In a S-1 filing with the SEC, Barnes & Noble offered details about its planned spinoff of its college operations, which it had announced in February. The move was a surprise, following years of speculation and indications that B&N would spin off the Nook division, possibly with the college division.
B&N said that its near-term goals for B&N Education include "the expansion of both the scale and the scope of the historic business model and also pursuing growth opportunities more broadly in the education sector, including by enhancing and expanding our digital assets." These goals will "likely require acquisitions or mergers funded, in part, with capital raises and strategic alliances with other companies," which will be easier if the college operations are "separate and distinct" from the rest of B&N.
For B&N, the spin-off will be advantageous because the core part of the company's focus is on "increasing foot traffic in existing locations, adapting offerings to shifting consumer tastes and patterns and harmonizing the in-store, online and digital experiences"--all of which require "a fully engaged board of directors and management team that has a different skill set and experience than those required to execute" B&N Education's objectives.
The spinoff will be accomplished through the distribution of shares in the new company to current holders of B&N stock at a rate yet to be determined. B&N Education doesn't plan on paying any dividends "in the foreseeable future." The company is applying to be listed on the New York Stock Exchange with the symbol BNED.
B&N chairman Len Riggio, who owns 18.9% of B&N, will also own 18.9% of B&N Education after the spinoff. Riggio and his wife, Louise, sold B&N College, then a privately held company, to B&N in 2009.
Max J. Roberts will be CEO of the new company and has a base salary for 2015 of $850,000. Last year, his total compensation, including base pay, stock awards and bonuses, was $4,587,416. Barry Brover, v-p, CFO, has a base salary of $485,000. Last year, his total compensation was $1,416,032. Patrick Maloney, executive v-p, COO, has a base salary of $732,000. Last year, his total compensation was $1,470,288.
In its most recent fiscal year, ended May 3, 2014, B&N Education revenue slipped 0.9%, to $1.747 billion, and net earnings rose 16.3%, to $35.1 million. In the first three months of the current fiscal year, ended January 31, revenues rose 3.6%, to $1.5 billion, and net earnings fell 43.8%, to $19.4 million.
Sales at stores open at least a year fell 0.7%, affected by an increase in textbook rentals, which was partly offset by stronger emblematic apparel sales.
As of the end of January, B&N Education operated 717 stores, which reach 24% of the total number of college students in the U.S.--about five million students. The company has 455 contracts to operate the stores, some of which cover multiple locations, and 158 of the stores are co-branded with the Barnes & Noble name. B&N Education estimates that its 717 stores are 16% of the number of college stores run nationwide.
The company's "largest growth area is sales through the school-branded e-commerce sites we operate for each store, allowing students and faculty to purchase textbooks, course materials and other products online."
The company sees potential in these areas:
- Some 53% of college stores are operated by their institutions and "have yet to be outsourced." The company plans to continue to bid "aggressively" to operate stores.
- Because many marketers want to reach college students, who have "a disproportionate impact on trendsetting and early adoption," B&N Education has an opportunity "to further monetize our direct relationship" with students.
- B&N Education can meet the demand for "non-traditional educational content, including online coursework and supplemental materials."
- The company has a recognized brand, both in academia and with 7,000 publishers and is expanding its digital capabilities with the Yuzu system.
Most of B&N Education's contracts are for five years with renewal options. In the past three years, 93% of the contracts have been renewed or extended. The "average relationship tenure" is 14 years. Under the contracts, B&N pays the institution a percentage of sales, in some cases with minimum guarantees.
The company's "attractive" business model is flexible with "minimal sensitivity to the economic cycle and ability to typically achieve profitability within the first year of operation." Customer acquisition costs are "relatively modest" and there are "high customer conversion and retention rates, unlike an online-only competitor that typically invests millions of dollars to gain access to its target customers, and then increases its customer retention costs to convert and retain those customers."
In its obligatory section outlining risks to the company, B&N Education said that among other potential problems, "the market for course materials, including textbooks and supplemental materials, is intensely competitive and subject to rapid change. We are experiencing growing competition from alternative media and alternative sources of textbooks and course-related materials, such as websites that sell textbooks, e-books, digital content and other merchandise directly to students; online resources; publishers bypassing the bookstore distribution channel by selling directly to students and educational institutions; print-on-demand textbooks; textbook rental companies; and student-to-student transactions over the Internet." Competitors include Follett, Nebraska Book Co., Amazon.
In addition, while products the company sells "originate from a wide variety of domestic and international vendors," during the last year, its four largest suppliers accounted for approximately 48% of merchandise purchased, and the largest supplier accounted for approximately 19% of merchandise purchased. "While we believe that our relationships with our suppliers are good, suppliers may modify the terms of these relationships due to general economic conditions or otherwise." Its main textbook suppliers are Pearson Education, Cengage Learning, McGraw-Hill, MPS, MBS Textbook Exchange, Inc., and John Wiley & Sons.
B&N Education also has a "long-term supply agreement" with MBS Textbook Exchange, the new and used textbook wholesaler that is majority owned by Leonard Riggio and other members of the Riggio family. Total purchases over the last three years from MBS have declined from $96 million in 2012 to $70.1 million last year. MBS also pays B&N Education commissions that similarly declined from $10.9 million in 2012 to $7.1 million last year.
And business is seasonal, with the most sales occurring when students buy textbooks at the start of semesters.