

 

 

    

 

 

 

Total

   $ 87,651      $ 96,258      $ 94,274  
  

 

 

    

 

 

    

 

 

 

Total Assets(e)

          As of
April 28,
2018
     As of
April 29,
2017
 

B&N Retail

      $ 1,724,279      $ 1,897,122  

NOOK

        25,289        35,799  
     

 

 

    

 

 

 

Total

      $ 1,749,568      $ 1,932,921  
     

 

 

    

 

 

 

 

(a) 

Represents sales from NOOK to B&N Retail on a sell-through basis.

(b) 

Includes tangible books, music, movies, rentals and newsstand.

(c) 

Includes NOOK®, related accessories, eContent and warranties.

(d) 

Includes Toys & Games, café products, gifts and miscellaneous other.

(e) 

Excludes intercompany balances.

A reconciliation of operating income (loss) from reportable segments to income (loss) from continuing operations before taxes in the consolidated financial statements is as follows:

 

     52 weeks ended
April  28,

2018
    52 weeks ended
April  29,

2017
    52 weeks ended
April  30,

2016
 

Reportable segments operating income (loss)

   $ (127,858   $ 54,308     $ 14,656  

Interest expense, net and amortization of deferred financing costs

     (9,837     (7,509     (8,770
  

 

 

   

 

 

   

 

 

 

Consolidated income (loss) before taxes

   $ (137,695   $ 46,799     $ 5,886  
  

 

 

   

 

 

   

 

 

 

 

  15. Legal Proceedings

The Company is involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, securities, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.

The Company records a liability when it believes that it is both probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount of a loss or potential loss. The Company may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if proceedings are in the early stages; (iii) if there is uncertainty as to the outcome of pending proceedings (including motions and appeals); (iv) if there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) if there are significant factual issues to be determined or resolved; (vi) if the proceedings involve a large number of parties; (vii) if relevant law is unsettled or novel or untested legal theories are presented; or (viii) if the proceedings are taking place in jurisdictions where the laws are complex or unclear. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.

 

F-65


With respect to the legal matters described below, the Company has determined, based on its current knowledge, that the amount of loss or range of loss that is reasonably possible, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company’s business, financial condition, results of operations, or cash flows.

The following is a discussion of the material legal matters involving the Company.

PIN Pad Litigation

As previously disclosed, the Company discovered that PIN pads in certain of its stores had been tampered with to allow criminal access to card data and PIN numbers on credit and debit cards swiped through the terminals. Following public disclosure of this matter on October 24, 2012, the Company was served with four putative class action complaints (three in federal district court in the Northern District of Illinois and one in the Northern District of California), each of which alleged on behalf of national and other classes of customers who swiped credit and debit cards in Barnes & Noble Retail stores common law claims such as negligence, breach of contract and invasion of privacy, as well as statutory claims such as violations of the Fair Credit Reporting Act, state data breach notification statutes, and state unfair and deceptive practices statutes. The actions sought various forms of relief including damages, injunctive or equitable relief, multiple or punitive damages, attorneys’ fees, costs, and interest. All four cases were transferred and/or assigned to a single judge in the United States District Court for the Northern District of Illinois, and a single consolidated amended complaint was filed. The Company filed a motion to dismiss the consolidated amended complaint in its entirety, and in September 2013, the Court granted the motion to dismiss without prejudice. The Plaintiffs then filed an amended complaint, and the Company filed a second motion to dismiss. On October 3, 2016, the Court granted the second motion to dismiss, and dismissed the case without prejudice; in doing so, the Court permitted plaintiffs to file a second amended complaint by October 31, 2016. On October 31, 2016, the plaintiffs filed a second amended complaint, and on January 25, 2017, the Company filed a motion to dismiss the second amended complaint. On June 13, 2017, the Court granted the Company’s motion to dismiss with prejudice. Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Seventh Circuit. On April 11, 2018, the Court of Appeals reversed the District Court’s decision granting the motion to dismiss the case, and remanded the case to the District Court for further proceedings. The Company filed with the Court of Appeals a petition for rehearing and rehearing en banc; that petition was denied on May 10, 2018.

Cassandra Carag individually and on behalf of others similarly situated v. Barnes & Noble, Inc., Barnes & Noble Booksellers, Inc. and DOES 1 through 100 inclusive

On November 27, 2013, former Associate Store Manager Cassandra Carag (Carag) brought suit in Sacramento County Superior Court, asserting claims on behalf of herself and all other hourly (non-exempt) Barnes & Noble employees in California in the preceding four years for unpaid regular and overtime wages based on alleged off-the-clock work, penalties and pay based on missed meal and rest breaks, and for improper wage statements, payroll records, and untimely pay at separation as a result of the alleged pay errors during employment. Via the complaint, Carag seeks to recover unpaid wages and statutory penalties for all hourly Barnes & Noble employees within California from November 27, 2009 to present. On February 13, 2014, the Company filed an answer to the complaint in the state court and concurrently requested removal of the action to federal court. On May 30, 2014, the federal court granted Plaintiff’s motion to remand the case to state court and denied Plaintiff’s motion to strike portions of the answer to the complaint (referring the latter motion to the lower court for future consideration). The Court has not yet scheduled any further hearings or deadlines.

 

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Café Manager Class Actions

Two former Café Managers have filed separate actions alleging similar claims of entitlement to unpaid compensation for overtime. In each action, the plaintiff seeks to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). Specifically, Christine Hartpence filed a complaint against Barnes & Noble in Philadelphia County Court of Common Pleas on May 26, 2015, alleging that she is entitled to unpaid compensation for overtime under Pennsylvania law and seeking to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). On July 14, 2016, Ms. Hartpence amended her complaint to assert a purported collective action for alleged unpaid overtime compensation under the federal Fair Labor Standards Act (FLSA), by which she sought to act as a class representative for similarly situated Café Managers throughout the United States. On July 27, 2016, Barnes & Noble removed the case to the U.S. District Court of the Eastern District of Pennsylvania. Ms. Hartpence then voluntarily dismissed her complaint and subsequently re-filed a similar complaint in the Philadelphia County Court of Common Pleas. The re-filed complaint alleged only claims of unpaid overtime under Pennsylvania law and class claims under Pennsylvania law that were limited to current and former Café Managers within Pennsylvania. On June 22, 2017, Ms. Hartpence filed an additional, separate action in Philadelphia County Court of Common Pleas in which she repeated her allegations under Pennsylvania law and asserts a similar claim for unpaid wages under New Jersey law, purportedly on behalf of herself and others similarly situated. The Court consolidated the two pending cases on November 1, 2017. On December 8, 2017, Barnes & Noble removed the consolidated action after Ms. Hartpence amended her complaint to add a cause of action under the FLSA in which Ms. Hartpence purported to assert claims on behalf of herself and a national class of all similarly situated Café Managers. The Hartpence matter settled pursuant to a settlement agreement and release. The Court approved the settlement in an Order entered on April 25, 2018.

On September 20, 2016, Kelly Brown filed a complaint against Barnes & Noble in the U.S. District Court for the Southern District of New York in which she also alleges that she is entitled to unpaid compensation under the FLSA and Illinois law. Ms. Brown seeks to represent a national class of all similarly situated Café Managers under the FLSA, as well as an Illinois-based class under Illinois law. On November 9, 2016, Ms. Brown filed an amended complaint to add an additional plaintiff named Tiffany Stewart, who is a former Café Manager who also alleges unpaid overtime compensation in violation of New York law and seeks to represent a class of similarly situated New York-based Café Managers under New York law. On May 2, 2017, the Court denied Plaintiffs’ Motion for Conditional Certification, without prejudice. The Plaintiffs filed a renewed motion for Conditional Certification on November 17, 2017, which is now fully briefed by the parties and pending before the Court. There are currently 23 former Café Managers who have joined the action as opt-in plaintiffs.

Bernardino v. Barnes & Noble Booksellers, Inc.

On June 16, 2017, a putative class action complaint was filed against Barnes & Noble Booksellers, Inc. (B&N Booksellers) in the United States District Court for the Southern District of New York, alleging violations of the federal Video Privacy Protection Act and related New York law. The plaintiff, who seeks to represent a class of subscribers of Facebook, Inc. (Facebook) who purchased DVDs or other video media from the Barnes & Noble website, seeks damages, injunctive relief and attorneys’ fees, among other things, based on her allegation that B&N Booksellers supposedly knowingly disclosed her personally identifiable information to Facebook without her consent when she bought a DVD from Barnes & Noble’s website. On July 10, 2017, the plaintiff moved for a preliminary injunction requiring Barnes & Noble to change the operation of its website, which motion B&N Booksellers opposed. On July 31, 2017, B&N Booksellers moved to compel the case to arbitration, consistent with the terms of use on Barnes & Noble’s website. On August 28,

 

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2017, the court denied the plaintiff’s motion for a preliminary injunction. On January 31, 2018, the court granted B&N Booksellers’ motion to compel arbitration, and the clerk of court closed the case on February 1, 2018. On March 2, 2018, the plaintiff filed an appeal in the United States Court of Appeals for the Second Circuit from the district court’s grant of B&N Booksellers’ motion to compel arbitration.

 

  16. Discontinued Operations of Barnes & Noble Education, Inc.

On August 2, 2015, Barnes & Noble completed the spin-off of Barnes & Noble Education, Inc. (Barnes & Noble Education or B&N Education) from Barnes & Noble into an independent public company (the Spin-Off) and distributed, on a pro rata basis, all of the shares of B&N Education common stock to the Company’s stockholders of record as of July 27, 2015. These Barnes & Noble stockholders of record as of July 27, 2015 received a distribution of 0.632 shares of B&N Education common stock for each share of Barnes & Noble common stock held as of the record date. Immediately following the completion of the Spin-Off, the Company’s stockholders owned 100% of the outstanding shares of common stock of B&N Education. Following the Spin-Off, B&N Education operates as an independent public company and as the parent of Barnes & Noble College, trading on New York Stock Exchange under the ticker symbol “BNED”.

In connection with the separation of B&N Education, the Company and B&N Education entered into a Separation and Distribution Agreement on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the Company and B&N Education after the separation, allocate between the Company and B&N Education various assets, liabilities, rights and obligations following the separation and describe the Company’s future commitments to provide B&N Education with certain transition services.

This Spin-Off is expected to be a non-taxable event for Barnes & Noble and its shareholders, and Barnes & Noble’s U.S. shareholders (other than those subject to special rules) generally will not recognize gain or loss as a result of the distribution of B&N Education shares.    

The Company has recognized the separation of B&N Education in accordance with ASC 205-20, Discontinued Operations. As such, the historical results of Barnes & Noble Education have been adjusted to include pre-spin B&N Education results, separation-related costs and investment banking fees (as they directly related to the Spin-Off) and exclude corporate allocations with B&N Retail, and have been classified as discontinued operations.

The following financial information presents the discontinued operations for fiscal 2016:

 

     Fiscal 2016  

Sales

   $ 238,983  

Cost of sales and occupancy

     186,697  
  

 

 

 
Gross profit      52,286  

Selling and administrative expenses

     94,933  

Depreciation and amortization

     13,100  
  

 

 

 

Operating loss from discontinued operations

     (55,747

Interest expense, net and amortization of deferred financing fees

     3  
  

 

 

 

Loss before income taxes from discontinued operations

     (55,750

Income tax benefit

     (16,604
  

 

 

 

Net loss from discontinued operations

   $ (39,146
  

 

 

 

 

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  17. Barnes & Noble Education, Inc. Transactions

Direct Costs Incurred Related to On-going Agreements with Barnes & Noble Education, Inc. (Subsequent to the Spin-Off)

In connection with the separation of B&N Education, the Company entered into a Separation and Distribution Agreement with B&N Education on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the parties after the separation and allocate between the parties various assets, liabilities, rights and obligations following the separation, including inventory purchases, employee benefits, intellectual property, information technology, insurance and tax-related assets and liabilities. The agreements also describe the Company’s future commitments to provide B&N Education with certain transition services following the Spin-Off. These agreements include the following:

 

   

a Separation and Distribution Agreement that sets forth the Company’s and B&N Education’s agreements regarding the principal actions that both parties took in connection with the Spin-Off and aspects of this relationship following the Spin-Off. The term of the agreement is perpetual after the Distribution date;

 

   

a Transition Services Agreement, pursuant to which the Company agreed to provide B&N Education with specified services for a limited time to help ensure an orderly transition following the Spin-Off. The Transition Services Agreement specifies the calculation of B&N Education costs for these services. The agreement will expire and services under it will cease no later than two years following the Spin-Off date or sooner in the event B&N Education no longer requires such services;

 

   

a Tax Matters Agreement governs the respective rights, responsibilities and obligations of the Company and B&N Education after the Spin-Off with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests). The agreement will expire after two years following the Spin-Off date;

 

   

an Employee Matters Agreement with B&N Education, addressing employment, compensation and benefits matters, including the allocation and treatment of assets and liabilities arising out of employee compensation and benefits programs, in which B&N Education employees participated prior to the Spin-Off. The agreement will expire and services under it will cease when B&N Education no longer requires such services; and

 

   

a Trademark License Agreement, pursuant to which the Company grants B&N Education an exclusive license in certain licensed trademarks and a non-exclusive license in other licensed trademarks. The term of the agreement is perpetual after the Spin-Off date.

Summary of Transactions with Barnes & Noble Education, Inc.

During the 52 weeks ended April 28, 2018, the Company charged B&N Education $25,930 for purchases of inventory and direct costs incurred under the agreements discussed above.

As of April 28, 2018, amounts due from B&N Education for book purchases and direct costs incurred under the agreements discussed above were $7,849.

 

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  18. Certain Relationships and Related Transactions

The Company believes that the transactions and agreements discussed below (including renewals of any existing agreements) between the Company and related third parties are at least as favorable to the Company as could have been entered into with unrelated parties at the time they were entered into. The Audit Committee of the Board of Directors utilizes procedures in evaluating the terms and provisions of proposed related party transactions or agreements in accordance with the fiduciary duties of directors under Delaware law. The Company’s related party transaction procedures contemplate Audit Committee review and approval of all new agreements, transactions or courses of dealing with related parties, including any modifications, waivers or amendments to existing related party transactions. The Company tests to ensure that the terms of related party transactions are at least as favorable to the Company as could have been obtained from unrelated parties at the time of the transaction. The Audit Committee considers, at a minimum, the nature of the relationship between the Company and the related party, the history of the transaction (in the case of modifications, waivers or amendments), the terms of the proposed transaction, the Company’s rationale for entering the transaction and the terms of comparable transactions with unrelated third parties. In addition, management and internal audit annually analyze all existing related party agreements and transactions and review them with the Audit Committee.

In fiscal 2010, the Company entered into an Aircraft Time Sharing Agreement with LR Enterprises Management LLC (LR Enterprises), which is owned by Leonard Riggio and Louise Riggio, pursuant to which LR Enterprises granted the Company the right to use a jet aircraft owned by it on a time-sharing basis in accordance with, and subject to the reimbursement of certain operating costs and expenses as provided in, the Federal Aviation Regulations (FAR). Such operating costs were $185, $153 and $63 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. LR Enterprises is solely responsible for the physical and technical operation of the aircraft, aircraft maintenance and the cost of maintaining aircraft liability insurance, other than insurance obtained for the specific flight as requested by the Company, as provided in the FAR.

The Company has leases for two locations for its corporate offices with related parties: the first location is leased from an entity, in which Leonard Riggio has a majority interest, under a lease expiring in 2023, and the second location is leased from an entity, in which Leonard Riggio has a minority interest, under a lease expiring in 2023. Both locations were rented at an aggregate annual rent, including real estate taxes, of approximately $10,503, $9,637 and $7,784 during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

The Company leased an office/warehouse from a partnership, in which Leonard Riggio had a 50% interest, pursuant to a lease terminated effective December 30, 2015. The space was rented at an annual rent of $456 during fiscal 2016 through the date of termination. Net of subtenant income, the Company paid rent of $179 during fiscal 2016 through the date of termination.

Kimberley A. Van Der Zon is a member of the Company’s Board of Directors. Ms. Van Der Zon leads the Global Board Practice at Egon Zehnder (Egon), a global board advisory, executive search and leadership consulting firm, which she joined in 1999. She had served as Partner of Egon from 2005 to April 2018. The Company had retained Egon to provide recruiting consultation for certain executive positions. Total fees paid to Egon were $253 and $64 during fiscal 2018 and fiscal 2017, respectively.

On February 27, 2017, B&N Education purchased MBS Textbook Exchange, Inc. (MBS), which was then privately-held and majority-owned by affiliates of Leonard Riggio (the MBS Purchase). MBS is a new and used textbook wholesaler, which also sells textbooks online and provides bookstore systems and distant learning distribution services. Following the MBS Purchase, Leonard Riggio, his affiliates and other members of the Riggio family ceased to have any ownership interest in MBS.

 

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The Company entered into an agreement with MBS in 2009, which had a term of ten years and contained restrictive covenants limiting the ability of the Company to become a used textbook wholesaler and placing certain limitations on MBS’s business activities. The Company also entered into an agreement with MBS in fiscal 2011, pursuant to which MBS agreed to purchase at the end of a given semester certain agreed upon textbooks, which the Company shall have rented to students during such semester. Total sales to MBS under this program were $0 and $2 for fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively. Total outstanding amounts payable to MBS for all arrangements, net of any amounts due, were $480 for fiscal 2017.

The Company purchases new and used textbooks directly from MBS. Total purchases were $8,328 and $7,092 for fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively. MBS sells used books through the Barnes & Noble dealer network. The Company earned a commission of $198 and $268 on the MBS used book sales in fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively. In addition, Barnes & Noble hosts pages on its website, through which Barnes & Noble customers are able to sell used books directly to MBS. The Company is paid a fixed commission on the price paid by MBS to the customer. Total commissions paid to the Company under this arrangement were $47 and $68 for fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively.

In fiscal 2010, the Company entered into an agreement with TXTB.com LLC (TXTB), a subsidiary of MBS, pursuant to which the marketplace program on the Barnes & Noble website was made available through the TXTB website. The Company receives a fee from third-party sellers for sales of marketplace items sold on the TXTB website and, upon receipt of such fee, the Company remits a separate fee to TXTB for those sales. In fiscal 2011, the Company entered into an agreement with TXTB, pursuant to which the Company became the exclusive provider of trade books to TXTB customers through the TXTB website. TXTB receives a commission from the Company on each purchase by a TXTB customer. In fiscal 2013, the Company also entered into an agreement with MBS Direct, a division of MBS, pursuant to which the marketplace program on the Barnes & Noble website was made available through the MBS Direct website. The Company receives a fee from third-party sellers for sales of marketplace items sold on the MBS Direct website and, upon receipt of such fee, the Company remits a separate fee to MBS Direct for those sales. Total commissions paid to TXTB and MBS Direct under these arrangements were $645 and $515 during fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively. Outstanding amounts payable to TXTB and MBS Direct were $5 and $0 for fiscal 2017 prior to the MBS Purchase and fiscal 2016, respectively.

The Company was provided with national freight distribution and trucking services by Argix Direct Inc. (Argix), a company in which a brother of Leonard Riggio owned a 20% interest. The contracted relationship between Argix and the Company has terminated due to Argix exiting the industry during fiscal 2016. The Company paid Argix $19,102 for such services during fiscal 2016 through the date of termination.

 

  19. Dividends

The Company paid a dividend to common stockholders in the amount of $43,638 and $43,887 during fiscal 2018 and fiscal 2017, respectively.

 

  20. Severance

On February 13, 2018, the Company announced that it has implemented a new labor model for its stores that has resulted in the elimination of certain store positions. The new model will allow stores to adjust staff up or down based on the needs of the business, increase store productivity and streamline store operations. Current year also included home office reductions as part of the Company’s strategic initiatives. The Company recorded a charge of $16,212 for aggregate employee-related severance costs in connection with these actions within selling and administrative expenses during fiscal 2018.

 

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  21. EBook Settlement

The Company provided credits to eligible customers resulting from the settlement reached with Apple Inc. (Apple) in an antitrust lawsuit filed by various State Attorneys General and private class plaintiffs regarding the price of digital books. The Company’s customers were entitled to $95,707 in total credits as a result of the settlement, which was funded by Apple. If a customer’s credit was not used to make a purchase by June 24, 2017, the entire credit would have expired. The program concluded on July 1, 2017, through which date the Company’s customers had activated $60,397 in credits, of which $56,472 were redeemed. No balances were due from the Apple settlement fund as of April 28, 2018 related to this portion of the program.

On September 7, 2017, the court approved redistribution of remaining funds from the Apple settlement. Customers who redeemed some or all of their credits from the first distribution that concluded on July 1, 2017 were eligible to receive additional credits in October 2017. The Company’s customers were entitled to $14,815 in total credits as a result of the redistribution, which were funded by Apple. This program concluded on April 20, 2018, through which date the Company’s customers had activated $10,851 in credits, of which $10,249 were redeemed. Total receivables from the Apple settlement fund were $452 and $2,478 as of April 28, 2018 and April 29, 2017, respectively.

 

  22. CEO Departure

On October 26, 2016, the Company entered into a release agreement (the Release Agreement) with its former Chief Executive Officer, Ronald D. Boire. Under the Release Agreement, Mr. Boire and the Company agreed to release claims against each other in connection with Mr. Boire’s termination of employment in exchange for a cash payment contemplated by his employment agreement. In connection with the execution of the Release Agreement, Mr. Boire also agreed to forfeit all equity awards that were granted to him by the Company.

The cash payment in connection with the Release Agreement totaled $4,826. The Company has previously recognized $1,933 in expense relating to the equity awards granted to Mr. Boire during his employment. Taking into account the reversal of those expenses, the Company recorded a net charge related to the cash payment to Mr. Boire in connection with the Release Agreement of $2,892 within selling and administrative expenses during fiscal 2017.

 

  23. Resignation Charge

On August 2, 2015, Michael P. Huseby resigned from the Company’s Board of Directors and as Chief Executive Officer of the Company, which was contingent upon the successful separation of B&N Education. In connection with his termination of employment, he received severance payments based on the terms of his employment agreement with the Company, effective as of January 7, 2014. Under the terms of his employment agreement, upon a resignation for “Good Reason”, Mr. Huseby was entitled to receive lump-sum severance equal to two times the sum of (a) annual base salary, (b) the average annual incentive compensation paid to the named executive officer with respect to the preceding two completed years and (c) the cost of benefits. In addition, Mr. Huseby was entitled to accelerated vesting of the equity-based awards granted pursuant to his employment agreement. As a result, Mr. Huseby received a severance payment equal to $7,742 and additionally was entitled to 300,000 shares of the Company’s common stock pursuant to the accelerated vesting of the equity-based awards, which were settled for cash based on the closing price of the Company’s common stock on the record date of the Spin-Off in an amount equal to $8,022. The net cash payments related to Mr.

 

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Huseby’s resignation totaled $15,764 during the second quarter of fiscal 2016. Mr. Huseby’s 300,000 shares have been ratably expensed from the initial grant date, thereby reducing the total resignation charge to $10,510, which was recorded within selling and administrative expenses during fiscal 2016.

 

  24. Selected Quarterly Financial Information (Unaudited)

A summary of quarterly financial information for fiscal 2018 and fiscal 2017 is as follows:

 

Fiscal 2018 Quarterly Period Ended On

   July 29,
2017
    October 28,
2017
    January 27,
2018
    April 28,
2018
    Fiscal
Year 2018
 

Sales

   $ 853,316       791,117       1,231,771       786,076     $ 3,662,280  

Gross profit

     253,481       228,695       400,026       229,001       1,111,203  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (10,778     (30,094     (63,536     (21,072   $ (125,480

Basic loss per common share

   $ (0.15     (0.41     (0.87     (0.29   $ (1.73

Diluted loss per common share

   $ (0.15     (0.41     (0.87     (0.29   $ (1.73

Fiscal 2017 Quarterly Period Ended On

   July 30,
2016
    October 29,
2016
    January 28,
2017
    April 29,
2017
    Fiscal
Year 2017
 

Sales

   $ 913,882       858,548       1,300,908       821,220     $ 3,894,558  

Gross profit

     277,539       255,375       436,801       242,487       1,212,202  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (14,416     (20,409     70,276       (13,428   $ 22,023  

Basic income (loss) per common share

   $ (0.20     (0.29     0.97       (0.19   $ 0.30  

Diluted income (loss) per common share

   $ (0.20     (0.29     0.96       (0.19   $ 0.30  

 

  25. Subsequent Events

Dividends to Stockholders

On June 13, 2018, the Company announced its Board of Directors declared a quarterly cash dividend of $0.15 per share, payable on July 27, 2018 to stockholders of record at the close of business on July 6, 2018.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Barnes & Noble, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Barnes & Noble, Inc. (the “Company”) as of April 28, 2018 and April 29, 2017, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended April 28, 2018, and the related notes and the financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 28, 2018 and April 29, 2017, and the results of its operations and its cash flows for each of the three years in the period ended April 28, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of April 28, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated June 21, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP                                

We have served as the Company’s auditor since 2012.

New York, NY

June 21, 2018

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Barnes & Noble, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Barnes & Noble, Inc.’s internal control over financial reporting as of April 28, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Barnes & Noble, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of April 28, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2018 consolidated balance sheets of the Company as of April 28, 2018 and April 29, 2017, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended April 28, 2018, and the related notes and the financial statement schedules listed in the Index at Item 15(a), and our report dated June 21, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP                                

New York, NY

June 21, 2018

 

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MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

The management of Barnes & Noble, Inc. is responsible for the contents of the Consolidated Financial Statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The Consolidated Financial Statements necessarily include amounts based on judgments and estimates. Financial information elsewhere in the Annual Report is consistent with that in the Consolidated Financial Statements.

The Company maintains a comprehensive accounting system, which includes controls designed to provide reasonable assurance as to the integrity and reliability of the financial records and the protection of assets. An internal audit staff is employed to regularly test and evaluate both internal accounting controls and operating procedures, including compliance with the Company’s statement of policy regarding ethical and lawful conduct. The Audit Committee of the Board of Directors composed of directors who are not members of management, meets regularly with management, the independent registered public accountants and the internal auditors to ensure that their respective responsibilities are properly discharged. Ernst & Young LLP and the Internal Audit Department of the Company have full and free independent access to the Audit Committee. The role of Ernst & Young LLP, an independent registered public accounting firm, is to provide an objective examination of the Consolidated Financial Statements and the underlying transactions in accordance with the standards of the Public Company Accounting Oversight Board. The report of Ernst & Young LLP accompanies the Consolidated Financial Statements.

OTHER INFORMATION

The Company has included the Section 302 certifications of the Chief Executive Officer and the Chief Financial Officer of the Company as Exhibits 31.1 and 31.2 to its Annual Report on Form 10-K for fiscal 2018 filed with the Securities and Exchange Commission, and the Company will submit to the New York Stock Exchange a certificate of the Chief Executive Officer of the Company certifying that he is not aware of any violation by the Company of New York Stock Exchange corporate governance listing standards.

 

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