Barnes & Noble Education, Inc.
Barnes & Noble Education, Inc. (Form: 10-K, Received: 07/12/2017 16:34:18)
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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 29, 2017
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
 
¨
Accelerated filer
 
x  
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨  
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 $423 million based upon the closing market price of $9.25 per share of Common Stock on the New York Stock Exchange as of October 29, 2016. As of June 16, 2017 , 46,516,890 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 2017 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 physical and/or online 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;
our ability to continue to successfully integrate the operations of MBS Textbook Exchange, LLC into our Company, while facing competition from not only physical bookstore operations, but also virtual solutions;
the strategic objectives, anticipated synergies, and/or other expected potential benefits of the MBS Textbook Exchange, LLC acquisition may not be fully realized or may take longer than expected;
the integration of MBS Textbook Exchange, LLC’s operations into our own may also increase the risk of our internal controls being found ineffective;
risks associated with operation or performance of MBS Textbook Exchange, LLC’s point-of-sales systems that are sold to college bookstore customers;
implementation 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 enhancements to 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, compete for and execute upon additional acquisitions and strategic investments;
technological changes;
risks associated with counterfeit and piracy of digital and print materials;
our international operations could result in additional risks;
our ability to attract and retain employees;
changes to purchase or rental general terms, 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 managed bookstore, physical and/or online store contracts and higher-than-anticipated store closings;
disruptions to our information technology systems, infrastructure and data due to computer malware, viruses, hacking and phishing attacks, resulting in harm to our business and results of operations;
disruption of or interference with third party web service providers and our own proprietary technology;
work stoppages or increases in labor costs;

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the risk of price reduction or change in format of course materials by publishers, which could negatively impact revenues and margin;
possible increases in shipping rates or interruptions in shipping service;
product shortages, including risks associated with merchandise sourced indirectly from outside the United States;
changes in law or regulation;
enactment of laws which may restrict or prohibit our use of emails or similar marketing activities;
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;
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.

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EXPLANATORY NOTE

On August 2, 2015, we completed the legal separation ("Spin-Off") from Barnes & Noble, Inc., at which time we began to operate as an independent publicly-traded company.
For the results of operations for the 13 weeks ended August 1, 2015 (first quarter of Fiscal 2016), 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 for the results of operations for the 39 weeks ended April 30, 2016, our consolidated financial statements are presented on a consolidated basis as we became a separate consolidated entity. For Fiscal 2017, the results of operations for the entire 52 weeks ended April 29, 2017 reflected in our consolidated financial statements are presented on a consolidated basis.
On February 27, 2017, we acquired MBS Textbook Exchange, LLC ("MBS"). The consolidated financial statements for the 52 weeks ended April 29, 2017 include the financial results of MBS from the acquisition date, February 27, 2017, to April 29, 2017. For additional information on the MBS acquisition, see Form 8-K filed on February 28, 2017 and Form 8K/A pro forma information filed on May 8, 2017.
Additionally, effective with the acquisition of MBS, we determined that we have two reportable segments: Barnes & Noble College Booksellers, LLC ("BNC") and MBS, whereas BNC was previously our only reportable segment prior to the acquisition.


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PART I
Item 1. BUSINESS
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 College” or “BNC” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our virtual bookstore and wholesale textbook distribution business operated through our subsidiary MBS Textbook Exchange, LLC, a Delaware corporation.
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. “Fiscal 2017” means the 52 weeks ended April 29,2017, “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, and “Fiscal 2013” means the 52 weeks ended April 27, 2013.
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
General
Barnes & Noble Education, Inc. (“BNED”) is one of the largest contract operators of physical and virtual bookstores for college and university campuses, and private/parochial K-12 schools, across the United States, and a leading provider of digital education services. Through our Barnes & Noble College (“BNC”) and MBS Textbook Exchange (“MBS”) subsidiaries, we operate 1,481 physical and virtual bookstores and serve more than 6 million students enrolled in higher education institutions and K-12 schools.
Effective with the acquisition of MBS on February 27, 2017, we have determined that we operate two reportable segments: BNC and MBS. See the BNC and MBS segment discussions below.
BNC operates 769 physical campus bookstores, the majority of which also have school-branded e-commerce sites operated by BNC, and BNC also includes our digital operations. 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 offerings; convenience food and beverages; and graduation products. BNC product offerings also include a suite of digital content, software, and services through our LoudCloud platform, such as predictive analytics, a variety of courseware built on a foundation of open educational resources ("OER"), and competency-based learning solutions.
Our MBS subsidiary operates two highly integrated businesses. The MBS Direct business is the largest contract operator of virtual bookstores for college and university campuses, and private/parochial K-12 schools. MBS Direct operates 712 virtual bookstores, offering new and used print and digital textbooks, which are available for sale or rent. Additionally, MBS Direct sells textbooks directly to students through textbooks.com SM , one of the largest e-commerce sites for new and used textbooks. MBS Wholesale is one of the largest textbook wholesalers in the country, providing a comprehensive selection of new and used textbooks at a low cost of supply to more than 3,700 physical bookstores, including BNC’s 769 campus bookstores.
Educational institutions increasingly are outsourcing bookstore operations, investing in data-driven analytical tools, and offering students more affordable options for textbooks and other learning tools. Given these continuing trends, we are well-positioned to capture new market share and partner with an increasing number of schools across the country. As demand for new, improved, and more affordable products and services increase in the rapidly changing education landscape, we are working to evolve our business model and enhance our solutions. We aim to be an even stronger partner for schools and meet customer needs by expanding our physical and virtual bookstore service capabilities, courseware offerings and digital platform services. We believe that our recent strategic actions, including the acquisition of LoudCloud, Promoversity and MBS, and development of courseware, have substantially enhanced our competitive position. We continue to aggressively innovate and collaborate with our partners to provide solutions that extend well beyond course materials sourcing and sales to include new digital services that support successful student outcomes.
Strength of Our Business
We believe our product offerings and services for students, faculty and administrators enable a more personalized learning experience, which improves student success rates and retention. We strive to be the first stop for students, educators and administrators by offering the most comprehensive resources available with our flexible physical and/or virtual bookstore options. The strengths of our business are as follows:

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Large Footprint with Well-Recognized Brand : We operate 1,481 physical and virtual bookstores and serve more than 6 million students enrolled in higher education institutions and K-12 schools. 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 Barnes & Noble College footprint, 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. The addition of MBS’s wholesale and virtual bookstore customers meaningfully expanded our customer base, and MBS Direct’s advanced virtual bookstore capabilities increased our footprint to include higher education institutions and K-12 schools that prefer virtual bookstore solutions, enabling us to offer existing and prospective clients physical, virtual and hybrid bookstore models.
Ability to Meet Students’ Affordability Needs: We are dedicated to providing quality, cost-effective course materials and are constantly seeking new ways to deliver the most affordable and easily accessible materials possible. We offer a comprehensive range of cost-effective options for textbooks (new and used, for rent or for sale), as well as programs that help students to secure the best price, such as our “price match” program. The MBS Wholesale distribution channel, warehousing systems and fulfillment expertise allow us to provide an expanded selection of new and used textbooks. Our digital courseware utilizing open educational resources (“OER”), defined as any type of educational materials that are available to a learning community at little or no cost, is a cost-effective solution for today’s educators, providing course materials at a significantly lower cost to students.
Comprehensive Suite of Course Materials: Our physical bookstores and accompanying e-commerce sites offer new and used print and digital textbooks, which are available to buy or rent. Through our MBS Wholesale business, we have a robust inventory comprised of approximately 300,000 textbook titles in stock and a comprehensive catalog of new and used textbooks and digital course material solutions. We offer alternative forms of educational materials, including digital courseware built on a foundation of OER, so that students and educators have the flexibility to learn and teach in digital and/or print formats.
Well-Established, Deep Relationships with Partners: We have strong partnerships with college and university administrators, as well as with publishers, vendors and suppliers.
Our Barnes & Noble College campus bookstores have an average relationship tenure of 15 years. Our BNC 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 10,000 publishers, who can partner with us to access one of the largest distribution networks of college and K-12 educational materials in the United States.
MBS has developed deep relationships with its wholesale customer base as a result of its substantial inventory of used textbooks, a comprehensive catalog of textbooks, superior service and systems support. MBS Wholesale provides inventory management, hardware and point-of-sale software to approximately 477 college bookstores.
Direct Access to Students and Faculty: We have excellent visibility into the needs of our customers. At our physical campus stores, we 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. For our MBS Direct and Wholesale businesses, we are connected with our customers’ students online and through our proprietary systems. Our multi-channel strategies focus on building close relationships and one-to-one connections with our students, faculty, administrators and alumni, whether in-store, online or mobile. We provide connectivity to our services whether our customers are in the classroom, at the stadium, or at orientation. Our Student Point of View (POV) panel gains insights from more than 8,000 college students, and allows us to adjust our offerings to better meet expressed needs. Through this unique relationship with students, we also operate as a media channel that drives revenue through brands looking to target the college demographic.
Integrated Systems with Our Customers : We are deeply ingrained in the course material adoption processes of our customers. Both BNC and MBC have highly integrated online systems that streamline the adoption process for faculty, enabling them to research, update, approve and submit textbook adoptions online, as well as make informed decisions on adoptions as the application gives real-time information regarding title availability, edition status and price.
Stable, Long-Term Contracts: BNC physical bookstores are operated 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 2014 through Fiscal 2017, 94% of these contracts were renewed or extended, often before their termination dates. Virtual bookstores offered through MBS Direct operate under a contract with the school as the exclusive seller of course materials. Over the past three years, we have retained more than 95% of our contracts, with the majority of the contracts being automatically renewed as per the contract terms or renewed before their expiration dates without going through a formal bid process.

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Seasoned Management Team: Both BNC and MBS possess experienced senior management teams with proven track records, and demonstrated expertise in bookstore outsourcing, virtual bookstore operations, wholesale distribution and fulfillment operations, content distribution, marketing and retail operations, and in scaling digital educational and other digital products and services.
Growth Drivers
The primary factors that we expect will enable us to grow our business are as follows:
Increasing Market Share with New Accounts : New store openings are an important driver of growth. In Fiscal 2017, BNC signed 38 new stores for estimated first year annual sales of $118 million. Currently, approximately 52% of college and university affiliated physical bookstores in the United States are operated by their respective institutions. Based on the anticipated continuing trend towards outsourcing in the campus bookstore market, we intend to aggressively pursue these opportunities to grow BNC’s core business. Additionally, our acquisition of MBS expands our addressable market to include K-12 and higher education schools that prefer virtual bookstore solutions. MBS Direct signed 80 new accounts in Fiscal 2017 for $17 million of estimated annual sales. Our ability to offer existing and prospective clients physical, virtual and hybrid bookstore models is a key element of our competitive strategy. We believe that our message of affordability and convenience will continue to gain traction and allow us to capture market share by offering flexible physical and virtual bookstores options, as well as digital solutions.
Scalable and Advanced Digital Solutions : 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. Through our LoudCloud platform, we address the growing demand for alternative forms of educational materials and learning tools. By focusing on advanced OER courseware, we plan to continue to enhance and grow our digital content and services in an efficient, low-cost/high-value manner to complement our printed textbook businesses. Additionally, we believe that our predictive analytics solution has strong benefits for higher education institutions, and therefore potentially strong demand characteristics in this emerging space. Our recently announced partnership with Unizin underscores the value proposition of our predictive analytics solutions in helping client institutions improve student success rates and retention.
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. Our acquisitions and partnerships this fiscal year helped us expand into new educational verticals and markets, such as workforce and skills gap training and K-12, but other markets for expansion remain, including international markets. These will continue to be opportunistically evaluated.
Segments
Effective with the acquisition of MBS on February 27, 2017, we have determined that we operate two reportable segments: BNC and MBS. We identified our segments 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.
BARNES & NOBLE COLLEGE
General
As of April 29, 2017, BNC operates 769 physical campus bookstores, the majority of which also have school-branded e-commerce sites operated by BNC, and BNC also includes our digital operations. During Fiscal 2017, we opened 38 stores with estimated first year annual sales of $118 million, and closed 20 stores, primarily comprised of satellite store locations that we elected to close and we continue to operate the main contract, contracts with low sales volume,  as well as those contracts that may have been lost in a competitive bid process. As of June 16, 2017, BNC has signed additional contracts for 23 new physical stores with estimated first year annual sales of $50 million, which we expect to open during our Fiscal 2018.
Contracts
Our BNC 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. We offer existing and prospective clients physical, virtual and hybrid bookstore models. 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 to 120 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 online. 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 obtain student and faculty email lists for direct communication which provide for seamless integration into the university community and potential co-branded marketing opportunities.

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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 an RFP process.
Customers and Distribution Network
We leverage our BNC 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. As of April 29, 2017, we operate 769 physical bookstores nationwide.
BNEDSCHOOLMAP2017.JPG
The number of BNC college and university bookstores operations located in the United States as of April 29, 2017, is listed below:
STATE
 
NUMBER
OF STORES
 
STATE
 
NUMBER
OF STORES
 
STATE
 
NUMBER
OF STORES
Alabama
 
18
 
Kentucky
 
30
 
North Dakota
 
1
Arizona
 
8
 
Louisiana
 
14
 
Ohio
 
42
Arkansas
 
7
 
Maryland
 
20
 
Oklahoma
 
5
California
 
46
 
Massachusetts
 
29
 
Oregon
 
5
Colorado
 
7
 
Michigan
 
36
 
Pennsylvania
 
64
Connecticut
 
14
 
Minnesota
 
7
 
Rhode Island
 
3
Delaware
 
2
 
Mississippi
 
8
 
South Carolina
 
20
District of Columbia
 
6
 
Missouri
 
9
 
South Dakota
 
2
Florida
 
45
 
Nebraska
 
1
 
Tennessee
 
13
Georgia
 
14
 
Nevada
 
2
 
Texas
 
65
Hawaii
 
3
 
New Hampshire
 
4
 
Virginia
 
19
Illinois
 
19
 
New Jersey
 
22
 
Washington
 
21
Indiana
 
14
 
New Mexico
 
6
 
West Virginia
 
11
Iowa
 
5
 
New York
 
67
 
Wisconsin
 
6
Kansas
 
2
 
North Carolina
 
27
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Product and Service Offerings
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 offerings; convenience food and beverages; and graduation products. BNC product offerings also include a suite of digital content, software, and services through our LoudCloud platform, such as learning analytics, a variety of courseware developed utilizing OER, and competency-based learning solutions, which allow students to advance in a course based on their ability to master a skill or competency at their own pace.
BNC’s full suite of product offerings include:
Course Material Sales and Rentals : Sales and rentals of print textbooks are a core revenue driver. Our online platform and registration solutions (discussed below) are deeply ingrained in our partner schools’ textbook selection process.We work directly with faculty to ensure the textbooks they have chosen for their courses are available in all required formats before the start of classes. MBS’s wholesale distribution channel enables us to optimize our textbook sourcing, purchasing and liquidation processes, and we are able to more efficiently source and distribute a comprehensive inventory of affordable course materials to customers with the highest and greatest need. On average, MBS Wholesale has approximately 300,000 textbook titles in stock at any given time to support the course offerings of our partner schools.
OER Courseware: In Fall 2016, we launched OER courseware, a turnkey solution for colleges and universities, within our existing physical bookstore footprint and beyond, which offers advanced, affordable learning materials built on a high-quality foundation of OER and enhanced with content such as videos and self-assessments. Our high-quality OER courseware significantly reduces course material costs for students and enables easier implementation for faculty, all with the objective of ultimately improving learning outcomes. Our courseware is delivered digitally on our LoudCloud platform, with analytics integrated into the solution, and companion print versions available to students and educators who prefer the flexibility to learn and teach in either format. Courseware offerings include general education courses, including sociology, psychology and economics, which were piloted in 2016 at institutions such as the Pennsylvania State University, Cuyahoga Community College and West Liberty State College.
eTextbooks: We have partnered with VitalSource, a global leader in building, enhancing and delivering digital content, on our digital reading platform and a broad digital catalog.
General Merchandise : We drive general merchandise sales through both our instore and online channels, including pop up retail locations at major sporting events, throughout the academic year. Our stores feature collegiate and athletic apparel, other custom-branded school spirit products, technology, supplies and convenience items. We continue to see significant year over year growth in our e-commerce sales and in the demand for our True Spirit fan sites, which are dedicated virtual stores that appeal specifically to the alumni and sports fanbase. As of April 29, 2017, we operate 61 True Spirit sites. Additionally, in June 2016, we enhanced our merchandise offering through the acquisition of Promoversity, a custom merchandise supplier and e-commerce storefront solution serving the collegiate bookstore business and its customers. This acquisition provides us with a wide customer base outside of the BNC footprint, as Promoversity’s standalone e-commerce solution can serve any school, corporation or group looking for customized apparel, corporate gifts and novelties, and merchandise.
Cafes and Convenience Stores: We operate 83 customized cafés, featuring Starbucks Coffee ® , and 17 stand-alone convenience stores, as well as diverse grab-and-go options including organic, vegan, gluten-free and ethnic fare for students. These offerings increase traffic and time spent in our physical stores.
Brand Partnerships: Through our unique relationship with students, colleges and universities, and our premier position on campus, we operate as a media channel for brands looking to target the college demographic, and derive revenue from these marketing share programs. We create strategic, integrated campaigns which include research, email, social media, display advertising, on-campus events, signage, and sampling. Our client list includes brands like Target, MasterCard, GEICO, Kellogg’s, Verizon, Samsung Pay, and more.
Platform Services
FacultyEnlight ® : Used by approximately 310,000 faculty members, FacultyEnlight ® , our proprietary online platform enhances content search, discovery and adoption (i.e. textbook selection) by faculty on each campus, enabling them to find and select the course materials that are both relevant to their subject matter and affordable to their students. FacultyEnlight ® , which is available to faculty at no cost, 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 : Our Campus Connect Technologies platform is customizable technology that delivers a seamless experience, providing students and faculty with the ability to research, find and purchase the most affordable course materials. The platform includes registration integration, learning management system (“LMS”) integration, real-time financial

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aid platform, point of sale ("POS") platform and course fee solution. Through our fully integrated purchasing process, students can purchase their course materials in-store or online, or buy them when registering for classes through our Registration Integration solution.
LoudCloud platform: Through our LoudCloud platform, we address the growing demand for alternative forms of educational materials and learning tools. LoudCloud is a sophisticated digital platform comprised of learning analytics, LoudSight ; advanced OER courseware; and competency learning solutions.
Our LoudSight predictive analytics solution captures and analyzes key demographic, behavioral and performance metrics from students, allowing educators to identify, monitor and support at-risk student to improve student success. LoudCloud's analytics solution connects disparate systems on campus, builds predictive models based upon data collected by institutions, and presents advisors with a unified view of the factors that drive student success on their campus. By sharing predictive models with institutions, LoudCloud promotes collaboration to ensure advisors and administrators understand what drives student performance. Additionally, LoudSight integrates with campus communication systems, allowing advisors and faculty to easily reach out to students for support in a timely manner. LoudSight has the ability to capture and analyze over 200 parameters across demographic, performance and participation data points. Its powerful predictive engine has the ability to support advisors, faculty and students with real-time alerts and insights into managing and improving student outcomes.
Through our partnership with Instructure, a leading educational technology company and creator of the Canvas LMS, LoudSight can be fully integrated in Canvas’s platform, providing higher education institutions with actionable insights that provide a comprehensive view of the student journey. Instructure is a leading LMS provider at schools across the country, and we believe the ability to integrate with a school’s Canvas system makes our analytics solution more efficient and effective.
We entered into an agreement with Unizin, Ltd. ("Unizin") in May 2017 to provide its 22 member universities with LoudSight . As a result, faculty and advisors will have access to a customized solution that helps educators identify, monitor, and support at-risk students, with the goal of improving student success rates and retention.
Career Now: Our Career Now initiative provides early career preparation for students through personal brand building workshops, faculty resource guides, career prep podcasts and dedicated content through The College Juice, our student blog. We also help build a stronger connection between students and campus resources, including career fairs, mentors, career sponsors and other career services. These career preparatory programs help students achieve their post-graduation goals, which supports our campus partners’ recruitment and retention goals.
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 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. MBS has historically been one of our largest suppliers of new and used books, and our acquisition of MBS significantly increased our textbook supply at competitive prices. MBS’s broad wholesale distribution channel and warehousing systems also drive inventory efficiencies, allowing us to optimize our textbook sourcing, purchasing and liquidation processes.
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, and John Wiley & Sons. Our primary suppliers of used textbooks are students, through returns of previously rented and purchased books. 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 (general reading) books and use the Barnes & Noble, Inc. Book Master system, a proprietary merchandising system licensed from Barnes & Noble, Inc. Our merchants meet with publishers on a regular basis to identify new titles and trends to support this changing business. In the smaller stores, trade book purchasing is controlled at the store level.
General merchandise vendors and products are initially selected by our 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

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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.
Omnichannel Retailer and Customer Marketing Strategies
We operate bookstores in our dynamic, multichannel format virtually and on campuses of state universities, private universities and community colleges of various sizes. Our omnichannel strategies focus on building close relationships and one-to-one connections where our customers need us to be - in-store, online, mobile, at the stadium, at orientation, or wherever they are.
Students, Parents, Alumni
We have flexible research channels that help us stay ahead of the rapidly changing needs and behaviors of our customers, and proactively respond with dynamic solutions. Our Student Point of View (POV) panel gains insights from more than 8,000 college students, and helps us to create the ideal customer experience.
Our marketing efforts are centered around an active digital community of over 6.6 million people, which includes engaged email subscribers and 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 online panel of over 8,000 students nationwide and our Parent POV online panel of over 2,800 parents help 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, BNC has been able to grow online textbook and apparel sales significantly. BNC’S official online bookstores for colleges or universities drove over $438 million of sales in Fiscal 2017. Nationwide, during the current fiscal year, we have built more than 695,000 connections with incoming students and their parents. These efforts have allowed us to maintain and expand market share and cement the college bookstore as the student's first choice for everything they need for academic success.
Promoversity has provided us with the ability to further customize our e-commerce solution to promote our partners’ brands more effectively and drive on-campus merchandise sales. Our True Spirit e-commerce sites for athletic branded merchandise continue to build our partner schools’ brands through alumni and athletics, fostering school spirit and capturing the excitement of collegiate sports. Our ability to support and promote our partner schools’ brands strengthens and deepens our relationships with the administration, faculty, alumni, parents and students. Additionally, our access to alumni through university alumni offices, including over 920,000 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.
Seasonality
BNC’s 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.
MBS TEXTBOOK EXCHANGE
In February 2017, we acquired MBS, the largest contract operator of virtual bookstores for the higher education and private/parochial K-12 school markets, and one of the largest textbook wholesalers in the United States. For additional information, see Item 8. Financial Statements and Supplementary Data - Note 4. Acquisitions and Strategic Agreements .
This acquisition significantly enhances our competitive positioning, increasing our addressable market to include K-12 schools and higher education institutions that need virtual bookstore solutions as an alternative to or in addition to a physical store on campus. The acquisition also increases our addressable market for our digital courseware and analytics solutions, and enables us to generate more value from the textbook marketplace through inventory and procurement synergies.
Our MBS subsidiary operates two highly integrated businesses: MBS Direct and MBS Wholesale. The MBS Direct business is the largest contract operator of virtual bookstores for college and university campuses, and private/parochial K-12 schools, operating 712 virtual bookstores. MBS Direct signed 80 new accounts in Fiscal 2017 with estimated first year annual sales of $17 million, and has signed additional contracts to open 46 new accounts in Fiscal 2018 for estimated first year annual sales of $8 million. MBS Direct offers new and used print and digital textbooks, which are available for sale or rent. Our ability to offer existing and prospective clients physical, virtual and hybrid bookstore models is a key element of our competitive strategy. Additionally, MBS Direct sells textbooks directly to students through textbooks.com SM , one of the largest e-commerce sites for new and used textbooks.

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MBS Wholesale is one of the largest textbook wholesalers in the country, providing an expanded selection of new and used textbooks at a lower cost of supply. MBS Wholesale business centrally sources and sells new and used textbooks to physical college bookstores, including BNC’s campus bookstores. MBS Wholesale purchases new and used textbooks from bookstore operators, institutional bookstores, book dealers, publishers, other distributors and wholesalers, and students. To secure a steady supply of in-demand used books, MBS Wholesale has a large national sales force to call on college bookstores. MBS Wholesale has deep relationships with clients due to the large inventory of used textbooks, a comprehensive catalog of textbooks, superior service and systems support. The MBS Database Buying Guide has the most complete and accurate source of college textbook information available.
Contracts
Virtual bookstores offered through MBS Direct operate under a contract with the school as the exclusive seller of course materials. Agreements typically have a term that ranges between 3-5 years, with automatic renewal periods. Over the past three years, we have retained more than 95% of our contracts, with the majority of the contracts being automatically renewed as per the contract or renewed before their expiration dates without going through an RFP process.
Customers and Distribution Network
MBS Direct operates 712 virtual bookstores, including 454 virtual stores at K-12 schools. Through contracts with its clients, MBS Direct operates as the institution’s official source of course materials with exclusive rights to booklists and access to online programs that link course materials to the courses offered by the school. MBS Direct utilizes Course Director , a web-based product that allows faculty and/or staff to research, update, approve and submit textbook adoptions online, as well as make informed decisions on adoptions based on real-time information regarding title availability, edition status and price. This real-time information is primarily sourced from the MBS Wholesale used textbook inventory. MBS also operates textbooks.com sm one of the largest e-commerce sites for new and used textbooks. This division is primarily for direct-to-student sales.
DIRECTGRAPHA04.JPG













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The number of MBS Direct accounts located in the United States as of April 29, 2017, is listed below:
 
 
Number of
Stores
 
 
 
Number of
Stores
 
 
 
Number of
Stores
STATE
 
K-12
 
Higher Ed
 
STATE
 
K-12
 
Higher Ed
 
STATE
 
K-12
 
Higher Ed
Alabama
 
12
 
3
 
Kentucky
 
8
 
1
 
Ohio
 
11
 
12
Alaska
 
 
6
 
Louisiana
 
14
 
2
 
Oklahoma
 
3
 
2
Arizona
 
3
 
3
 
Maine
 
2
 
8
 
Oregon
 
1
 
9
Arkansas
 
1
 
3
 
Maryland
 
28
 
7
 
Pennsylvania
 
13
 
17
California
 
58
 
14
 
Massachusetts
 
16
 
6
 
Rhode Island
 
3
 
Colorado
 
7
 
 
Michigan
 
17
 
8
 
South Carolina
 
8
 
2
Connecticut
 
14
 
2
 
Minnesota
 
1
 
6
 
South Dakota
 
 
Delaware
 
3
 
1
 
Mississippi
 
2
 
 
Tennessee
 
4
 
1
District of Columbia
 
5
 
 
Missouri
 
13
 
16
 
Texas
 
43
 
9
Florida
 
33
 
12
 
Nebraska
 
1
 
6
 
Utah
 
1
 
2
Georgia
 
24
 
12
 
Nevada
 
3
 
 
Vermont
 
1
 
2
Hawaii
 
15
 
 
New Hampshire
 
2
 
4
 
Virginia
 
26
 
9
Idaho
 
 
2
 
New Jersey
 
5
 
4
 
Washington
 
6
 
3
Illinois
 
14
 
16
 
New Mexico
 
 
3
 
West Virginia
 
 
5
Indiana
 
3
 
2
 
New York
 
17
 
8
 
Wisconsin
 
3
 
1
Iowa
 
 
10
 
North Carolina
 
9
 
9
 
International
 
 
1
Kansas
 
1
 
7
 
North Dakota
 
 
1
 
Puerto Rico
 
 
1
Product and Service Offerings
MBS’s full suite of product offerings includes:
Virtual Bookstores : MBS Direct services 712 virtual bookstores with a comprehensive e-commerce experience and a broad suite of affordable course materials, including new and used print and digital textbooks, which are available for sale or rent. MBS Direct offers a robust used textbook selection, unique guaranteed buyback program, dynamic pricing, and marketplace offerings.
Wholesale Textbook Distribution: MBS Wholesale centrally sources and sells new and used textbooks to over 3,700 physical college bookstores, including BNED’s 769 campus bookstores. Its large inventory of used textbooks consists of approximately 300,000 textbook titles in stock, and it has a highly automated distribution facility that process more than 13 million textbooks annually. Additionally, MBS Wholesale provides inventory management, hardware and point-of-sale software to approximately 477 college bookstores.
OER Courseware: MBS’s broad base of wholesale and virtual bookstore customers provides us with new sales opportunities for LoudCloud’s digital suite of course materials and platforms as discussed above under the BNC segment discussion.
E-Commerce Site: Through textbooks.com SM , MBS offers new, used and digital textbooks online directly to students.
eTextbooks: MBS has partnered with VitalSource, a global leader with a broad digital catalogue to build, enhance and deliver digital content.
Platform Services
MBS Direct utilizes Course Director , a web-based product that allows faculty and/or staff to research, update, approve and submit textbook adoptions online, as well as make informed decisions on adoptions as the application gives real-time information regarding title availability, edition status and price. This real-time inventory information is leveraged from the inventory sourced first from MBS Wholesale, primarily for used textbooks. Using the MBS Direct system ensures that the fulfillment order is directed first to MBS Wholesale before other sources of inventory are utilized.
Our MBS Wholesale business also provides inventory management, hardware and point-of-sale software to more than 477 college bookstore customers. MBS provides on-site installation for point-of-sale terminals and servers, and offers technical assistance through user training and our support center facility. The cost savings and ease of deployment ensure clients get the

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most out of their management systems and create strong customer loyalty. These systems also direct all orders through MBS, giving MBS first rights to fill or refuse the order.
Supply Chain Management
MBS is one of our largest suppliers of used textbooks, as well as new textbooks. An extensive national sales force secures a steady supply of highly-prized used books, which is critical to the success of the MBS Wholesale business. MBS’s broad wholesale distribution channel and warehousing systems also drive inventory efficiencies, allowing us to optimize our textbook sourcing, purchasing and liquidation processes. We can leverage MBS Wholesale’s distribution channel and warehousing systems to more efficiently source and distribute a robust, comprehensive inventory of affordable course materials to customers with the highest and greatest need. Through the proprietary MBS Database Buying Guide, we have access to the best maintained, most accurate, and most complete source of college textbook information available - a key asset that allows us to develop superior supply and demand insights and risk management capabilities.
MBS’s primary suppliers of used textbooks are students, through returns of previously rented and purchased books. MBS also purchases new and used textbooks from BNC, other bookstore operators, institutional bookstores, book dealers, publishers, other distributors and other wholesalers. MBS offers 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.
Customer Marketing Strategies
Students
MBS student marketing programs promote the retail businesses of MBS Direct and textbooks.com SM . MBS Direct marketing efforts target the student population of contracted schools. We email students frequently throughout the year to promote the online bookstore, offer purchasing incentives and encourage buyback, in addition to other communications. Textbooks.com SM marketing strategies target an online population of students, lifelong learners, parents and general textbook shoppers through a variety of channels including email, search engine marketing, affiliate marketing and display marketing.
School Administrators
To market MBS Direct and Wholesale services, MBS maintains an active contact list of school management and administrators of over 37,000 contacts. We produce and distribute print and digital marketing campaigns to this list several times throughout the year. MBS employs a field sales and marketing force tasked with representing the entire MBS line of products and services to schools across North America.
During the last fiscal year, we have built more than 34,000 connections with current and potential clients through our blog sites and social media presence, and have had over 1.6 million visits to our primary business websites, mbsbooks.com and mbsdirect.net. These efforts have allowed us to capture market share and successfully engage administrators.
Seasonality
MBS’s business is highly seasonal. For MBS’s retail operations (virtual bookstores), a major portion of sales and operating profit are realized during the second and third quarters, when students generally purchase and rent textbooks for the upcoming semesters. For MBS’s wholesale business, a major portion of sales and operating profit is realized during the first, second and third fiscal quarters, as it sells textbooks for retail distribution, which somewhat offsets the decreased first quarter sales attributable to our retail business.
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.
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 physical and virtual bookstore market. Our expanded capabilities enable us to customize our bookstores to meet customer needs, offering our partners the option of physical, virtual and hybrid bookstore models.

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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. We work with a number of brands in partnership marketing efforts, often engaging our Student POV panel of more than 8,000 students to learn how a certain brand is perceived on campus. The importance of this demographic provides a significant opportunity to further monetize our direct relationship with more than 6 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 print 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. Importantly, we have the ability to adjust and grow our digital offering efficiently to complement our printed textbook sales and rental business.
Enrollment Trends: Community college enrollments saw continued declines in 2016, but the overall enrollment trend is expected to be positive over the longer term, and we remain confident in the industry projections of higher education enrollments to reach 22.6 million students by 2026. Technology-enabled education is a key growth area in the higher education industry, with an increasing number of students taking courses away from a traditional campus. According to a Digital Learning Compass report, students taking at least one distance education course comprised 29.7% of all higher education enrollments as of fall 2015. Online degree program enrollments continue to grow, even in the face of declining overall higher education enrollment. Our comprehensive digital offering, particularly with our OER courseware program and analytics capabilities, as well as our virtual bookstore solution, which provides students with the ability to purchase course materials directly through a dedicated e-commerce site, leave us well positioned to capitalize on this trend.
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 official physical or virtual 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.
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 or rent textbooks, eTextbooks, digital content and other merchandise directly to students; online resources, including open educational resources; publishers including Cengage, Pearson and McGraw Hill, 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.
In addition to the competition we face from alternative distribution sources, 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, Inc.; Chegg.com, an online textbook rental company; Civitas Learning, a learning analytics platform; eCampus, an online provider of course materials; Follett Corporation, a contract operator of campus bookstores; IndiCo, an entity created by National Association of College Bookstores (“NACS”); Texas Book Company, bookstore management and operations; and Vital Source Technologies, Inc., a digital course materials provider. We also have competition from providers of eTextbooks, such as Apple iTunes, Blackboard, Google, and Redshelf, and various private textbook rental websites.
In addition, Akademos and Amazon have recently begun to develop relationships with colleges and universities to provide online bookstore solutions which not only competes with our physical bookstore operations but also competes with our subsidiary MBS’ Direct virtual solution. MBS Direct also faces competition from Ambassador Educational Solutions, eCampus, edMap, EdTech, Follett Corporation, Texas Book Company, Tree of Life, and VitalSource Technologies, Inc. MBS Wholesale competes with Amazon, BBA Solutions, Follett, IndiCo, Nebraska Book Company, and Texas Book Company.
Competitors that compete with our general merchandise offerings include Fanatics, Sodexo & Aramark, online retailers, and physical and online office supply stores.
Students often 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.

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In addition, a variety of business models are being pursued for the provision of print and digital textbooks, some of which may be more profitable or successful than our business model. Furthermore, the market for course materials is diluted from counterfeiting and piracy of digital and print copies or illegal copies of selected chapters made by students or others; user and faculty created content; and sharing or non-purchase of required course materials by students.
TRENDS AND OTHER FACTORS AFFECTING OUR BUSINESS
Current trends and other factors affecting our business include:
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 in the long term. 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 9.6%, from 20.6 million in 2012 to 22.6 million in 2026 driven by increased demand for educational services.
Supply Chain and Inventory: Since the demand for used and new textbooks has historically been greater than the available supply, our financial results are highly dependent upon MBS Wholesale’s ability to build its textbook inventory from suppliers in advance of the selling season.
Demand for Digital Offerings: Over the longer-term, we anticipate significant new opportunities for our digital product offerings. Through our LoudCloud platform, we address the growing demand for alternative forms of educational materials and learning tools. Technology-enabled learning is a key growth area in the higher education industry, as a growing number of students are enrolling in online digital courses, and we are ready to meet demand with our virtual bookstore and e-commerce solutions, as well as our OER courseware offering.
New and Existing Bookstore Contracts: We expect awards of new accounts resulting in new physical and virtual store openings will continue to be an important driver of future growth in our business. We 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. Our virtual bookstore capability expands our addressable market to include schools that cannot or prefer not to have a physical campus bookstore. 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. Closed stores are primarily comprised of satellite store locations that we elected to close and we continue to operate the main contract, contracts with low sales volume,  as well as those contracts that may have been lost in a competitive bid process. During Fiscal 2017, BNC opened 38 stores with estimated first year annual sales of $118 million, and closed 20 stores. As of June 16, 2017, BNC has signed additional contracts for 23 new physical stores with estimated first year annual sales of $50 million, which we expect to open during our Fiscal 2018. MBS Direct has opened 80 virtual bookstores during the 52 weeks ending April 29, 2017, with estimated first year annual sales of $17 million, and has signed additional contracts to open 46 new accounts in Fiscal 2018 for estimated first year annual sales of $8 million.
Campus Bookstore Outsourcing: 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. 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.
Course Materials Market: 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 29, 2017, our comparable store sales declined by 3.0% primarily due to lower community college enrollment and general weakness in the retail environment.
Retail Environment: BNC general merchandise sales, which are subject to short-term fluctuations driven by the broader retail environment, continue to increase over the long term 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. However, lighter store traffic and a continued reluctance by the consumer to make discretionary purchases have created a softer retail

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environment. We are confident in our assortment and have received encouraging customer response to our promotional and digital marketing efforts, especially as it relates to web orders. We are encouraged by the growth in our e-commerce sales and expect general merchandise sales to improve as the general retail environment rebounds, but we are taking a cautious approach given the overall uncertainty in the market.
EMPLOYEES
As of April 29, 2017 , BNC and MBS had approximately 5,800 and 900 full time and regularly scheduled part-time employees, respectively, or a total of 6,700 full time and regularly scheduled part-time employees. In addition, both BNC and MBS hired approximately 13,000 and 350 additional temporary employees, respectively, during peak periods during Fiscal 2017. Our employees are not represented by unions, with the exception of 25 employees. We believe that our relationship with our employees is good.
EXECUTIVE OFFICERS
The following sets forth information regarding our executive officers, including their positions (ages as of June 16, 2017):
Name
 
Age
 
Position
Michael P. Huseby
 
62
 
Executive Chairman
Max J. Roberts
 
64
 
Chief Executive Officer
Patrick Maloney
 
61
 
Executive Vice President and Chief Operating Officer
Executive Vice President and President, Barnes & Noble College
William Maloney
 
68
 
Executive Vice President
Barry Brover
 
56
 
Chief Financial Officer
Kanuj Malhotra
 
50
 
Chief Strategy and Development Officer and Chief Operating Officer, Digital Education
Michael C. Miller
 
45
 
Chief Legal Officer and Vice President of Corporate Affairs
Suzanne E. Andrews
 
57
 
Vice President, General Counsel, and Corporate Secretary
Jay Chakrapani
 
46
 
Vice President, Chief Digital Officer
Stephen Culver
 
52
 
Vice President, Chief Information Officer
Thomas D. Donohue
 
47
 
Vice President, Treasurer and Investor Relations
Joel Friedman
 
66
 
Vice President, Chief Merchandising Officer
JoAnn Magill
 
63
 
Vice President, Chief Human Resources Officer
Lisa Malat
 
57
 
Vice President, Operations and Chief Marketing Officer
Seema C. Paul
 
53
 
Vice President, Chief Accounting Officer
Michael P. Huseby , age 62, 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 acquired by Altice Group. 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. Since July 2016 to present, Mr. Huseby is a member of the Board of Directors of Commercehub, Inc., serving as the Chair of the Audit Committee and member of the Compensation Committee. In addition, Mr. Huseby spent over 23 years at Arthur Andersen, LLP and Andersen Worldwide, S.C., where he held the position of Global Equity Partner.
Max J. Roberts, age 64, 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 61, 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.

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William Maloney , age 68, 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 56, serves as our Chief Financial Officer. In this role, he oversees all aspects of accounting and finance, including treasury, investor relations, risk management, and tax, as well as provides strategic leadership in areas related to operations and business development. 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.
Kanuj Malhotra, age 50, 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.
Michael C. Miller , age 45, has been Chief Legal Officer and Vice President of Corporate Affairs for Barnes & Noble Education, and its subsidiaries since April 2017. Before joining the Company, he served as Executive Vice President, General Counsel and Secretary of Monster Worldwide, Inc. from December 2008 through December 2016, as Vice President and Deputy General Counsel from July 2008 to December 2008, and as Vice President and Associate General Counsel from October 2007 to July 2008. Prior to Monster, Mr. Miller was Senior Counsel for Motorola, Inc. from February 2007 to September 2007. From June 2002 to January 2007, he served in various capacities as Senior Corporate Counsel for Symbol Technologies, Inc. Prior to joining Symbol, Mr. Miller was associated with both Sullivan & Cromwell, LLP and Winthrop, Stimson, Putnam & Roberts in New York.
Suzanne E. Andrews , age 57, joined the Company in September 2015 as Vice President, General Counsel, and Corporate Secretary. Ms. Andrews provides guidance to the Company and its Board of Directors on 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 46, 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 52, 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 47, 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 66, 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.

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JoAnn Magill, age 63, 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 57, 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 53, joined the Company in July 2015 as our Vice President, Chief Accounting Officer. In this role she manages external reporting and technical accounting, corporate accounting, and financial reporting 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 or rent textbooks, eTextbooks, digital content and other merchandise directly to students; online resources, including open educational resources; publishers including Cengage, Pearson and McGraw Hill, 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, Inc.; Chegg.com, an online textbook rental company; Civitas Learning, a learning analytics platform; eCampus, an online provider of course materials; Follett Corporation, a contract operator of campus bookstores; IndiCo, an entity created by National Association of College Bookstores (“NACS”); Texas Book Company, bookstore management and operations; and Vital Source Technologies, Inc., a digital course materials provider. We also have competition from providers of eTextbooks, such as Apple iTunes, Blackboard, Google, and Redshelf; Vital Source Technologies, Inc., and various private textbook rental websites. In addition, Akademos and Amazon have recently begun to develop relationships with colleges and universities to provide online bookstore solutions which not only competes with our physical bookstore operations but also competes with our subsidiary MBS’ Direct virtual solution. MBS Direct also faces competition from Ambassador Educational Solutions, eCampus, edMap, EdTech, Follett Corporation, Texas Book Company, Tree of Life, and VitalSource Technologies, Inc. MBS Wholesale competes with Amazon, BBA Solutions, Follett Corporation, IndiCo, Nebraska Book Company, and Texas Book Company. Competitors that compete with our general merchandise offerings include Fanatics, Sodexo & Aramark, online retailers, and physical and online office supply stores. Students often 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 and digital textbooks, some of which may be more profitable or successful than our business model. Furthermore, the market for course materials is diluted from counterfeiting and piracy of digital and print copies or illegal copies of selected chapters made by students or others; user and faculty created content; and sharing or non-purchase of required course materials by students.
We may not be able to enter into new managed bookstore contracts or successfully retain or renew our managed bookstore contracts on profitable terms.
An important part of our business strategy for both BNC and MBS Direct is to expand sales for our college bookstore operations by being awarded additional contracts to manage physical and/or online bookstores for colleges and universities, and private/parochial K-12 schools, across the United States. 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 for BNC’s operation of physical bookstores, 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. The retail price charged to the consumer for textbooks is set by our contracts with colleges and universities to be a maximum markup based on the publishers’ costs and if prices were reduced by publishers, it could negatively impact our revenues and margin. 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.
In addition, we may face significant competition in retaining existing physical and online store contracts and when renewing those contracts as they expire. Our BNC 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. Our MBS Direct contracts are typically for three to five years and most are cancellable without penalty with notice. Despite the lower startup and ongoing

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operating expense associated with online stores, the loss of such contracts could impact revenue and profitability. 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.
We face the risk of disruption of supplier relationships and/or supply chain and/or inventory surplus.
The retail products that we sell and products for the MBS wholesale business originate from a wide variety of domestic and international vendors. During Fiscal 2017, BNC’s four largest retail suppliers, including MBS, accounted for approximately 42% of our merchandise purchased, with the largest supplier accounting for approximately 17% of our merchandise purchased. MBS Wholesale sources over 80% of its inventory from two primary channels, approximately 50% from retail bookstores (including BNC) and approximately 32% from third party suppliers. 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 or, especially with respect to wholesale inventory, publishers could terminate distribution to wholesalers such as MBS.
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. 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, our retail and wholesale businesses are 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, purchase or rental general terms, 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. For example, some textbook publishers have proposed to supply textbooks on consignment terms, instead of selling to us, which would eliminate those titles from the used textbook inventory supply. With respect to the business of MBS Wholesale, the demand for used and new textbooks is typically greater than the available supply, and MBS is highly dependent upon its ability to build its textbook inventory from publishers and suppliers in advance of the selling season. These relationships are not generally governed by long-term contracts and publishers and suppliers could choose not to sell to MBS. Any negative impact on MBS's ability to build its textbook inventory could have an adverse impact on financial results.
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 textbooks being returned late or in poor condition, faculty members not continuing to adopt or use certain textbooks, or, as discussed above, changes in the way publishers supply textbooks to us.
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. The implementation of our digital strategy is a complex process and relies on leveraging our core products, services and relationships to help accelerate the adoption of our new digital products and services. Success of our future operating results will be dependent upon rapid customer adoption of our new digital products and services and our ability to scale our business to meet customer demand appropriately. If colleges and universities, faculty and students are not receptive to our new products and services or our new products and services do not meet the expectations of these constituencies, there could be a negative impact on the implementation of our strategy. To successfully execute on this strategy, we need to continue to further evolve the focus of our organization towards the delivery of cost effective and unique solutions for our customers. Any failure to successfully execute this strategy could adversely affect our operating results. Further, even if successfully implemented, our business strategy may not ultimately produce positive results.

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We may not achieve the strategic objectives, anticipated synergies, and/or other expected potential benefits of the recent acquisition of MBS Textbook Exchange, LLC.
We recently announced the acquisition of MBS Textbook Exchange, LLC (“MBS”). MBS is the largest contract operator of virtual bookstores for the institutional client market and one of the largest textbook wholesalers in the U.S. We expect to realize strategic and other financial and operating benefits as a result of the acquisition of MBS, including leveraging MBS’s wholesale distribution channel and warehousing systems to enable BNC to optimize its textbook sourcing, purchasing and liquidation processes, and increasing sales of product offerings through relationships with MBS customers. However, we cannot predict with certainty the extent to which these benefits will actually be achieved or the timing of any such benefits. The following factors, among others, may prevent us from realizing these benefits:
we may not be able to leverage additional sales from the expanded customer base;
we may fail to retain key employees; and
we may not be able to integrate the business of MBS in an efficient and effective manner.
In addition, the integration process could also take longer than we anticipate and could result in the disruption of ongoing businesses, processes and systems or inconsistencies in standards, controls, procedures, practices and policies, any of which could adversely affect our ability to achieve the benefits it anticipates.
MBS Wholesale may not be able to manage its inventory levels effectively which may lead to excess inventory or inventory obsolescence.
MBS Wholesale sources new textbooks from publishers and new and used textbooks from other suppliers to resell to its customers. If it is unable to appropriately manage its inventory and anticipate the release of new editions of titles, faculty’s change in choice of titles, return rate, or use of alternative educational material, MBS Wholesale could be exposed to risks of excess inventory and less marketable or obsolete inventory. This may lead to excess or obsolete inventory which might have to be sold at a deep discount impacting its revenues and profit margin and may have a negative impact on our financial condition and results of operations.
Our strategy includes pursuing strategic acquisitions and partnerships and we may not be able to identify and successfully complete such transactions.
In addition to the MBS acquisition, 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 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 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. In addition, we compete for acquisitions with other potential acquirers, some of which may have greater financial or operational resources than we do. This competition may increase costs of acquiring desirable businesses, and, as a result, we may be unable to make acquisitions or be forced to pay more or agree to less advantageous acquisition terms for the businesses that we are able to acquire. 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 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.
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.

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Our business is seasonal.
Our retail 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. Sales attributable to the MBS wholesale business are generally highest in our first, second and third quarter as it sells textbooks for retail distribution, which somewhat offsets the decreased first quarter sales attributable to our retail business. 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 international operations 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.
Computer malware, viruses, hacking and phishing attacks could harm our business and results of operations.
We are increasingly dependent upon information technology systems, infrastructure and data. Our computer systems may be vulnerable to service interruption or destruction, malicious intrusion, ransomware and random attack. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, denial-of service, social engineering, ransomware and other means to affect service reliability and threaten data confidentiality, integrity and availability. Our key business partners face similar risks, and a security breach of their systems could adversely affect our security posture. While we continue to invest data protection and information technology, there can be no assurance that our efforts will prevent service interruptions, or identify breaches in our systems, that could adversely affect our business and operations and/or result in the loss of critical or sensitive information, which could result in financial, legal, business or reputational harm.

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Laws or regulations may be enacted which restrict or prohibit use of emails or similar marketing activities that we currently rely on.
Our marketing efforts are centered around an active digital community, which includes engaged email subscribers and our continuous dialogue with customers on our school-customized social media channels. For example, the following laws and regulations may apply:    
the CAN-SPAM Act of 2003 and similar laws adopted by a number of states regulate unsolicited commercial emails, create civil and criminal penalties for emails containing fraudulent headers and control other abusive online marketing practices; and    
the U.S. Federal Trade Commission (FTC) has guidelines that impose responsibilities on companies with respect to communications with consumers and impose fines and liability for failure to comply with rules with respect to advertising or marketing practices they may deem misleading or deceptive.    
Even if no relevant law or regulation is enacted, we may discontinue use or support of these activities if we become concerned that students or potential students deem them intrusive or they otherwise adversely affect our goodwill and brand. If our marketing activities are curtailed, our ability to attract new students may be adversely affected.
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 labor and employee benefits (including the costs associated with complying with the Patient Protection and Affordable Care Act or any legislation enacted in connection with repeal of the Affordable Care Act). Changes in federal, state, local or international laws, rules or regulations relating to these matters could increase regulatory compliance requirements in addition to increasing our costs of doing business or otherwise impact our business. For example, changes in federal and state minimum wage laws could raise the wage requirements for certain of our employees at our retail locations, which would increase our selling costs and may cause us to reexamine our wage structure for such employees.
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 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. Volatility in global financial markets may also limit our ability to access the capital markets at a time when we would

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like, or need, to raise capital, which could have an impact on our ability to react to changing economic and business conditions. Accordingly, if the economy worsens, our business, results of operations and financial condition could be materially and adversely affected.
We rely upon third party web service providers to operate certain aspects of our service and any disruption of or interference with such services would impact our operations and our business would be materially and adversely impacted.
Amazon Web Services (“AWS”) and other third party web service providers provide a distributed computing infrastructure platform for business operations, or what is commonly referred to as a “cloud” computing service. We have architected our software and computer systems so as to utilize data processing, storage capabilities, and other services provided by AWS and other providers. Any disruption of or interference with our use of AWS or other third party service providers would impact our operations and our business would be materially and adversely impacted.
We rely heavily on proprietary technology to process deliveries and returns of the textbooks and to manage other aspects of our operations.
We, primarily through our subsidiary MBS, use a proprietary system to source, distribute and manage inventory of textbooks and to manage other aspects of our operations, including systems to consider the market pricing for textbooks, general availability of textbook titles and other factors to determine how to buy textbooks and set prices for textbooks and other content in real time. MBS has invested significant amounts of resources in the hardware and software to develop this system. We rely on the expertise of our engineering and software development teams to maintain and enhance the equipment and software used for our distribution operations. We cannot be sure that the maintenance and enhancements we make to our distribution operations will achieve the intended results or otherwise be of value to students. If we are unable to maintain and enhance our technology to manage textbook sourcing, distribution and inventory, it could disrupt our business operation and have a material adverse impact on our results.
Defects, errors, installation difficulties or performance issues with our point-of-sales and other systems could expose us to potential liability, harm our reputation and negatively impact our business.
MBS sells and services point-of-sales systems to its college bookstore customers. These systems are complex and incorporate third-party hardware and software. Despite testing and quality control, we cannot be certain that defects or errors will not be found in these systems. In addition, because these systems are installed in different environments, we may experience difficulty or delay in installation. Our products may be integrated with other components or software, and, in the event that there are defects or errors, it may be difficult to determine the origin of defects or errors. Additionally, any difficulty or failure in the operation of these systems could cause business disruption for MBS’ customers. If any of these risks materialize, they could result in additional costs and expenses, exposure to liability claims, diversion of technical and other resources to engage in remediation efforts, loss of customers or negative publicity, each of which could impact our business and operating results.
Our MBS subsidiary relies on a sophisticated system for warehousing and distribution of the vast majority of our textbooks and any material failure of that system could impair our ability to operate our businesses.
MBS is dependent on sophisticated equipment and related software technology for the warehousing and distribution of the vast majority of textbooks supplied to us and others located at MBS’ facility in Columbia, Missouri. MBS’ ability to efficiently manage its business depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems, especially if such events were to occur during peak periods, could adversely affect our operation, the ability to serve our customers and our results of operations. In addition, substantially all of MBS’ inventory is located in the Columbia warehouse facility. We could experience significant interruption in the operation of this facility or damage or destruction of our inventory due to physical damage to the facility caused by natural disasters, accidents or otherwise. If a material portion of our inventory were to be damaged or destroyed, we would likely incur significant financial loss, including loss of revenue and harm to our customer relationships.
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

26

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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.
In addition, the publishing industry has been, and we expect in the future will continue to be, the target of counterfeiting and piracy. While we have in place anti-counterfeit policies and procedures (which include removing from distribution suspected counterfeit titles) for preventing the proliferation of counterfeit textbooks, we may inadvertently purchase counterfeit textbooks which may unknowingly be included in the textbooks we offer for sale or rent to students or we may purchase such textbooks through our buyback program. As such, we may be subject to allegations of selling counterfeit books. We have in the past and may continue to receive communications from publishers alleging that certain textbooks sold or rented by us are counterfeit. When receiving such communications, we cooperate, and will continue to cooperate in the future, with such publishers in identifying fraudulent textbooks and removing them from our inventory. We may implement measures in an effort to protect against these potential liabilities that could require us to spend substantial resources. Any costs incurred as a result of liability or asserted liability relating to sales of counterfeit textbooks could harm our business, reputation and financial condition.
Legal proceedings may significantly harm our business.
From time to time, we may become involved in litigation or other proceedings in the ordinary course of business. It is possible that such litigation or proceedings may significantly harm our future results of operations or financial condition due to expenses we may incur to defend ourselves or the ramifications of an adverse decision.
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, Inc. 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, Inc. to maintain the licensed trademarks.
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 Spin-Off from Barnes & Noble, Inc.
We could have an indemnification obligation to Barnes & Noble, Inc. 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, Inc. 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, Inc., 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, Inc. due to such 50% or greater change in the ownership of our stock, Barnes & Noble, Inc. would have to recognize gain in an amount up to the fair market value of our stock held by it immediately before the

27

Index to Form 10-K Index to FS

Spin-Off, and we generally would be required to indemnify Barnes & Noble, Inc. 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 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 certain historical financial information for the period prior to the Spin-Off included in this Form 10-K from Barnes & Noble, Inc.’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. Prior to the Spin-Off, we operated as part of Barnes & Noble, Inc.’s broader corporate organization, and Barnes & Noble, Inc. performed various corporate functions for us. Our historical financial information reflects allocations of corporate expenses from Barnes & Noble, Inc. for these and similar functions. These allocations do not necessarily reflect the costs we now incur for similar services as 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 have been able to receive better terms from unaffiliated third parties than the terms we received in our agreements with Barnes & Noble, Inc..
We entered into agreements with Barnes & Noble, Inc. related to our separation from Barnes & Noble, Inc., 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, Inc.. 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, Inc. and us. We may have received better terms from third parties than we received from Barnes & Noble, Inc. 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.
We are dependent on Barnes & Noble, Inc. to provide certain services pursuant to the Transition Services Agreement and the Separation and Distribution Agreement.
Although we have developed the capabilities to handle certain corporate and administrative services such as information technology and financial, we will continue to rely on Barnes & Noble, Inc. to provide Human Resources Information Systems pursuant to the Transition Services Agreement until we provide such services from unaffiliated third parties. If Barnes & Noble, Inc. is unable or unwilling to provide such services pursuant to the Transition Services Agreement, or if the agreement is terminated prior to the end of its term, we may be unable to provide such services ourselves or we may have to incur additional expenditures to obtain such services from another provider. Pursuant to the Separation and Distribution Agreement, we were granted access to Barnes & Noble, Inc.’s product procurement and merchandising systems for a perpetual period of time unless a termination event occurs. These systems provide inventory management and buying for BNC’s trade books. In the event these systems no longer operated or were otherwise not available to BNC, BNC would incur substantial expense replicating these systems.
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;

28

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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;
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”.

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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 81,500 square feet of space for our corporate headquarters in Basking Ridge, New Jersey, and 340,000 square feet of office and warehouse space for our MBS operations in Columbia, Missouri pursuant to leases that expire in October 2023 and September 2023, respectively. In addition, we also lease approximately 55,000 square feet, in aggregate, of office space located in Crystal Lake, Illinois, Dallas, Texas, New York, New York and Mumbai, India to support our operations pursuant to leases that expire between 2017 and 2023.
For BNC, we typically have the exclusive right to operate the official physical school bookstore on college campuses, the majority of which also have school-branded e-commerce sites operated by BNC, through multi-year management service agreements with our schools. In turn, we pay the school a percentage of store sales and, in some cases, a minimum fixed guarantee. These 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. As of April 29, 2017 , these BNC contracts for the 769 stores that we operate expire as follows:
Contract Terms to Expire During (12 months ending on or about April 30)
 
BNC
Number of Stores
2018
 
58
2019
 
31
2020
 
69
2021
 
69
2022
 
46
2023 and later
 
496

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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 held a trial on June 23-24 and July 15, 2016 to determine the damage award related to the '703 patent. The Court awarded Adrea $266,832 for B&N's non-willful infringement of the ‘703 patent. By order dated January 12, 2017, the Court granted Adrea $3,000 in prejudgement interest; final judgment was entered against defendants in the total amount of $269,832. On February 2, 2017, Adrea filed a motion for supplemental damages seeking royalties on all Nook devices sold through the date of final judgment and for an ongoing royalty with respect to post-final judgment sales. B&N filed its responsive brief on February 16, 2017. On March 22, 2017, the court awarded $12,606 in supplemental damages on old devices only. On April 5, 2017, Adrea re-filed its Bill of Costs seeking to recover costs as the prevailing party. The period for notice of appeal expired on April 24, 2017. The Court will make a final determination of costs and after such determination and satisfaction of judgment, this matter may be deemed resolved.
Item 4. MINE SAFETY DISCLOSURES

Not applicable.


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PART II
Item 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our authorized capital stock consists 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 trades on the New York Stock Exchange ("NYSE") under the symbol “BNED.”
As of April 29, 2017, 46,516,890 shares of our Common Stock and 0 shares of our preferred stock were outstanding. We had reserved 2,409,345 shares and 4,000,000 shares of Common Stock for future grants during the second quarter of Fiscal 2016 and second quarter of Fiscal 2017, respectively, in accordance with the Barnes & Noble Education Inc. Equity Incentive Plan. See Item 8. Financial Statements and Supplementary Data - 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 we began publicly trading on August 3, 2015:
 
 
Fiscal 2017
 
Fiscal 2016
 
 
High
 
Low
 
High
 
Low
First Quarter
 
$
11.88

 
$
8.50

 
N/A

 
N/A

Second Quarter
 
$
12.31

 
$
9.15

 
$
15.34

 
$
11.75

Third Quarter
 
$
13.15

 
$
8.75

 
$
15.49

 
$
8.15

Fourth Quarter
 
$
11.30

 
$
9.09

 
$
11.93

 
$
8.71

On June 16, 2017 , there were approximately 836 holders of record of our Common Stock and the closing price of our Common Stock on the New York Stock Exchange was $10.31 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 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 may include 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 Fiscal 2017, we repurchased 688,948 shares for approximately $6.7 million at a weighted average cost per share of $10.10. As of April 29, 2017, approximately $26.7 million remains available under the stock repurchase program. We did not purchase shares under the stock repurchase program during the fourth quarter of Fiscal 2017.
During the year ended April 29, 2017 , we also repurchased 276,292 shares of our Common Stock in connection with employee tax withholding obligations for vested stock awards.

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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)
 
2017
 
2016
 
2015
 
2014
 
2013
STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
Product sales and other (b)
 
$
1,638,934

 
$
1,579,617

 
$
1,544,975

 
$
1,536,180

 
$
1,631,454

Rental income (c)
 
235,428

 
228,412

 
228,023

 
211,742

 
131,793

Total sales
 
1,874,362

 
1,808,029

 
1,772,998

 
1,747,922

 
1,763,247

Cost of sales:
 
 
 
 
 
 
 
 
 
 
Product and other cost of sales
 
1,280,374

 
1,224,955

 
1,198,300

 
1,180,727

 
1,270,381

Rental cost of sales
 
136,625

 
129,725

 
131,125

 
130,430

 
88,250

Total cost of sales
 
1,416,999

 
1,354,680

 
1,329,425

 
1,311,157

 
1,358,631

Gross profit
 
457,363

 
453,349

 
443,573

 
436,765

 
404,616

Selling and administrative expenses
 
379,095

 
372,821

 
359,504

 
330,426

 
302,902

Depreciation and amortization expense
 
53,318

 
52,690

 
50,509

 
48,014

 
46,849

Transaction costs (d)
 
9,605

 
2,398

 

 

 

Restructuring costs (e)
 
1,790

 
8,830

 

 

 

Impairment loss (non-cash) (e)
 

 
11,987

 

 

 

Operating income
 
13,555

 
4,623

 
33,560

 
58,325

 
54,865

Interest expense, net
 
3,464

 
1,872

 
210

 
385

 
4,871

Earnings before taxes
 
10,091

 
2,751

 
33,350

 
57,940

 
49,994

Income taxes
 
4,730

 
2,667

 
14,218

 
22,834

 
19,820

Net income
 
$
5,361

 
$
84

 
$
19,132

 
$
35,106

 
$
30,174

 
 
 
 
 
 
 
 
 
 
 
Earnings per common share (f) :
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.12

 
$

 
$
0.33

 
$
0.88

 
$
0.78

Diluted
 
$
0.11

 
$

 
$
0.33

 
$
0.88

 
$
0.78

Weighted average common shares (thousands) (f) :
 
 
 
 
 
 
 
 
 
 
Basic
 
46,317

 
46,238

 
38,452

 
37,270

 
36,812

Diluted
 
46,763

 
46,479

 
38,493

 
37,275

 
36,812


 
 
Fiscal Year  (a)
(In thousands of dollars,
 except for share and per share amounts)
 
2017
 
2016
 
2015
 
2014
 
2013
OTHER OPERATING DATA:
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (non-GAAP) (g)
 
$
78,268

 
$
80,528

 
$
84,069

 
$
106,339

 
$
101,714

Adjusted Earnings (non-GAAP) (g)
 
$
12,347

 
$
15,462

 
$
19,132

 
$
35,106

 
$
30,174

Capital expenditures
 
$
34,670

 
$
50,790

 
$
48,452

 
$
38,253

 
$
38,760

 
 
 
 
 
 
 
 
 
 
 
OTHER OPERATING DATA - BNC:
 
 
 
 
 
 
 
 
 
 
Comparable store sales (decrease) increase (h)
 
(3.0
)%
 
(1.9
)%
 
0.1
%
 
(2.7
)%
 
(1.2
)%
Number of stores at period end
 
769

 
751

 
724

 
700

 
686



33

Index to Form 10-K Index to FS

 
 
Fiscal Year  (a)
(In thousands of dollars,
 except for share and per share amounts)
 
2017
 
2016
 
2015
 
2014
 
2013
BALANCE SHEET DATA
 (at period end):
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,299,832

 
$
1,071,683

 
$
1,090,668

 
$
1,109,919

 
$
1,006,237

Total liabilities
 
$
586,124

 
$
363,297

 
$
363,999

 
$
360,282

 
$
358,208

Short-term debt (i)
 
$
100,000

 
$

 
$

 
$

 
$

Long-term debt (i)
 
$
59,600

 
$

 
$

 
$

 
$

Preferred membership interests
 
$

 
$

 
$

 
$
383,397

 
$
381,627

Parent company equity
 
$

 
$

 
$
726,669

 
$
366,240

 
$
266,402

Total stockholders' equity
 
$
713,708

 
$
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 2017” means the 52 weeks ended April 29, 2017, “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, and “Fiscal 2013” means the 52 weeks ended April 27, 2013.
(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, and graduation products.
(c)
Rental income includes the rental of physical and digital textbooks.
(d)
Transaction costs are costs incurred for business development and acquisitions.
(e)
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) was $8.8 million and $1.8 million in Fiscal 2016 and Fiscal 2017, respectively. The restructuring was completed in the first quarter of Fiscal 2017.
(f)
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.
(g)
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).
(h)
Effective Fiscal 2017, comparable store sales includes sales from stores that have been open for an entire fiscal year period, does not include sales from closed stores for all periods presented, and digital agency sales are included on a gross basis. We believe the current comparable store sales calculation method better reflects the manner in which management views comparable store sales, as well as the seasonal nature of our business.
For Fiscal 2015 through Fiscal 2016, comparable store sales included sales from stores that were open for at least 15 months, excluded sales from closed stores for all periods presented, and included digital agency sales on a net basis.
For 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 were determined based upon the actual revenue received from textbook rentals and were no longer adjusted to reflect the equivalent textbook retail selling price.
(i)
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. On February 27, 2017, we amended the credit agreement to add a new $100 million incremental first in, last out seasonal loan facility.

34

Index to Form 10-K Index to FS

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 College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our virtual bookstore and wholesale textbook distribution business operated through our subsidiary MBS Textbook Exchange, LLC, a Delaware corporation.
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. “Fiscal 2017” means the 52 weeks ended April 29,2017, “Fiscal 2016” means the 52 weeks ended April 30, 2016, and “Fiscal 2015” means the 52 weeks ended May 2, 2015.
Overview
Description of business
Barnes & Noble Education, Inc. (“BNED”) is one of the largest contract operators of physical and virtual bookstores for college and university campuses, and private/parochial K-12 schools, across the United States, and a leading provider of digital education services. Through our Barnes & Noble College (“BNC”) and MBS Textbook Exchange (“MBS”) subsidiaries, we operate 1,481 physical and virtual bookstores and serve more than 6 million students enrolled in higher education institutions and K-12 schools.
Effective with the acquisition of MBS on February 27, 2017, we have determined that we operate two reportable segments: BNC and MBS. See the BNC and MBS segment discussions below.
BNC operates 769 physical campus bookstores, the majority of which also have school-branded e-commerce sites operated by BNC, and BNC also includes our digital operations. 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 offerings; convenience food and beverages; and graduation products. BNC product offerings also include a suite of digital content, software, and services through our LoudCloud platform, such as predictive analytics, a variety of courseware built on a foundation of open educational resources ("OER"), and competency-based learning solutions.
Our MBS subsidiary operates two highly integrated businesses. The MBS Direct business is the largest contract operator of virtual bookstores for college and university campuses, and private/parochial K-12 schools. MBS Direct operates 712 virtual bookstores, offering new and used print and digital textbooks, which are available for sale or rent. Additionally, MBS Direct sells textbooks directly to students through textbooks.com SM , one of the largest e-commerce sites for new and used textbooks. MBS Wholesale is one of the largest textbook wholesalers in the country, providing a comprehensive selection of new and used textbooks at a low cost of supply to more than 3,700 physical bookstores, including BNC’s 769 campus bookstores.
Educational institutions increasingly are outsourcing bookstore operations, investing in data-driven analytical tools, and offering students more affordable options for textbooks and other learning tools. Given these continuing trends, we are well-positioned to capture new market share and partner with an increasing number of schools across the country. As demand for new, improved, and more affordable products and services increase in the rapidly changing education landscape, we are working to evolve our business model and enhance our solutions. We aim to be an even stronger partner for schools and meet customer needs by expanding our physical and virtual bookstore service capabilities, courseware offerings and digital platform services. We believe that our recent strategic actions, including the acquisition of LoudCloud, Promoversity and MBS, and development of courseware, have substantially enhanced our competitive position. We continue to aggressively innovate and collaborate with our partners to provide solutions that extend well beyond course materials sourcing and sales to include new digital services that support successful student outcomes.
For additional information related to our segments, customers, distribution network, and business conditions, see Part I - Item 1. Business .
Fiscal Year 2017 Summary
At the beginning of Fiscal 2017, BNC operated 751 physical bookstores nationwide through our BNC subsidiary, which reached 26% of the total number of students enrolled at colleges and universities in the United States. During Fiscal 2017, BNC opened 38 stores with estimated first year annual sales of $118 million, and closed 20 stores, primarily comprised of satellite store locations that we elected to close and we continue to operate the main contract, contracts with low sales volume,  as well as those contracts that may have been lost in a competitive bid process. As of June 16, 2017, BNC has signed additional contracts for 23 new physical stores with estimated first year annual sales of $50 million, which we expect to open during Fiscal 2018.

35

Index to Form 10-K Index to FS

In June 2016, we enhanced our general merchandise offering through the acquisition of Promoversity, a custom merchandise supplier and e-commerce storefront solution serving the collegiate bookstore business and its customers. This acquisition enables us to broaden our selection and customize our e-commerce offerings to drive on-campus and online apparel sales with faculty, alumni, parents and students.
In February 2017, we acquired MBS, the largest contract operator of virtual bookstores for college and university campuses, and private/parochial K-12 schools, and one of the largest textbook wholesalers in the United States. This acquisition significantly enhances our competitive positioning, increasing our addressable market to include K-12 schools and higher education institutions that need virtual bookstore solutions as an alternative to, or in addition to, a physical store on campus. The acquisition also increases our addressable market for our digital courseware and analytics solutions (discussed below), and enables us to generate more value from the textbook marketplace through inventory and procurement synergies. We are leveraging our newly-expanded customer base and distribution channels, which broadens our reach and deepens our institutional partnerships through our ability to provide unmatched access to affordable solutions.
During Fiscal 2017, we focused on our ability to leverage our digital technology LoudCloud 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. Through our LoudCloud platform, we address the growing demand for alternative forms of educational materials and learning tools. The implementation of our digital strategy relies on leveraging our core bookstore relationships, both physical and virtual, to help accelerate the adoption of our new digital products and services and to minimize the amount of selling and marketing expenses we otherwise would incur to promote these new offerings.
By focusing on advanced OER courseware, we plan to continue to enhance and grow our digital content and services in an efficient, low-cost/high-value manner to complement our printed textbook business. In August 2016, we extended our relationship with OpenStax, a nonprofit organization whose mission is to improve student access to education. In October 2016, we launched Barnes & Noble Education Courseware. We received positive feedback from faculty after launching pilot programs at a mix of dynamic colleges and universities, including the Pennsylvania State University, Cuyahoga Community College and West Liberty State College, and expect to continue to gain adoptions at colleges and universities nationwide.
Additionally, we believe that our predictive analytics solution has strong benefits for higher education institutions, and therefore potentially strong demand characteristics in this emerging space. Our partnership with Unizin, Ltd. ("Unizin") underscores the value proposition of our predictive analytics solutions in helping client institutions improve student success rates and retention. In May 2017, we entered into an agreement with Unizin to provide its 22 member universities with LoudCloud's predictive analytics solution, LoudSight . As a result, faculty and advisors will have access to a customized solution that helps educators identify, monitor, and support at-risk students, with the goal of improving student success rates and retention. For additional information related to ou r Strategies, see Part I - Item 1. Business - Overview.
Segments
Effective with the acquisition of MBS on February 27, 2017, we have determined that we operate two reportable segments: BNC and MBS. We identified our segments 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. Prior to the acquisition of MBS, BNC was previously our only reportable segment.
Seasonality
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. Our retail business (BNC and MBS Direct) is highly 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. Sales attributable to our MBS wholesale business are generally highest in our first, second and third quarter, as it sells textbooks for retail distribution, which somewhat offsets the decreased first quarter sales attributable to our retail business.
Trends and Other Factors Affecting Our Business
For a discussion of our trends and other factors affecting our business, see Part I - Item 1. Business - Overview - Trends and Other Factors Affecting Our Business.

36

Index to Form 10-K Index to FS

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). Our rental income is primarily derived from the rental of physical and digital textbooks. At college and university bookstores which we operate, we sell emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. We also derive revenue from sales related to inventory management, hardware and point-of-sale software.
Our cost of sales primarily include costs such as merchandise costs, textbook rental amortization, payroll costs, as well as warehouse costs related to inventory management and order fulfillment, and management service agreement costs, including rent expense, related to our college and university contracts and other facility related expenses.
Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include stock-based compensation and general office expenses, such as executive oversight, merchandising, procurement, field support, finance, human resources, benefits, training, legal, and information technology, as well as our investments in our digital platform.
Basis of Consolidation
Stand-alone financial statements (Prior to the Spin-Off)
On August 2, 2015, we completed the legal separation ("Spin-Off") from Barnes & Noble, Inc., at which time we began to operate as an independent publicly-traded company.
For the results of operations for the 13 weeks ended August 1, 2015 (first quarter of Fiscal 2016) and Fiscal 2015 (periods presented prior to the Spin-Off), (collectively referred to as the "stand-alone periods"), 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, Inc.. Our consolidated financial statements include certain assets and liabilities that have historically been held at the Barnes & Noble, Inc. corporate level but are specifically identifiable or otherwise attributable to us. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 10. Barnes & Noble, Inc. Transactions .
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, Inc. under various agreements. Certain corporate and shared service functions historically provided by Barnes & Noble, Inc. (as described above) will continue to be provided by Barnes & Noble, Inc. under the Transition Services Agreement. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 10. Barnes & Noble, Inc. Transactions .
For our Fiscal 2017 (52 weeks ended April 29, 2017), the results of operations for the entire 52 weeks ended April 29, 2017 reflected in our consolidated financial statements are presented on a consolidated basis.
On February 27, 2017, we acquired MBS Textbook Exchange, LLC ("MBS"). The consolidated financial statements for the 52 weeks ended April 29, 2017 include the financial results of MBS from the acquisition date, February 27, 2017, to April 29, 2017. Subsequent to the acquisition, the consolidated financial statements include the accounts of MBS and all material intercompany accounts and transactions have been eliminated in consolidation. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 4. Acquisitions and Strategic Agreements.

37


Results of Operations - Summary
 
 
Fiscal Year
Dollars in thousands
 
2017
 
2016
 
2015
Sales:
 
 
 
 
 
 
Product sales and other
 
$
1,638,934

 
$
1,579,617

 
$
1,544,975

Rental income
 
235,428

 
228,412

 
228,023

Total sales
 
$
1,874,362

 
$
1,808,029

 
$
1,772,998

 
 
 
 
 
 
 
Net Income
 
$
5,361

 
$
84

 
$
19,132

 
 
 
 
 
 
 
Adjusted Earnings (non-GAAP) (a)
 
$
12,347

 
$
15,462

 
$
19,132

 
 
 
 
 
 
 
Adjusted EBITDA (non-GAAP) (a)
 
 
 
 
 
 
BNC
 
$
82,474

 
$
80,528

 
$
84,069

MBS
 
(3,569
)
 

 

Elimination
 
(637
)
 

 

Total Adjusted EBITDA (non-GAAP)
 
$
78,268

 
$
80,528

 
$
84,069

 
 
 
 
 
 
 
BNC Comparable store sales (decrease) increase (b)
 
(3.0
)%
 
(1.9
)%
 
0.1
%
BNC Stores opened
 
38

 
39

 
48

BNC Stores closed
 
20

 
12

 
24

BNC Number of stores open at end of period
 
769

 
751

 
724

 
(a)
Adjusted Earnings and Adjusted EBITDA are a non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.
(b)
Effective Fiscal 2017, BNC comparable store sales includes sales from stores that have been open for an entire fiscal year period, does not include sales from closed stores for all periods presented, and digital agency sales are included on a gross basis. We believe the current comparable store sales calculation method better reflects the manner in which management views comparable sales, as well as the seasonal nature of our business. For Fiscal 2015 through Fiscal 2016, BNC comparable store sales included sales from stores that were open for at least 15 months, excluded sales from closed stores for all periods presented, and included digital agency sales on a net basis.
The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales: 
 
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
Sales:
 
 
 
 
 
 
Product sales and other
 
87.4
%
 
87.4
%
 
87.1
%
Rental income
 
12.6

 
12.6

 
12.9

Total sales
 
100.0

 
100.0

 
100.0

Cost of sales:
 
 
 
 
 
 
Product and other cost of sales (a)
 
78.1

 
77.5

 
77.6

Rental cost of sales (a)
 
58.0

 
56.8

 
57.5

Total cost of sales
 
75.6

 
74.9

 
75.0

Gross margin
 
24.4

 
25.1

 
25.0

Selling and administrative expenses
 
20.2

 
20.6

 
20.3

Depreciation and amortization expense
 
2.8

 
2.9

 
2.8

Transactions costs
 
0.5

 
0.1

 

Restructuring costs
 
0.1

 
0.5

 

Impairment loss
 

 
0.7

 

Operating income
 
0.7
%
 
0.2
%
 
1.9
%
(a) Represents the percentage these costs bear to the related sales, instead of total sales.

38


Results of Operations - 52 weeks ended April 29, 2017 compared with the 52 weeks ended April 30, 2016
 
52 weeks ended, April 29, 2017
 
 
 
52 weeks ended,
 April 29, 2017
 
Acquisition Period (Feb. 27 - Apr. 29, 2017)
 
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
BNC
 
MBS (a)
 
Eliminations
 
April 29,
2017
(a)
 
April 30,
2016
Sales:
 
 
 
 
 
 
 
 
 
Product sales and other
$
1,611,055

 
$
33,169

 
$
(5,290
)
 
$
1,638,934

 
$
1,579,617

Rental income
234,506

 
922

 

 
235,428

 
228,412

Total sales
1,845,561

 
34,091

 
(5,290
)
 
1,874,362

 
1,808,029

Cost of sales:
 
 
 
 
 
 
 
 
 
Product and other cost of sales
1,256,004

 
29,023

 
(4,653
)
 
1,280,374

 
1,224,955

Rental cost of sales
136,305

 
320

 

 
136,625

 
129,725

Total cost of sales
1,392,309

 
29,343

 
(4,653
)
 
1,416,999

 
1,354,680

Gross profit
453,252

 
4,748

 
(637
)
 
457,363

 
453,349

Selling and administrative expenses
370,778

 
8,317

 

 
379,095

 
372,821

Depreciation and amortization expense
52,259

 
1,059

 

 
53,318

 
52,690

Transaction costs
9,605

 

 

 
9,605

 
2,398

Restructuring costs
1,790

 

 

 
1,790

 
8,830

Impairment loss (non-cash)

 

 

 

 
11,987

Operating income
$
18,820

 
$
(4,628
)
 
$
(637
)
 
$
13,555

 
$
4,623

 
 
 
 
 
 
 
 
 
 
(a)
On February 27, 2017, we acquired MBS. The consolidated financial statements for the 52 weeks ended April 29, 2017 include the financial results of MBS from the acquisition date, February 27, 2017, to April 29, 2017. For additional information related to the intercompany activities and eliminations, see Part II - Item 8. Financial Statements and Supplementary Data - Note 4. Acquisitions and Strategic Agreements and Note 5. Segment Reporting.
Sales
The following table summarizes our sales for the 52 weeks ended April 29, 2017 and April 30, 2016 :
 
 
52 weeks ended
Dollars in thousands
 
April 29,
 2017
 
April 30,
 2016
 
%
Product sales and other
 
$
1,638,934

 
$
1,579,617

 
3.8%
Rental income
 
235,428

 
228,412

 
3.1%
Total Sales
 
$
1,874,362

 
$
1,808,029

 
3.7%
Our total sales increased $66.3 million, or 3.7%, to $1,874.4 million during the 52 weeks ended April 29, 2017 from $1,808.0 million during the 52 weeks ended April 30, 2016.

39


The components of the variances are reflected in the table below.
Sales variances
 
 
Dollars in millions
 
52 weeks ended
MBS Sales (a)
 
 
Wholesale
 
$
14.1

Direct
 
20.0

MBS Sales subtotal:
 
$
34.1

BNC Sales
 
 
New stores
 
$
109.5

Closed stores
 
(23.8
)
Comparable stores
 
(50.6
)
Textbook rental deferral
 
0.6

Service revenue (b)
 
5.8

Other (c)
 
(4.0
)
BNC Sales subtotal:
 
$
37.5

Eliminations (d)
 
$
(5.3
)
Total sales variance
 
$
66.3

(a)
Represents sales for MBS from the acquisition date, February 27, 2017, to April 29, 2017. MBS’s business is highly seasonal. For MBS’s retail operations (virtual bookstores), a major portion of sales and operating profit are realized during the second and third quarters, when students generally purchase and rent textbooks for the upcoming semesters. For MBS’s wholesale business, a major portion of sales and operating profit is realized during the first, second and third fiscal quarters, as it sells textbooks for retail distribution, which somewhat offsets the decreased first quarter sales attributable to our retail business. MBS has significantly lower operating profit or operating loss realized during the fourth quarter.
(b)
Service revenue includes Promoversity, LoudCloud, brand partnerships, shipping and handling and revenue from other programs.
(c)
Other includes certain adjusting items related to return reserves and other deferred items.
(d)
Eliminates MBS sales to BNC and BNC commissions earned from MBS. See Part II - Item 8. Financial Statements and Supplementary Data - Note 5. Segment Reporting for a discussion of intercompany activities and eliminations.
Rental income for BNC for the 52 weeks ended April 29, 2017 increased $6.1 million, or 2.7%. The increase in rental income for the 52 weeks ended April 29, 2017 was primarily due to increased rental activity, offset by a decrease in the recognition of our previously deferred rental revenue of $0.6 million. Excluding the impact of the deferred revenue, rental income increased $5.5 million, or 2.4%.
BNC added 38 new stores and closed 20 stores during the 52 weeks ended April 29, 2017 , ending the period with a total of 769 stores.
Comparable store sales variances for BNC by category for the 52 week periods are as follows:
Comparable Store Sales variances for BNC
 
52 weeks ended
Dollars in millions
 
April 29, 2017
Textbooks
 
$
(46.1
)
 
(4.0
)%
General Merchandise
 
(0.7
)
 
(0.1
)%
Trade Books
 
(3.2
)
 
(5.8
)%
Other
 
(0.6
)
 
(88.9
)%
Total Comparable Store Sales
 
$
(50.6
)
 
(3.0
)%
Comparable store sales for BNC decreased for the 52 weeks ended April 29, 2017 and were negatively impacted primarily by lower student enrollment, specifically in two-year community colleges, increased consumer purchases directly from publishers and other online providers, and other recent negative retail trends. The components of the variances are reflected in the table above.

40


New and used textbook revenue for BNC for the 52 weeks ended April 29, 2017 decreased primarily due to lower new and used textbook sales, while eTextbook revenue increased due to expanded eTextbook title offerings. General merchandise sales for BNC decreased for the 52 weeks ended April 29, 2017 primarily due to lower computer product, school supplies and convenience sales, partially offset by higher emblematic apparel sales.
Cost of Sales and Gross Margin
Our cost of sales increased as a percentage of sales to 75.6% during the 52 weeks ended April 29, 2017 compared to 74.9% during the 52 weeks ended April 30, 2016. Our gross margin increased $4.0 million, or 0.9%, to $457.4 million, or 24.4% of sales, during the 52 weeks ended April 29, 2017 from $453.3 million, or 25.1% of sales, during the 52 weeks ended April 30, 2016. The cost of sales eliminations of $0.6 million represents the elimination of intercompany profit in ending inventory.
The cost of sales and gross margin for MBS was $29.4 million or 86.1% and $4.7 million or 13.9%, respectively, from the acquisition date, February 27, 2017, to April 29, 2017. The MBS gross margin as a percentage of sales is impacted by significantly lower sales for MBS realized during the fourth quarter (generally February through April) as the majority of the quarter is focused on purchasing inventory for the upcoming Fall semester, fixed warehouse facility and operation costs, as well as the incremental cost of sales related to recording MBS inventory at fair value as of the acquisition date.
The following table summarizes the BNC cost of sales for the 52 weeks ended April 29, 2017 and April 30, 2016
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 29,
2017
 
% of
Related Sales
 
April 30,
2016
 
% of
Related Sales
Product and other cost of sales
 
$
1,256,004

 
78.0%
 
$
1,224,955

 
77.5%
Rental cost of sales
 
136,305

 
58.1%
 
129,725

 
56.8%
Total Cost of Sales
 
$
1,392,309

 
75.4%
 
$
1,354,680

 
74.9%
The following table summarizes the BNC gross margin for the 52 weeks ended April 29, 2017 and April 30, 2016 :
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 29,
2017
 
% of
Related Sales
 
April 30,
2016
 
% of
Related Sales
Product and other gross margin
 
$
355,051

 
22.0%
 
$
354,662

 
22.5%
Rental gross margin
 
98,201

 
41.9%
 
98,687

 
43.2%
Gross Margin
 
$
453,252

 
24.6%
 
$
453,349

 
25.1%
For the 52 weeks ended April 29, 2017, the BNC gross margin as a percentage of sales decreased due to lower margin rate and higher costs related to our college and university contracts resulting from contract renewals and new store contracts, partially offset by a favorable sales mix as discussed below:
Product and other gross margin decreased (50 basis points), driven primarily by lower margin rates (50 basis points), primarily related to increased markdowns on textbooks, including the impact of our price-matching program (15 basis points), and increased costs related to our college and university contracts (25 basis points) resulting from contract renewals and new store contracts. These decreases were partially offset by improved shrink results (20 basis points) and a favorable sales mix (15 basis points) resulting from an increase in sales of higher margin general merchandise.
Rental gross margin decreased (135 basis points), driven primarily by lower rental margin rates (120 basis points), including the impact of our price-matching program (40 basis points) and increased costs related to our college and university contracts (20 basis points) resulting from contract renewals and new store contracts. This decrease was partially offset by a favorable rental mix (5 basis points).
Selling and Administrative Expenses
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 29,
2017
 
% of
Sales
 
April 30,
2016
 
% of
Sales
Selling and Administrative Expenses
 
$
379,095

 
20.2%
 
$
372,821

 
20.6%
During the 52 weeks ended April 29, 2017 , selling and administrative expenses increased $6.3 million, or 1.7%, to $379.1 million from $372.8 million during the 52 weeks ended April 30, 2016 . The increase was primarily due to the selling and administrative expenses for MBS of $8.3 from the acquisition date, February 27, 2017, to April 29, 2017.

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BNC's selling and administrative expenses decreased by $2.0 million, or 0.5%, to $370.8 million from $372.8 million during the 52 weeks ended April 30, 2016 . The decrease was due primarily to an $11.2 million net decrease in digital expenses related to the restructuring of our digital operations (as discussed below), net of increased costs related to our LoudCloud digital operations, and a $6.4 million decrease in comparable store payroll and operating expenses. These decreases were partially offset by a $14.6 million increase in new store payroll and operating expenses (net of closed stores), as a result of a $85.7 million increase in new store sales (net of closed stores), and a $0.9 million increase in corporate payroll and infrastructure costs, including increased costs associated with an acquired business.
Depreciation and Amortization Expense
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 29,
2017
 
% of
Sales
 
April 30,
2016
 
% of
Sales
Depreciation and Amortization Expense
 
$
53,318

 
2.8%
 
$
52,690

 
2.9%
Depreciation and amortization expense increased $0.6 million, or 1.2%, to $53.3 million during the 52 weeks ended April 29, 2017 from $52.7 million during the 52 weeks ended April 30, 2016 . This increase was primarily attributable to incremental depreciation resulting from recording MBS property and equipment and identified intangibles at fair value as of the acquisition date and additional capital expenditures for BNC.
Transaction Costs
Transaction costs were $9.6 million during the 52 weeks ended April 29, 2017 compared to $2.4 million during the 52 weeks ended April 30, 2016 . We incur transaction costs for business development and acquisitions. For additional information related to our recent acquisitions, see Part II - Item 8. Financial Statements and Supplementary Data - Note 4. Acquisitions and Strategic Agreements.
Impairment Loss (non-cash) and Restructuring Costs
In Fiscal 2016, we implemented a plan to restructure our digital operations in our BNC segment. 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, in our BNC segment, we announced a reduction in staff and closure of the facilities in Mountain View, California, and Redmond, Washington that supported the Yuzu ® eTextbook platform. The cost of severance, retention, and other restructuring costs (i.e. facility exit costs) was $8.8 million and $1.8 million in Fiscal 2016 and Fiscal 2017, respectively. The restructuring was completed during Fiscal 2017.
Operating Income
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 29,
2017
 
% of
Sales
 
April 30,
2016
 
% of
Sales
Operating Income
 
$
13,555

 
0.7%
 
$
4,623

 
0.2%
In Fiscal 2017, our operating income was $13.6 million during the 52 weeks ended April 29, 2017 . The increase compared to Fiscal 2016 was due to the matters discussed above. In Fiscal 2017, operating income, excluding eliminations of $(0.6) million, for BNC and MBS was $18.8 million and $(4.6) million, respectively, during the 52 weeks ended April 29, 2017 . MBS results are consolidated from the acquisition date, February 27, 2017, to April 29, 2017. MBS has significantly lower sales realized during the fourth quarter (generally February through April) as the majority of the quarter is focused on purchasing inventory for the upcoming Fall semester. Excluding the transaction costs of $9.6 million and restructuring costs of $1.8 million, operating income for BNC was $30.2 million (or 1.6% of total sales) during the 52 weeks ended April 29, 2017.
In Fiscal 2016, our operating income was $4.6 million due to the matters discussed above. Excluding the impairment loss of $12.0 million, restructuring costs of $8.8 million, and transaction costs 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.
Interest Expense, Net
 
 
52 weeks ended
Dollars in thousands
 
April 29, 2017
 
April 30, 2016
Interest Expense, Net
 
$
3,464

 
$
1,872

Net interest expense increased by $1.6 million to $3.5 million during the 52 weeks ended April 29, 2017 from $1.9 million during the 52 weeks ended April 30, 2016 primarily due to increased borrowings under the Credit Facility and FILO Facility entered into during Fiscal 2017. On February 27, 2017, in connection with the acquisition of MBS, we amended our existing credit

42


agreement to add a new $100 million incremental first in, last out seasonal loan facility, and borrowed approximately $55 million under the credit facility to fund the acquisition at February 27, 2017.
Income Tax Expense
 
 
52 weeks ended