Barnes & Noble Education, Inc.
Barnes & Noble Education, Inc. (Form: 10-K, Received: 06/29/2016 08:46:59)
Index to Form 10-K Index to FS

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-37499
BARNES & NOBLE EDUCATION, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
46-0599018
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
120 Mountain View Blvd., Basking Ridge, NJ
 
07920
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (908) 991-2665
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
  
Name of Exchange on which registered
Common Stock, $0.01 par value per share
  
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes   ¨   No   x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   x     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):
Large accelerated filer
 
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Accelerated filer
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
x   (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $707 million based upon the closing market price of $14.75 per share of Common Stock on the New York Stock Exchange as of October 31, 2015. As of June 17, 2016 , 46,308,085 shares of Common Stock, par value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders are incorporated by reference into Part III.
 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
INDEX TO FORM 10-K
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 


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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and information relating to us and our business that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to us or our management, identify forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Such statements reflect our current views with respect to future events, the outcome of which is subject to certain risks, including, among others:
 
general competitive conditions, including actions our competitors may take to grow their businesses;
a decline in college enrollment or decreased funding available for students;
decisions by colleges and universities to outsource their bookstore operations or change the operation of their bookstores;
the general economic environment and consumer spending patterns;
decreased consumer demand for our products, low growth or declining sales;
restructuring of our digital strategy may not result in the expected growth in our digital sales and/or profitability;
risk that digital sales growth does not exceed the rate of investment spend;
the performance of our online, digital and other initiatives, integration of and deployment of, additional products and services, and further enhancements to Yuzu ® and any future higher education digital products, and the inability to achieve the expected cost savings;
our ability to successfully implement our strategic initiatives including our ability to identify and execute upon additional acquisitions and strategic investments;
technological changes;
our international expansion could result in additional risks;
our ability to attract and retain employees;
challenges to running our company independently from Barnes & Noble, Inc. following the Spin-Off;
the potential adverse impact on our business resulting from the Spin-Off;
changes to payment terms, return policies, the discount or margin on products or other terms with our suppliers;
risks associated with data privacy, information security and intellectual property;
trends and challenges to our business and in the locations in which we have stores;
non-renewal of contracts and higher-than-anticipated store closings;
disruptions to our computer systems, data lines, telephone systems or supply chain, including the loss of suppliers;
work stoppages or increases in labor costs;
possible increases in shipping rates or interruptions in shipping service, effects of competition;
obsolete or excessive inventory;
product shortages;
changes in law or regulation;
the amount of our indebtedness and ability to comply with covenants applicable to any future debt financing;
our ability to satisfy future capital and liquidity requirements;
our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms;
adverse results from litigation, governmental investigations or tax-related proceedings or audits;

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changes in accounting standards; and
the other risks and uncertainties detailed in the section titled “Risk Factors” in Part I - Item 1A of this Form 10-K.
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 us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. We undertake 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 Form 10-K.
AVAILABILITY OF INFORMATION
You may read and copy any materials Barnes & Noble Education, Inc. files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of such materials also can be obtained free of charge at the SEC’s website, www.sec.gov , or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Barnes & Noble Education, Inc.’s SEC filings are also available to the public, free of charge, on its corporate website, www.bned.com, as soon as reasonably practicable after Barnes & Noble Education, Inc. electronically files such material with, or furnishes it to, the SEC. You may also request a copy of any of our filings with the SEC at no cost by writing us at Investor Relations, Barnes & Noble Education, Inc., 120 Mountain View Blvd., Basking Ridge, N.J. 07920. Barnes & Noble Education, Inc.’s common stock is traded on the New York Stock Exchange. Material filed by Barnes & Noble Education, Inc. can be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, N.Y. 10005.
EXPLANATORY NOTE
On February 26, 2015, Barnes & Noble, Inc. (“Barnes & Noble”) announced plans for the complete legal and structural separation of Barnes & Noble Education, Inc. (the “Company”, "us", "we") from Barnes & Noble (the “Spin-Off”). Under the Separation and Distribution Agreement between Barnes & Noble and the Company (the “Separation and Distribution Agreement”), Barnes & Noble planned to distribute all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis.
On July 14, 2015, Barnes & Noble approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of our common stock, par value $0.01 per share (“Common Stock”), to Barnes & Noble’s existing stockholders. The pro rata dividend was made on August 2, 2015 to the Barnes & Noble stockholders of record (as of July 27, 2015). Each Barnes & Noble stockholder of record received a distribution of 0.632 shares of our Common Stock for each share of Barnes & Noble common stock held on the record date. Following the Spin-Off, Barnes & Noble does not own any equity interest in us.
On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. Our Common Stock began to trade on a “when-issued” basis on the New York Stock Exchange ("NYSE") under the symbol “BNED WI” beginning on July 23, 2015. On August 3, 2015, when-issued trading of our Common Stock ended, and our Common Stock began “regular-way” trading under the symbol “BNED.”
The results of operations for the 13 weeks ended August 1, 2015, Fiscal 2015, Fiscal 2014 (periods presented prior to the Spin-Off), reflected in our consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc. until the consummation of the Spin-Off on August 2, 2015, and the results of operations for the 39 weeks ended April 30, 2016 reflected in our consolidated financial statements are presented on a consolidated basis as we became a separate consolidated entity.



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PART I
Item 1. BUSINESS
Unless the context otherwise indicates, references in these Notes to the accompanying consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc., a Delaware corporation. References to “Barnes & Noble” refer to Barnes & Noble, Inc., a Delaware corporation, and its consolidated subsidiaries (other than Barnes & Noble Education, Inc. and its consolidated subsidiaries) unless the context otherwise requires. References to “Barnes & Noble College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. .
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. “Fiscal 2016” means the 52 weeks ended April 30, 2016, “Fiscal 2015” means the 52 weeks ended May 2, 2015, “Fiscal 2014” means the 53 weeks ended May 3, 2014, “Fiscal 2013” means the 52 weeks ended April 27, 2013, and “Fiscal 2012” means the 52 weeks ended April 28, 2012.
Unless otherwise indicated, market and industry information contained in this Form 10-K is based on information provided by the National Association of College Stores ("NACS") and management estimates of market shares.
OVERVIEW
Barnes & Noble Education, Inc., one of the largest contract operators of bookstores on college and university campuses across the United States and a leading provider of digital education services, enhances the academic and social purpose of educational institutions. As a strategic partner, we are committed to offering a complete support system and an unmatched retail and digital learning experience to foster student success in higher education. Through our wholly-owned subsidiary, Barnes & Noble College, we operate 751 campus bookstores and the school-branded e-commerce sites for each store, serving more than 5 million college students and their faculty nationwide. On August 2, 2015, we completed the legal separation from Barnes & Noble, Inc., at which time we began to operate as an independent publicly-traded company.
Overall educational spending in the United States continues to increase dramatically, and as tuition and other costs rise, colleges and universities face pressure to attract and retain students and provide them with innovative, affordable educational content and tools that support their educational development. While traditional print textbooks remain the first choice of students, demand for alternative forms of educational materials is growing.
We offer a comprehensive set of products and services to help students, faculty and administrators achieve their shared educational and social goals on college and university campuses across the United States. As one of the largest contract operators of bookstores and a provider of digital education services, we operate as a focal point for college life and learning, advancing the educational mission of our institution partners, enlivening campus culture and delivering an important revenue stream to our partner schools.
For over 5 million students and their faculty, our campus stores are a social and academic hub through which students can access affordable course materials and affinity products, including new and used print and digital textbooks, which are available for sale or rent; emblematic apparel and gifts; trade books (general reading); computer products; school and dorm supplies; café; convenience food and beverages; and graduation products. Through multi-year management service agreements with our schools, we typically have the sole right to operate the official school bookstore on college campuses. In turn, we pay the school a percentage of store sales and, in some cases, a minimum fixed guarantee. We create seamless retail experiences for our customers, both in our dynamic physical stores and on our official school-branded e-commerce sites for each school.
As of April 30, 2016 , we operated 751 stores nationwide, which reached 26% of the total number of students enrolled at colleges and universities in the United States. Our stores are operated under 472 contracts, some of which cover multiple store locations, and 165 of our college and university affiliated bookstores are co-branded with the Barnes & Noble name.
Fiscal 2016 was an excellent year for new store signings, and we have a strong pipeline of new business opportunities. During the 2016 fiscal year, we opened 39 stores with estimated first year annual sales of $64 million. In addition, as of June 17, 2016, we have signed additional contracts for 32 new stores with estimated first year annual sales of $109 million. We expect these new stores to open during our fiscal year 2017.
We are well positioned to benefit from the continuing trend towards outsourcing across the campus bookstore market given our brand, reputation with institutions, students and faculty for service and our full suite of products and services including: bookstore management, textbook rental and digital delivery.


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Strength of Our Business
We enhance the academic and social purpose of educational institutions by providing essential educational content and tools within a dynamic retail environment. Our products and services improve academic outcomes, provide support to students, and create loyalty and retention, while also supporting the financial goals of the colleges and universities we serve. We provide more than course materials and merchandise - we work as a true partner with colleges and universities, aligned with their missions and goals by acting as a valuable support system for students and faculty. We deliver an attractive retail and digital learning experience driven by innovation, advanced technologies and a deep understanding of the evolving needs and behaviors of our students, faculty and administrators. Our competitive strengths are:
Large Footprint with Well-Recognized Brand : We are one of the largest operators of bookstores on college and university campuses in the United States, with 751 stores in 43 states and the District of Columbia as of April 30, 2016, which reached 26% of the total number of students enrolled at colleges and universities in the United States. The Barnes & Noble brand is virtually synonymous with bookselling, and we believe it is one of the most widely recognized and respected brands in the United States. Our large footprint and our reputation and credibility in the marketplace not only support our marketing efforts to universities, students and faculty, but are also important for leading publishers who rely on us as one of their primary distribution channels.
Stable, Long-Term Contracts: We operate our stores under management contracts with colleges and universities that are typically for five year terms with renewal options, but can range from one to 15 years, and are typically cancelable by either party without penalty with 90 to 120 days' notice. From Fiscal 2013 through Fiscal 2016, 94% of these contracts were renewed or extended, often before their termination dates. In addition, these contracts are financially beneficial to us as we typically pay the college or university a percentage of our sales, including certain contracts with minimum guarantee payments. Therefore, the expense related to our college and university contracts is primarily a function of each stores' success. This arrangement is also beneficial to the colleges and universities, providing them with an incentive to encourage their students and faculty to shop at our affiliated stores.  
Well-Established Relationships: We have strong partnerships with college and university administrators, as well as with publishers, vendors and suppliers.
With an average relationship tenure of 15 years, we generate value for our college and university partners, and our relationships are supported by innovative engagement programs and educational initiatives. Our decentralized management structure empowers local teams to make decisions based on the local campus needs and foster collaborative working relationships with our partners.
We have long-term relationships with over 9,000 publishers, who can partner with us to access one of the largest distribution networks of college education materials in the United States.
Direct Access to Students and Faculty: We have a flexible business model with excellent visibility into the needs of our customers, and the ability to achieve profitability typically within the first year of operation. Our stores serve as social hubs for over 5 million students and their faculty, allowing us to forge deep customer relationships and seamlessly integrate their systems with our technology. Our established position on campus as the official, contracted provider for bookstore services gives us direct access to students and faculty and translates into relatively modest customer acquisition costs and high customer conversion and retention rates. Our flexible research channels help us stay ahead of the rapidly changing needs and behaviors of our customers, and proactively respond with dynamic solutions. The ReFuel Agency College Explorer Study 2015 estimates $523 billion total annual spending for tuition, housing, etc. and $203 billion annual discretionary spending, such as for food, clothing, etc., for the college demographic. Brand partners looking to reach the college audience are also exploring how to leverage our unique position on campus to access the coveted demographic we serve.
Highly Relevant Digital Products and Services: Our position as a strategic partner with our large footprint of existing and prospective colleges and universities allows us to use our suite of digital products and services to best serve their diverse needs and provides a broader scope of products and services beyond outsourcing of bookstore services. Digital products and services range from those related to providing accessible and affordable course materials solutions more directly related to our core business to analytic solutions designed to improve learning outcomes and retention rates.
Seasoned Management Team: We have an experienced senior management team with a proven track record, and demonstrated expertise in college bookstore outsourcing and content distribution, marketing and retail operations, and in scaling digital educational products and services.

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Growth Drivers
The primary factors that we expect will enable us to grow our business are as follows:
Increasing Market Share with New Accounts : Historically, new store openings have been an important driver of growth. From Fiscal 2012 to end of Fiscal 2016, we increased the number of stores we serve from 636 to 751, or 18%. Currently, approximately 52% of college and university affiliated bookstores in the United States are operated by their respective institutions. As of the end of Fiscal 2016, we operated only 19% of all college and university affiliated bookstores in the United States. Based on the anticipated continuing trend towards outsourcing in the campus bookstore market, we intend to aggressively pursue these opportunities and bid on these contracts. We expect new store openings will be the most important driver of future growth in our business.
Adapting our Merchandising Strategy and Product and Service Offerings : We create on campus and online retail destinations with services students want, and capture market share through new product offerings; enhanced marketing efforts using mobile, search and other technologies; increased local social and promotional offerings; and a broad category assortment of general merchandise, including school spirit apparel and gifts, school supplies, computer and technology products, dorm furnishings, graduation products, and café, convenience food and beverage offerings, marketed to our growing student and alumni base. We also are actively working with publishers by offering them access to FacultyEnlight ® , our proprietary online platform, to expedite and better coordinate textbook adoption.
Scalable and Advanced Digital Product and Solution Set : We leverage our digital technology platform to provide product and service offerings designed to address the most pressing issues in higher education, such as affordable and accessible course materials, retention solutions driven by our analytics platform, and products designed to drive and improve student outcomes.
Expanding Strategic Opportunities through Acquisitions and Partnerships : We intend to pursue strategic relationships with companies that enhance our educational services or distribution platform, or create compelling content offerings. In Fiscal 2016, we acquired LoudCloud Systems, Inc., a sophisticated digital platform and analytics provider. We may also expand our current suite of digital content offerings and platform through acquisitions, internal or third-party software development and strategic partnerships. Expansion into new educational verticals and markets, such as K-12, vocational and international markets, will be opportunistically evaluated.
Product and Service Offering
Our full suite of product offerings includes:
Textbook and Course Material Sales : Textbooks are a core product offering of our business. We work directly with faculty to ensure the correct textbooks are available in required formats before the start of classes. We provide students with affordable textbook solutions and educate them about each format through various means. During Fiscal 2016, we offered over 220,000 unique textbook titles for sale to support the course offerings on our campuses.
Textbook and Course Material Rentals : Students are increasingly turning to renting as the most affordable way to obtain their textbooks, and we are an industry leader in textbook rentals. The majority of our robust title list is available for rent, including custom course packs and adaptive learning materials, along with traditional textbooks. We also offer a convenient buyout option to allow the customer to purchase the rented book at the end of the semester, thereby enhancing our revenue and improving our inventory management processes.
General Merchandise : General merchandise sales are generated in-store, on campus at sporting and other events, as well as online through school-branded e-commerce sites. Our stores feature collegiate and athletic apparel relating to a school and/or its athletic programs and other custom-branded school spirit products, technology, supplies and convenience items. Other merchandise, such as laptops and other technology products, notebooks, backpacks, school and dormitory supplies and related items are also offered. In addition, as of April 30, 2016, we operated 80 customized cafés, featuring Starbucks Coffee ® , and 18 stand-alone convenience stores, as well as diverse grab-and-go options including organic, vegan and gluten-free, and ethnic fare for students on the move. These offerings increase traffic and time spent in our stores.
Trade : In our stores located on larger campuses, we carry an extensive selection of trade, academic and reference books, along with educational toys and games, and schedule store events, such as author signings, that extend beyond the academic community. The majority of our stores carry the most popular campus bestsellers, along with academically relevant titles.
Digital Education: Using our LoudCloud platform (as described below), we offer a suite of digital content and learning materials to supplement our traditional products (textbooks and course materials) and help faculty provide a more robust educational experience for students. We enable educators to mix and author many forms of content, including eTextbooks and rich media, and provide them with adaptive analytics and assessment capabilities that, when combined, drive improved outcomes and better experiences for students.

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Brand Partnerships: United States college students spend billions on discretionary purchases each year in categories such as technology, clothing, entertainment, and food. As the official partner to the colleges and universities we serve, we are in a unique position to provide leading brands direct access to 5 million students who shop at our stores. We operate not just as a retailer, but as a media channel for these brands looking to target the college demographic. We are experts in creating strategic solutions and customer programs for brand partners, creating live touch points during the academic year through digital marketing, custom content, store brand building product sampling and live engagement at our locations in the center of campus life. We conduct business with a wide range of companies, including Adobe ® , Verizon ® , Nutella ® , Visa Checkout ® , West Elm ® and Kind ® .

Platform Services
FacultyEnlight ® : Our proprietary online platform enhances content search, discovery and adoption (i.e. textbook selection) by faculty on each campus. Thus far, approximately 245,000 faculty members use FacultyEnlight ® to compare and contrast key decision-making factors, such as cost savings to students and format availability (including rental and digital options); read and write peer product reviews; and see what textbooks are being used by colleagues at other colleges and universities. This wealth of available information enables faculty to find and select the course materials that are both relevant to their subject matter and affordable to their students. FacultyEnlight ® also provides us with a communication platform to connect with faculty directly, allowing us to better understand their needs, preferences and challenges when it comes to the textbook adoption process, and deliver our affordability message.
Campus Connect Technologies : We enhance the academic and social purpose of higher education institutions by integrating our technology and systems with the school’s technology and organizational infrastructure to forge a bond with the school with a particular emphasis on the needs of students and faculty. Our customizable technology delivers a seamless experience that enables faculty to research and select, and enables students to find and purchase, the most affordable course materials, maximizing savings and sales. Campus Connect Technologies platform includes:
Simple Registration Integration : By linking the online course registration process to the bookstore’s e-commerce site, students can easily find their specific required course materials and purchase those materials immediately. They can view the list of necessary course materials and select their preferred format, delivery and payment method.
Seamless LMS Integration : By tying directly into the school’s Learning Management System ("LMS"), faculty and students can easily purchase their course materials and leverage our single-sign on functionality - enabling a stronger connection between student, faculty and campus bookstore.
Real-Time Financial Aid Platform : To help simplify financial aid transactions, we provide a sophisticated, real-time Student Financial Aid ("SFA") platform that is fully-integrated with any college or university’s financial aid systems and point-of-sale technology. This integration provides a direct and simple way for students to use their financial aid dollars in our stores and online, even before the start of classes.
Dynamic Point of Sale ("POS") Platform : We build a secure, highly customized checkout experience for each campus, greatly expediting and simplifying a student’s shopping experience. Campus debit cards, financial aid and all major forms of tender are fully integrated, allowing students to check out from any register.
Flexible Course Fee Solution : Through this model, all required course materials for a particular course or program are included in the cost of tuition. Students are guaranteed the course materials they need in the format they prefer. Course materials can be picked up at the campus store, shipped directly to the student or delivered digitally.
LoudCloud Platform: Our LoudCloud platform is a sophisticated digital platform and analytics system that includes a competency based courseware platform, a learning analytics platform, an eReading product, and a learning management system. Its software captures and analyzes key behavioral and performance metrics from students, allowing educators to monitor and improve student success. The core framework, rooted in the student-centric design, simplifies course and content authoring using proprietary algorithms to inform and guide course progress. Our module-based architecture allows for customization and the ability to support different educational models, and support additional capabilities, including competency-based learning and courseware development. These tools enable teachers to provide, and students to experience, a more personalized learning experience and improve student success rates. Additionally, our LMS platform helps institutions handle all aspects of the learning process, including delivery and management of instructional content, learning goals, assessment, course administration and reporting.

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Customers and Distribution Network
We leverage our physical bookstores, e-commerce sites and digital platform to serve and interact with the key constituents in our business ecosystem and act as a key partner for students, universities and publishers.
We work with colleges and universities to transform the campus bookstore into a destination that enhances social and academic experiences. We offer students a customized retail experience, including what we believe to be the largest inventory of used and rental titles, as well as a number of other affordable textbook solutions, including digital textbooks and our Flexible Course Fee Solution. For the colleges and universities that we support, we provide a customized school official website for course materials and general merchandise, which includes emblematic apparel and gifts and school supplies. We provide faculty with valuable tools, resources and insights that allow them to gain a deeper understanding of student needs and higher education trends. We also offer approximately 5,000 publishers access to one of the largest distribution networks of college education materials in the United States.
As of April 30, 2016, we managed 751 bookstores nationwide across 43 states and the District of Columbia, serving over 5 million students and their faculty. During the period of Fiscal 2012 through Fiscal 2016, the number of stores we operated increased by 115, or approximately 18%, from 636 to 751, as a result of the increased demand for outsourcing in this market and the awarding of contracts for stores previously run by our competitors. In addition, as of June 17, 2016, we have signed additional contracts for 32 new stores, which we expect to open during our fiscal year 2017.

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The number of Barnes & Noble College stores located in each state and the District of Columbia as of April 30, 2016, is listed below:
STATE
 
NUMBER
OF STORES
 
STATE
 
NUMBER
OF STORES
 
STATE
 
NUMBER
OF STORES
Alabama
 
18
 
Kentucky
 
32
 
North Dakota
 
1
Arizona
 
8
 
Louisiana
 
14
 
Ohio
 
41
Arkansas
 
7
 
Maryland
 
20
 
Oklahoma
 
5
California
 
44
 
Massachusetts
 
29
 
Oregon
 
5
Colorado
 
5
 
Michigan
 
36
 
Pennsylvania
 
63
Connecticut
 
5
 
Minnesota
 
7
 
Rhode Island
 
2
Delaware
 
2
 
Mississippi
 
9
 
South Carolina
 
19
District of Columbia
 
4
 
Missouri
 
8
 
South Dakota
 
2
Florida
 
46
 
Nebraska
 
1
 
Tennessee
 
12
Georgia
 
14
 
Nevada
 
2
 
Texas
 
67
Hawaii
 
3
 
New Hampshire
 
4
 
Virginia
 
20
Illinois
 
20
 
New Jersey
 
21
 
Washington
 
19
Indiana
 
14
 
New Mexico
 
6
 
West Virginia
 
11
Iowa
 
6
 
New York
 
66
 
Wisconsin
 
6
Kansas
 
2
 
North Carolina
 
25
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multichannel Retailer
As of April 30, 2016, we operated 751 bookstores in our dynamic, multichannel format on campuses of state universities, private universities and community colleges of various sizes. Our typical bookstore is located on campus in a location convenient to students and faculty. Of our 751 stores, 41 are academic superstores at select major campuses, including the Harvard Coop, University of Pennsylvania, Yale University, the College of William and Mary, Boston University, The Ohio State University, DePaul University, Vanderbilt University and Georgia Institute of Technology.
Our academic superstores include a café and carry a large selection of trade and reference books, as well as our campus bookstore offerings of course-required textbooks, supplies, emblematic clothing and gifts. Our academic superstores often act as an anchor to the local community; they are positioned in locations that attract customers from the neighborhood community, as well as students and faculty from the college or university. They are open extended hours and have ongoing events, such as author signings. These stores differ from our traditional-format stores because the majority has a customer base that includes the general public and sales which are less dependent on course-required materials.
e-Commerce Platform : With an active digital community of over 6.5 million customers, our official online bookstores for colleges or universities drove over $400 million of sales in Fiscal 2016, with transactions up over 8.5% over the prior fiscal year. Designed to appeal to students, parents and alumni, the school-branded sites offer simple and seamless textbook purchasing with free in-store pick up or shipping to any location, general merchandise promotions and collections that are customized to the individual user, as well as faculty course material adoption tools and customer service support. Our strategy has allowed us to connect and personalize our promotions directly to new students, parents and alumni, helping drive our online general merchandise sales. Additionally, our access to alumni through university alumni offices, including over 940,000 alumni with existing customer accounts, allow us to leverage digital marketing strategies on our dedicated fan and alumni e-commerce sites focused on athletic game day and other milestone events for further general merchandise sales growth in school-spirit apparel and related items.
Contracts
Our stores are typically operated under management agreements with the college or university to be the official university bookstore and the exclusive seller of course materials and supplies, including physical and digital products sold in-store, online or through learning management systems. Agreements are typically five years with renewal options, but can range from one to 15 years, and are typically cancelable by either party without penalty with 90 to120 days' notice. We pay the school a percentage of sales for the right to be the official college or university bookstore and the use of the premises; more than half of our agreements do not have any minimum guaranteed amount to be paid to our partners. In addition, we have the non-exclusive right to sell all items typically sold in a college bookstore both in-store and on the web. We also have the ability to integrate our systems with the university’s systems in order to accept student financial aid, university debit cards and other forms of payment. We are able to

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obtain student and faculty email lists for direct communication which provide for seamless integration into the university community and potential co-branded marketing opportunities.
Over the past four years, we have renewed more than 94% of our agreements, with the majority of the agreements being renewed before their expiration dates and without going through a formal bid process.
Merchandising and Supply Chain Management
Our purchasing procedures vary by product type (i.e. textbooks, general merchandise or trade books). Purchases are made at the store level based on the relationships our managers have with the faculty, with strategic corporate oversight, while maintaining appropriate inventory levels. After titles are adopted for an upcoming term, we determine how much inventory we will need to purchase based on several factors, including student enrollment and the previous term’s textbook sales history. We first use our automated sourcing systems to determine if our stores have the necessary new or used books on hand and may transfer the inventory to the appropriate store. After internal sourcing, we purchase books from outside suppliers. As part of our contracts with institutions, we guarantee that we will order textbooks for all courses.
Our primary suppliers of new textbooks include Pearson Education, Cengage Learning, McGraw-Hill, MPS, MBS Textbook Exchange, Inc. (“MBS”), and John Wiley & Sons. Our primary suppliers of used textbooks are students, through returns of previously rented and purchased books, and MBS. The stores offer a "Cash for Books" program in which students can sell their books back to the store at the end of the semester, typically in December and May. Students typically receive 50% of the price they originally paid for the book if it has been adopted for a future class or the current wholesale price if it has not. Both unsold textbooks and trade books are generally returnable to publishers for full credit. For textbook sales and rentals, we utilize our sophisticated inventory management platforms to manage pricing and inventory across all our stores.
The larger stores feature an expanded selection of trade books and use the Barnes & Noble Book Master system, a proprietary merchandising system licensed from Barnes & Noble. Our home office merchants meet with publishers on a regular basis to identify new titles and trends to support this changing business. In the smaller stores, trade (general reading) book purchasing is controlled at the store level.
General merchandise vendors and products are initially selected by our home office merchants using the analytics and insights from our planning and allocation systems. This data is used to establish benchmarks across school type, region and the socio-economics of each of our partner institution’s student base to help local store management team forecast sales and trends. Recommended assortments are provided to the stores, and stores then make selections based on the perceived needs of each campus, reaching back out to the home office merchants with their recommendations on any additional campus specific needs.
Customer Marketing Strategies
Students, Parents, Alumni
Our expertise in student marketing is supported by our active digital community of over 6.5 million people, which includes engaged email subscribers and our continuous dialogue with customers on our school-customized social media channels, including Facebook, Instagram and Twitter, as well as our student blog, The College Juice. Our exclusive Student POV ("Point of View") online panel of over 8,000 students nationwide, as well as our Parent POV online panel of over 2,800 parents, helps us to better understand their attitudes, values and behaviors. Using a marketing automation platform, we segment students based on demographics and purchasing behavior to ensure our audience receives the most relevant messages and experience. Our dynamic email campaigns educate students on format and affordability options as well as ongoing promotions from game day to graduation. Through our search engine marketing strategies, we have been able to grow online textbook and apparel sales significantly.
One example of our commitment to turning our research insights into action is our Igniting the New Student Connection initiative. We connect with new students starting with their acceptance letters, allowing us to capture textbook sales from day one and building loyalty with new students and their parents, and this relationship continues over the lifecycle of their academic experience.
As rewarding and helpful as our connections are for new students, they also drive revenue. Nationwide, during the current fiscal year, we have built more than 440,000 connections with incoming students and their parents, resulting in increased revenues. These efforts have allowed us to recapture market share and cement the college bookstore as the student's first choice for everything they need for academic success. We also form the same personal connections with the alumni base, creating a customized loyalty program that builds and enhances relationships with them while driving revenue for the bookstore.

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Business Conditions and Competition
The market for educational materials is undergoing unprecedented change. Overall spending on education, including tuition, continues to increase dramatically. As tuition and other costs rise, colleges and universities face increasing pressure to attract and retain students and provide them with innovative, affordable educational content and tools that support their educational development. While traditional print textbooks remain the first choice of students, demand for alternative forms of educational materials, including digital, media-rich content and study aids, is emerging. Current competitive dynamics in the market for distribution of course materials include:
A Majority of Traditional Campus Bookstores Have Yet to be Outsourced : Approximately 52% of college and university affiliated bookstores in the United States are operated by their respective institutions. As the delivery of educational materials continues to evolve, driven in large part by the growth of rentals and digital content, and the complexity of modern campus bookstore operations increases, institutions are increasingly outsourcing bookstore operations to third parties such as us, because we can offer a complete set of solutions to students and faculty. We believe that we will benefit from the continuing trend towards outsourcing across the campus bookstore market.
Direct Relationship with a Coveted Demographic : Due to the disproportionate impact on trend-setting and early adoption, marketing to college students is important for many brands, as they seek more effective methods to engage with this audience. The importance of this demographic provides a significant opportunity to further monetize our direct relationship with more than 5 million students both during and beyond their college years.
Increased Use of Online and Digital Platforms as Companions to Printed Course Materials : Students and faculty can now choose from a wider variety of educational content and tools than ever before, delivered across both traditional and digital platforms. Students and faculty are increasingly relying on online and digital platforms as a means to discover, consume and share educational content and access affordable non-traditional educational content, including online coursework and supplemental materials. Whereas some companies are creating digital delivery systems that would seek to make traditional textbooks obsolete, others are developing new technologies to complement traditional offerings. However, today, traditional print textbooks sold remain the first choice of students, according to the Student Monitor LLC, with 77% preferring a physical textbook (whether new, used, purchased or rented) over other options. In addition, printed course materials are the primary instructional resource for most courses and the highest revenue generator for most higher education publishers.
Highly-Fragmented Educational Content Market Presents Opportunity for Consolidation : The evolving market for educational content is increasingly competitive, with a broad array of content providers, digital content delivery platforms, educational enterprise providers and campus store operators that compete to serve this approximately $13 billion market in educational books alone. As the market for educational content evolves, we believe there will be a significant opportunity to increase our market share. The traditional college bookstore market is very fragmented, with approximately 52% of college and university affiliated bookstores owned and operated by the college or university (institutional stores). The campus store continues to be the main source for books, course materials and general merchandise, such as school-branded apparel and gifts, computer products, school and dormitory supplies, café and convenience items. According to NACS, college and university store sales totaled approximately $10.3 billion during 2013.
Distribution Network Evolving : The way course materials are distributed and consumed is changing significantly, a trend that is expected to continue. It is clear that significant change in the distribution of course materials is already underway as a result of start-ups promoting free online textbooks and generating revenue from related services, institutions licensing digital materials and providing them to students for a fee, or the surge of textbook rental programs in campus bookstores and online platforms. In addition to the campus bookstore, course materials are also sold through off-campus bookstores, e-commerce outlets, digital platform companies, publishers’ direct sales to institutions and students and student-to-student marketplaces.
Expanding E-Commerce Business Focused on Athletics/Alumni: By rapidly scaling our dedicated alumni and fan e-commerce sites, we can leverage existing student and fan relationships, and exploit weak competition and grow market opportunities to drive increased sales of higher margin general merchandise product.
The marketplace for course materials is highly competitive. The campus bookstore is no longer the sole provider of course materials. Students have many choices and options, including e-commerce outlets, digital platform companies, and publishers’ direct sales to students.
The following companies compete directly with us: Akademos, a virtual bookstore and marketplace for academic institutions; Amazon.com, an e-commerce operator and a provider of contract services to colleges and universities; BBA Solutions, a college textbook retailer; bn.com, the e-commerce platform of Barnes & Noble; Chegg.com, an online textbook rental company; CourseSmart, a digital course materials provider; eCampus, an online provider of course materials; Follett Corporation, a contract operator of campus bookstores; MBS Direct, an online bookstore provider; and Rafter, a course materials management solution for higher educational institutions.

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Publishers are increasing efforts to sell directly to students, and technology companies, such as Apple, Google and Blackboard, are also increasing their digital offerings to students. In addition, student-to-student transactions are taking place on campuses and over the Internet.
Trends and Other Factors Affecting Our Business
Our business is dependent on the overall economic environment, college enrollment and consumer spending patterns. Our business is affected by funding levels at colleges and universities, by changes in enrollments at colleges and universities, and spending on textbooks and general merchandise. The growth of our business depends on our ability to attract new students and to increase the level of engagement by existing students.
Historically, increasing enrollment has been a significant driver of sales growth at campus bookstores, a trend that is expected to continue. According to the National Center for Education Statistics of the U.S. Department of Education ("NCES"), total enrollment in post-secondary degree-granting institutions is expected to increase 15.5%, from 20.6 million in 2012 to 23.8 million in 2023 driven by increased demand for educational services.
We expect awards of new accounts resulting in new store openings will continue to be an important driver of future growth in our business. We are awarded additional contracts for stores as colleges and universities decide to outsource their bookstore, and we also obtain new contracts for stores that were previously operated by competitors. Sales trends are primarily impacted by new store openings, increasing the students and faculty served, as well as changes in comparable store sales and store closings. We close stores at the end of their contract terms due to low profitability or because the new contract has been awarded to a competitor. Over the last four years, we have consistently opened new stores increasing our total number of stores open from 636 at the beginning of Fiscal 2012 to 751 at the end of Fiscal 2016.
We continue to see increasing trends towards outsourcing in the campus bookstore market, including virtual bookstores and online marketplace websites. We also continue to see a variety of business models being pursued for the provision of textbooks, course materials and general merchandise. In addition to the competition in the services we provide to our customers, our textbook business faces significant price competition. Many students purchase from multiple textbook providers, are highly price sensitive and can easily shift spending from one provider or format to another. Some of our competitors have adopted, and may continue to adopt, aggressive pricing policies and devote substantial resources to marketing, website and systems development.
As we expanded our textbook rental offerings, students have been shifting away from higher priced textbook purchases to lower priced rental options, which has resulted in lower textbook sales and increasing rental income. After several years of comparable store sales declines, primarily due to lower textbook unit volume, during the 52 weeks ended May 2, 2015, our comparable store sales trends improved for both textbooks and general merchandise. For the 52 weeks ended April 30, 2016, our comparable store sales declined primarily due to lower community college enrollment.
General merchandise sales have continued to increase as our product assortments continue to emphasize and reflect the changing consumer trends and we evolve our presentation concepts and merchandising of products in stores and online.
Contract costs, which are included in cost of sales, and primarily consist of the payments we make to the colleges and universities to operate their official bookstores (management service agreement costs), including rent expense, have generally increased as a percentage of sales as a result of increased competition for renewals and new store contracts.
Prior to the recent restructuring of our digital operation, selling and administrative expenses have generally increased primarily as a result of our investments in Yuzu ® , our eTextbook platform. Additionally, selling and administrative expenses have increased due to infrastructure costs to support growth and costs associated with being an independent publicly-traded company. In an effort to reduce and manage digital expenditures, while at the same time maintaining high quality digital products, we restructured our digital operations in Fiscal 2016. We are closing our Yuzu ® offices and eliminating staffing in California and Washington. The total cost of severance, retention, and other restructuring costs (i.e. facility exit costs) related to our Yuzu ® operations will be approximately $11 million. We incurred approximately $8.8 million of restructuring costs in Fiscal 2016 and expect the restructuring to be completed in the first quarter of Fiscal 2017.
Additionally, we have effectively outsourced the Yuzu ® eTexbook reading platform and have acquired LoudCloud Systems, Inc., a sophisticated digital platform and analytics provider. With the implementation of these initiatives, we expect to operate with a lower digital cost structure in fiscal 2017, as compared to our historical Yuzu ® digital spend in previous years.

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Seasonality
Our business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April.
Segment
We have determined that we operate within a single reportable segment. We identified our single operating segment based on the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance.
Corporate History
On September 30, 2009, Barnes & Noble acquired Barnes & Noble College Booksellers, LLC from Leonard and Louise Riggio. From that date until October 4, 2012, Barnes & Noble College Booksellers, LLC was wholly owned by Barnes & Noble Booksellers, Inc., a wholly owned subsidiary of Barnes & Noble. We were initially incorporated under the name NOOK Media Inc. in July 2012 to hold Barnes & Noble’s college and digital businesses. On October 4, 2012, Microsoft Corporation (“Microsoft”) acquired a 17.6% non-controlling preferred membership interest in our subsidiary NOOK Media LLC (“NOOK Media”), and through us, Barnes & Noble maintained an 82.4% controlling interest of the college and digital businesses.
On January 22, 2013, Pearson Education, Inc. (“Pearson”) acquired a 5% non-controlling preferred membership interest in NOOK Media, received warrants to purchase an additional preferred membership interest in NOOK Media and entered into a commercial agreement with NOOK Media relating to the college business.
On December 4, 2014, we re-acquired Microsoft’s interest in NOOK Media in exchange for cash and common stock of Barnes & Noble. On December 22, 2014, we also re-acquired Pearson’s interest in NOOK Media and related warrants previously issued to Pearson in exchange for cash and common stock of Barnes & Noble. As a result of these transactions, Barnes & Noble owned 100% of our Company prior to the Spin-Off.
In February 2015, we changed our name from NOOK Media Inc. to Barnes & Noble Education, Inc. and NOOK Media’s name to B&N Education, LLC.
On May 1, 2015, we distributed to Barnes & Noble all of the membership interests in NOOK Digital LLC (formerly known as barnesandnoble.com llc), which owns the NOOK digital business and which will continue to be owned by Barnes & Noble. At such time, we ceased to own any interest in the NOOK digital business.
On February 26, 2015, Barnes & Noble announced plans to Spin-Off its 100% equity interest in our Company. At the time of the Spin-Off on August 2, 2015, Barnes & Noble distributed all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis (the “Distribution”). Following the Spin-Off, Barnes & Noble does not own any equity interest in us. On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. For details related to the Distribution of our Common Stock, see Item 8. Financial Statements and Supplementary Data - Note 6. Equity and Earnings Per Share .
In connection with the separation from Barnes & Noble, we entered into several agreements that govern the relationship between the parties after the separation and allocate between the parties various assets, liabilities, rights and obligations following the separation and also describe Barnes & Noble’s future commitments to provide us with certain transition services following the Spin-Off. For information on our on-going agreements with Barnes & Noble, Inc. see Item 8. Financial Statements and Supplementary Data - Note 10. Barnes & Noble, Inc. Transactions .
EMPLOYEES
As of April 30, 2016 , we had approximately 5,500 full time and regularly scheduled part-time employees. In addition, we typically hire approximately 13,000 or more additional temporary employees during peak periods. Our employees are not represented by unions, with the exception of 28 employees. We believe that our relationship with our employees is good.

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EXECUTIVE OFFICERS
The following sets forth information regarding our executive officers, including their positions (ages as of June 25, 2016):
Name
 
Age
 
Position
Michael P. Huseby
 
61
 
Executive Chairman
Max J. Roberts
 
63
 
Chief Executive Officer
Patrick Maloney
 
60
 
Executive Vice President and Chief Operating Officer
Executive Vice President and President, Barnes & Noble College
William Maloney
 
67
 
Executive Vice President
Barry Brover
 
55
 
Chief Financial Officer
Kanuj Malhotra
 
49
 
Chief Strategy and Development Officer and Chief Operating Officer, Digital Education
Suzanne E. Andrews
 
56
 
Vice President, General Counsel, and Corporate Secretary
Jay Chakrapani
 
45
 
Vice President, Chief Digital Officer
Stephen Culver
 
51
 
Vice President, Chief Information Officer
Thomas D. Donohue
 
46
 
Vice President, Treasurer and Investor Relations
Joel Friedman
 
65
 
Vice President, Chief Merchandising Officer
JoAnn Magill
 
62
 
Vice President, Chief Human Resources Officer
Lisa Malat
 
56
 
Vice President, Operations and Chief Marketing Officer
Seema C. Paul
 
52
 
Vice President, Chief Accounting Officer
Barnes & Noble Education, Inc. (the “Company”) became an independent publicly-traded company effective August 2, 2015 in connection with its spin-off from Barnes & Noble, Inc. Barnes & Noble College, is a subsidiary of the Company through which the college bookstore business is operated.
Michael P. Huseby , age 61, serves as our Executive Chairman, elected in August 2015, and a director, elected in July 2013. He has served as the Chief Executive Officer and a member of the board of directors of Barnes & Noble, Inc. from January 2014 until the Spin-Off. Previously, Mr. Huseby was appointed Chief Executive Officer of NOOK Media LLC and President of Barnes & Noble, Inc. in July 2013, and Chief Financial Officer of Barnes & Noble, Inc. in March 2012. From 2004 to 2011, Mr. Huseby served as Executive Vice President and Chief Financial Officer of Cablevision Systems Corporation, a leading telecommunications and media company. He served on the Cablevision Systems Corporation Board in 2000 and 2001. Prior to joining Cablevision, Mr. Huseby served as Executive Vice President and Chief Financial Officer of Charter Communications, Inc., then the fourth largest cable operator in the United States. Mr. Huseby served on the Board of Directors of Charter Communications from May 2013 to May 2016. From 1999 to 2002, Mr. Huseby served as Executive Vice President, Finance and Administration, of AT&T Broadband, a provider of cable television services. In addition, Mr. Huseby spent over 20 years at Arthur Andersen, LLP and Andersen Worldwide, S.C., where he held the position of Global Equity Partner.
Max J. Roberts, age 63, serves as our Chief Executive Officer. Mr. Roberts joined our company in 1996 as President, and has served as Chief Executive Officer, of Barnes & Noble College since August of 2013. Prior to joining Barnes & Noble College in 1996, Mr. Roberts held senior executive positions at Petrie Retail, R.H. Macy & Company and May Department Stores. Mr. Roberts started his professional career at the global public accounting firm of Touche Ross & Company (currently Deloitte).
Patrick Maloney , age 60, serves as our Executive Vice President and Chief Operating Officer. Mr. Maloney is also President of Barnes & Noble College. In this role, he oversees operations at all bookstores nationwide, including bookstore e-commerce, store design and construction, internal operations, learning and development, and book and general merchandising departments. Mr. Maloney began his career at Barnes & Noble in 1974 as a student and assistant manager at SUNY Stony Brook University.
William Maloney , age 67, serves as our Executive Vice President. Mr. Maloney has served as Executive Vice President of Barnes & Noble College since 2002. In this role, he oversees campus relations activities, builds partnerships and handles strategic planning and corporate marketing activities. Mr. Maloney began his career at Barnes & Noble in 1971 as a Regional Manager and Operations Director.
Barry Brover , age 55, serves as our Chief Financial Officer. In this role, he oversees all financial functions including treasury, investor relations, risk management, accounting, financial reporting, inventory control, accounts payable, internal audit, tax, financial planning and analysis. Mr. Brover has served as Chief Financial Officer of Barnes & Noble College since 2006. Mr. Brover joined Barnes & Noble College in 1986 and has held various executive positions with increasing responsibility. Prior to joining Barnes & Noble College, Mr. Brover started his career at KPMG where he earned his CPA.

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Kanuj Malhotra, age 49, serves as our Chief Strategy and Development Officer and Chief Operating Officer, Digital Education. Mr. Malhotra was appointed Chief Financial Officer of NOOK Media LLC in July 2013. He joined Barnes & Noble as Vice President of Corporate Development in May 2012. Prior to joining the Company, Mr. Malhotra was Vice President and Finance Head for Kaplan Test Prep, a division of The Washington Post Company, from 2011 to 2012. At Kaplan, he led a business transformation from physical test centers to a digital online learning platform. From 2008 to 2010, Mr. Malhotra was Chief Financial Officer of Sloane Square Partners LLC. Between 2005 and 2007, he was the Chief Financial Officer for the International Division of the Cendant Marketing Group and Affinion International, which was divested by Cendant Corporation to Apollo Management. Mr. Malhotra began his career in Mergers and Acquisitions at Lehman Brothers.
Suzanne E. Andrews , age 56, joined the Company in September 2015 as Vice President, General Counsel, and Corporate Secretary. She is responsible for all legal matters for Barnes & Noble Education, and its subsidiaries, including management of outside counsel. She provides guidance to the Company and its Board of Directors on all corporate governance and Securities and Exchange Commission matters, including public disclosures, mergers and acquisitions, compliance, intellectual property, vendor management, e-commerce, litigation, and employment. Prior to joining Barnes & Noble Education, Ms. Andrews served as General Counsel to Investors Bank from 2013 to 2015, and General Counsel to Healthcare Finance Group from 2004 to 2013. Ms. Andrews has also held positions with several law firms in New York.
Jay Chakrapani , age 45, joined the Company in August 2015 as our Chief Digital Officer. In this role he leads the product planning and development for the digital business and is responsible for development of digital content offerings and operations. Prior to joining the Company, Mr. Chakrapani served as President of CK-12 Foundation, a digital learning company, from February 2013 to January 2015 and prior to that he was with McGraw-Hill Higher Education-Digital from 2007 to 2013.
Stephen Culver , age 51, serves as our Vice President, Chief Information Officer and is responsible for overseeing the Company’s Information Technology operations and strategic development. Prior to joining Barnes & Noble College in 2005, Mr. Culver held leadership positions in both the private and public sectors. He owned and presided over an Information Technology consulting company, which specialized in the retail and wholesale industries. As CIO of Giorgio Armani Corporation, he led the Information Technology operations during the development and expansion of their North American operations.
Thomas D. Donohue , age 46, serves as our Vice President, Investor Relations and Treasurer. Mr. Donohue served as Treasurer of Barnes & Noble, Inc. since June 2012. In that role, he was responsible for the leadership and direction of all treasury activities including corporate finance, capital structure, cash management, financial risk management, international finance, debt management and relationships with financial institutions. Prior to joining Barnes & Noble Inc., he worked at The Interpublic Group of Companies for 12 years, a global provider of advertising and marketing services, where he served as Vice President, Assistant Treasurer, International from May 2004 to May 2012.
Joel Friedman , age 65, serves as our Vice President, Chief Merchandising Officer. In his time at Barnes & Noble College, Mr. Friedman has managed the non-book sales, developed store concepts and directed the planning, design and interior build outs of the Company’s many store renovations and new store projects. He joined Barnes & Noble College in 1998 after a 20 year career in department store merchandising of menswear apparel in Boston with Federated based Filene’s and Jordan Marsh, a five year term in product development and sourcing of menswear and children’s apparel with Fredrick Atkins and a one year term with Capital Mercury, a wholesale importer, running their product development and design department.
JoAnn Magill, age 62, serves as our Vice President, Chief Human Resources Officer. In her time at Barnes & Noble College, Ms. Magill has been responsible for the development, implementation, and coordination of policies, practices and programs to include employee relations, recruitment, benefits, payroll and compensation for the bookstores and home office. She joined the company in 2003 after a five year career as the Vice President of Human Resources for the AT&T Broadband Media Services Team. Prior to that she had an extensive 25 year career with Pathmark Supermarkets, where she held a variety of field and corporate leadership roles.
Lisa Malat , age 56, serves as our Vice President, Operations and Chief Consumer Marketing Officer. Ms. Malat provides strategic direction and executive oversight to Barnes & Noble College’s campus stores in the areas of consumer and corporate marketing, learning and development and in-store and e-commerce strategy and operational efficiencies. Prior to joining Barnes & Noble College in 1996, Ms. Malat held several senior level management positions at Macy’s, including roles in store operations, process re-engineering, distribution, customer service, and learning and development.
Seema C. Paul , age 52, joined the Company in July 2015 as our Vice President, Chief Accounting Officer. In this role she manages the external reporting and technical accounting functions of the Company. Prior to joining the Company, Ms. Paul held positions of increasing responsibility at Covanta Holding Corporation, including Corporate Controller from July 2014 to July 2015, Senior Director-External Reporting & Technical Accounting from June 2013 to July 2014, Director-External Reporting from January 2011 to May 2013 and Manager-External Reporting from August 2005 to December 2010. Ms. Paul is a Certified Public Accountant and has held various senior financial roles with several large companies, including Net2Phone, Sybase, Inc. and Liberty Mutual Insurance Company.

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Item 1A. RISK FACTORS
The risks and uncertainties described below are not the only ones faced by us. Additional risks and uncertainties not presently known or that are currently deemed immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows and the trading price of our Common Stock could be materially adversely affected.
Risks Relating to Our Business
We face significant competition in our business, and we expect such competition to increase.
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, eTextbooks, digital content and other merchandise directly to students; online resources, including open educational 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. We also have competition from other college bookstore operators and educational content providers, including Akademos, a virtual bookstore and marketplace for academic institutions; Amazon.com, an e-commerce operator and a provider of contract services to colleges and universities; BBA Solutions, a college textbook retailer; bn.com, the e-commerce platform of Barnes & Noble; Chegg.com, an online textbook rental company; CourseSmart, a digital course materials provider; eCampus, an online provider of course materials; Follett Corporation, a contract operator of campus bookstores; MBS Direct, an online bookstore provider; and Rafter, a course materials management solution for higher educational institutions. We also have competition from providers of eTextbooks, such as Apple iTunes, CourseSmart, Blackboard, Rafter and Google; and various private textbook rental websites. In addition, Amazon, Akademos and Rafter have recently begun to develop relationships with colleges and universities to provide online bookstore solutions. Many students purchase from multiple textbook providers, are highly price sensitive and can easily shift spending from one provider or format to another. As a consequence, in addition to being competitive in the services we provide to our customers, our textbook business faces significant price competition. Some of our competitors have adopted, and may continue to adopt, aggressive pricing policies and devote substantial resources to marketing, website and systems development. In addition, a variety of business models are being pursued for the provision of print textbooks, some of which may be more profitable or successful than our business model.
We may not be able to enter into new contracts and contracts for existing or additional college and university affiliated bookstores may not be profitable.
An important part of our business strategy is to expand sales for our college bookstore operations by being awarded additional contracts to manage bookstores for colleges and universities. Our ability to obtain those additional contracts is subject to a number of factors that we are not able to control. In addition, the anticipated strategic benefits of new and additional college and university bookstores may not be realized at all or may not be realized within the time frames contemplated by management. In particular, contracts for additional managed stores may involve a number of special risks, including adverse short-term effects on operating results, diversion of management’s attention and other resources, standardization of accounting systems, dependence on retaining, hiring and training key personnel, unanticipated problems or legal liabilities, and actions of our competitors and customers. Because certain terms of any contract are generally fixed for the initial term of the contract and involve judgments and estimates that may not be accurate, including for reasons outside of our control, we have contracts that are not profitable and may have such contracts in the future. Even if we have the right to terminate a contract, we may be reluctant to do so even when a contract is unprofitable due to, among other factors, the potential effect on our reputation.
We may not be able to successfully retain or renew our managed bookstore contracts on profitable terms.
We face significant competition in retaining existing store contracts and when renewing those contracts as they expire. Our contracts are typically for five years with renewal options, but can range from one to 15 years, and most contracts are cancelable by either party without penalty with 90 to 120 days' notice. We may not be successful in retaining our current contracts, renewing our current contracts or renewing our current contracts on terms that provide us the opportunity to improve or maintain the profitability of managing stores that are the subject matter of such contracts.
Our business is dependent on the overall economic environment, college enrollment and consumer spending patterns.
A deterioration of the current economic environment could have a material adverse effect on our financial condition and operating results, as well as our ability to fund our growth and strategic business initiatives. Our business is affected by funding levels at colleges and universities and by changes in enrollments at colleges and universities, changes in student enrollments and lower spending on textbooks and general merchandise. The growth of our business depends on our ability to attract new students and to increase the level of engagement by existing students. To the extent we are unable to attract new students or students spend less generally, our business could be adversely affected.

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We face the risk of disruption of supplier relationships and/or supply chain and/or inventory surplus.
The products that we sell originate from a wide variety of domestic and international vendors. During Fiscal 2016, our four largest suppliers accounted for approximately 46% of our merchandise purchased, with the largest supplier accounting for approximately 19% of our 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.
We do not have long-term arrangements with most of our suppliers to guarantee availability of merchandise, content or services, particular payment terms or the extension of credit limits. If our current suppliers were to stop selling merchandise, content or services to us on acceptable terms, including as a result of one or more supplier bankruptcies due to poor economic conditions, we may be unable to procure the same merchandise, content or services from other suppliers in a timely and efficient manner and on acceptable terms, or at all. In addition, our business is dependent on the continued supply of textbooks. The publishing industry generally has suffered recently due to, among other things, changing consumer preferences away from the print medium and the economic climate. A significant disruption in this industry generally or a significant unfavorable change in our relationships with key suppliers could adversely impact our business. In addition, any significant change in the terms that we have with our key suppliers including, payment terms, return policies, the discount or margin on products or changes to the distribution model of textbooks, could adversely affect our financial condition and liquidity. Furthermore, certain of our merchandise is sourced indirectly from outside the United States. Political or financial instability, merchandise quality issues, product safety concerns, trade restrictions, work stoppages, tariffs, foreign currency exchange rates, transportation capacity and costs, inflation, civil unrest, natural disasters, outbreaks of pandemics and other factors relating to foreign trade are beyond our control and could disrupt our supply of foreign-sourced merchandise.
In addition, we have significantly increased our textbook rental business, offering students a lower cost alternative to purchasing textbooks, which is also subject to certain inventory risks, such as textbooks not being resold or re-rented due to delayed returns or poor condition, or faculty members not continuing to adopt or use certain textbooks.
We are dependent upon access to the capital markets, bank credit facilities, and short-term vendor financing for liquidity needs.
We must have sufficient sources of liquidity to fund working capital requirements. We believe that the combination of cash-on-hand, cash flow received from operations, funds available under our revolving senior credit facility and short-term vendor financing will be sufficient to meet our normal working capital and debt service requirements for at least the next twelve months. If these sources of liquidity do not satisfy our requirements, we may need to seek additional financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, and the availability of credit. These factors could materially adversely affect our costs of borrowing, and our financial position and results of operations would be adversely impacted.
Our business relies on certain key personnel.
Management believes that our continued success will depend to a significant extent upon the efforts and abilities of certain of our key personnel. The loss of the services of any of these key personnel could have a material adverse effect on our business. We do not maintain “key man” life insurance on any of our officers or other employees.
Our business is seasonal.
Our business is seasonal, with sales generally highest in the second and third fiscal quarters, when college students generally purchase textbooks for the upcoming semesters, and lowest in the first and fourth fiscal quarters. Less than satisfactory net sales during our peak fiscal quarters could have a material adverse effect on our financial condition or operating results for the year, and our results of operations from those quarters may not be sufficient to cover any losses that may be incurred in the other fiscal quarters of the year.
Our results also depend on the successful implementation of our strategic initiatives. We may not be able to implement these strategies successfully, on a timely basis, or at all.
Our ability to grow depends upon a number of factors, including our ability to implement our strategic initiatives to retain and expand existing customer relationships, acquire new accounts, expand sales channels and marketing efforts, develop and market higher education digital products and adapt to changing industry trends. While we believe we have the capital resources, experience, management resources and internal systems to successfully operate our business, we may not be successful in implementing these strategies. Further, even if successfully implemented, our business strategy may not ultimately produce positive results.
Our strategy includes pursuing strategic acquisitions and partnerships and we may not be able to identify and successfully complete such transactions.
As part of our strategy, we have acquired, and, may in the future acquire, businesses or business operations, or enter into other business transactions, such as our recent acquisition of LoudCloud Systems, Inc. and strategic commercial agreement with Vital Source Technologies, Inc. We may not be able to identify suitable candidates for additional business combinations and strategic

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investments, obtain financing on acceptable terms for such transactions, obtain necessary regulatory approvals, if any, or otherwise consummate such transactions on acceptable terms, or at all. Any strategic acquisitions or investments that we are able to identify and complete may also involve a number of risks, including our inability to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees; the diversion of our management’s attention from our existing business to integrate operations and personnel; possible material adverse effects on our results of operations during the integration process; becoming subject to contingent or other liabilities, including liabilities arising from events or conduct predating the acquisition that were not known to us at the time of the acquisition; and our possible inability to achieve the intended objectives of the transaction, including the inability to achieve cost savings and synergies. Acquisitions may also have unanticipated tax, legal, regulatory and accounting ramifications, including recording goodwill and non-amortizable intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges and incurring amortization expenses related to certain intangible assets.
Our international expansion could result in additional risks.
Historically, our operations have been limited to the United States; however, we contract with service providers outside the United States and we recently have acquired operations in India (and we may continue to expand internationally). Such international expansion may result in additional risks that are not present domestically and which could adversely affect our business or our results of operations, including compliance with additional United States regulations and those of other nations applicable to international operations; cultural and language differences; currency fluctuations between the U.S. dollar and foreign currencies, which are harder to predict in the current adverse global economic climate; restrictions on the repatriation of earnings; potentially adverse tax consequences and limitations on our ability to utilize losses generated in our foreign operations; different regulatory requirements and other barriers to conducting business; and different or less stable political and economic environments. Further, conducting business abroad subjects us to increased regulatory compliance and oversight. For example, in connection with our international operations, we are subject to laws prohibiting certain payments to governmental officials, such as the Foreign Corrupt Practices Act. A failure to comply with applicable regulations could result in regulatory enforcement actions as well as substantial civil and criminal penalties assessed against us and our employees.
We face data security risks with respect to personal information.
Our business involves the receipt, storage, processing and transmission of personal information about customers and employees. We may share information about such persons with vendors and third parties that assist with certain aspects of our business. Also, in connection with our student financial aid platform and the processing of university debit cards, we secure and have access to certain student personal information that has been provided to us by the universities we serve. Our handling and use of personal information is regulated at the international, federal and state levels and by industry standards, such as the Payment Card Industry Data Security Standard. As an entity that provides services to institutions of higher education, we are contractually bound to handle certain personal information from student education records in accordance with the requirements of Family Educational Rights and Privacy Act (“FERPA”). Privacy and information security laws, regulations, and industry standards change from time to time, and compliance with them may result in cost increases due to necessary systems changes and the development of new processes and may be difficult to achieve. If we fail to comply with these laws, regulations and standards, we could be subjected to legal risk. In addition, even if we fully comply with all laws, regulations and standards, and even though we have taken significant steps to protect personal information, we could experience a data security breach, and our reputation could be damaged, possibly resulting in a material breach of contract with one or more of our clients, lost future sales or decreased usage of credit and debit card products. Further, in the event that we disclose student information in violation of FERPA, the U.S. Department of Education could require a client to suspend our access to their student information for at least five years. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent our security measures could misappropriate our or our users’ proprietary information and cause interruption in our operations. Any compromise of our data security could result in a violation of applicable privacy and other laws or standards, significant legal and financial exposure beyond the scope or limits of insurance coverage, increased operating costs associated with remediation, equipment acquisitions or disposal and added personnel, and a loss of confidence in our security measures, which could harm our business or affect investor confidence. Data security breaches may also result from non-technical means, for example, actions by an employee.
Our business could be impacted by changes in federal, state, local or international laws, rules or regulations.
We are subject to general business regulations and laws relating to all aspects of our business. These regulations and laws may cover taxation, privacy, data protection, our access to student financial aid, pricing and availability of educational materials, competition and/or antitrust, content, copyrights, distribution, college distribution, mobile communications, electronic contracts and other communications, consumer protection, the provision of online payment services, unencumbered Internet access to our services, the design and operation of websites, digital content (including governmental investigations and litigation relating to the agency pricing model for digital content distribution), the characteristics and quality of products and services and employee benefits

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(including the costs associated with complying with the Patient Protection and Affordable Care Act). Changes in federal, state, local or international laws, rules or regulations relating to these matters could increase our costs of doing business or otherwise impact our business.
Changes in tax laws and regulations might adversely impact our businesses or financial performance.
We collected sales tax on the majority of the products and services that we sold in our respective prior fiscal years that were subject to sales tax, and we generally have continued the same policies for sales tax within the current fiscal year. While management believes that the financial statements included elsewhere in this Form 10-K reflect management’s best current estimate of any potential additional sales tax liability based on current discussions with taxing authorities, we cannot assure you that the outcome of any discussions with any taxing authority will not result in the payment of sales taxes for prior periods or otherwise, or that the amount of any such payments will not be materially in excess of any liability currently recorded. In the future, our businesses may be subject to claims for not collecting sales tax on the products and services we currently sell for which sales tax is not collected. In addition, our provision for income taxes and our obligation to pay income tax is based on existing federal, state and local tax laws. Changes to these laws, in particular as they relate to depreciation, amortization and cost of goods sold, could have a significant impact on our income tax provision, our projected cash tax liability, or both.
Our expansion into new products, services and technologies subjects us to additional business, legal, financial and competitive risks.
We may require additional capital in the future to sustain or grow our business. Our gross profits and margins in our newer activities may be lower than in our traditional activities, and we may not be successful enough in these newer activities to recoup our investments in them. In addition, we may have limited or no experience in our newer products and services, and our customers may not adopt our new product or service offerings. Some of these offerings may present new and difficult technological challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues.
We may not be able to adequately protect our intellectual property rights or may be accused of infringing upon intellectual property rights of third parties.
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as important to our success, and we rely on trademark, copyright and patent law, domain name regulations, trade secret protection and confidentiality or license agreements to protect our proprietary rights, including our use of the Barnes & Noble trademark. Laws and regulations may not adequately protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or diminish the value of our trademarks and other proprietary or licensed rights.
We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.
Other parties also may claim that we infringe their proprietary rights. Because of the changes in Internet commerce and digital content businesses, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain components of our products and business methods may unknowingly infringe existing patents or intellectual property rights of others.
Our digital content offerings depend in part on effective digital rights management technology to control access to digital content. If the digital rights management technology that we use is compromised or otherwise malfunctions, we could be subject to claims, and content providers may be unwilling to include their content in our service.
We do not own the Barnes & Noble trademark and instead rely on a license of that trademark and certain other trademarks, which license imposes limits on what those trademarks can be used to do.
In connection with the Spin-Off, Barnes & Noble granted us an exclusive, perpetual, fully paid up, non-transferable and non-assignable license to use the trademarks “Barnes & Noble College,” “B&N College,” “Barnes & Noble Education” and “B&N Education” and the non-exclusive, perpetual, fully paid up, non-transferable and non-assignable license to use the marks “Barnes & Noble,” “B&N” and “BN,” solely in connection with the contract management of college and university bookstores and other bookstores associated with academic institutions and related websites, as well as education products and services (including digital education products and services) and related websites. These restrictions may materially limit our ability to use the licensed marks in the expansion of our operations in the future. In addition, we are reliant on Barnes & Noble to maintain the licensed trademarks.

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We rely on third-party digital content and applications, which may not be available to us on commercially reasonable terms or at all.
We contract with certain third-parties to offer their digital content. Our licensing arrangements with these third-parties do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some third-party content providers currently or in the future may offer competing products and services, and could take action to make it more difficult or impossible for us to license our content in the future. Other content owners, providers or distributors may seek to limit our access to, or increase the total cost of, such content. If we are unable to offer a wide variety of content at reasonable prices with acceptable usage rules, our business may be materially adversely affected.
Risks Relating to Our Recent Spin-Off from Barnes & Noble
We could have an indemnification obligation to Barnes & Noble if the Spin-Off were determined not to qualify for non-recognition treatment.
If, due to any of our covenants in the Tax Matters Agreement being breached, it were determined as a tax matter that the Spin-Off did not qualify for non-recognition of gain and loss, we could be required to indemnify Barnes & Noble for the resulting taxes and related expenses. In addition, Section 355(e) of the Internal Revenue Code of 1986, as amended (the “Code”), generally creates a presumption that the Spin-Off would be taxable to Barnes & Noble, but not to holders, if we or our stockholders were to engage in transactions that result in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Spin-Off, unless it were established that such transactions and the Spin-Off were not part of a plan or series of related transactions giving effect to such a change in ownership. If the Spin-Off were taxable to Barnes & Noble due to such 50% or greater change in the ownership of our stock, Barnes & Noble would have to recognize gain in an amount up to the fair market value of our stock held by it immediately before the Spin-Off, and we generally would be required to indemnify Barnes & Noble for the tax on such gain and related expenses. See “Certain Relationships and Related Party Transactions—Agreements with Barnes & Noble—Tax Matters Agreement” in our Prospectus dated July 15, 2015 and filed with SEC on that date for more information.
We have agreed to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating flexibility.
We have agreed in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355(e) of the Code. These covenants and indemnification obligations may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that might maximize the value of our business, and could discourage or delay a strategic transaction that our stockholders may consider favorable. See “Certain Relationships and Related Party Transactions—Agreements with Barnes & Noble—Tax Matters Agreement” in our Prospectus dated July 15, 2015 and filed with SEC on that date for more information.
We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.
We believe that, as an independent publicly-traded company, we will be able to, among other things, better focus our financial and operational resources on our specific business, implement and maintain a capital structure designed to meet our specific needs, design and implement corporate strategies and policies that are targeted to our business, more effectively respond to industry dynamics and create effective incentives for our management and employees that are more closely tied to our business performance. However, following our separation from Barnes & Noble, we may be more susceptible to market fluctuations and have less leverage with suppliers, and we may experience other adverse events. In addition, we may be unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all.
We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent publicly-traded company, and we may experience increased costs after the Spin-Off.
In the past, Barnes & Noble provided us with various corporate services. Following the Spin-Off, Barnes & Noble has no obligation to provide us with assistance other than the transition services described under “Certain Relationships and Related Party Transactions—Agreements with Barnes & Noble” in our Prospectus dated July 15, 2015 and filed with SEC on that date. These services do not include every service that we have received from Barnes & Noble in the past, and Barnes & Noble is only obligated to provide these services for limited periods from the date of the Spin-Off. Accordingly, we now provide internally or obtain from unaffiliated third parties, the services we previously received from Barnes & Noble prior to the Spin-Off. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from Barnes & Noble. We may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently or may incur additional costs. If we fail to obtain the services necessary to operate effectively or if we incur greater costs in obtaining these services, our business, financial condition and results of operations may be adversely affected.

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We have limited operating history as an independent publicly-traded company, and our historical financial information is not necessarily representative of the results we would have achieved as an independent publicly-traded company and may not be a reliable indicator of our future results.
We derived the historical financial information (prior to the Spin-Off) included in this Form 10-K from Barnes & Noble’s consolidated financial statements, and this information does not necessarily reflect the results of operations and financial position we would have achieved as an independent publicly-traded company during the periods presented (prior to the Spin-Off) or those that we will achieve in the future. This is primarily because of the following factors:
Prior to the Spin-Off, we operated as part of Barnes & Noble’s broader corporate organization, and Barnes & Noble performed various corporate functions for us. Our historical financial information reflects allocations of corporate expenses from Barnes & Noble for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent publicly-traded company.
We have entered into transactions with Barnes & Noble that did not exist prior to the Spin-Off and modified our existing agreements with Barnes & Noble, such as Barnes & Noble’s provision of transition services, which will cause us to incur new costs.
Our historical financial information does not reflect changes that we expect to experience in the future as a result of our separation from Barnes & Noble, including changes in our cost structure, personnel needs, tax structure, financing and business operations. As part of Barnes & Noble, we enjoyed certain benefits from Barnes & Noble’s operating diversity, size, purchasing power, borrowing leverage and available capital for investments, and we lost these benefits after the Spin-Off. As an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses or access capital markets on terms as favorable to us as those we obtained as part of Barnes & Noble prior to the Spin-Off.
Following the Spin-Off, we are now also responsible for the additional costs associated with being an independent publicly-traded company, including costs related to corporate governance, investor and public relations and public reporting. In addition, certain costs incurred by Barnes & Noble, including executive oversight, accounting, treasury, tax, legal, human resources, procurement, information technology and other shared services, had historically been allocated to us by Barnes & Noble; but these allocations may not reflect the future level of these costs to us as we provide these services ourselves. Therefore, our historical financial statements (prior to the Spin-Off) may not be indicative of our future performance as an independent publicly-traded company. We cannot assure you that our operating results will continue at a similar level when we are an independent publicly-traded company. For additional information about our past financial performance and the basis of presentation of our financial statements, see Part II - Item 8. Financial Statements and Supplementary Data and Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K.
We may not be able to access the credit and capital markets at the times and in the amounts needed on acceptable terms.
From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Although we believe our current sources of capital will permit us to finance our operations for the foreseeable future on acceptable terms and conditions, we have not previously accessed the capital markets as an independent public company, and our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including our financial performance, our credit ratings or absence thereof, the liquidity of the overall capital markets and the state of the economy. We cannot assure you that we will have access to the capital markets at the times and in the amounts needed or on terms acceptable to us.
We may have been able to receive better terms from unaffiliated third parties than the terms we received in our agreements with Barnes & Noble.
We entered into agreements with Barnes & Noble related to our separation from Barnes & Noble, including the Separation Agreement, Transition Services Agreement, Tax Matters Agreement, the Trademark License Agreement and Employee Matters Agreement, while we were still part of Barnes & Noble. Accordingly, these agreements may not reflect terms that would have resulted from arms-length negotiations between unaffiliated parties. The terms of the agreements relate to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations between Barnes & Noble and us. We may have received better terms from third parties than we received from Barnes & Noble because third parties would have competed with each other to win our business, but we are now bound by the terms of the agreements we entered into with Barnes & Noble. See “Certain Relationships and Related Party Transactions” in our Prospectus dated July 15, 2015 and filed with SEC on that date for more information.

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Risks Relating to our Common Stock and the Securities Market
Our stock price may fluctuate significantly.
We cannot predict the prices at which our Common Stock may trade. The market price of our Common Stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:  
actual or anticipated fluctuations in our operating results due to factors related to our businesses;
success or failure of our business strategies, including our digital education initiative;
our quarterly or annual earnings or those of other companies in our industries;
our ability to obtain financing as needed;
announcements by us or our competitors of significant acquisitions or dispositions;
changes in accounting standards, policies, guidance, interpretations or principles;
the failure of securities analysts to cover our Common Stock;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of other comparable companies;
investor perception of our Company and the college bookstore industry;
overall market fluctuations;
results from any material litigation or government investigation;
changes in laws and regulations (including tax laws and regulations) affecting our business;
changes in capital gains taxes and taxes on dividends affecting stockholders; and
general economic conditions and other external factors.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our Common Stock.
The concentration of our Common Stock ownership may limit our stockholders’ ability to influence corporate matters and may involve other risks.
A portion of our Common Stock is controlled by a few stockholders. This control may limit the ability of the Company’s other stockholders to influence corporate matters and, as a result, we may take actions with which our other stockholders do not agree.
We do not intend to pay any cash dividends in the foreseeable future and, therefore, any return on your investment in our Common Stock must come from increases in the fair market value and trading price of our Common Stock.
We do not intend to pay cash dividends on our Common Stock in the foreseeable future. We expect to retain future earnings, if any, for reinvestment in our business. Also, our credit agreements may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our Board and will be dependent upon our financial condition, results of operations, cash requirements, future prospects and any other factors our Board deems relevant. Therefore, any return on your investment in our Common Stock must come from increases in the fair market value and trading price of our Common Stock. For more information, see Part II - Item 5. Market for Registrants - Dividends .
Your percentage ownership in the Company may be diluted in the future.
Your percentage ownership in the Company may be diluted in the future because of equity awards that we expect to grant to our directors, officers and other employees. We have an incentive plan that provides for the grant of Common Stock-based equity awards to our directors, officers and other employees. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic investments that we may make in the future or as necessary to finance our ongoing operations.
Provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and of Delaware law may prevent or delay an acquisition of the Company, which could affect the trading price of our Common Stock.
Our Amended and Restated Certificate of Incorporation and our Amended and Restated By-laws contain provisions which, together with applicable Delaware law, may discourage, delay or prevent a merger or acquisition that our stockholders consider favorable, including provisions that:  
divide our Board into three staggered classes of directors that are each elected to three-year terms;
prohibit stockholder action by written consent;

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authorize the issuance of “blank check” preferred stock that could be issued by our Board to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive;
provide that special meetings of the stockholders may be called only by or at the direction of a majority of our Board or the chairman of our Board; and
require advance notice to be given by stockholders for any stockholder proposals or director nominations.
In addition, Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder”.
These provisions may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of the Company, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their Common Stock at a price above the prevailing market price. See “Description of Our Capital Stock—Certain Provisions of Delaware Law, Our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws” in our Prospectus dated July 15, 2015 and filed with SEC on that date for more information.
Our Amended and Restated By-laws designate courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our Amended and Restated By-laws provide that, subject to limited exceptions, the state and federal courts of the State of Delaware are the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (c) any action asserting a claim arising pursuant to any provision of the DGCL, our Amended and Restated Certificate of Incorporation or our Amended and Restated By-laws or (d) any other action asserting a claim that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice of and to have consented to these provisions. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.
Alternatively, if a court were to find this provision of our Amended and Restated By-laws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.
Item 1B. UNRESOLVED STAFF COMMENTS

None.
Item 2. PROPERTIES
Facilities
We lease approximately 81,000 square feet of space for our corporate headquarters in Basking Ridge, New Jersey, pursuant to a lease that expires in October 2023. We also lease approximately 12,000, 5,000 and 6,000 square feet of office space primarily for our digital operations in New York, New York, Dallas, Texas, and Mumbai, India pursuant to leases that expire in 2020, 2017 and 2017, respectively.
Our contracts with colleges and universities are typically five years with renewal options, but can range from one to 15 years, and are typically cancelable by either party without penalty with 90 to120 days' notice. The contracts for the 751 stores as of April 30, 2016 expire as follows:
Contract Terms to Expire During (12 months ending on or about April 30)
 
Number of Stores
2017
 
49
2018
 
42
2019
 
33
2020
 
76
2021
 
61
2022 and later
 
490


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Item 3. LEGAL PROCEEDINGS
We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, personal injuries and other matters. We record a liability when we believe that it is both probable that a loss has been incurred and the amount of loss can be reasonably estimated. Based on our current knowledge, we do not believe that there is a reasonable possibility that the final outcome of any pending or threatened legal proceedings to which we or any of our subsidiaries are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. As such, there can be no assurance that the final outcome of these matters will not materially and adversely affect our business, financial condition, results of operations or cash flows.
The litigation matter described below is the only material legal proceeding in which we are currently involved. Under the Separation Agreement, Barnes & Noble, Inc. is obligated to indemnify us against any expenses and liabilities incurred in connection with the matter; consequently, we do not expect an adverse outcome to this litigation to adversely impact our financial condition, results of operations or cash flows.
Adrea LLC v. Barnes & Noble, Inc., NOOK Digital, LLC (formerly barnesandnoble.com llc) and B&N Education, LLC (formerly Nook Media LLC):
On June 14, 2013, Adrea LLC (“Adrea”) filed a complaint against Barnes & Noble, Inc., NOOK Digital, LLC (formerly barnesandnoble.com llc) and B&N Education, LLC (formerly NOOK Media LLC) (collectively, “B&N”) in the United States District Court for the Southern District of New York alleging that various B&N NOOK products and related online services infringe U.S. Patent Nos. 7,298,851 (the “’851 patent”), 7,299,501 (the “’501 patent”) and 7,620,703 (the “’703 patent”). B&N filed its Answer on August 9, 2013, denying infringement and asserting several affirmative defenses. At the same time, B&N filed counterclaims seeking declaratory judgments of non-infringement and invalidity with respect to each of the patents-in-suit. Discovery was commenced and completed and summary judgment motions were filed. On July 1, 2014, the Court issued a decision granting partial summary judgment in B&N’s favor, and in particular granting B&N’s motion to dismiss one of Adrea’s infringement claims, and granting B&N’s motion to limit any damages award with respect to another of Adrea’s infringement claims. Beginning October 7, 2014, through and including October 22, 2014, the case was tried before a jury in the Southern District of New York. The jury returned its verdict on October 27, 2014. The jury found no infringement with respect to the ‘851 patent, and infringement with respect to the ‘501 patent and ‘703 patent. It awarded damages in the amount of $1.3 million. The jury further found no willful infringement with respect to any patent.
On July 24, 2015, the Court granted B&N’s post trial application to invalidate one of the two patents (the ‘501 patent) the jury found to have been infringed. The Court heard oral argument on September 28, 2015 on the post-trial motions on the jury’s infringement and validity determinations. On February 24, 2016, the Court issued a decision upholding the jury’s determination of infringement and validity with respect to the ‘703 patent and ordered a new trial on damages with respect to ‘703 patent since the original damages award was a total award for both the ‘501 patent and the ‘703 patent. The court commenced a trial on June 23, 2016 to determine the damage award related to the '703 patent. The trial continued the following day but was not completed. The trial will be continued sometime this summer; however, a date has not yet been determined.
Item 4. MINE SAFETY DISCLOSURES

Not applicable.


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Index to Form 10-K Index to FS

PART II
Item 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On February 26, 2015, Barnes & Noble, Inc. (“Barnes & Noble”) announced plans for the complete legal and structural separation of Barnes & Noble Education, Inc. (the “Company”, "us", "we") from Barnes & Noble (the “Spin-Off”). Under the Separation and Distribution Agreement between Barnes & Noble and the Company (the “Separation and Distribution Agreement”), Barnes & Noble planned to distribute all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis.
On July 14, 2015, Barnes & Noble approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of our common stock, par value $0.01 per share (“Common Stock”), to Barnes & Noble’s existing stockholders. The pro rata dividend was made on August 2, 2015 to the Barnes & Noble stockholders of record (as of July 27, 2015). Each Barnes & Noble stockholder of record received a distribution of 0.632 shares of our Common Stock for each share of Barnes & Noble common stock held on the record date. Following the Spin-Off, Barnes & Noble does not own any equity interest in us.
On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. Following the Spin-Off on August 2, 2015, our authorized capital stock consisted of  200,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. Our Common Stock began to trade on a “when-issued” basis on the New York Stock Exchange ("NYSE") under the symbol “BNED WI” beginning on July 23, 2015. On August 3, 2015, when-issued trading of our Common Stock ended, and our Common Stock began “regular-way” trading under the symbol “BNED.”
As of April 30, 2016, 46,755,561 shares of our Common Stock and 0 shares of our preferred stock were outstanding. During the second quarter, 2,409,345 shares of Common Stock were reserved for future grants, in accordance with the Barnes & Noble Education Inc. Equity Incentive Plan. See Item 8. Financial Statements and Supplementary Information - Note 13. Stock-Based Compensation .
The following table sets forth the high and low stock prices of our common stock for the quarterly periods indicated since August 3, 3015:
 
 
Fiscal 2016
 
 
High
 
Low
Second Quarter
 
$
15.34

 
$
11.75

Third Quarter
 
$
15.49

 
$
8.15

Fourth Quarter
 
$
11.93

 
$
8.71

On June 17, 2016 , there were approximately 845 holders of record of our common stock and the closing price of our common stock on the New York Stock Exchange was $9.72 per share.
Dividends
We have not, and we do not intend to pay cash dividends on our Common Stock in the foreseeable future. We expect to retain future earnings, if any, for reinvestment in our business. Any credit agreements which we may enter into, including the Credit Facility entered into on August 3, 2016, may restrict our ability to pay dividends. The payment of dividends in the future will be subject to the discretion of our Board of Directors and will depend, among other things, on our financial condition, results of operations, cash requirements, future prospects and any other factors our Board of Directors deems relevant.

Issuer Purchases of Equity Securities
On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $50 million, in the aggregate, of our outstanding Common Stock. The stock repurchase program is carried out at the direction of management (which includes a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. During Fiscal 2016 , we repurchased 1,715,269 shares for approximately $16.6 million at a weighted average cost per share of $9.95.
During the year ended April 30, 2016 , we also repurchased 174,511 shares of our Common Stock in connection with employee tax withholding obligations for vested stock awards.


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The following table provides information as of April 30, 2016 with respect to shares of common stock we purchased during the fourth quarter of fiscal 2016:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share (a)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
January 31, 2016 - February 27, 2016
 
177,620

 
$
10.34

 
177,620

 
$
40,068,343

February 28, 2016 - April 2, 2016
 
302,021

 
$
10.14

 
302,021

 
$
37,065,337

April 3, 2016 - April 30, 2016
 
385,786

 
$
9.54

 
385,786

 
$
33,387,825

 
 
865,427

 
$
10.01

 
865,427

 
 
(a)
This amount represents the weighted average price paid per common share. This price includes a per share commission paid for all repurchases.
Item 6. SELECTED FINANCIAL DATA
The selected financial information presented below should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data .
 
 
Fiscal Year (a)
(In thousands of dollars,
 except for share and per share amounts)
 
2016
 
2015
 
2014
 
2013
 
2012
STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
Product sales and other (b)
 
$
1,579,617

 
$
1,544,975

 
$
1,536,180

 
$
1,631,454

 
$
1,647,014

Rental income (c)
 
228,412

 
228,023

 
211,742

 
131,793

 
96,161

Total sales
 
1,808,029

 
1,772,998

 
1,747,922

 
1,763,247

 
1,743,175

Cost of sales:
 
 
 
 
 
 
 
 
 
 
Product and other cost of sales
 
1,224,955

 
1,198,300

 
1,180,727

 
1,270,381

 
1,284,691

Rental cost of sales
 
129,725

 
131,125

 
130,430

 
88,250

 
64,046

Total cost of sales
 
1,354,680

 
1,329,425

 
1,311,157

 
1,358,631

 
1,348,737

Gross profit
 
453,349

 
443,573

 
436,765

 
404,616

 
394,438

Selling and administrative expenses
 
375,219

 
359,504

 
330,426

 
302,902

 
283,215

Depreciation and amortization expense
 
52,690

 
50,509

 
48,014

 
46,849

 
45,343

Impairment loss (non-cash) (d)
 
11,987

 

 

 

 

Restructuring costs (d)
 
8,830

 

 

 

 

Operating income
 
4,623

 
33,560

 
58,325

 
54,865

 
65,880

Interest expense, net
 
1,872

 
210

 
385

 
4,871

 
5,684

Earnings before taxes
 
2,751

 
33,350

 
57,940

 
49,994

 
60,196

Income taxes
 
2,667

 
14,218

 
22,834

 
19,820

 
23,771

Net income
 
$
84

 
$
19,132

 
$
35,106

 
$
30,174

 
$
36,425

 
 
 
 
 
 
 
 
 
 
 
Earnings per common share (e) :
 
 
 
 
 
 
 
 
 
 
Basic
 
$

 
$
0.33

 
$
0.88

 
$
0.78

 
$
0.99

Diluted
 
$

 
$
0.33

 
$
0.88

 
$
0.78

 
$
0.99

Weighted average common shares (thousands) (e) :
 
 
 
 
 
 
 
 
 
 
Basic
 
46,238

 
38,452

 
37,270

 
36,812

 
36,237

Diluted
 
46,479

 
38,493

 
37,275

 
36,812

 
36,237



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Index to Form 10-K Index to FS

 
 
Fiscal Year  (a)
(In thousands of dollars,
 except for share and per share amounts)
 
2016
 
2015
 
2014
 
2013
 
2012
OTHER OPERATING DATA:
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (non-GAAP) (f)
 
$
80,528

 
$
84,069

 
$
106,339

 
$
101,714

 
$
111,223

Adjusted Earnings (non-GAAP) (f)
 
$
15,462

 
$
19,132

 
$
35,106

 
$
30,174

 
$
36,425

Capital expenditures
 
$
50,790

 
$
48,452

 
$
38,253

 
$
38,760

 
$
40,479

Comparable store sales (decrease) increase (g)
 
(1.9
)%
 
0.1
%
 
(2.7
)%
 
(1.2
)%
 
(0.3
)%
Number of stores at period end
 
751

 
724

 
700

 
686

 
647

BALANCE SHEET DATA
 (at period end):
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,071,683

 
$
1,090,668

 
$
1,109,919

 
$
1,006,237

 
$
954,067

Total liabilities
 
$
363,297

 
$
363,999

 
$
360,282

 
$
358,208

 
$
336,295

Long-term debt (h)
 
$

 
$

 
$

 
$

 
$

Preferred membership interests
 
$

 
$

 
$
383,397

 
$
381,627

 
$

Parent company equity
 
$

 
$
726,669

 
$
366,240

 
$
266,402

 
$
617,772

Total stockholders' equity
 
$
708,386

 
$

 
$

 
$

 
$

(a)
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. “Fiscal 2016” means the 52 weeks ended April 30, 2016, “Fiscal 2015” means the 52 weeks ended May 2, 2015, “Fiscal 2014” means the 53 weeks ended May 3, 2014, “Fiscal 2013” means the 52 weeks ended April 27, 2013, and “Fiscal 2012” means the 52 weeks ended April 28, 2012.
(b)
Product sales and other revenue include sales of new and used physical and digital textbooks, emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items, graduation products and other.
(c)
Rental income includes the rental of physical and digital textbooks.
(d)
In Fiscal 2016, we implemented a plan to restructure our digital operations. As a result of this restructuring, we recorded a non-cash impairment loss of $12.0 million related to all of the capitalized content costs for the Yuzu ® eTextbook platform ($9 million), and recorded a non-recurring other than temporary loss related to an investment held at cost ($3 million).  Additionally, we announced a reduction in staff and closure of the facilities in Mountain View, California, and Redmond, Washington that support the Yuzu ® eTextbook platform. The cost of severance, retention, and other restructuring costs (i.e. facility exit costs) of $8.8 million in fiscal 2016. We expect the restructuring to be completed in the first quarter of fiscal 2017.
(e)
For periods prior to the Spin-Off from Barnes & Noble, Inc. on August 2, 2015, basic earnings per share and weighted-average basic shares outstanding are based on the number of shares of Barnes & Noble, Inc. common stock outstanding as of the end of the period, adjusted for the distribution ratio of 0.632 shares of our Common Stock for every one share of Barnes & Noble, Inc. common stock held on the record date for the Spin-Off. Additionally, for period prior to the Spin-Off, diluted earnings per share and weighted-average diluted shares outstanding reflect potential common shares from Barnes & Noble, Inc. equity plans in which our employees participated. Certain of our employees held restricted stock units and stock options granted by Barnes & Noble, Inc. which were considered participating securities.
(f)
To supplement our results prepared in accordance with GAAP, we use the measure of Adjusted EBITDA and Adjusted Earnings, which are non-GAAP financial measures as defined by the Securities and Exchange Commission (the “SEC”). See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Adjusted EBITDA (non-GAAP) and - Adjusted Earnings (non-GAAP).
(g)
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 does not include sales from closed stores for all periods presented. In Fiscal 2012 through Fiscal 2014, as we developed our textbook rental business, comparable store sales reflected the retail selling price of a new or used textbook when rented, rather than solely the rental fees received, to provide a more representative comparable store sales figure. Beginning with the 26 weeks ended November 1, 2014, as a result of the significant expansion of the textbook rental business as compared to prior periods, our comparable store sales are determined based upon the actual revenue received from textbook rentals and are no longer adjusted to reflect the equivalent textbook retail selling price.
(h)
Prior to or at the time of the Spin-Off, we were party to an amended and restated credit facility with Barnes & Noble, Inc. All outstanding debt under this Credit Facility was recorded on Barnes & Noble, Inc.’s balance sheet. On August 3, 2015, we entered into a credit agreement under which the lenders committed to provide us with a five-year asset-backed revolving credit facility in an aggregate committed principal amount of $400 million. As of April 30, 2016, we had no borrowings outstanding under our Credit Facility.

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Item 7.
MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise indicates, references to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc., a Delaware corporation. References to “Barnes & Noble” refer to Barnes & Noble, Inc., a Delaware corporation, and its consolidated subsidiaries (other than Barnes & Noble Education, Inc. and its consolidated subsidiaries) unless the context otherwise requires. References to “Barnes & Noble College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC.
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. “Fiscal 2016” means the 52 weeks ended April 30, 2016, “Fiscal 2015” means the 52 weeks ended May 2, 2015, and “Fiscal 2014” means the 53 weeks ended May 3, 2014.
Overview
Description of business
Barnes & Noble Education, Inc., one of the largest contract operators of bookstores on college and university campuses across the United States and a leading provider of digital education services, enhances the academic and social purpose of educational institutions. As a strategic partner, we are committed to offering a complete support system and an unmatched retail and digital learning experience to foster student success in higher education. Through our wholly-owned subsidiary, Barnes & Noble College, we operate 751 campus bookstores and the school-branded e-commerce sites for each store, serving more than 5 million college students and their faculty nationwide. On August 2, 2015, we completed the legal separation from Barnes & Noble, Inc., at which time we began to operate as an independent publicly-traded company.
Overall educational spending in the United States continues to increase dramatically, and as tuition and other costs rise, colleges and universities face pressure to attract and retain students and provide them with innovative, affordable educational content and tools that support their educational development. While traditional print textbooks remain the first choice of students, demand for alternative forms of educational materials is growing.
We offer a comprehensive set of products and services to help students, faculty and administrators achieve their shared educational and social goals on college and university campuses across the United States. As one of the largest contract operators of bookstores and a provider of digital education services, we operate as a focal point for college life and learning, advancing the educational mission of our institution partners, enlivening campus culture and delivering an important revenue stream to our partner schools.
For over 5 million students and their faculty, our campus stores are a social and academic hub through which students can access affordable course materials and affinity products, including new and used print and digital textbooks, which are available for sale or rent; emblematic apparel and gifts; trade books; computer products; school and dorm supplies; café; convenience food and beverages; and graduation products. Through multi-year management service agreements with our schools, we typically have the exclusive right to operate the official school bookstore on college campuses. In turn, we pay the school a percentage of store sales and, in some cases, a minimum fixed guarantee. We create seamless retail experiences for our customers, both in our dynamic physical stores and on our official school-branded e-commerce sites for each school.
As of April 30, 2016 , we operated 751 stores nationwide, which reached 26% of the total number of students enrolled at colleges and universities in the United States. Our stores are operated under 472 contracts, some of which cover multiple store locations, and 165 of our college and university affiliated bookstores are co-branded with the Barnes & Noble name.
Fiscal 2016 was an excellent year for new store signings, and we have a strong pipeline of new business opportunities. During the 2016 fiscal year, we opened 39 stores with estimated first year annual sales of $64 million. In addition, as of June 17, 2016, we have signed additional contracts for 32 new stores with estimated first year annual sales of $109 million. We expect these new stores to open during our fiscal year 2017.
We are well positioned to benefit from the continuing trend towards outsourcing across the campus bookstore market given our brand, reputation with institutions, students and faculty for service and our full suite of products and services including: bookstore management, textbook rental and digital delivery.
For additional information related to our comprehensive learning solutions, customer and distribution network, and business conditions, see Part I - Item 1. Business .

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Growth Drivers
The primary factors that we expect will enable us to grow our business are as follows:
 
Increasing our Market Share with New Accounts .
Adapting our Merchandising Strategy and Product and Service Offerings.
Developing our Scalable and Leading Digital Product and Solution Set .
Expanding Strategic Opportunities through Acquisitions and Partnerships .
For additional information related to our Strategies, see Part I - Item 1. Business - Overview - Offering - Comprehensive Learning Solutions - Growth Drivers.
Segment
We have determined that we operate within a single reportable segment. We identified our single operating segment based on the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance.
Seasonality
Our business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters. We rent both physical and digital textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April.
Trends and Other Factors Affecting Our Business
Our business is dependent on the overall economic environment, college enrollment and consumer spending patterns. Our business is affected by funding levels at colleges and universities, by changes in enrollments at colleges and universities, and spending on textbooks and general merchandise. The growth of our business depends on our ability to attract new students and to increase the level of engagement by existing students.
For a discussion of our trends and other factors affecting our business, see Part I - Item 1. Business - Overview - Offering - Comprehensive Learning Solutions - Trends and Other Factors Affecting Our Business.
Results of Operations
Elements of Results of Operations
Our consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”).
Our sales are primarily derived from the sale of course materials (which include new and used textbooks and digital textbooks), emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. Our rental income is primarily derived from the rental of physical and digital textbooks.
Our cost of sales primarily includes costs such as merchandise costs, textbook rental amortization and management service agreement costs, including rent expense, related to our college and university contracts and by other facility related expenses.
Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include stock-based compensation and general office expenses, such as executive oversight, merchandising, field support, finance, human resources, benefits, training, legal, and information technology, as well as our investments in our digital platform.
Stand-alone financial statements (Prior to the Spin-Off)
The results of operations for the 13 weeks ended August 1, 2015, Fiscal 2015, Fiscal 2014 (periods presented prior to the Spin-Off), (collectively referred to as the "stand-alone periods") reflected in our consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc. Our consolidated financial statements were derived from the consolidated financial statements and accounting records of Barnes & Noble. Our consolidated financial statements include certain assets and liabilities that have historically been held at the Barnes & Noble corporate level but are specifically identifiable or otherwise attributable to us. For additional information, see Part II - Item 8. Financial Statements - Note 10. Barnes & Noble, Inc. Transactions .

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Consolidated financial statements (Subsequent to the Spin-Off)
The Spin-Off from Barnes & Noble, Inc. occurred on August 2, 2015 and therefore, the results of operations are presented on a consolidated basis for the 39 weeks ended April 30, 2016 (i.e. second, third and fourth quarter of fiscal 2016) which includes direct costs incurred with Barnes & Noble under various agreements. Certain corporate and shared service functions historically provided by Barnes & Noble (as described above) will continue to be provided by Barnes & Noble under the Transition Services Agreement. For additional information, see Part II - Item 8. Financial Statements - Note 10. Barnes & Noble, Inc. Transactions .
Results of Operations - Summary
 
 
Fiscal Year (a)
Dollars in thousands
 
2016
 
2015
 
2014
Sales:
 
 
 
 
 
 
Product sales and other
 
$
1,579,617

 
$
1,544,975

 
$
1,536,180

Rental income
 
228,412

 
228,023

 
211,742

Total sales
 
$
1,808,029

 
$
1,772,998

 
$
1,747,922

 
 
 
 
 
 
 
Net income
 
$
84

 
$
19,132

 
$
35,106

 
 
 
 
 
 
 
Adjusted EBITDA (non-GAAP) (b)
 
$
80,528

 
$
84,069

 
$
106,339

 
 
 
 
 
 
 
Adjusted Earnings (non-GAAP) (c)
 
$
15,462

 
$
19,132

 
$
35,106

 
 
 
 
 
 
 
Comparable store sales (decrease) increase (d)
 
(1.9
)%
 
0.1
%
 
(2.7
)%
Stores opened
 
39

 
48

 
30

Stores closed
 
12

 
24

 
16

Number of stores open at end of period
 
751

 
724

 
700

 
(a)
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. “Fiscal 2016” means the 52 weeks ended April 30, 2016, “Fiscal 2015” means the 52 weeks ended May 2, 2015 and “Fiscal 2014” means the 53 weeks ended May 3, 2014.
(b)
Adjusted EBITDA is a non-GAAP financial measure. See Adjusted EBITDA (non-GAAP) discussion below.
(c)
Adjusted Earnings is a non-GAAP financial measure. See Adjusted Earnings (non-GAAP) discussion below.
(d)
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 does not include sales from closed stores for all periods presented. In Fiscal 2012 through Fiscal 2014, as we developed our textbook rental business, comparable store sales reflected the retail selling price of a new or used textbook when rented, rather than solely the rental fees received, to provide a more representative comparable store sales figure. Beginning with the 26 weeks ended November 1, 2014, as a result of the significant expansion of the textbook rental business as compared to prior periods, our comparable store sales are determined based upon the actual revenue received from textbook rentals, and are no longer adjusted to reflect the equivalent textbook retail selling price.


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The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company: 
 
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Sales:
 
 
 
 
 
 
Product sales and other
 
87.4
%
 
87.1
%
 
87.9
%
Rental income
 
12.6

 
12.9
%
 
12.1

Total sales
 
100.0

 
100.0

 
100.0

Cost of sales:
 
 
 
 
 
 
Product and other cost of sales (a)
 
77.5

 
77.6

 
76.9

Rental cost of sales (a)
 
56.8

 
57.5

 
61.6

Total cost of sales
 
74.9

 
75.0

 
75.0

Gross margin
 
25.1

 
25.0

 
25.0

Selling and administrative expenses
 
20.8

 
20.3

 
18.9

Depreciation and amortization expense
 
2.9

 
2.8

 
2.7

Impairment loss
 
0.7

 

 

Restructuring costs
 
0.5

 

 

Operating income
 
0.2

 
1.9

 
3.3

Interest expense, net
 
0.1

 

 

Income before income taxes
 
0.1

 
1.9

 
3.3

Income tax expense
 
0.1

 
0.8

 
1.3

Net income
 
%
 
1.1
%
 
2.0
%
 
(a)
Represents the percentage these costs bear to the related sales, instead of total sales.
Results of Operations - 52 weeks ended April 30, 2016 compared with the 52 weeks ended May 2, 2015
Sales
The following table summarizes our sales for the 52 weeks ended April 30, 2016 and May 2, 2015 :
 
 
52 weeks ended
Dollars in thousands
 
April 30,
 2016
 
May 2,
 2015
Product sales and other
 
$
1,579,617

 
$
1,544,975

Rental income
 
228,412

 
228,023

Total Sales
 
$
1,808,029

 
$
1,772,998

Our sales increased $35.0 million, or 2.0%, to $1,808.0 million during the 52 weeks ended April 30, 2016 from $1,773.0 million during the 52 weeks ended May 2, 2015 . New store openings over the past year increased sales by $77.2 million, partially offset by closed stores, which decreased sales by $9.4 million.
Comparable store sales decreased 1.9%, or $31.7 million, for the comparable 52 week sales period. Comparable store sales were negatively impacted by student enrollment, specifically in two-year community colleges. Textbook revenue decreased $43.9 million, primarily due to lower new and used textbook sales. This decrease was partially offset by a $13.3 million, or 2.6%, increase in general merchandise sales, primarily due to higher emblematic apparel, gift and graduation product sales, which were partially offset by lower technology product sales.
We added 39 new stores and closed 12 stores during the 52 weeks ended April 30, 2016 , ending the period with a total of 751 stores.

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Cost of Sales and Gross Margin
The following table summarizes our cost of sales for the 52 weeks ended April 30, 2016 and May 2, 2015
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 30,
 2016
 
% of
Related Sales
 
May 2,
 2015
 
% of
Related Sales
Product and other cost of sales
 
$
1,224,955

 
77.5%
 
$
1,198,300

 
77.6%
Rental cost of sales
 
129,725

 
56.8%
 
131,125

 
57.5%
Total Cost of Sales
 
$
1,354,680

 
74.9%
 
$
1,329,425

 
75.0%
The following table summarizes our gross margin for the 52 weeks ended April 30, 2016 and May 2, 2015 :
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 30,
 2016
 
% of
Related Sales
 
May 2,
 2015
 
% of
Related Sales
Product and other gross margin
 
$
354,662

 
22.5%
 
$
346,675

 
22.4%
Rental gross margin
 
98,687

 
43.2%
 
96,898

 
42.5%
Gross Margin
 
$
453,349

 
25.1%
 
$
443,573

 
25.0%
Our cost of sales decreased as a percentage of sales to 74.9% during the 52 weeks ended April 30, 2016 compared to 75.0% during the 52 weeks ended May 2, 2015 . The decrease was due to the matters discussed below.
Our gross margin increased $9.8 million, or 2.2%, to $453.3 million, or 25.1% of sales, during the 52 weeks ended April 30, 2016 from $443.6 million, or 25.0% of sales, during the 52 weeks ended May 2, 2015 . Gross margin as a percentage of sales increased due to margin improvements and a favorable sales mix, partially offset by higher costs related to our college and university contracts resulting from contract renewals and new store contracts as discussed below:
Product and other gross margin increased (10 basis points), driven primarily by margin improvements (20 basis points), predominately as a result of improved inventory management strategies for textbooks, and a favorable sales mix (20 basis points) resulting from an increase in higher margin general merchandise as a percentage of sales, partially offset by increased costs related to our college and university contracts (30 basis points) resulting from contract renewals and new store contracts.
Rental gross margin increased (70 basis points), driven primarily by margin improvements (150 basis points) and a favorable rental mix (10 basis points), partially offset by increased costs related to our college and university contracts (90 basis points) resulting from contract renewals and new store contracts.
Selling and Administrative Expenses
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 30,
 2016
 
% of
Sales
 
May 2,
 2015
 
% of
Sales
Total Selling and Administrative Expenses
 
$
375,219

 
20.8%
 
$
359,504

 
20.3%
During the 52 weeks ended April 30, 2016 , selling and administrative expenses increased $15.7 million, or 4.4%, to $375.2 million from $359.5 million during the 52 weeks ended May 2, 2015 . The increase was due primarily to an $8.8 million increase in new store payroll and operating expenses (net of closed stores) as a result of a $67.8 million increase in new store sales (net of closed stores). Also contributing to the increase was a $5.0 million increase in corporate payroll and infrastructure costs to support business growth including incremental costs associated with our separation from Barnes & Noble, Inc., a $2.1 million increase in comparable store payroll and operating expenses (including a $1.9 million increase in employee benefit costs primarily due to higher medical claims costs), and $2.4 million of transaction costs incurred for business development and acquisitions. These increases were partially offset by a $2.4 million decrease in digital expenses related to Yuzu ® and LoudCloud. See Impairment Loss (Non-cash) and Restructuring Costs discussion below.
Depreciation and Amortization Expense
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 30,
 2016
 
% of
Sales
 
May 2,
 2015
 
% of
Sales
Total Depreciation and Amortization Expense
 
$
52,690

 
2.9%
 
$
50,509

 
2.8%

33

Index to Form 10-K Index to FS

Depreciation and amortization expense increased $2.2 million, or 4.3%, to $52.7 million during the 52 weeks ended April 30, 2016 from $50.5 million during the 52 weeks ended May 2, 2015 . This increase was primarily attributable to additional capital expenditures.
Impairment Loss (non-cash) and Restructuring Costs
In Fiscal 2016, we implemented a plan to restructure our digital operations. As a result of this restructuring, we recorded a non-cash impairment loss of $12.0 million related to all of the capitalized content costs for the Yuzu ® eTextbook platform ($9 million), and recorded a non-recurring other than temporary loss related to an investment held at cost ($3 million). 
Additionally, we announced a reduction in staff and closure of the facilities in Mountain View, California, and Redmond, Washington that support the Yuzu ® eTextbook platform. The cost of severance, retention, and other restructuring costs (i.e. facility exit costs) is $8.8 million in fiscal 2016. We expect the restructuring to be completed in the first quarter of fiscal 2017.
Operating Income
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 30,
 2016
 
% of
Sales
 
May 2,
 2015
 
% of
Sales
Total Operating Income
 
$
4,623

 
0.2%
 
$
33,560

 
1.9%
Our operating income was $4.6 million during the 52 weeks ended April 30, 2016 compared to $33.6 million during the 52 weeks ended May 2, 2015 . This decrease was due to the matters discussed above. Excluding the impairment loss of $12.0 million, restructuring costs of $8.8 million, and transaction costs (included in selling and administrative expenses) of $2.4 million, we reported operating income of $27.8 million (or 1.5% of sales) during the 52 weeks ended April 30, 2016 , compared with operating income of $33.6 million (1.9% of sales) during the 52 weeks ended May 2, 2015 .
Interest Expense, Net
 
 
52 weeks ended
Dollars in thousands
 
April 30, 2016
 
May 2, 2015
Interest Expense, Net
 
$
1,872

 
$
210

Net interest expense increased $1.7 million to $1.9 million during the 52 weeks ended April 30, 2016 from $0.2 million during the 52 weeks ended May 2, 2015 primarily due to increased borrowings under the Credit Facility entered into during fiscal 2016.
Income Tax Expense
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 30,
 2016
 
Effective Rate
 
May 2,
 2015
 
Effective Rate
Income Tax Expense
 
$
2,667

 
96.9%
 
$
14,218

 
42.6%
We recorded an income tax expense of $2.7 million on pre-tax income of $2.8 million during the 52 weeks ended April 30, 2016 , which represented an effective income tax rate of 96.9% and an income tax expense of $14.2 million on pre-tax income of $33.4 million during the 52 weeks ended May 2, 2015 , which represented an effective income tax rate of 42.6%.
The income tax provision for the 52 weeks ended April 30, 2016 reflects the impact of nondeductible expenses, including certain restructuring costs, partially offset by beneficial rate changes and income tax credits.
Net Income  
 
 
52 weeks ended
Dollars in thousands
 
April 30, 2016
 
May 2, 2015
Net Income
 
$
84

 
$
19,132

As a result of the factors discussed above, we reported net income of $0.1 million during the 52 weeks ended April 30, 2016 , compared with net income of $19.1 million during the 52 weeks ended May 2, 2015 . Adjusted Earnings (non-GAAP) is $15.5 million during the 52 weeks ended April 30, 2016 , compared with $19.1 million during the 52 weeks ended May 2, 2015 . See Adjusted Earnings (non-GAAP) discussion below.

34

Index to Form 10-K Index to FS

Results of Operations - 52 weeks ended May 2, 2015 compared with the 53 weeks ended May 3, 2014
Sales
The following table summarizes our sales for the 52 weeks ended May 2, 2015 and the 53 weeks ended May 3, 2014:
 
 
52 weeks ended
 
53 weeks ended
Dollars in thousands
 
May 2,
2015
 
May 3,
2014
Product sales and other
 
$
1,544,975

 
$
1,536,180

Rental income
 
228,023

 
211,742

Total Sales
 
$
1,772,998

 
$
1,747,922

Our sales increased $25.1 million, or 1.4%, to $1,773.0 million during the 52 weeks ended May 2, 2015 from $1,748.0 million during the 53 weeks ended May 3, 2014. The inclusion of the 53 rd week in the prior year contributed $14.6 million of additional sales in Fiscal 2014. Excluding the 53 rd week, sales increased $39.7 million, or 2.3%, for the year. New store openings over the past year increased sales by $71.0 million, partially offset by closed stores, which decreased sales by $22.9 million.
Comparable store sales increased 0.1% for the comparable sales period with a decrease in comparable store sales dollars by $13.9 million, impacted by the 53 rd week. General merchandise sales increased $22.2 million, or 4.7%, primarily due to strong emblematic apparel sales, partially offset by $17.9 million in decreased textbook sales as students continued to shift to lower priced rentals. General merchandise sales have continued to increase as our product assortments continue to emphasize and reflect the changing consumer trends and we evolve our presentation concepts and merchandising of product in stores and online.
We added 48 new stores and closed 24 stores during the 52 weeks ended May 2, 2015, ending the period with a total of 724 stores.
Cost of Sales and Gross Margin
The following table summarizes our cost of sales for the 52 weeks ended May 2, 2015 and 53 weeks ended May 3, 2014:
 
 
52 weeks ended
 
53 weeks ended
Dollars in thousands
 
May 2,
2015
 
% of
Related Sales
 
May 3,
2014
 
% of
Related Sales
Product and other cost of sales
 
$
1,198,300

 
77.6%
 
$
1,180,727

 
76.9%
Rental cost of sales
 
131,125

 
57.5%
 
130,430

 
61.6%
Total Cost of Sales
 
$
1,329,425

 
75.0%
 
$
1,311,157

 
75.0%
The following table summarizes our gross margin for the 52 weeks ended May 2, 2015 and 53 weeks ended May 3, 2014:
 
 
52 weeks ended
 
53 weeks ended
Dollars in thousands
 
May 2,
2015
 
% of
Sales
 
May 3,
2014
 
% of
Sales
Product and other gross margin
 
$
346,675

 
22.4%
 
$
355,453

 
23.1%
Rental gross margin
 
96,898

 
42.5%
 
81,312

 
38.4%
Gross Margin
 
$
443,573

 
25.0%
 
$
436,765

 
25.0%
Our cost of sales as a percentage of sales remained flat at 75.0% during the 52 weeks ended May 2, 2015 compared to the 53 weeks ended May 3, 2014. This was due to the matters discussed below.
Our gross margin increased $6.8 million, or 1.6%, to $443.6 million, or 25.0% of sales, during the 52 weeks ended May 2, 2015 from $436.8 million, or 25.0% of sales, during the 53 weeks ended May 3, 2014. Gross margin as a percentage of sales was unchanged as higher costs related to our college and university contracts resulting from contract renewals and new store contracts and comparison to prior year’s favorable LIFO adjustment of $7.7 million were offset by a favorable sales mix and margin improvements as discussed below:
Product and other gross margin decreased (70 basis points), primarily driven by comparison to prior year’s favorable LIFO adjustment (50 basis points) and increased costs related to our college and university contracts (15 basis points) resulting from contract renewals and new store contracts.
Rental gross margin increased (410 basis points), primarily driven by margin improvements (660 basis points) and a favorable rental mix (80 basis points), partially offset by increased costs related to our college and university contracts (330 basis points) resulting from contract renewals and new store contracts.

35


Selling and Administrative Expenses
 
 
52 weeks ended
 
53 weeks ended
Dollars in thousands
 
May 2,
2015
 
% of
Sales
 
May 3,
2014
 
% of
Sales
Total Selling and Administrative Expenses
 
$
359,504

 
20.3%
 
$
330,426

 
18.9%
Selling and administrative expenses increased $29.1 million, or 8.8%, to $359.5 million during the 52 weeks ended May 2, 2015 from $330.4 million during the 53 weeks ended May 3, 2014. The increase was primarily due to a $12.8 million increase in corporate payroll and infrastructure costs to support business growth, an $8.1 million increase in comparable store payroll and operating expenses, a $6.2 million increase in new store payroll and operating expenses (net of closed stores) and a $3.0 million increase in Yuzu ® expenses.
Depreciation and Amortization Expense
 
 
52 weeks ended
 
53 weeks ended
Dollars in thousands
 
May 2,
2015
 
% of
Sales
 
May 3,
2014
 
% of
Sales
Total Depreciation and Amortization Expense
 
$
50,509

 
2.8%
 
$
48,014

 
2.7%
Depreciation and amortization expense increased $2.5 million, or 5.2%, to $50.5 million during the 52 weeks ended May 2, 2015 from $48.0 million during the 53 weeks ended May 3, 2014. This increase was primarily attributable to additional capital expenditures.
Operating Income
 
 
52 weeks ended
 
53 weeks ended
Dollars in thousands
 
May 2,
2015
 
% of
Sales
 
May 3,
2014
 
% of
Sales
Total Operating Profit
 
$
33,560

 
1.9%
 
$
58,325

 
3.3%
Our operating income decreased $24.8 million, or 42.2%, to $33.6 million during the 52 weeks ended May 2, 2015 from $58.3 million during the 53 weeks ended May 3, 2014. This decrease was due to the matters discussed above.
Interest Expense, Net
 
 
52 weeks ended
 
53 weeks ended
Dollars in thousands
 
May 2,
2015
 
May 3,
2014
Interest Expense, Net
 
$
210

 
$
385

Net interest expense decreased $0.2 million, or 45.5%, to $0.2 million during the 52 weeks ended May 2, 2015 from $0.4 million during the 53 weeks ended May 3, 2014.
Income Tax Expense
 
 
52 weeks ended
 
53 weeks ended
Dollars in thousands
 
May 2,
2015
 
Effective
Rate
 
May 3,
2014
 
Effective
Rate
Income Tax Expense
 
$
14,218

 
42.6
%
 
$
22,834

 
39.4
%
We recorded an income tax provision of $14.2 million during the 52 weeks ended May 2, 2015 compared with an income tax provision of $22.8 million during the 53 weeks ended May 3, 2014. Our effective tax rate was 42.6% for the 52 weeks ended May 2, 2015 compared with an effective tax rate of 39.4% during the 53 weeks ended May 3, 2014.
Net Income
 
 
52 weeks ended
 
53 weeks ended
Dollars in thousands
 
May 2,
2015
 
May 3,
2014
Net Income
 
$
19,132

 
$
35,106

As a result of the factors discussed above, we reported net income of $19.1 million during the 52 weeks ended May 2, 2015, compared with net income of $35.1 million during the 53 weeks ended May 3, 2014.

36

Index to Form 10-K Index to FS

Adjusted EBITDA (non-GAAP)
To supplement our results prepared in accordance with GAAP, we use the measure of Adjusted EBITDA, which is a non-GAAP financial measure under Securities and Exchange Commission (the “SEC”) regulations. We define Adjusted EBITDA as net income plus (1) depreciation and amortization; (2) interest expense and (3) income taxes, (4) as adjusted for additional items and subtracted from or added to net income.
To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this Form 10-K and the reconciliation from Adjusted EBITDA to net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from Adjusted EBITDA to net income are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance.
This non-GAAP financial measure is not intended as a substitute for and should not be considered superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of this non-GAAP financial measure may be different from an Adjusted EBITDA measure used by other companies, limiting its usefulness for comparison purposes. Adjusted EBITDA should not be considered as an alternative to net income as an indicator of our performance or any other measures of performance derived in accordance with GAAP. As noted above, Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results reported under GAAP. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any requirements for such replacements.
We believe that Adjusted EBITDA is a useful performance measure, and it is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone. Our Board of Directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations. We review this non-GAAP measure internally to evaluate our performance and manage our operations. We believe that the inclusion of Adjusted EBITDA results provides investors useful and important information regarding our operating results.
Dollars in thousands
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Net income
 
$
84

 
$
19,132

 
$
35,106

Add:
 
 
 
 
 
 
Depreciation and amortization expense
 
52,690

 
50,509

 
48,014

Interest expense, net
 
1,872

 
210

 
385

Income tax expense
 
2,667

 
14,218

 
22,834

Impairment loss (non-cash) (a)
 
11,987

 

 

Restructuring costs (a)
 
8,830

 

 

Transaction costs (b)
 
2,398

 

 

Adjusted EBITDA (non-GAAP)
 
$
80,528

 
$
84,069

 
$
106,339

(a) See Management Discussion and Analysis - Results of Operations discussion above.
(b) Transaction costs are costs incurred for business development and acquisitions, and are included in selling and administrative expenses in the consolidated statements of operations.
Adjusted Earnings (non-GAAP)
To supplement our results prepared in accordance with GAAP, we use the measure of Adjusted Earnings, which is a non-GAAP financial measure under SEC regulations. We define Adjusted Earnings as net income as adjusted for additional items and subtracted from or added to net income.
To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this Form 10-K and the reconciliation from Adjusted Earnings to net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from Adjusted Earnings to net income are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance.

37

Index to Form 10-K Index to FS

This non-GAAP financial measure is not intended as a substitute for and should not be considered superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of this non-GAAP financial measure may be different from an Adjusted Earnings measure used by other companies, limiting its usefulness for comparison purposes. Adjusted Earnings should not be considered as an alternative to net income as an indicator of our performance or any other measures of performance derived in accordance with GAAP. As noted above, Adjusted Earnings has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results reported under GAAP. The limitations of Adjusted Earnings include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; and (iii) it does not reflect income tax payments we may be required to make.
We believe that Adjusted Earnings is a useful performance measure, and it is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone. Our Board of Directors and management also use Adjusted Earnings as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations. We review this non-GAAP measure internally to evaluate our performance and manage our operations. We believe that the inclusion of Adjusted Earnings results provides investors useful and important information regarding our operating results.
Dollars in thousands
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Net income
 
$
84

 
$
19,132

 
$
35,106

Reconciling items, after-tax (below)
 
15,378

 

 

Adjusted Earnings (non-GAAP)
 
$
15,462

 
$
19,132

 
$
35,106

 
 
 
 
 
 
 
Reconciling items, pre-tax
 
 
 
 
 
 
Impairment loss (non-cash) (a)
 
$
11,987

 
$

 
$

Restructuring costs (a)
 
8,830

 

 

Transaction costs (b)
 
2,398

 

 

Reconciling items, pre-tax
 
23,215

 

 

Less: Pro forma income tax impact (c)
 
7,837

 

 

Reconciling items, after-tax
 
$
15,378

 
$

 
$

(a) See Management Discussion and Analysis - Results of Operations discussion above.
(b) Transaction costs are costs incurred for business development and acquisitions, and are included in selling and administrative expenses in the consolidated statements of operations.
(c)
Represents the projected reduction in income tax expense based on our current combined federal and state aggregate income tax rate.

Liquidity and Capital Resources
Our primary sources of cash are net cash flows from operating activities, funds available under a credit facility and short-term vendor financing.
Prior to the Spin-Off on August 2, 2015, we were party to the Credit Facility held by Barnes & Noble, Inc. ("B&N Credit Facility"). The B&N Credit Facility provided for up to $1 billion in aggregate commitments under a five-year asset-backed revolving credit facility expiring on April 29, 2016. The B&N Credit Facility was secured by eligible inventory and accounts receivable with the ability to include eligible real estate and related assets. We were a borrower and co-guarantor of all amounts owing under the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble’s balance sheet prior to the Spin-Off on August 2, 2015.
On August 3, 2015, in connection with the Spin-Off, we entered into a new five-year $400 million asset-backed revolving credit facility (the “BNED Credit Facility”), the proceeds of which will be used for general corporate purposes, including seasonal working capital needs. See Financing Arrangements discussion below. As of April 30, 2016 , we had no outstanding borrowings under the BNED Credit Facility.
As of April 30, 2016 , Other long-term liabilities includes $69.3 million related to the long-term tax payable associated with the LIFO reserve. Management believes it is remote that the long-term tax payable associated with the LIFO reserve will be payable or will result in a cash tax payment in the foreseeable future, assuming that LIFO will continue to be an acceptable inventory method for tax purposes.

38


Share Repurchases
On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $50 million, in the aggregate, of our outstanding Common Stock. The stock repurchase program is carried out at the direction of management (which includes a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. During Fiscal 2016 , we repurchased 1,715,269 shares for approximately $16.6 million at a weighted average cost per share of $9.95. As of April 30, 2016, approximately $33.4 million remains available under the stock repurchase program.
During Fiscal 2016 , we also repurchased 174,511 shares of our Common Stock in connection with employee tax withholding obligations for vested stock awards.
Sources and Uses of Cash Flow
Dollars in thousands
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Cash and cash equivalents at beginning of period
 
$
44,816

 
$
132,117

 
$
54,697

Net cash flows provided by operating activities
 
82,781

 
17,725

 
50,736

Net cash flows used in investing activities
 
(70,740
)
 
(58,185
)
 
(37,445
)
Net cash flows (used in) provided by financing activities
 
(28,289
)
 
(46,841
)
 
64,129

Cash and cash equivalents at end of period
 
$
28,568

 
$
44,816

 
$
132,117

Cash Flow from Operating Activities
Our business is highly seasonal. Cash flows from operating activities are typically a source of cash in the second and third fiscal quarters, when students generally purchase and rent textbooks for the upcoming semesters. Cash flows from operating activities are typically a use of cash in the first and fourth fiscal quarters, when sales volumes are materially lower than the other quarters. Our quarterly cash flows also may fluctuate depending on the timing of the start of the various school’s semesters, as well as shifts in fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods.
Cash flows provided by operating activities during Fiscal 2016 were $82.8 million compared to $17.7 million during Fiscal 2015. This net change of $65.1 million was primarily due changes in working capital, including receipts of a $38.2 million receivable from Barnes & Noble, Inc., which was paid at the time of the Spin-Off, and changes in deferred taxes.
Cash flows provided by operating activities during Fiscal 2015 were $17.7 million compared to $50.7 million during Fiscal 2014. This decrease of $33.0 million was primarily due to a $38.2 million receivable from Barnes & Noble, Inc. which was paid at the time of the Spin-Off.
Cash Flow from Investing Activities
Our investing activities consist principally of capital expenditures for contractual capital investments associated with renewing existing contracts, new store construction, digital initiatives and enhancements to internal systems and our website.
Cash flows used in investing activities during Fiscal 2016 were $(70.7) million compared to $(58.2) million during Fiscal 2015. The increase is primarily due to the acquisition of LoudCloud Systems, Inc. for $17.9 million in Fiscal 2016. Capital expenditures totaled $50.8 million and $48.5 million during Fiscal 2016 and Fiscal 2015, respectively.
Cash flows used in investing activities during Fiscal 2015 were $(58.2) million compared to $(37.4) million during Fiscal 2014. Capital expenditures totaled $48.5 million and $38.3 million during Fiscal 2015 and Fiscal 2014, respectively.
Cash Flow from Financing Activities
Cash flows used in financing activities during Fiscal 2016 decreased by $18.6 million compared to Fiscal 2015 primarily due to the acquisition of Preferred Membership Interests of $76.2 million in the prior year, offset by the net change in the Barnes & Noble, Inc. investment of $35.8 million, and increased payments for common stock repurchased of $18.6 million and deferred financing costs of $3.3 million.
Cash flows used in financing activities during Fiscal 2015 were $(46.8) million compared to inflows of $64.1 million during Fiscal 2014. During Fiscal 2015, we acquired the preferred membership interests from Microsoft and Pearson, resulting in a $76.2 million payment. The receipts in Fiscal 2014 represent net transfers from Barnes & Noble, including NOOK Media partnership activities.

39


Financing Arrangements
Until August 3, 2015, we were party to the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble’s balance sheet prior to the Spin-Off on August 2, 2015.
On August 3, 2015, we, and certain of our subsidiaries from time to time party thereto, entered into the Credit Agreement with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders from time to time party thereto, under which the lenders committed to provide us with a five-year asset-backed revolving credit facility in an aggregate committed principal amount of $400 million under the BNED Credit Facility. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the BNED Credit Facility.
The Company and certain of its subsidiaries (collectively, the “Loan Parties”) will be permitted to borrow under the BNED Credit Facility. The BNED Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the BNED Credit Facility, but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and certain other property. The Company has the option to request an increase in commitments under the BNED Credit Facility of up to $100 million, subject to certain restrictions.
As of April 30, 2016 , we had no outstanding borrowings under the BNED Credit Facility. During Fiscal 2016, we borrowed and repaid $60.6 million under the BNED Credit Facility. As of April 30, 2016 , we have issued $3.6 million in letters of credit under the facility.
During Fiscal 2016, we incurred debt issuance costs totaling $3.3 million related to the BNED Credit Facility. The debt issuance costs have been deferred and are presented as an asset which is subsequently amortized ratably over the term of the credit agreement.
Interest under the BNED 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 BNED Credit Facility. Loans will initially bear interest at LIBOR plus 2.000% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 1.000% per annum, in the alternative, and thereafter the interest rate will fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.750% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.750% per annum), based upon the excess availability under the BNED Credit Facility at such time.
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 BNED 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 have the right to 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. We are in compliance with all covenants, representations and warranties under the Credit Agreement as of April 30, 2016.
We believe that our future cash from operations, access to borrowings under the BNED Credit Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our access to, and the availability of, financing in the future will be impacted by many factors, including the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms.

40


Contractual Obligations
The following table sets forth our contractual obligations as of April 30, 2016 (in millions):
 
 
Payments Due by Period
 
 
Total
 
Less Than
1 Year
 
1-3
Years
 
3-5
Years
 
More Than
5 Years
BNED Credit Facility (a)
 
$

 
$

 
$

 
$

 
$

School management contract and other lease obligations (b)
 
748.9

 
130.9

 
232.6

 
196.4

 
189.0

Purchase obligations (c)
 
7.7

 
2.9

 
4.8

 

 

Other long-term liabilities reflected on the balance sheet under GAAP (d)
 

 

 

 

 

Total
 
$
756.6

 
$
133.8

 
$
237.4

 
$
196.4

 
$
189.0

 
(a)
As of April 30, 2016 , we had no outstanding borrowings under the BNED Credit Facility.