Barnes & Noble Education: Losses Are Growing (NYSE:BNED)

Investing is about growing your capital. Barnes & Noble Education, Inc. (NYSE:BNED) has unfortunately been unable to do this for themselves or investors for a long time. Over the last five years, investors have seen the stock price drop by 70.23%.

The business fundamentals have been trending downwards, with negative cash flow, total debt is increasing, and we see a spike in interest expenses. Although the company has grown revenue from its newer FDC business model, it continues to miss quarterly earnings expectations, and there is little obvious growth potential in the next year. For this reason, I do not recommend buying this stock and giving it a hold status.

Company overview

BNED is the college bookstore spin-off of the now privately owned Barnes and Noble book chain, established in 2015. At a glance, the business looks good. It is the number one operator of college bookstores. We can see that the company has a large footprint offline and online and reports high annual revenue.

However, if we ignore COVID-inflicted FY21, revenue has been downward trending with little future growth prospect insight. The company has been producing losses for years. BNED was debt free until FY17, which has since increased to $573.6 million, and high-interest rates on loans are adding to expenses.

The company generates revenue through three business segments. Firstly, the most significant segment is retail, which includes 793 college, university or K-12 physical bookstores and 606 virtual bookstores. It accounted for 94% of annual sales in FY22. Secondly, there is the wholesale segment. The wholesale business is still one of the largest in the USA and accounts for 7.3% of annual sales. They sell to their 606 virtual bookstores and over 3000 physical bookstores. This segment also sells inventory application management solutions to 350 college bookshops. Thirdly, there is the smallest but fastest-growing segment, digital student solutions (DSS), at a share of 2.3%. It includes subscription-based services to help students with their academic performances. The increase in sales from FY21 to FY22 is not on trend due to the COVID-19 pandemic’s impact.

We can see this if we look at Q2 2023’s 13 and 26 weeks end in the table below. Only the DSS segment saw an increase over the three-month period, although retail has increased over the last nine months.

One of the potential growth drivers is that the company has a new business model, the First Day Complete program, which is a subscription-based model that gives students access to all their required learning material before the start of the school term. However, it is currently insufficient to improve the overall business at less than $100 million in revenue.

Financials and valuation

BNED has been producing back-to-back financial disappointments, missing earning expectations for four consecutive quarters. Last quarter the company reported revenues of $617.1 million, which was a decrease of 1.6% YoY from the quarter prior, and this is amidst an inflationary market. Its net income was $22.1 million, a decrease of 1.5% YoY, and the profit margin is at a low of 3.6%, which has remained similar YoY. If we look at earnings per share, the company is at $0.42 per share, a decrease of $0.01 from last year’s Q2, and earnings missed analyst expectations by 45%.

We can also see that the company has a negative cash flow from operations at a TTM of $12.84 million. Its levered free cash flow is a negative TTM of $19.92 million. This does not look good if the company wants to grow the business, give back to investors or pay off expenses. Furthermore, if we look at the balance sheet, there is a total cash availability of $19.13 million, compared to a very high debt of $573.56 million. If we look at the company’s liquidity, it has a current ratio of 1.22. However, its quick ratio is below one at 0.40, a major red flag as there are insufficient liquid assets to pay off short-term liabilities.

BNED has a small market cap of $114.14 million. This is much lower than its enterprise value of $668.57 million. At the same time, the stock may look like a bargain at its current price, especially if we look at its original IPO price. The company’s fundamentals do not paint a pretty picture for future growth. If we look at Quant Factor grades over the last six months, we can see an evident deterioration in its valuation. It has a price-to-book ratio of 0.57, which could indicate that the stock is undervalued. However, we must pay attention to how large its debt intake is, making it a risky stock.

Final thoughts

BNED faces a very challenging market in which sales are static or declining. Although it has a new asset-light business model that can be implemented across colleges, and the results are promising, it does not have a significant enough impact on the overall business. We are still seeing the company consecutively miss EPS expectations, increase its debt intake, produce negative cash flow and maintain high expenses. The firm is focused on cutting costs, but growth is not on the table in the near future. For this reason, I recommend a hold status.