Attached files

file filename
EX-32.2 - EXHIBIT 32.2 Q418 - Barnes & Noble Education, Inc.bned-ex322_20180428xq418.htm
EX-32.1 - EXHIBIT 32.1 Q418 - Barnes & Noble Education, Inc.bned-ex321_20180428xq418.htm
EX-31.2 - EXHIBIT 31.2 Q418 - Barnes & Noble Education, Inc.bned-ex312_20180428xq418.htm
EX-31.1 - EXHIBIT 31.1 Q418 - Barnes & Noble Education, Inc.bned-ex311_20180428xq418.htm
EX-23.1 - EXHIBIT 23.1 CONSENT - Barnes & Noble Education, Inc.bned-ex231_20180428xq418.htm
EX-21.1 - EXHIBIT 21.1 LIST OF SUBSIDIARIES - Barnes & Noble Education, Inc.bned-ex211_20180428xq418.htm

 
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 28, 2018
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 $301 million based upon the closing market price of $6.52 per share of Common Stock on the New York Stock Exchange as of October 28, 2017. As of June 8, 2018, 46,916,616 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 2018 Annual Meeting of Shareholders are incorporated by reference into Part III.
 



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


2


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 and content providers 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;
the strategic objectives, successful integration, anticipated synergies, and/or other expected potential benefits of various acquisitions, including MBS Textbook Exchange, LLC and Student Brands, LLC, 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;
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 including new digital channels, 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;
risks associated with operation or performance of MBS Textbook Exchange, LLC’s point-of-sales systems that are sold to college bookstore customers;
changes to purchase or rental terms, payment terms, return policies, the discount or margin on products or other terms with our suppliers;
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;
the risk of price reduction or change in format of course materials by publishers, which could negatively impact revenues and margin;
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;

3


disruption of or interference with third party web service providers and our own proprietary technology;
work stoppages or increases in labor costs;
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 domestic and international laws or regulations, including U.S. tax reform, changes in tax rates, laws and regulations, as well as related guidance;
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, 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.

4


EXPLANATORY NOTE
The consolidated financial statements for the 13 and 52 weeks ended April 28, 2018 include the financial results of MBS Textbook Exchange, LLC ("MBS") for the entire period and include the financial results of Student Brands, LLC from the date of acquisition, August 3, 2017. The consolidated financial statements for the 13 and 52 weeks ended April 29, 2017 include the financial results of MBS from the acquisition date, February 27, 2017, and exclude the financial results of Student Brands, LLC. All material intercompany accounts and transactions have been eliminated in consolidation.
Prior to the fourth quarter of fiscal year 2018, we had two reportable segments: BNC and MBS. In connection with our focus on developing digital solutions, during the fourth quarter of fiscal year 2018, the Company realigned its business into the following three reportable segments: BNC, MBS and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, are presented as “Corporate Services”.
The BNC Segment is comprised of the operations of Barnes & Noble College Booksellers, LLC ("BNC") which operates 768 physical campus bookstores, the majority of which also have school-branded e-commerce sites operated by BNC and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. BNC also offers its First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class. Additionally, the BNC segment offers a suite of digital content, software, and services to colleges and universities through our LoudCloud platform, such as predictive analytics, a variety of open educational resources courseware, and a competency-based learning platform.
The MBS Segment is comprised of MBS Textbook Exchange, LLC's ("MBS") two highly integrated businesses: MBS Direct which operates 676 virtual bookstores for college and university campuses, and K-12 schools, and MBS Wholesale which is one of the largest textbook wholesalers in the country. MBS Wholesale's business centrally sources and sells new and used textbooks to more than 3,500 physical college bookstores, including BNC’s 768 campus bookstores. MBS Wholesale sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 430 college bookstores.
The Digital Student Solutions ("DSS") Segment includes direct-to-student product and service offerings to assist students to study more effectively and improve academic performance, thus enabling them to gain the valuable skills necessary to succeed after college. DSS is comprised of the operations of Student Brands, LLC, a leading direct-to-student subscription-based writing services business, with approximately 100,000 subscribers across its digital properties, as well as tutoring and test prep services offered through our partnership with The Princeton Review. We currently offer these online student services directly to students, and increasingly will be leveraging our BNC and MBS physical and virtual bookstore footprint to market directly to students where we serve as the campus bookstore. We continue to aggressively expand our ecosystem of products and services through our own internal development, as well as by partnering with other companies to provide a complete hub of products and services designed to improve student success and outcomes.
Corporate Services represents unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources.
Our consolidated financial statements reflect the following reclassifications for consistency with the current year presentation:
Cost of Sales expenses primarily related to facility costs and insurance for the Corporate Services component have been reclassified to Selling and Administrative Expenses.
For our digital rental products, we have reclassified Rental Income to Product Sales and Other, and have reclassified Rental Cost of Sales to Product and Other Cost of Sales, with no impact to Gross Margin. Digital rental revenue and digital rental cost of sales are recognized at the time of delivery and are not deferred over the rental period.
Prior periods presented reflect the segment presentation and reclassifications noted above. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.






5


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. References to "Student Brands" refer to our direct-to-student subscription-based writing services business operated through our subsidiary Student Brands, LLC.
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. “Fiscal 2018” means the 52 weeks ended April 28,2018, “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, and “Fiscal 2014” means the 53 weeks ended May 3, 2014.
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 K-12 institutions across the United States, one of the largest textbook wholesalers and inventory management hardware and software providers, and a leading provider of digital education solutions. Through our Barnes & Noble College (“BNC”) and MBS Textbook Exchange (“MBS”) subsidiaries, we operate 1,444 physical and virtual bookstores and serve more than 6 million students, delivering essential educational content and tools within a dynamic retail environment. Additionally, through our Student Brands subsidiary and associated websites, a leading direct-to-student subscription-based writing services business, we offer services to approximately 100,000 subscribers, by offering student assistance through the writing process and journey.
The strengths of our business, as discussed below, includes our ability to compete by developing new products and solutions to meet market needs, our large footprint with direct access to students and faculty, our well-established, deep relationships with partners and stable, long-term contracts and our well-recognized brands. We expect to continue to grow our business by introducing scalable and advanced digital solutions focused largely on the student, increasing market share with new accounts, and expanding our strategic opportunities through acquisitions and partnerships.
As demand for new, enhanced, and more affordable products and services increase in the rapidly changing education landscape, we strive to evolve our business model and enhance our solutions. 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. 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.
Technology-enabled learning is a rapid growth area in the higher education industry, as a growing number of students are enrolling in online services to complement print and digital course materials and classroom activities. We continue to enhance our digital content and services in an efficient, low-cost/high-value manner to complement our course materials business. The implementation of our core digital strategy relies on our direct access to students from our bookstore operations, where we can attach our existing and future suite of digital products and services both online and in our stores.
We are ready to meet the digital demand with our virtual bookstore and e-commerce solutions. We focus on providing affordable solutions, such as our First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class. Additionally, LoudCloud Courseware™, is a turnkey solution for colleges and universities that offers advanced, affordable learning materials built on a high-quality foundation of OER or custom developed content from experts and faculty, as well as enhanced with digital content that includes videos, activities and auto-graded practice assessments that faculty can easily customize to align with class objectives. LoudCloud Courseware™ significantly reduces course material costs for students and enables easier implementation for faculty.
We offer our Student Brands solutions focused on providing students assistance through the writing process and journey. We offer these online solutions to students via internet search engine optimization ("SEO"), as well as by marketing directly to students in our BNC and MBS physical and virtual bookstore footprint.
We believe that our strategic actions over the past three years, including the acquisitions of LoudCloud Systems, Inc. ("LoudCloud"), MBS and Student Brands, respectively, and ongoing development of courseware, have substantially enhanced

6


our competitive position. Fiscal 2018 was a transformational period in which we began to leverage our newly-expanded customer base and distribution channels to broaden our reach to students and deepen our institutional partnerships. We continue to focus on providing product and service offerings designed to address the most pressing issues in higher education, including affordable and accessible course materials and products designed to drive and improve student outcomes.
Strengths of Our Businesses
The major strengths of our businesses are as follows:
Ability to Compete by Developing New Products and Solutions to Meet Market Needs. We offer a comprehensive range of cost-effective alternatives for course materials. As demand for new, enhanced, and more affordable products and services increase in the rapidly changing education landscape, we strive to evolve our business model and enhance our solutions. We continue to aggressively innovate and collaborate with our partners to provide solutions that extend well beyond course materials to include new digital services that increase the likelihood of successful student outcomes.
First Day™. We offer our First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class. We have entered into several agreements with major publishers, including Cengage, McGraw-Hill Education and Pearson, to distribute their e-content through First Day™.
Comprehensive Suite of Course Materials. Our physical and virtual bookstores and accompanying e-commerce sites offer new and used, print and digital course materials, which are available to buy or rent. Through our MBS Wholesale business, we possess a robust inventory comprised of approximately 300,000 textbook titles in stock and maintain a comprehensive catalog of new and used textbooks and digital course material solutions.
Additionally, MBS was selected as a national distributor for rental textbooks offered through McGraw-Hill Education's newly announced consignment rental program (which includes approximately 230 titles) and Pearson Education’s expanded consignment rental program (which includes approximately 150 titles). Through its centrally located, advanced distribution center, MBS will offer the seamless integration of these consignment rental programs and centralized administration and distribution to more than 3,500 stores. These consignment rental programs will also be made available to MBS Wholesale customers, including institutionally run and contract managed campus bookstores, as well as BNC physical bookstores, and MBS Direct customers.
LoudCloud Courseware. Our courseware, utilizing open educational resources ("OER") and other expert sources, is a cost-effective solution enhanced with digital content that includes videos, activities and auto-graded practice assessments that faculty can easily customize to align with class objectives. In Fiscal 2018, consistent with our LoudCloud Courseware™ development road map, we expanded our courseware titles from 10 to 32 course titles, with sales to approximately 21,000 students at 40 colleges and universities, including technical colleges and online programs. LoudCloud Courseware™ significantly reduces course material costs for students and enables easier implementation for faculty.
Student Solutions. Direct-to-student businesses focused on study tools, writing help, all centered around assisting students with the writing process and journey. Student Brands addresses writing pain points; students can search for a topic, develop an outline, and access authenticity technology. The content database allows students to leverage academic resources and references, with over 26 million essays across 4 languages representing more than 15 different countries, and receives more than 20 million unique monthly visitors to its sites. Student Brands has a substantial and growing community of online learners, with approximately 100,000 subscribers across its digital properties. We continue to aggressively expand our ecosystem of products and services through our own internal development, as well as by partnering with other companies to provide a complete hub of products and services designed to improve student success and outcomes.
Large Footprint with Direct Access to Students and Faculty. We operate 1,444 physical and virtual bookstores and serve more than 6 million students enrolled in higher education institutions and K-12 institutions. Through Student Brands and its affiliated websites, we extend our footprint directly to students as we offer services focused on writing help to approximately 100,000 subscribers using our digital properties, across 4 languages representing more than 15 different countries.
Social Hub and Customer Connections. At our physical campus bookstores, we serve as social hubs for students and their faculty, allowing us to forge deep customer relationships that help us drive awareness of our services and loyalty. For our MBS Direct and MBS Wholesale businesses, we are connected with our customers’ students online and through our proprietary systems. As a result of our proprietary data on students and textbook adoptions, we can develop prescriptive content and services to help students.
System Integrations with Our Higher Education Partners. We are deeply ingrained in the course material adoption processes of our customers and seamlessly integrate their systems with our technology. Both BNC and MBS have highly

7


integrated technology that streamlines the adoption process for faculty, enabling them to research and submit textbook adoptions online. Our technology solutions support informed decisions made by faculty on course material selection, provide information regarding title and format availability and the cost to students.
Understanding Our Demographics. 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. We leverage and monetize our unique access to college students for third party brand partners looking to target the college demographic.
Well-Established, Deep Relationships with Partners and Stable, Long-Term Contracts. We have strong partnerships with college and university administrators, as well as with publishers, vendors, and suppliers. We strive to be the first stop for students, educators, and administrators by offering existing and prospective clients the most comprehensive solutions available with our flexible physical, virtual, and hybrid bookstore models.
Relationships with Colleges and Universities. 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. BNC's management contracts with colleges and universities typically include five year terms with renewal options and are typically cancelable by either party without penalty with 90 to 120 days' notice. Our BNC campus bookstores have an average relationship tenure of 15 years. From Fiscal 2015 through Fiscal 2018, over 90% of these contracts were renewed or extended, often before their termination dates. Our BNC decentralized management structure empowers local teams to make decisions based on the local campus needs and fosters collaborative working relationships with our partners.
Virtual bookstores offered through MBS Direct operate under a contract with the school as the exclusive online seller of course materials. For the past three years, we have retained over 90% of our contracts annually, with the majority of the contracts being automatically renewed as per the contract terms or renewed before their expiration dates. 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, and superior service and systems support. MBS Wholesale sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 430 college bookstores.
Relationships with Publishers. We have long-term relationships with over 10,000 publishers, who partner with us to access one of the largest distribution networks of college and K-12 educational materials in the United States.
Well-Recognized Brands. The Barnes & Noble and MBS brands are virtually synonymous with bookselling, and we believe are widely recognized and respected brands in the United States. Our large 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.
Growth Drivers
The primary factors that we expect will enable us to grow our businesses and profitability are as follows:
Scalable and Advanced Digital Solutions Focused Largely on the Student. The implementation of our digital strategy leverages our significant bookstore management assets, both physical and virtual, our student relationships, and our well established brands to help accelerate the adoption of our new digital products and services. Our physical and virtual bookstore footprint, and associated student relationships, present a sizable addressable market for the Company’s new digital products and services. By their nature, our new digital solutions are designed to be marketed and sold both inside and outside our physical and virtual bookstore footprint. We continue to enhance and invest in our digital content and solutions to complement and leverage our bookstore and wholesale businesses. The revenue from these services have higher margin rates due to the relatively fixed cost structure of these operations.
Technology-enabled learning is a rapid growth area in the higher education industry, as a growing number of students are enrolling in online services to complement print and digital course materials and classroom activities, and we are ready to meet demand with our virtual bookstore and e-commerce solutions, our LoudCloud Courseware™ offerings, and our direct to student writing and learning solutions. We plan to leverage our physical and virtual product offerings by bundling our complementary digital solutions to improve student success and outcomes.
During Fiscal 2019, we will invest in our student success platform and proprietary content to drive our ecosystem of products and services.  In the future, our strategy is to aggressively grow the DSS segment via: (i) internally developed new products and services; (ii) through acquisitions of companies, products and services; (iii) and by partnering with other leading service providers, like The Princeton Review. Unlike other providers of digital services to students, our well-established, deep relationships with college and university partners, as well as our physical presence on campus, provides us with a significant competitive advantage as we roll out new products and services on the campuses and universities we serve. This integration

8


with the products and services from our other operating segments allows us to offer students new products and services in an increasingly relevant, cost effective, and targeted way.  The addressable market outside our physical and virtual bookstore footprint is an additional area where we plan to market these products and services to students.
Increasing Market Share with New Accounts. New store openings are an important driver of growth. In Fiscal 2018, BNC signed contracts for 33 new physical bookstores for estimated first year annual sales of $66 million. In Fiscal 2018, MBS signed contracts for 21 new virtual bookstores for estimated first year annual sales of $6 million. Currently, over 50% of college and university affiliated physical bookstores in the United States are operated by their respective institutions. We anticipate the trend towards outsourcing in the campus bookstore market, and we intend to aggressively pursue these opportunities to grow our BNC and MBS businesses. We evaluate each new contract based on established profitability measures to ensure we maintain a portfolio of profitable accounts. Our ability to offer existing and prospective clients physical, virtual and hybrid bookstore models is a key element of our competitive strategy.
Expanding Our 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. Acquisitions and partnerships, such as Student Brands, LoudCloud and MBS, helped us expand into new educational verticals and markets, but other markets for expansion remain, including international markets. These will continue to be opportunistically evaluated.
Segments
Prior to the fourth quarter of fiscal year 2018, we had two reportable segments: BNC and MBS. In connection with our focus on developing digital solutions, during the fourth quarter of fiscal year 2018, the Company realigned its business into the following three reportable segments: BNC, MBS and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, are presented as “Corporate Services”.
We identified our segments in accordance with 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. The following summarizes the three segments, with additional information in each respective subsequent segment discussion.
BNC Segment
The BNC Segment is comprised of the operations of BNC which operates 768 physical campus bookstores, the majority of which also have school-branded e-commerce sites operated by BNC and which offers students access to affordable course materials and affinity products, including emblematic apparel and gifts. BNC also offers its First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class. Additionally, the BNC segment offers a suite of digital content, software, and services to colleges and universities through our LoudCloud platform, such as predictive analytics, a variety of open educational resources courseware, and a competency-based learning platform.
MBS Segment
The MBS Segment is comprised of MBS's two highly integrated businesses: MBS Direct which operates 676 virtual bookstores for college and university campuses, and K-12 schools, and MBS Wholesale which is one of the largest textbook wholesalers in the country. MBS Wholesale's business centrally sources and sells new and used textbooks to more than 3,500 physical college bookstores, including BNC’s 768 campus bookstores. MBS Wholesale sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 430 college bookstores.
DSS Segment
The Digital Student Solutions ("DSS") segment includes direct-to-student product and service offerings to assist students to study more effectively and improve academic performance, thus enabling them to gain the valuable skills necessary to succeed after college. DSS is comprised of the operations of Student Brands, LLC, a leading direct-to-student subscription-based writing services business, with approximately 100,000 subscribers across its digital properties, as well as tutoring and test prep services offered through our partnership with The Princeton Review. We currently offer these online student services directly to students, and increasingly will be leveraging our BNC and MBS physical and virtual bookstore footprint to market directly to students where we serve as the campus bookstore. We continue to aggressively expand our ecosystem of products and services through our own internal development, as well as by partnering with other companies to provide a complete hub of products and services designed to improve student success and outcomes.

9


BNC SEGMENT
General
The BNC segment is comprised of the operations of BNC which operates physical college and university campus bookstores, the majority of which also have school-branded e-commerce sites operated by BNC, offering students access to affordable course materials and affinity products, including emblematic apparel and gifts. BNC physical bookstores, e-commerce sites and digital platforms serve and interact with the key constituents in our business ecosystem and act as a key partner for students, universities and publishers.
Contracts
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. BNC offers existing and prospective clients the flexibility of physical, virtual and hybrid bookstore models.
Agreements are typically five years with renewal options and are typically cancelable by either party without penalty with 90 to 120 days' notice. BNC pays 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, BNC has the non-exclusive right to sell all items typically sold in a college bookstore both in-store and online. BNC also has the ability to integrate its systems with the university’s systems in order to accept student financial aid, university debit cards and other forms of payment. Over the past four years, BNC has renewed more than 90% of their agreements, with the majority of the agreements being renewed before their expiration dates.
Customers and Distribution Network
As of April 28, 2018, BNC operates 768 physical college and university bookstores operations located in the United States, in 43 states and the District of Columbia. During Fiscal 2018, BNC opened 33 stores with estimated first year annual sales of $66 million, and closed 34 stores with estimated first year annual sales of $47 million. As of June 11, 2018, BNC has signed additional contracts for 21 new stores with estimated first year annual sales of $55 million, which are expected to open during Fiscal 2019 and expects to close 25 stores with estimated first year annual sales of $35 million. Closed stores are comprised of contracts that may have been lost in a competitive bid process, satellite store locations that we elect to close but continue to operate the main contract, and other contracts with low sales volume. We evaluate each new contract based on established profitability measures to ensure we maintain a portfolio of profitable stores.
Product and Service Offerings
BNC's campus stores are social and academic hubs through which students can access affordable course materials and affinity products, including new and used print, eTextbooks, and e-content, which are available for sale or rent; emblematic apparel and gifts; trade books; technology; school and dorm supplies; café offerings; convenience food and beverages; and graduation products. The majority of campus stores also have school-branded e-commerce sites operated by BNC which offer the same products as the on campus stores. BNC offerings also include a variety of digital content, courseware and software and related services, such as predictive analytics, and competency-based learning solutions. Product and service offerings include:
Course Material Sales and Rentals. Sales and rentals of course materials are a core revenue driver and BNC's online platform and registration solutions are deeply ingrained in their partner schools’ textbook selection process. BNC works 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 BNC to optimize textbook sourcing so they are able to more efficiently source and distribute a comprehensive inventory of affordable course materials to customers.
BNC offers its First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class. We have entered into several agreements with major publishers, including Cengage, McGraw-Hill Education and Pearson, to provide their e-content through First Day™, or directly to BNC campus bookstores and MBS Direct virtual bookstores. The seamless delivery is made possible by our First Day™ technology and publishers' technology integrations with campus systems. These initiatives provide students, faculty and institutions greater access to more affordable course materials.
In Fiscal 2018, we signed an agreement with McGraw-Hill Education, in which MBS was selected as a national distributor for rental textbooks offered through McGraw-Hill Education's newly announced consignment rental program. The program includes approximately 230 titles. Through its centrally located, advanced distribution center, MBS will offer the seamless integration of McGraw-Hill Education's consignment rental program and centralized administration and distribution to more than 3,500 stores. McGraw-Hill Education's consignment rental program will also be made available to MBS Wholesale

10


customers, including institutionally run and contract managed campus bookstores, as well as BNC physical bookstores, and MBS Direct customers.
LoudCloud Courseware. LoudCloud Courseware™, a turnkey solution for colleges and universities, offers advanced, affordable learning materials built on a high-quality foundation of open educational resources and enhanced with digital content that includes videos, activities and auto-graded practice assessments that faculty can easily customize to align with class objectives. LoudCloud Courseware™ significantly reduces course material costs for students and enables easier implementation for faculty. LoudCloud Courseware™ is delivered digitally on BNC's LoudCloud platform, with analytics integrated into the solution, and companion print versions available to students and educators to provide flexibility to learn and teach in either format. Courseware offerings include general education courses, including sociology, psychology and economics. In May 2018, as part of its ongoing mission to drive affordability and accessibility, BNC announced that it lowered the price of its courseware and expanded its available subject offerings to 32 courses for the fall 2018 semester, which is consistent with our LoudCloud Courseware™ development road map. In Fiscal 2018, we had LoudCloud Courseware™ sales to approximately 21,000 students at 40 colleges and universities, including technical colleges and online programs.
eTextbooks. BNC has 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. BNC drives general merchandise sales through both its in-store and online channels and features collegiate and athletic apparel, other custom-branded school spirit products, technology products, supplies and convenience items. We continue to see significant growth in our general merchandise e-commerce sales, with year over year growth of 22.8% in Fiscal 2018. Additionally, BNC's Promoversity subsidiary's standalone e-commerce solution can serve any school, corporation or group looking for customized apparel, corporate gifts and novelties, and other merchandise.
As of April 28, 2018, BNC operates 87 True Spirit e-commerce websites, which are dedicated virtual stores that appeal specifically to the alumni and sports fan base. BNC also operates pop-up retail locations at major sporting events, such as football and basketball games, for our partner colleges and universities. The True Spirit e-commerce websites for athletic branded merchandise and the physical pop-up retail locations continue to build our partner schools’ brands through alumni and athletics, fostering school spirit and capturing the excitement of collegiate sports. We utilize event driven direct marketing strategies for events, such as tournament playoffs or homecoming events, to target an online population of students, alumni and sports fans, with emails and search engine marketing.
Cafes and Convenience Stores. BNC operates 86 customized cafés, featuring Starbucks Coffee®, and 18 stand-alone convenience stores, as well as diverse grab-and-go options including organic, vegan, gluten-free and ethnic fare. These offerings increase traffic and time spent in our physical stores.
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 and competency learning solutions. Our LoudSight predictive analytics solution captures and analyzes key demographic, behavioral and performance metrics from students and provides real-time alerts, allowing educators to identify, monitor and support at-risk students 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. LoudSight has the ability to capture and analyze over 200 parameters across demographic, performance and participation data points.
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 Fiscal 2018 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.
We announced our strategic partnership with Portland State University ("PSU") to co-develop a degree planning solution. Using insights generated by PSU's reTHINK initiative and leveraging our analytics platform, the solution will ultimately help more students graduate on time with better pathways to employment and provide the university with long-term demand planning tools.
Brand Partnerships. Through BNC's unique relationship with students, colleges and universities, and our premier position on campus, BNC operates as a media channel for brands looking to target the college demographic, and derives revenue from these marketing share programs. BNC creates strategic, integrated campaigns which include research, email, social media, display advertising, on-campus events, signage, and sampling. BNC's client list includes brands, such as Chase, Target,

11


Masterpass, GEICO, DirecTV, Verizon, The New York Times and Tom's of Maine. Revenue from these services have higher margin rates due to the relatively low incremental cost structure to provide these services.
Merchandising and Supply Chain Management
BNC's purchasing procedures vary by product type (i.e. textbooks, general merchandise or trade books). Purchases are made at the store level with strategic corporate oversight, to determine purchase quantities and maintain appropriate inventory levels. After titles are adopted for an upcoming term, the BNC store staff determine how much inventory to purchase based on several factors, including student enrollment and the previous term’s textbook sales history. BNC uses an automated sourcing systems to determine if its stores have the necessary new or used textbooks on hand and may transfer the inventory to the appropriate store. Our acquisition of MBS significantly increased our textbook supply at competitive prices, as well as our ability to liquidate non-returnable inventory. MBS’s broad wholesale distribution channel and warehousing systems also drive inventory efficiencies, allowing BNC to optimize its textbook sourcing and purchasing processes.
After internal sourcing, BNC purchases books from outside suppliers. As part of its contracts with institutions, BNC generally guarantees that it will order textbooks for all courses. BNC's primary suppliers of new textbooks include Pearson Education, Cengage Learning, McGraw-Hill Education, MacMillan, and John Wiley & Sons. BNC's 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, BNC utilizes sophisticated inventory management platforms to manage pricing and inventory across all its stores.
The larger stores feature an expanded selection of trade books (general reading) and use the Barnes & Noble, Inc. Book Master system, a proprietary merchandising system licensed from Barnes & Noble, Inc. BNC home office merchants meet with publishers on a regular basis to identify new titles and trends to support this changing business.
General merchandise vendors and products are initially selected by home office merchants using the analytics and insights from BNC's planning and allocation systems. This data is used to establish benchmarks across school type, region and the demographics of each of our partner institution’s student base to help local store management team forecast sales and trends.
Omni Channel Retailer and Customer Marketing Strategies
BNC obtains student and faculty email lists for direct communication which provides for seamless integration into the university community and potential co-branded marketing opportunities. BNC's ability to support and promote our partner schools’ brands strengthens and deepens our relationships with the administration, faculty, alumni, parents and students. BNC's omni channel 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.
Faculty
BNC connects with approximately 390,000 faculty members who use FacultyEnlight®, our proprietary online platform which enhances content search, discovery and adoption (i.e. textbook selection), enabling them to find and select the course materials that are both relevant to their subject matter and affordable to their students.
Students and Parents
BNC's Campus Connect Technologies platform is customizable technology that delivers a seamless experience, providing students and faculty with the ability to research, locate and purchase the most affordable course materials. The platform includes registration integration, learning management system integration, real-time financial aid platform, point of sale platform and course fee solution. Through BNC's 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.
BNC has flexible research channels that help us stay ahead of the rapidly changing needs and behaviors of our customers, and proactively respond with dynamic solutions. BNC's College InsightsTM platform connects with more than 8,000 college students, and helps us to create the ideal customer experience. BNC's marketing efforts are centered around an active digital community of over 6.8 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. BNC's exclusive Student Point of View ("POV") online panel and our Parent POV online panel helps BNC to better understand their attitudes, values and behaviors. Nationwide, during the current fiscal year, BNC has built approximately one million connections with incoming students and their parents. Using a marketing automation platform, BNC segments students based on demographics and purchasing behavior to ensure its audience receives the most relevant messages and experience. BNC's dynamic email campaigns educate students on format and affordability options, as well as ongoing promotions from game day to graduation.

12


Alumni
Additionally, BNC's access to alumni through university alumni offices, including over 1.3 million alumni with existing customer accounts, allow BNC to leverage digital marketing strategies on its 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.
MBS SEGMENT
General
The MBS segment is comprised of the operations of our MBS subsidiary, which we acquired in February 2017, and which operates two highly integrated businesses: MBS Direct and MBS Wholesale, as described below. MBS enables the Company to generate more value from the textbook marketplace through inventory and procurement synergies, increases our addressable market for digital courseware solutions and services, and allows the Company to offer existing and prospective clients physical, virtual and hybrid bookstore models, which is a key element of our competitive strategy.
Contracts
Virtual bookstores offered through MBS Direct operate under a contract with the school as the exclusive online seller of course materials. Agreements typically have a term that ranges between 3-5 years, with automatic renewal periods. For the past three years, MBS has annually retained over 90% of its contracts, with the majority of the contracts being automatically renewed as per the contract or renewed before their expiration dates.
MBS Direct signed contracts for 21 new virtual stores in Fiscal 2018 with estimated first year annual sales of $6 million, and closed 57 stores. As of June 8, 2018, MBS has signed additional contracts for 25 new relationships in Fiscal 2019 for estimated first year annual sales of $9 million. Closed contracts are primarily comprised of contracts that may have been lost in a competitive bid process, as well as contracts with low sales volume. We evaluate each new contract based on established profitability measures to ensure we maintain a portfolio of profitable accounts.
Customers and Distribution Network
MBS Direct
The MBS Direct business is the largest contract operator of virtual bookstores for college and university campuses, and K-12 schools, operating 676 virtual bookstores. 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 also operates Textbooks.comSM which is one of the largest e-commerce sites for new and used textbooks. This division is primarily for direct-to-student sales.
As of April 28, 2018, MBS Direct operated 448 K-12 virtual stores (66%) and 228 Higher Education virtual stores (34%) in approximately 48 states, and District of Columbia and Puerto Rico. In Fiscal 2018, sales from K-12 virtual stores were approximately 25% of total sales and sales from Higher Education virtual stores were approximately 75% of total sales.
MBS Wholesale
MBS Wholesale is one of the largest textbook wholesalers in the country, providing a comprehensive selection of new and used textbooks at a lower cost of supply to more than 3,500 physical bookstores, including BNC’s 768 campus bookstores. MBS Wholesale sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 430 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.
Product and Service Offerings
Product and Service offerings include:
Course Material Sales and Rentals. MBS Direct services 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. Additionally, MBS Direct sells new, used and digital textbooks directly to students through Textbooks.comSM, one of the largest e-commerce sites for new and used textbooks. MBS’s Wholesale distribution channel

13


enables MBS Direct to optimize its textbook sourcing so it is able to more efficiently source and distribute a comprehensive inventory of affordable course materials to customers. MBS Direct also digitally delivers cost-effective course materials via inclusive access programs to ensure students have their course materials on the first day of class. Similar to the BNC segment, MBS Direct partnered with McGraw-Hill Education and Pearson to offer their e-content through the inclusive access programs through the MBS Direct virtual bookstores. For additional information, see the BNC Segment discussion.
Wholesale Textbook Distribution. MBS Wholesale centrally sources and sells new and used textbooks to over 3,500 physical college bookstores, including BNED’s 768 campus bookstores. MBS Wholesale's large inventory of used textbooks consists of approximately 300,000 textbook titles in stock, and it has a highly automated distribution facility that processes more than 13 million textbooks annually.
Additionally, MBS was selected as a national distributor for rental textbooks offered through McGraw-Hill Education's newly announced consignment rental program (which includes approximately 230 titles) and Pearson Education’s expanded consignment rental program (which includes approximately 150 titles). Through its centrally located, advanced distribution center, MBS will offer the seamless integration of these consignment rental programs and centralized administration and distribution to more than 3,500 stores. These consignment rental programs will also be made available to MBS Wholesale customers, including institutionally run and contract managed campus bookstores, as well as BNC physical bookstores, and MBS Direct customers.
Wholesale Inventory Management, Hardware and POS Software. MBS Wholesale sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 430 college bookstores. MBS Wholesale 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 most out of their management systems and create strong customer loyalty.
eTextbooks. MBS has partnered with VitalSource, a global leader with a broad digital catalog to build, enhance and deliver digital content.
LoudCloud Courseware. LoudCloud Courseware™, a turnkey solution for colleges and universities, offers advanced, affordable learning materials built on a high-quality foundation of open educational resources and enhanced with digital content that includes videos, activities and auto-graded practice assessments that faculty can easily customize to align with class objectives. LoudCloud Courseware™ significantly reduces course material costs for students and enables easier implementation for faculty. MBS’s broad base of wholesale and virtual bookstore customers provides us with new sales opportunities for BNC's digital suite of course materials and platforms as discussed above in the BNC Segment discussion.
Supply Chain Management
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 support informed decisions made by faculty 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. Using the MBS Direct system ensures that the fulfillment order is directed first to MBS Wholesale before other sources of inventory are utilized.
An extensive national sales force secures a steady supply of high demand used books, which is critical to the success of the MBS Wholesale business. 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.
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.
Customer Marketing Strategies
Students
MBS student marketing programs promote the retail businesses of MBS Direct and Textbooks.comSM. MBS Direct marketing efforts target the student population of contracted schools. MBS Direct emails students frequently throughout the year to promote the online bookstore, offer purchasing incentives and encourage buyback, in addition to other communications. Textbooks.comSM 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.

14


School Administrators
To market MBS Direct and Wholesale services, MBS maintains an active contact list of over 37,000 school management and administrators. MBS produces and distributes print and digital marketing campaigns to this contact 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 Fiscal 2018, MBS built more than 56,000 connections with current and potential clients through its blog sites and social media presence, and had over 2.2 million visits to its primary business websites, mbsbooks.com and mbsdirect.net. These efforts have allowed MBS to capture market share and successfully engage administrators.
Seasonality
MBS’s business is highly seasonal. For MBS Direct 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.
DIGITAL STUDENT SOLUTIONS SEGMENT
General
The Digital Student Solutions ("DSS") Segment includes direct-to-student product and service offerings to assist students to study more effectively and improve academic performance, thus enabling them to gain the valuable skills necessary to succeed after college. DSS is comprised of the operations of Student Brands, LLC, a leading direct-to-student subscription-based writing services business, with approximately 100,000 subscribers across its digital properties, as well as tutoring and test prep services offered through our partnership with The Princeton Review. We currently offer these online student services directly to students, and increasingly will be leveraging our BNC and MBS physical and virtual bookstore footprint to market directly to students where we serve as the campus bookstore. We offer these online services to students via internet search engine optimization ("SEO"), as well as by marketing directly to students in our BNC and MBS physical and virtual bookstore footprint.
With the acquisition of Student Brands, the Company expanded its product portfolio with a complementary educational subscription-based product and gained access to a direct-to-student operation which can be leveraged to expand or introduce other products and services beyond the footprint of the existing college bookstore operations. Our physical and virtual bookstore footprint, and associated student relationships, present a sizable addressable market for the Company’s new digital products and services. By their nature, our new digital solutions are designed to be marketed and sold both inside and outside our physical and virtual bookstore footprint. We continue to enhance and invest in our digital content and solutions to complement and leverage our bookstore and wholesale businesses. The revenue from these services have higher margin rates due to the relatively fixed cost structure of these operations.
We continue to aggressively expand our ecosystem of products and services through our own internal development, as well as by partnering with other companies to provide a complete hub of products and services designed to improve student success and outcomes. We continue to innovate and collaborate with our partners to provide solutions and services in an efficient, low-cost/high-value manner that extend well beyond sourcing course materials and sales to include new digital services that support successful student outcomes. We plan to leverage our product offerings by bundling our products, with complementary solution services.
During Fiscal 2019, we will invest in our student success platform and proprietary content to drive our ecosystem of products and services.  In the future, our strategy is to aggressively grow the DSS segment via: (i) internally developed new products and services; (ii) through acquisitions of companies, products and services; (iii) and by partnering with other leading service providers, like The Princeton Review. Unlike other providers of digital services to students, our well-established, deep relationships with college and university partners, as well as our physical presence on campus, provides us with a significant competitive advantage as we roll out new products and services on the campuses and universities we serve. This integration with the products and services from our other operating segments allows us to offer students new products and services in an increasingly relevant, cost effective, and targeted way.  The addressable market outside our physical and virtual bookstore footprint is an additional area where we plan to market these products and services to students.
Customers and Service Offerings
Student Brands provides writing services in a direct-to-student subscription-based model. The majority of subscriptions sold are one month in duration. Subscription revenue is deferred and recognized over the service period. Student Brands also generates revenue from digital advertisements. The revenue from these services have higher margin rates due to the relatively fixed cost structure of these operations.

15


Student Brands has a substantial and growing community of online learners, with approximately 100,000 subscribers across its digital properties, which include Bartleby.com, 123HelpMe.com, and StudyMode.com in the United States and TrabalhosFeitos.com, Etudier.com and Monografias.com in Brazil, France and Mexico, respectively.
Student Brands addresses writing pain points; students can search for a topic, develop an outline, and access authenticity technology. The content database allows students to leverage academic resources and references, with over 26 million essays across 4 languages representing more than 15 different countries, and receives more than 20 million unique monthly visitors to its sites. Student Brands utilizes deep data analytics and artificial intelligence to drive its content management system, the "Content Brain". The study tools supplement the student’s learning ecosystem by assisting across multiple subjects and varied assignments on a digital platform.
Customer Marketing Strategies
The implementation of our digital strategy initially relies on leveraging our bookstore relationships, both physical and virtual, to help accelerate the adoption of our new digital products and services. By leveraging the BNC and MBS footprints among students and faculty, K-12 schools and higher education institutions, as well with our SEO efforts, Student Brands has substantially more opportunities to market the solutions students need to improve success in the classroom and beyond.
Seasonality
Student Brands' sales and operating profit are realized relatively consistently throughout the year, although quarterly results may fluctuate depending on the timing of the start of the various schools' semesters.
TRENDS, COMPETITION AND OTHER BUSINESS CONDITIONS AFFECTING OUR BUSINESS
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 trends, competition and other factors affecting our business include:
Increased Use of Online and Digital Platforms as Companions or Alternatives 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. Technology-enabled learning is a rapid growth area in the higher education industry, as a growing number of students are enrolling in online services to complement print and digital course materials and classroom activities, and we are ready to meet demand with our virtual bookstore and e-commerce solutions, and our LoudCloud Courseware™ offering.
Distribution Network Evolving. The way course materials are distributed and consumed is changing significantly, a trend that is expected to continue. The market for course materials, including textbooks and supplemental materials, is intensely competitive and subject to rapid change.
Disintermediation. We are experiencing growing competition from alternative media and alternative sources of textbooks and course-related materials. Significant changes in the distribution of course materials are already underway as a result of start-ups promoting free online textbooks, including OER, 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, including Cengage, Pearson and McGraw Hill, bypassing the bookstore distribution channel by selling or renting directly to students and educational institutions, and student-to-student transactions over the Internet.
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. Some textbook publishers have begun to supply textbooks on consignment or rental programs which could impact used textbook supplies in the future. MBS was selected as a national distributor for rental textbooks offered through McGraw-Hill Education's newly announced consignment rental program (which includes approximately 230 titles) and Pearson Education’s expanded consignment rental program (which includes approximately 150 titles). Through its centrally located, advanced distribution center, MBS will offer the seamless integration of these consignment rental programs and centralized administration and distribution to more than 3,500 stores. These consignment rental programs will also be made available to MBS Wholesale customers, including institutionally run and contract managed campus bookstores, as well as BNC physical bookstores, and MBS Direct customers.

16


Price Competition. In addition to the competition in the services we provide to our customers, our textbook business faces significant price competition. Students often purchase textbooks and course materials from multiple 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. In Fiscal 2018, our comparable store sales were impacted by lower average selling prices of course materials driven by lower publisher prices resulting from a shift to lower cost options and more affordable solutions, including digital.
Competition. In addition to the competition we face from alternative distribution sources, we also have competition from other college bookstore operators and educational content providers.
Competitors consist of other college bookstore operators and educational content providers. Competitors include BBA Solutions, a college textbook retailer; bn.com, the e-commerce platform of Barnes & Noble, Inc.; Chegg.com, an online textbook rental company and student learning 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. At our institutions we serve, we face competition for predictive analytics and competency-based learning platforms, such as Civitas Learning, a learning analytics platform.
Competitors that provide online bookstore solutions to colleges and universities not only compete with our physical bookstore operations, but also compete with MBS Direct's virtual stores. MBS Direct also faces competition from Akademos, Ambassador Educational Solutions, Chegg.com; 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 for new and used book inventory and distribution.
Competitors that compete with our general merchandise and convenience offerings include Fanatics, Sodexo & Aramark, online retailers, physical and online office supply stores, and local and national retailers that offer college themed and other general merchandise.
Our DSS segment faces competition from other digital student solutions providers that include Chegg.com, CourseHero, Grammarly, Quizlet, Noodle Tools, and Turnitin (iParadigms). As we develop a wider range of products and services, our competitive landscape will change and include other competitors in the broader student services market.
A Majority of Traditional Campus Bookstores Have Yet to be Outsourced.
Outsourcing Trends. 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. We continue to work on evolving our business model and enhance our solutions, as well as enforce our contract exclusivity, to combat increased competition.
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 expect to continue to successfully renew our current contracts on favorable terms. 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.
Overall Economic Environment, College Enrollment and Consumer Spending Patterns. Our business is affected by the overall economic environment, funding levels at colleges and universities, by changes in enrollments at colleges and universities, and spending on course materials and general merchandise.
Economic Environment: BNC general merchandise sales are subject to short-term fluctuations driven by the broader retail environment. We expect general merchandise sales to 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. Lighter store traffic and a continued reluctance by the consumer to make discretionary purchases, along with a softer retail environment, has recently impacted our general merchandise sales. We are confident that our product assortment reflects consumer trends and have received encouraging customer response to

17


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.
Enrollment Trends. The growth of our business depends on our ability to attract new students and to increase the level of engagement by our current student customers. We continue to see downward enrollment trends and shrinking resources from state and federal government for colleges and universities. Enrollment trends, specifically at community colleges, continue to decline, led primarily by an improved economy and a dip in the United States birth rate resulting in fewer students at the traditional 18-24 year old college age. Consistent with projections from the National Center for Education Statistics, we expect undergraduate enrollment to increase in the long-term.
According to a Babson Survey Research Group report, over 30% of higher education students are taking at least one distance education or online course. Online degree program enrollments continue to grow, even in the face of declining overall higher education enrollment. Our comprehensive digital offerings, particularly with our LoudCloud Courseware™ program and the First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class, make us well positioned to capitalize on this trend.
EMPLOYEES
As of April 28, 2018, the Company had approximately 6,600 full time and regularly scheduled part-time employees. In addition, we hired approximately 15,800 temporary employees during peak periods during Fiscal 2018. Our employees are not represented by unions, with the exception of 26 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 21, 2018):
Name
 
Age
 
Position
Michael P. Huseby
 
63
 
Chairman and Chief Executive Officer
Patrick Maloney
 
62
 
Executive Vice President, Operations; President, Barnes & Noble College
Barry Brover
 
57
 
Executive Vice President, Chief Financial Officer
Kanuj Malhotra
 
51
 
Executive Vice President, Corporate Development; President, Digital Student Solutions
Michael C. Miller
 
46
 
Executive Vice President, Corporate Strategy and General Counsel
Stephen Culver
 
53
 
Senior Vice President, Chief Information Officer
JoAnn Magill
 
64
 
Senior Vice President, Human Resources
Seema C. Paul
 
54
 
Senior Vice President, Chief Accounting Officer
Michael P. Huseby, age 63, serves as our Chairman of the Board of Directors and Chief Executive Officer. He was a member of the Board of Directors of Barnes & Noble from January 2014 and served as the Chief Executive Officer of Barnes & Noble until the complete legal and structural separation of the Company from Barnes & Noble on August 2, 2015. Mr. Huseby was elected to the Board of Directors of the Company and was appointed Executive Chairman effective August 2, 2015. Effective September 19, 2017, Mr. Huseby became Chief Executive Officer of the Company in addition to his role as Chairman of the Board of Directors. Previously, Mr. Huseby was appointed President of Barnes & Noble in July 2013, and Chief Financial Officer of Barnes & Noble 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, which was acquired by the Altice Group in June 2016. He served on the Cablevision Systems Corporation Board of Directors in 2000 and 2001. Prior to joining Cablevision, Mr. Huseby served as Executive Vice President and Chief Financial Officer of Charter Communications, Inc., a large cable operator in the United States. Mr. Huseby served on the Board of Directors of Charter Communications from May 2013 through May 2016. Mr. Huseby served as Executive Vice President, Finance and Administration, of AT&T Broadband, a leading provider of cable television services from 1999 to 2002, when it was sold to Comcast Corporation. In addition, Mr. Huseby spent over 20 years at Arthur Andersen, LLP and Andersen Worldwide, S.C., where he held the position of Global Equity Partner serving a myriad of clients, including a number of large publicly-traded companies. Mr. Huseby served on the Board of Directors of CommerceHub, Inc., a cloud-based e-commerce fulfillment and marketing software platform company previously listed on Nasdaq, from July 2016 until May 2018 with his tenure ending upon the consummation of the sale of CommerceHub to financial sponsors. While on the Board of CommerceHub, Mr. Huseby served as chair of the Audit Committee and as a member of the Compensation Committee.

18


Patrick Maloney, age 62, serves as our Executive Vice President, Operations and 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.
Barry Brover, age 57, serves as our Executive Vice President and 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, serves as our Executive Vice President, Corporate Development and President of our Digital Student Solutions business. 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 46, serves as our Executive Vice President, Corporate Strategy and General Counsel. Mr. Miller joined Barnes & Noble Education in April 2017 and also serves as Corporate Secretary. 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.
Stephen Culver, age 53, serves as our Senior 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.
JoAnn Magill, age 64, serves as Senior Vice President, Human Resources of Barnes & Noble Education. Since joining the Company in 2003, Ms. Magill has played an integral role in the development and implementation of policies, practices and programs for thousands of full and part time employees at the Company’s corporate office and its campus bookstores nationwide. In her role as Vice President, Chief Human Resources Officer, Ms. Magill oversees employee relations, recruitment, benefits, payroll and compensation. Prior to joining Barnes & Noble Education, she served as the Vice President of Human Resources at AT&T Broadband Media Services for five years. Ms. Magill also had an extensive 25-year career with Pathmark Supermarkets, where she held a variety of field and corporate leadership roles.
Seema C. Paul, age 54, joined the Company in July 2015 and serves as our Senior 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.

19


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 for our products and services, and we expect such competition to increase.
We operate within a competitive and rapidly changing business environment, in general, and each of our lines of business faces significant competition for the products and services they offer. The market for course materials, including textbooks and supplemental materials, is experiencing significant changes relating to the offering of 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; 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 has 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, physical and online office supply stores and local and national retailers that offer college themed and other general merchandise. 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.
Our Digital Student Solutions business faces competition from other providers of online instruction platforms and other direct-to-student writing skills, study tools and tutor services, such as Chegg.com, CourseHero, Grammarly, Quizlet, Noodle Tools, and Turnitin (iParadigms). As we develop a wider range of products and services, our competitive landscape will change and include other competitors in the broader student services market. Since 2017, we have been focused on expanding these offerings, in many instances through the acquisition of other companies, like Student Brands, LLC, or through commercial arrangements. For example, in November 2017, we entered into a partnership with The Princeton Review to provide their test preparation courses and tutoring services through our websites. Our newer products and services, or any other products and services we may introduce or acquire, may not be integrated effectively into our business, achieve or sustain profitability or achieve market acceptance at levels sufficient to justify our investment.
Our ability to fully integrate new products and services into our platforms or achieve satisfactory financial results from them is unproven. Because we have a limited history in operating a fully digital platform, and the market for our products and services, including newly acquired or developed products and services, is rapidly evolving, it is difficult for us to predict our operating results, particularly with respect to our newer offerings, and the ultimate size of the market for our products and services. If the market for a learning platform does not develop as we expect, or if we fail to address the needs of this market, our business will be harmed.
We have encountered and will continue to encounter these risks and if we do not manage them successfully, our business, financial condition, results of operations and prospects may be materially and adversely affected.



20


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 virtual bookstores for colleges and universities, and 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 as colleges continue to focus on affordability those prices have been reduced, which negatively impacted our revenue and margin for Fiscal 2018 and further reductions could continue to have a negative impact. 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 virtual store contracts and when renewing those contracts as they expire. Our BNC contracts are typically for five years with renewal options, 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 cancelable without penalty with notice. Despite the lower startup and ongoing operating expense associated with virtual 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.
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 2018, 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 55% from retail bookstores (including BNC) and approximately 29% 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, and 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.
We face the risk of fluctuating inventory supplies as a consequence of changes in the way publishers distribute course materials.
Our traditional 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 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.


21


In response to changes in the market, over the last few years, we have also 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 below, changes in the way publishers supply textbooks to us.
Some textbook publishers have recently proposed to rent textbooks on consignment terms directly to students. Accordingly, we have entered into agreements with a number of textbook publishers to administer their consignment rental programs with distributors and their direct to student textbook consignment rental programs. These programs, if successful, will result in a substantial decrease in the supply of those titles from the used textbook inventory supply, which impacts MBS Wholesale.
MBS was selected as a national distributor for rental textbooks offered through McGraw-Hill Education's newly announced consignment rental program (which includes approximately 230 titles) and Pearson Education’s expanded consignment rental program (which includes approximately 150 titles). Through its centrally located, advanced distribution center, MBS will offer the seamless integration of these consignment rental programs and centralized administration and distribution to more than 3,500 stores. These consignment rental programs will also be made available to MBS Wholesale customers, including institutionally run and contract managed campus bookstores, as well as BNC physical bookstores, and MBS Direct customers. We expect the fees earned by MBS as a national distributor for consignment rental programs will offset the negative impact on MBS's ability to build its textbook inventory.
In addition, the profit margins associated with the traditional distribution model are fairly predictable and constant, but the move to a model of increased consignment rental programs combined with pressure to provide more affordable course materials to students could result in lower profit margins for a substantial part of our wholesale and retail business.
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 results also depend on the successful implementation of our strategic initiative to grow our digital products and services. We may not be able to implement this strategy successfully, on a timely basis, or at all.
In response to our changing business environment and to adopt to industry trends, we are focused on our digital initiatives to retain and expand existing customer relationships, acquire new accounts, expand sales channels and marketing efforts, integrate and develop direct to student digital solutions, develop and market higher education digital products. While we believe we have the capital resources, experience, management resources and internal systems to successfully operate our digital business, we may not be successful in implementing this strategy. 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.
Part of our strategy includes pursuing strategic acquisitions and partnerships and we may not be able to identify and successfully complete such transactions.
In addition to significant acquisitions, such as MBS, Student Brands and LoudCloud, as part of our strategy, we will continue to seek, and, may in the future acquire, businesses or business operations, or enter into other business transactions to grow our business and expand our product and service offerings. 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

22


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 course materials and general merchandise. The growth of our business depends on our ability to attract new students and to increase the level of engagement by current student customers. To the extent we are unable to attract new students or students spend less generally, our business could be adversely affected.
We intend to offer new products and solutions to students to grow our business. If our efforts are not successful, our business and financial results would be adversely affected.
Our ability to attract and retain students and increase their engagement with our learning platform depends on our ability to connect them with the product, person or service they need to save time, save money, and get smarter. For example, in Fiscal 2018, we acquired the Student Brands family of websites, including Bartleby.com. We also recently partnered with The Princeton Review in November 2017, to provide their test preparation courses and tutoring services through our websites. The markets for these new products and services may be unproven, and these products may include technologies and business models with which we have little or no prior development or operating experience or may significantly change our existing products and services. In addition, we may be unable to obtain long-term licenses from third-party content providers necessary to allow a product or service, including a new or planned product or service, to function. If our new or enhanced products and services fail to engage our students or attract new students, or if we are unable to obtain content from third parties that students want, we may fail to grow our student base or generate sufficient revenues, operating margin or other value to justify our investments, and our business would be adversely affected.
In the future, we may invest in new products and services and other initiatives to generate revenues, but there is no guarantee these approaches will be successful. Acquisitions of new companies, products and services create integration risk, while development of new products and services and enhancements to existing products and services involve significant time, labor and expense and are subject to risks and challenges, including managing the length of the development cycle, entry into new markets, integration into our existing business, regulatory compliance, evolution in sales and marketing methods and maintenance and protection of intellectual property and proprietary rights. If we are not successful with our new products and services, we may not be able to maintain or increase our revenues as anticipated or recover any associated acquisition or development costs, and our financial results could be adversely affected.
Our business depends on our ability to attract and retain talented employees, including senior management.    
Management believes that our continued success will depend to a significant extent upon the efforts and abilities of certain of our executive officers and senior management, many of whom have significant experience and strong commercial relationships in our industry and capital market relationships. The loss of any of these individuals could harm our business, financial condition and results of operations. We do not maintain “key man” life insurance on any of our officers or other employees. Experienced management and technical, marketing and support personnel in our industry are in high demand, and competition for their talents is intense. If we are less successful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver successful products and services may be adversely affected.
Our business is seasonal.
Our business is seasonal, particularly with respect to textbook sales and rentals, with sales and rentals attributable to our retail businesses (BNC physical and MBS virtual bookstores) 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. 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.

23


Our international operations could result in additional risks.
Our operations are substantially limited to the United States; however, we have operations in India, offer services and products to students and other customers internationally, contract with service providers outside the United States and may continue to expand internationally. Such international expansion may result in additional risks that are not present domestically and which could adversely affect our business or our results of operations, including compliance with additional United States regulations and those of other nations applicable to international operations; cultural and language differences; currency fluctuations between the U.S. dollar and foreign currencies, which are harder to predict in the current adverse global economic climate; restrictions on the repatriation of earnings; potentially adverse tax consequences and limitations on our ability to utilize losses generated in our foreign operations; different regulatory requirements and other barriers to conducting business; and different or less stable political and economic environments. Further, conducting business abroad subjects us to increased regulatory compliance and oversight. For example, in connection with our international operations, we are subject to laws prohibiting certain payments to governmental officials, such as the Foreign Corrupt Practices Act. A failure to comply with applicable regulations could result in regulatory enforcement actions, as well as substantial civil and criminal penalties assessed against us and our employees.
We face data security risks with respect to personal information.
Our business involves the receipt, storage, processing and transmission of personal information about customers and employees. We may share information about such persons with vendors and third parties that assist with certain aspects of our business. Also, in connection with our student financial aid platform and the processing of university debit cards, we secure and have access to certain student personal information that has been provided to us by the universities we serve. Our handling and use of personal information is regulated at the international, federal and state levels and by industry standards, such as the Payment Card Industry Data Security Standard. As an entity that provides services to institutions of higher education, we are contractually bound to handle certain personal information from student education records in accordance with the requirements of Family Educational Rights and Privacy Act (“FERPA”). Privacy and information security laws, regulations, and industry standards change from time to time, and compliance with them may result in cost increases due to necessary systems changes and the development of new processes and may be difficult to achieve. If we fail to comply with these laws, regulations and standards, we could be subjected to legal risk. In addition, even if we fully comply with all laws, regulations and standards, and even though we have taken significant steps to protect personal information, we could experience a data security breach, and our reputation could be damaged, possibly resulting in a material breach of contract with one or more of our clients, lost future sales or decreased usage of credit and debit card products. Further, in the event that we disclose student information in violation of FERPA, the U.S. Department of Education could require a client to suspend our access to their student information for at least five years. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent our security measures could misappropriate our or our users’ proprietary information and cause interruption in our operations. Any compromise of our data security could result in a violation of applicable privacy and other laws or standards, significant legal and financial exposure beyond the scope or limits of insurance coverage, increased operating costs associated with remediation, equipment acquisitions or disposal and added personnel, and a loss of confidence in our security measures, which could harm our business or affect investor confidence. Data security breaches may also result from non-technical means, for example, actions by an employee.
Our business is subject to a variety of domestic and international laws, rules, policies and other obligations regarding data protection.
Although most of our operations are in the United States, we do have some operations and offer services and products internationally. Our international operations subject us to a complex array of federal, state and international laws relating to the collection, use, retention, disclosure, security and transfer of personally identifiable data. Many jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. The interpretation and application of data protection laws in the United States, Europe, including but not limited to the General Data Protection Regulation (the “GDPR”), and elsewhere are uncertain and evolving. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. Complying with these various laws is difficult and could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
Further, although we are implementing internal controls and procedures designed to protect sensitive information and confidential and personal data and comply with the GDPR and other privacy-related laws, rules and regulations, our facilities, and systems may be vulnerable to security breaches and other data loss, including cyber-attacks. Such a security breach or data loss could lead to negative publicity, damage to our reputation, exposure to litigation and liability, theft, modification or destruction of proprietary information or key information, damage to or inaccessibility of critical systems, manufacture of defective products, production downtimes, operational disruptions and remediation and other significant costs, which could adversely affect our reputation, financial condition and results of operations.

24


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.
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 (the "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 (including complying with GDPR), 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 and mobile application (including complying with the Americans with Disabilities Act), 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.

25


Changes in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations or financial conditions.
Legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December 2017, and contains many significant changes to the U.S. federal income tax laws, the consequences of which have not yet been determined. Changes in corporate tax rates, the realizability of net deferred tax assets, and the deductibility of expenses contained in the Act or other tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense. The foregoing items could have a material adverse effect on our business, cash flow, results of operations or financial conditions.
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. In addition, as we expand our digital offerings and services, we may be exposed to more intellectual property infringement claims.
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 credit agreements 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 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 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.
We rely heavily on proprietary technology and sophisticated equipment to manage certain aspects of our business, including to manage textbook inventory, process deliveries and returns of the textbooks and manage warehousing and distribution.
We, primarily through our MBS subsidiary, 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 operations and have a material adverse impact on our results.
MBS is also dependent on sophisticated equipment and related software technology for the warehousing and distribution of the vast majority of textbooks supplied to BNC and others, which is located at MBS’ facility in Columbia, Missouri. MBS’ ability

26


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 operations, 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.
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.
We may not be able to adequately protect our intellectual property rights or may be accused of infringing upon intellectual property rights of third parties.
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as important to our success, and we rely on trademark, copyright and patent law, domain name regulations, trade secret protection and confidentiality or license agreements to protect our proprietary rights, including our use of the Barnes & Noble trademark. Laws and regulations may not adequately protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or diminish the value of our trademarks and other proprietary or licensed rights.
We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.
Other parties also may claim that we infringe their proprietary rights. Because of the changes in Internet commerce and digital content businesses, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain of our products, content and business methods may unknowingly infringe existing patents or intellectual property rights of others. Successful intellectual property infringement claims against us could result in monetary liability or a material disruption in the conduct of our business. We cannot be certain that our products, content and business methods do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We expect that infringement claims in our markets will increase in number. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we were found to have infringed the intellectual property rights of a third party, we could be liable to that party for license fees, royalty payments, lost profits or other damages, and the owner of the intellectual property might be able to obtain injunctive relief to prevent us from using the technology or software in the future. If the amounts of these payments were significant or we were prevented from incorporating certain technology or software into our products, our business could be significantly harmed.
We may incur substantial expenses in defending against these third-party infringement claims, regardless of their merit. As a result, due to the diversion of management time, the expense required to defend against any claim and the potential liability associated with any lawsuit, any significant litigation could significantly harm our business, financial condition and results of operations.
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. We have entered into agreements with major textbook publishers to implement the textbook industry’s Anti-Counterfeit Best Practices. These best practices were developed as a mechanism to assist publishers and distributors in the eradication of counterfeit copies of textbooks in the marketplace. While we have agreed to implement the Anti-Counterfeit Best Practices and have in place our anti-counterfeit policies and procedures (which include removing from distribution suspected counterfeit titles)

27


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 remain subject to continuing contingent liabilities of Barnes & Noble, Inc. following the spinoff.
The separation and distribution, tax matters and employee matters agreement allocated certain liabilities as between us and our previous parent, Barnes & Noble, Inc. whether incurred prior to or after the spinoff on August 2, 2015. In addition, under the Internal Revenue Code ("Code") and the related rules and regulations, each corporation that was a member of the Barnes & Noble consolidated tax reporting group during any taxable period or portion of any taxable period ending on or before the completion of the spinoff is jointly and severally liable for the federal income tax liability of the entire consolidated tax reporting group for that taxable period. In connection with the spinoff, we entered into a tax matters agreement with Barnes & Noble, Inc. that allocated the responsibility for prior period taxes of the consolidated tax reporting group between us and Barnes & Noble, Inc. However, if Barnes & Noble, Inc.is unable to pay any prior period taxes for which it is responsible, we could be required to pay the entire amount of such taxes.
Risks Relating to our Common Stock and the Securities Market
Our stock price may fluctuate significantly.
We cannot predict the prices at which our Common Stock may trade. The market price of our Common Stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:
actual or anticipated fluctuations in our operating results due to factors related to our businesses;
success or failure of our business strategies, including our digital education initiative;
our quarterly or annual earnings or those of other companies in our industries;
our ability to obtain financing as needed;
announcements by us or our competitors of significant acquisitions or dispositions;
changes in accounting standards, policies, guidance, interpretations or principles;
the failure of securities analysts to cover our Common Stock;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of other comparable companies;
investor perception of our Company and the higher education 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.

28


We have recorded significant goodwill impairment charges and may be required to record additional charges to future earnings if our goodwill or intangible assets become impaired.
We are required under generally accepted accounting principles to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets and/or goodwill may not be recoverable include a decline in stock price and market capitalization, slower growth rates in our industry or our own operations, and/or other materially adverse events that have implications on the profitability of our business. In the third quarter of Fiscal 2018, primarily due to the reduction in our market capitalization, we recorded a pre-tax goodwill impairment charge of $313.1 million in our BNC segment, as defined prior to the fourth quarter of Fiscal 2018, or $302.9 million on a net of tax basis. See Note 2. Summary of Significant Accounting Policies and Note 9. Supplementary Information of the Company’s financial statements included in Part II - Item 8 Financial Statement and Supplementary Data of this Annual Report on Form 10-K for details. We may be required to record additional charges to earnings during the period in which any impairment of our goodwill or other intangible assets is determined which could adversely impact our results of operations. As of April 28, 2018, our goodwill balance was $49.3 million, which represented 4.8% of total consolidated assets.
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 of Directors and will be dependent upon our financial condition, results of operations, cash requirements, future prospects and any other factors our Board of Directors 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:
authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors 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 of Directors; and
require advance notice to be given by stockholders for any stockholder proposals or director nominations.
In addition, Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder”.
These provisions may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of the Company, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their Common Stock at a price above the prevailing market price.

29


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 90,500 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 77,000 square feet, in aggregate, of office space located in Crystal Lake, Illinois, Los Angeles, California, New York, New York, Bangalore, India and Mumbai, India to support our operations pursuant to leases that expire between 2018 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 28, 2018, these BNC contracts for the 768 stores that we operate expire as follows:
Contract Terms to Expire During (12 months ending on or about April 30)
 
BNC
Number of Stores
2019
 
51
2020
 
47
2021
 
64
2022
 
50
2023
 
50
2024 and later
 
506
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.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.

30


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 28, 2018, 46,916,616 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:
 
 
Fiscal 2018
 
Fiscal 2017
 
 
High
 
Low
 
High
 
Low
First Quarter
 
$
11.12

 
$
10.75

 
$
11.88

 
$
8.50

Second Quarter
 
$
7.56

 
$
7.23

 
$
12.31

 
$
9.15

Third Quarter
 
$
9.10

 
$
8.39

 
$
13.15

 
$
8.75

Fourth Quarter
 
$
8.20

 
$
7.47

 
$
11.30

 
$
9.09

On June 8, 2018, there were approximately 816 holders of record of our Common Stock and the closing price of our Common Stock on the New York Stock Exchange was $6.57 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. During Fiscal 2018, we did not purchase shares under the stock repurchase program. As of April 28, 2018, approximately $26.7 million remains available under the stock repurchase program.
During the year ended April 28, 2018, we also repurchased 260,531 shares of our Common Stock in connection with employee tax withholding obligations for vested stock awards.

31


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)
 
2018 (b)
 
2017 (b)
 
2016 (b)
 
2015
 
2014
STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
Product sales and other
 
$
1,984,472

 
$
1,641,881

 
$
1,581,104

 
$
1,549,005

 
$
1,542,551

Rental income
 
219,145

 
232,481

 
226,925

 
223,993

 
205,371

Total sales
 
2,203,617

 
1,874,362

 
1,808,029

 
1,772,998

 
1,747,922

Cost of sales:
 
 
 
 
 
 
 
 
 
 
Product and other cost of sales
 
1,522,687

 
1,281,043

 
1,224,927

 
1,200,304

 
1,185,393

Rental cost of sales
 
123,697

 
134,258

 
128,403

 
127,980

 
124,767

Total cost of sales
 
1,646,384

 
1,415,301

 
1,353,330

 
1,328,284

 
1,310,160

Gross profit
 
557,233

 
459,061

 
454,699

 
444,714

 
437,762

Selling and administrative expenses
 
433,746

 
380,793

 
374,171

 
360,645

 
331,423

Depreciation and amortization expense
 
65,586

 
53,318

 
52,690

 
50,509

 
48,014

Impairment loss (non-cash) (c)(d)
 
313,130

 

 
11,987

 

 

Restructuring and other charges (d)(e)
 
5,429

 
1,790

 
8,830

 

 

Transaction costs (f)
 
2,045

 
9,605

 
2,398

 

 

Operating (loss) income
 
(262,703
)
 
13,555

 
4,623

 
33,560

 
58,325

Interest expense, net
 
10,306

 
3,464

 
1,872

 
210

 
385

(Loss) Earnings before taxes
 
(273,009
)
 
10,091

 
2,751

 
33,350

 
57,940

Income taxes
 
(20,443
)
 
4,730

 
2,667

 
14,218

 
22,834

Net (loss) income
 
$
(252,566
)
 
$
5,361

 
$
84

 
$
19,132

 
$
35,106

 
 
 
 
 
 
 
 
 
 
 
(Loss) Earnings per common share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(5.40
)
 
$
0.12

 
$

 
$
0.33

 
$
0.88

Diluted
 
$
(5.40
)
 
$
0.11

 
$

 
$
0.33

 
$
0.88

Weighted average common shares (thousands)(g):
 
 
 
 
 
 
 
 
 
 
Basic
 
46,763

 
46,317

 
46,238

 
38,452

 
37,270

Diluted
 
46,763

 
46,763

 
46,479

 
38,493

 
37,275


 
 
Fiscal Year (a)
(In thousands of dollars,
 except for share and per share amounts)
 
2018 (b)
 
2017 (b)
 
2016 (b)
 
2015
 
2014
OTHER OPERATING DATA:
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (non-GAAP) (h)
 
$
126,760

 
$
78,268

 
$
80,528

 
$
84,069

 
$
106,339

Adjusted Earnings (non-GAAP) (h)
 
$
56,949

 
$
12,347

 
$
15,462

 
$
19,132

 
$
35,106

Capital expenditures
 
$
42,809

 
$
34,670

 
$
50,790

 
$
48,452

 
$
38,253

 
 
 
 
 
 
 
 
 
 
 
OTHER OPERATING DATA - BNC:
 
 
 
 
 
 
 
 
 
 
Comparable store sales (decrease) increase (i)
 
(4.1
)%
 
(3.5
)%
 
(1.9
)%
 
0.1
%
 
(2.7
)%
Number of stores at period end
 
768

 
769

 
751

 
724

 
700

 
 
 
 
 
 
 
 
 
 
 
OTHER OPERATING DATA - MBS:
 
 
 
 
 
 
 
 
 
 
Number of stores at period end
 
676

 
712

 
N/A

 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 


32


 
 
Fiscal Year (a)
(In thousands of dollars,
 except for share and per share amounts)
 
2018 (b)
 
2017 (b)
 
2016 (b)
 
2015
 
2014
BALANCE SHEET DATA
 (at period end):
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,039,211

 
$
1,299,832

 
$
1,071,683

 
$
1,090,668

 
$
1,109,919

Total liabilities
 
$
571,248

 
$
586,124

 
$
363,297

 
$
363,999

 
$
360,282

Short-term debt (j)
 
$
100,000

 
$
100,000

 
$

 
$

 
$

Long-term debt (j)
 
$
96,400

 
$
59,600

 
$

 
$

 
$

Preferred membership interests
 
$

 
$

 
$

 
$

 
$
383,397

Parent company equity
 
$

 
$

 
$

 
$
726,669

 
$
366,240

Total stockholders' equity
 
$
467,963

 
$
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 2018” means the 52 weeks ended April 28, 2018, “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 and “Fiscal 2014” means the 53 weeks ended May 3, 2014.
Our consolidated financial statements reflect the following reclassifications for consistency with the current year presentation: 1) Cost of Sales expenses primarily related to facility costs and insurance related to corporate services have been reclassified to Selling and Administrative Expenses; and 2) For our digital rental products, we have reclassified Rental Income to Product Sales and Other, and have reclassified Rental Cost of Sales to Product and Other Cost of Sales, with no impact to Gross Margin. Digital rental revenue and digital rental cost of sales are recognized at the time of delivery and are not deferred over the rental period. Prior periods presented reflect the segment presentation and reclassifications. For additional information, see Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.
(b)
We acquired Student Brands, LLC on August 3, 2017. The consolidated financial statements for the 52 weeks ended April 28, 2018 include the financial results of Student Brands from the acquisition date, August 3, 2017, to April 28, 2018.
We acquired MBS Textbook Exchange, LLC on February 27, 2017. 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.
We completed the legal separation ("Spin-Off") from Barnes & Noble, Inc. on August 2, 2015 (the beginning of our second quarter of Fiscal 2016), at which time we began to operate as an independent publicly-traded company.
(c)
In Fiscal 2018, we completed our annual goodwill impairment test. Based on the results of the impairment test, the carrying value of goodwill exceeded its fair value for our BNC segment, as defined prior to the segment change in the fourth quarter of Fiscal 2018, and we recorded a goodwill impairment (non-cash impairment loss) of $313.1 million. For additional information, see Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.
(d)
In Fiscal 2016, we implemented a plan to restructure our digital operations. As a result of this restructuring, we recorded a non-cash impairment loss of $12.0 million related to all of the capitalized content costs for the Yuzu® eTextbook platform ($9 million), and recorded a non-recurring other than temporary loss related to an investment held at cost ($3 million). 
Additionally, we announced a reduction in staff and closure of the facilities in Mountain View, California, and Redmond, Washington that support the Yuzu® eTextbook platform. The cost of severance, retention, and other restructuring costs (i.e. facility exit costs) was $8.8 million and $1.8 million in Fiscal 2016 and Fiscal 2017, respectively. For additional information, see Item 8. Financial Statements and Supplementary Data - Note 9. Supplementary Information.
(e)
In Fiscal 2018, we recognized restructuring and other charges of approximately $5.4 million, which is comprised of the termination and transition payments related to the transition of the Chief Executive Officer. For additional information, see Item 8. Financial Statements and Supplementary Data - Note 9. Supplementary Information.
(f)
Transaction costs are costs incurred for business development and acquisitions.
(g)
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.
(h)
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.

33


Management's Discussion and Analysis of Financial Condition and Results of Operations - Adjusted EBITDA (non-GAAP) and - Adjusted Earnings (non-GAAP).
(i)
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 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.
(j)
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


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. References to “Student Brands” refer to our direct-to-student subscription-based writing services business operated through our subsidiary Student Brands, LLC.
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. “Fiscal 2018” means the 52 weeks ended April 28, 2018, “Fiscal 2017” means the 52 weeks ended April 29, 2017, and “Fiscal 2016” means the 52 weeks ended April 30, 2016.
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 K-12 institutions across the United States, one of the largest textbook wholesalers and inventory management hardware and software providers, and a leading provider of digital education solutions. Through our Barnes & Noble College (“BNC”) and MBS Textbook Exchange (“MBS”) subsidiaries, we operate 1,444 physical and virtual bookstores and serve more than 6 million students, delivering essential educational content and tools within a dynamic retail environment. Additionally, through our Student Brands subsidiary and associated websites, a leading direct-to-student subscription-based writing services business, we offer services to approximately 100,000 subscribers, by offering student assistance through the writing process and journey.
The strengths of our business, as discussed below, includes our ability to compete by developing new products and solutions to meet market needs, our large footprint with direct access to students and faculty, our well-established, deep relationships with partners and stable, long-term contracts and our well-recognized brands. We expect to continue to grow our business by introducing scalable and advanced digital solutions focused largely on the student, increasing market share with new accounts, and expanding our strategic opportunities through acquisitions and partnerships.
As demand for new, enhanced, and more affordable products and services increase in the rapidly changing education landscape, we strive to evolve our business model and enhance our solutions. 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. 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.
Technology-enabled learning is a rapid growth area in the higher education industry, as a growing number of students are enrolling in online services to complement print and digital course materials and classroom activities. We continue to enhance our digital content and services in an efficient, low-cost/high-value manner to complement our course materials business. The implementation of our core digital strategy relies on our direct access to students from our bookstore operations, where we can attach our existing and future suite of digital products and services both online and in our stores.
We are ready to meet the digital demand with our virtual bookstore and e-commerce solutions. We focus on providing affordable solutions, such as our First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class. Additionally, our open educational resources ("OER") courseware, is a turnkey solution for colleges and universities that offers advanced, affordable learning materials built on a high-quality foundation of OER and enhanced with digital content that includes videos, activities and auto-graded practice assessments that faculty can easily customize to align with class objectives. LoudCloud Courseware™ significantly reduces course material costs for students and enables easier implementation for faculty.
We offer our Student Brands solutions focused on providing students assistance through the writing process and journey. We offer these online solutions to students via internet search engine optimization ("SEO"), as well as by marketing directly to students in our BNC and MBS physical and virtual bookstore footprint.
We believe that our strategic actions over the last three years, including the acquisitions of LoudCloud Systems, Inc. ("LoudCloud"), MBS and Student Brands, respectively, and ongoing development of courseware, have substantially enhanced our competitive position. Fiscal 2018 was a transformational period in which we began to leverage our newly-expanded customer base and distribution channels to broaden our reach to students and deepen our institutional partnerships. We continue to focus on providing product and service offerings designed to address the most pressing issues in higher education, including affordable and accessible course materials and products designed to drive and improve student outcomes.
See Fiscal Year 2018 Summary below for a discussion of recent activities to enhance our product offerings and services. For

35


additional information related to our segments, customers, distribution network, and business conditions, see Part I - Item 1. Business.
Fiscal Year 2018 Summary
The following summarizes some of the accomplishments of Fiscal Year 2018 as the company continues to build the foundation to execute its strategy.
New Store Growth - New store openings are an important driver of growth. In Fiscal 2018, BNC signed contracts for 33 new stores for estimated first year annual sales of $66 million. In Fiscal 2018, MBS signed contracts for 21 new stores for estimated first year annual sales of $6 million. We evaluate each new contract based on established profitability measures to ensure we maintain a portfolio of profitable stores. Our ability to offer existing and prospective clients physical, virtual and hybrid bookstore models is a key element of our competitive strategy.
LoudCloud Courseware™ - In Fiscal 2018, consistent with our LoudCloud Courseware™ development road map, we expanded our courseware titles from 10 to 32 course titles, with sales to approximately 21,000 students at 40 colleges and universities, including technical colleges and online programs.
First Day™ Key Publisher Distribution Agreements - We offer our First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class. We have entered into several agreements with major publishers, including Cengage, McGraw-Hill Education and Pearson, to provide their e-content through First Day™, or directly to BNC campus bookstores and MBS Direct virtual bookstores. The seamless delivery is made possible by our First Day™ technology and publishers' technology integrations with campus systems. These initiatives provide students, faculty and institutions greater access to more affordable course materials.
Consignment Rental Distribution Agreements - MBS was selected as a national distributor for rental textbooks offered through McGraw-Hill Education's newly announced consignment rental program (which includes approximately 230 titles) and Pearson Education’s expanded consignment rental program (which includes approximately 150 titles). Through its centrally located, advanced distribution center, MBS will offer the seamless integration of these consignment rental programs and centralized administration and distribution to more than 3,500 stores. These consignment rental programs will also be made available to MBS Wholesale customers, including institutionally run and contract managed campus bookstores, as well as BNC physical bookstores, and MBS Direct customers.
Kentucky Community and Technical College System ("KCTCS") - This Fall, more than 1,000 KCTCS students used BNED Courseware in their classes. Three colleges in the KCTCS took part in our digital courseware program, as part of an ongoing KCTCS effort to provide students with more affordable course materials. BNED Courseware is digital course content that includes videos, activities and auto-graded practice assessments that faculty can easily personalize to align with class objectives. BNED Courseware was offered through First Day™.
The Princeton Review - In November 2017, we entered into a strategic partnership with The Princeton Review. The partnership allows us to further expand our end-to-end offerings and fulfill the full breadth of student education needs by offering The Princeton Review's products and services to our network of more than 6 million students.
Portland State University ("PSU") - In October 2017, we announced our strategic partnership with PSU to co-develop a degree planning solution. Using insights generated by PSU's reTHINK initiative and leveraging our analytics platform, the solution will ultimately help more students graduate on time with better pathways to employment and provide the university with long-term demand planning tools.
Eastern Gateway Community College ("EGCC") - In August 2017, we announced that we signed a multi-year contract with EGCC to provide a full suite of solutions, including bookstore operations, an institution-wide learning management system (LMS), LoudSight, our predictive analytics offering, and digital courseware to the students, faculty and advisors of EGCC.
Acquisition of Student Brands, LLC - On August 3, 2017, we acquired Student Brands. Student Brands is an education technology company that operates multiple direct-to-student businesses focused on study tools and writing help, all centered on assisting students with the writing process. Student Brands generates revenue predominantly through its subscription-based services and digital advertisements. Student Brands has approximately 100,000 subscribers across its digital properties, which include Bartleby.com, 123HelpMe.com, and StudyMode.com in the United States and TrabalhosFeitos.com, Etudier.com and Monografias.com in Brazil, France and Mexico, respectively.
Unizin, Ltd. ("Unizin") - 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 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.
Integration of MBS Textbook Exchange, LLC. ("MBS") - In February 2017, we completed the purchase of MBS, which operates two highly integrated businesses, Wholesale and Direct. We continue our efforts to integrate the operations of MBS to achieve our strategic objectives and anticipated synergies.

36


Segments
Prior to the fourth quarter of fiscal year 2018, we had two reportable segments: BNC and MBS. In connection with our focus on developing digital solutions, during the fourth quarter of fiscal year 2018, the Company realigned its business into the following three reportable segments: BNC, MBS and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, are presented as “Corporate Services”.
BNC Segment
The BNC Segment is comprised of the operations of BNC which operates 768 physical campus bookstores, the majority of which also have school-branded e-commerce sites operated by BNC and which offers students access to affordable course materials and affinity products, including emblematic apparel and gifts. BNC also offers its First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class. Additionally, the BNC segment offers a suite of digital content, software, and services to colleges and universities through our LoudCloud platform, such as predictive analytics, a variety of open educational resources courseware, and a competency-based learning platform.
MBS Segment
The MBS Segment is comprised of MBS's two highly integrated businesses: MBS Direct which operates 676 virtual bookstores for college and university campuses, and K-12 schools, and MBS Wholesale which is one of the largest textbook wholesalers in the country. MBS Wholesale's business centrally sources and sells new and used textbooks to more than 3,500 physical college bookstores, including BNC’s 768 campus bookstores. MBS Wholesale sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 430 college bookstores.
DSS Segment
The Digital Student Solutions ("DSS") segment includes direct-to-student product and service offerings to assist students to study more effectively and improve academic performance, thus enabling them to gain the valuable skills necessary to succeed after college. DSS is comprised of the operations of Student Brands, LLC, a leading direct-to-student subscription-based writing services business, with approximately 100,000 subscribers across its digital properties, as well as tutoring and test prep services offered through our partnership with The Princeton Review. We currently offer these online student services directly to students, and increasingly will be leveraging our BNC and MBS physical and virtual bookstore footprint to market directly to students where we serve as the campus bookstore. We continue to aggressively expand our ecosystem of products and services through our own internal development, as well as by partnering with other companies to provide a complete hub of products and services designed to improve student success and outcomes.
Corporate Services represent unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources.
Seasonality
Our business is highly seasonal. Our quarterly results also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April.
For our retail operations (BNC and MBS Direct), sales are generally highest in the second and third fiscal quarters, when students generally purchase and rent textbooks, 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. Student Brands' sales and operating profit are realized relatively consistently throughout the year.
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, Competition and Other Business Conditions Affecting Our Business.




37


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, used and digital textbooks, and 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. Our rental income is primarily derived from the rental of physical textbooks. We also derive revenue from other sources, such as sales of inventory management, hardware and point-of-sale software, direct-to-student subscription-based writing services, and other services.
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 merchandising, procurement, field support, finance and accounting, and costs related to our direct-to-student subscription-based writing services business. Shared-service costs such as human resources, legal, treasury, information technology, and various other corporate level expenses and other governance functions, are not allocated to any specific reporting segment and are recorded in Corporate Services as discussed in the Overview - Segment discussion above.
Reclassifications
Prior to the fourth quarter of fiscal year 2018, we had two reportable segments: BNC and MBS. In connection with our focus on developing digital solutions, during the fourth quarter of fiscal year 2018, the Company realigned its business into the following three reportable segments: BNC, MBS and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, are presented as “Corporate Services”. Shared corporate overhead costs previously allocated to MBS prior to the fourth quarter of fiscal year 2018 have been reclassified and are included in selling and administrative expenses in the BNC segment or Corporate Services.
Our consolidated financial statements reflect the following reclassifications for consistency with the current year presentation: 1) Cost of Sales expenses primarily related to facility costs and insurance related to corporate services have been reclassified to Selling and Administrative Expenses; and 2) For our digital rental products, we have reclassified Rental Income to Product Sales and Other, and have reclassified Rental Cost of Sales to Product and Other Cost of Sales, with no impact to Gross Margin. Digital rental revenue and digital rental cost of sales are recognized at the time of delivery and are not deferred over the rental period.
Prior periods presented reflect the segment presentation and reclassifications. For additional information, see Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.
Basis of Consolidation
Fiscal 2018
For our Fiscal 2018 (52 weeks ended April 28, 2018), the results of operations for the entire 52 weeks ended April 28, 2018 reflected in our consolidated financial statements are presented on a consolidated basis. On August 3, 2017, we acquired Student Brands ("Student Brands"). The consolidated financial statements for the 52 weeks ended April 28, 2018 include the financial results of Student Brands from the acquisition date, August 3, 2017, to April 28, 2018. Subsequent to the acquisition date, the consolidated financial statements include the accounts of Student Brands and all material intercompany accounts and transactions have been eliminated in consolidation.
Fiscal 2017
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 date, the consolidated financial statements include the accounts of MBS and all material intercompany accounts and transactions have been eliminated in consolidation.

38


Fiscal 2016
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. Our consolidated financial statements were derived from the consolidated financial statements and accounting records of Barnes & Noble, Inc. Subsequent to the Spin-Off, 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. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 10. Barnes & Noble, Inc. Transactions.
Results of Operations - Summary
 
 
Fiscal Year
Dollars in thousands
 
2018
 
2017
 
2016
Sales:
 
 
 
 
 
 
Product sales and other
 
$
1,984,472

 
$
1,641,881

 
$
1,581,104

Rental income
 
219,145

 
232,481

 
226,925

Total sales
 
$
2,203,617

 
$
1,874,362

 
$
1,808,029

 
 
 
 
 
 
 
Net (loss) income
 
$
(252,566
)
 
$
5,361

 
$
84

 
 
 
 
 
 
 
Adjusted Earnings (non-GAAP) (a)
 
$
56,949

 
$
12,347

 
$
15,462

 
 
 
 
 
 
 
Adjusted EBITDA (non-GAAP) (a)
 
 
 
 
 
 
BNC
 
$
87,493

 
$
107,847

 
$
108,252

MBS
 
54,598

 
(3,569
)
 

DSS
 
7,559

 

 

Corporate Services
 
(22,166
)
 
(25,373
)
 
(27,724
)
Elimination
 
(724
)
 
(637
)
 

Total Adjusted EBITDA (non-GAAP)
 
$
126,760

 
$
78,268

 
$
80,528

 
 
 
 
 
 
 
 
(a)
Adjusted Earnings and Adjusted EBITDA are a non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.

Store Count
 
 
Fiscal 2018
 
Fiscal 2017
 
Fiscal 2016
 
 
BNC Stores
 
MBS Direct Stores
 
BNC Stores
 
MBS Direct Stores
 
BNC
Stores
Opened at beginning of period
 
769

 
712

 
751

 
700

 
724

Opened
 
33

 
21

 
38

 
15

 
39

Closed
 
34

 
57

 
20

 
3

 
12

Opened at end of period
 
768

 
676

 
769

 
712

 
751

Comparable store sales (a)
 
(4.1
)%
 
N/A

 
(3.5
)%
 
N/A

 
(1.9
)%
 
 
 
 
 
 
 
 
 
 
 
(a)
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. Prior year comparable store sales have been updated to exclude store inventory sales to MBS, which are reflected as intercompany inventory transfers since the acquisition. For 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.


39


The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales: 
 
 
Fiscal 2018
 
Fiscal 2017
 
Fiscal 2016
Sales:
 
 
 
 
 
 
Product sales and other
 
90.1
 %
 
87.6
%
 
87.4
%
Rental income
 
9.9

 
12.4

 
12.6

Total sales
 
100.0

 
100.0

 
100.0

Cost of sales:
 
 
 
 
 
 
Product and other cost of sales (a)
 
76.7

 
78.0

 
77.5

Rental cost of sales (a)
 
56.4

 
57.8

 
56.6

Total cost of sales
 
74.7

 
75.5

 
74.9

Gross margin
 
25.3

 
24.5

 
25.1

Selling and administrative expenses
 
19.7

 
20.3

 
20.7

Depreciation and amortization expense
 
3.0

 
2.8

 
2.9

Impairment loss (non-cash)
 
14.2

 

 
0.7

Restructuring and other charges
 
0.2

 
0.1

 
0.5

Transactions costs
 
0.1

 
0.5

 
0.1

Operating (loss) income
 
(11.9
)%
 
0.7
%
 
0.2
%
(a) Represents the percentage these costs bear to the related sales, instead of total sales.

40


Results of Operations - 52 weeks ended April 28, 2018 compared with the 52 weeks ended April 29, 2017
 
52 weeks ended, April 28, 2018
Dollars in thousands
BNC
 
MBS (a)
 
DSS (b)
 
Corporate Services
 
Eliminations (c)
 
Total
Sales:
 
 
 
 
 
 
 
 
 
 
 
Product sales and other
$
1,602,887

 
$
453,580

 
$
15,762

 
$

 
$
(87,757
)
 
$
1,984,472

Rental income
213,196

 
5,949

 

 

 

 
219,145

Total sales
1,816,083

 
459,529

 
15,762

 

 
(87,757
)
 
2,203,617

Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Product and other cost of sales
1,254,392

 
354,969

 
359

 

 
(87,033
)
 
1,522,687

Rental cost of sales
120,482

 
3,215

 

 

 

 
123,697

Total cost of sales
1,374,874

 
358,184

 
359

 

 
(87,033
)
 
1,646,384

Gross profit
441,209

 
101,345

 
15,403

 

 
(724
)
 
557,233

Selling and administrative expenses
353,716

 
50,020

 
7,844

 
22,166

 

 
433,746

Depreciation and amortization expense
53,737

 
6,406

 
5,253

 
190

 

 
65,586

Sub-Total:
$
33,756

 
$
44,919

 
$
2,306

 
$
(22,356
)
 
$
(724
)
 
57,901

Impairment loss (non-cash)
 
 
 
 
 
 
 
 
 
 
313,130

Restructuring and other charges
 
 
 
 
 
 
 
 
 
 
5,429

Transaction costs
 
 
 
 
 
 
 
 
 
 
2,045

Operating (loss) income


 


 


 


 


 
$
(262,703
)
 
 
 
 
 
 
 
 
 
 
 
 
 
52 weeks ended, April 29, 2017
Dollars in thousands
BNC
 
MBS (a)
 
DSS (b)
 
Corporate Services
 
Eliminations (c)
 
Total
Sales:
 
 
 
 
 
 
 
 
 
 
 
Product sales and other
$
1,614,002

 
$
33,169

 
$

 
$

 
$
(5,290
)
 
$
1,641,881

Rental income
231,559

 
922

 

 

 

 
232,481

Total sales
1,845,561

 
34,091

 

 

 
(5,290
)
 
1,874,362

Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Product and other cost of sales
1,256,673

 
29,023

 

 

 
(4,653
)
 
1,281,043

Rental cost of sales
133,938

 
320

 

 

 

 
134,258

Total cost of sales
1,390,611

 
29,343

 

 

 
(4,653
)
 
1,415,301

Gross profit
454,950

 
4,748

 

 

 
(637
)
 
459,061

Selling and administrative expenses
347,103

 
8,317

 

 
25,373

 

 
380,793

Depreciation and amortization expense
52,067

 
1,059

 

 
192

 

 
53,318

Sub-Total:
$
55,780

 
$
(4,628
)
 
$

 
$
(25,565
)
 
$
(637
)
 
24,950

Impairment loss (non-cash)
 
 
 
 
 
 
 
 
 
 

Restructuring and other charges
 
 
 
 
 
 
 
 
 
 
1,790

Transaction costs
 
 
 
 
 
 
 
 
 
 
9,605

Operating income


 


 


 


 


 
$
13,555

 
 
 
 
 
 
 
 
 
 
 
 
(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.

41


(b)
We acquired Student Brands, LLC on August 3, 2017. The consolidated financial statements for the 52 weeks ended April 28, 2018 include the financial results of Student Brands from the acquisition date, August 3, 2017, to April 28, 2018.
(c)
For additional information related to the intercompany activities and eliminations, see Part II - Item 8. Financial Statements and Supplementary Data - Note 4. Acquisitions and Note 5. Segment Reporting.
Sales
The following table summarizes our sales for the 52 weeks ended April 28, 2018 and April 29, 2017:
 
 
52 weeks ended
Dollars in thousands
 
April 28,
 2018
 
April 29,
 2017
 
%
Product sales and other
 
$
1,984,472

 
$
1,641,881

 
20.9%
Rental income
 
219,145

 
232,481

 
(5.7)%
Total Sales
 
$
2,203,617

 
$
1,874,362

 
17.6%
Our total sales increased $329.3 million, or 17.6%, to $2,203.6 million during the 52 weeks ended April 28, 2018 from $1,874.4 million during the 52 weeks ended April 29, 2017. Sales increased primarily due to the acquisition of MBS ($425.4 million) and Student Brands ($15.8), partially offset by BNC comparable sales declines primarily due to primarily by lower average selling prices of course materials driven by lower publisher prices resulting from a shift to lower cost options and more affordable solutions, including digital, lower student enrollment, specifically in two-year community colleges, increased consumer purchases directly from publishers and other online providers, and the general weakness in the retail environment.
The components of the variances are reflected in the table below.
Sales variances
 
52 weeks ended
Dollars in millions
 
April 28,
 2018
 
April 29,
 2017
MBS Sales (a)
 
 
 
 
Wholesale
 
$
236.9

 
$
14.1

Direct
 
188.5

 
20.0

MBS Sales subtotal:
 
$
425.4

 
$
34.1

BNC Sales
 
 
 
 
New stores
 
$
64.4

 
$
109.5

Closed stores
 
(12.1
)
 
(23.8
)
Comparable stores
 
(69.8
)
 
(60.2
)
Textbook rental deferral
 
1.3

 
0.6

Service revenue (b)
 
2.9

 
5.8

Other (c)
 
(16.2
)
 
5.6

BNC Sales subtotal:
 
$
(29.5
)
 
$
37.5

 
 
 
 
 
DSS Sales (d)
 
$
15.8

 
$

 
 
 
 
 
Eliminations (e)
 
$
(82.4
)
 
$
(5.3
)
Total sales variance
 
$
329.3

 
$
66.3

(a)
Represents sales for MBS for the 52 weeks ended April 28, 2018.
(b)
Service revenue includes Promoversity, brand partnerships, shipping and handling, LoudCloud digital content, software, and services, and revenue from other programs.
(c)
Other includes inventory liquidation sales to third parties, and certain accounting adjusting items related to return reserves, agency sales and other deferred items.
(d)
DSS revenue includes Student Brands, LLC subscription-based writing services business. The consolidated financial statements for the 52 weeks ended April 28, 2018 include the financial results of Student Brands, LLC from the date of acquisition, August 3, 2017. All material intercompany accounts and transactions have been eliminated in consolidation.
(e)
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.

42


BNC
BNC total sales decreased $29.5 million, or 1.6%, to $1,816.1 million during the 52 weeks ended April 28, 2018 from $1,845.6 million during the 52 weeks ended April 29, 2017. BNC added 33 new stores and closed 34 stores during the 52 weeks ended April 28, 2018, ending the period with a total of 768 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 28, 2018
 
April 29, 2017
Textbooks (Course Materials)
 
$
(65.6
)
 
(5.9
)%
 
$
(55.7
)
 
(4.9
)%
General Merchandise
 
1.2

 
0.2
 %
 
(0.7
)
 
(0.1
)%
Trade Books
 
(5.3
)
 
(10.2
)%
 
(3.2
)
 
(5.8
)%
Other
 
(0.1
)
 
(78.3
)%
 
(0.6
)
 
(88.9
)%
Total Comparable Store Sales
 
$
(69.8
)
 
(4.1
)%
 
$
(60.2
)
 
(3.5
)%
Comparable store sales for BNC decreased for the 52 weeks ended April 28, 2018 and were impacted primarily by lower average selling prices of course materials driven by lower publisher prices resulting from a shift to lower cost options and more affordable solutions, including digital. Comparable store sales were also impacted 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.
Textbook revenue for BNC for the 52 weeks ended April 28, 2018 decreased primarily due to lower new and used textbook sales and rentals as discussed above, while eTextbook revenue increased. General merchandise sales for BNC increased for the 52 weeks ended April 28, 2018 primarily due to higher emblematic apparel and graduation products sales, partially offset by a decrease in school supplies, computer and convenience product sales.
Rental income for BNC for the 52 weeks ended April 28, 2018 decreased by $18.4 million, or 7.9%. The decrease in rental income for the 52 weeks ended April 28, 2018 is due to decreased rental activity and increased digital offerings.
MBS
MBS total sales increased by $425.4 million to $459.5 million during the 52 weeks ended April 28, 2018 from $34.1 million which represents sales for MBS from the acquisition date, February 27, 2017, to April 29, 2017.
Cost of Sales and Gross Margin
Our cost of sales decreased as a percentage of sales to 74.7% during the 52 weeks ended April 28, 2018 compared to 75.5% during the 52 weeks ended April 29, 2017. Our gross margin increased $98.2 million, or 21.4%, to $557.2 million, or 25.3% of sales, during the 52 weeks ended April 28, 2018 from $459.1 million, or 24.5% of sales, during the 52 weeks ended April 29, 2017.
BNC
The following table summarizes the BNC cost of sales for the 52 weeks ended April 28, 2018 and April 29, 2017
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 28,
2018
 
% of
Related Sales
 
April 29,
2017
 
% of
Related Sales
Product and other cost of sales
 
$
1,254,392

 
78.3%
 
$
1,256,673

 
77.9%
Rental cost of sales
 
120,482

 
56.5%
 
133,938

 
57.8%
Total Cost of Sales
 
$
1,374,874

 
75.7%
 
$
1,390,611

 
75.3%
The following table summarizes the BNC gross margin for the 52 weeks ended April 28, 2018 and April 29, 2017:
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 28,
2018
 
% of
Related Sales
 
April 29,
2017
 
% of
Related Sales
Product and other gross margin
 
$
348,495

 
21.7%
 
$
357,329

 
22.1%
Rental gross margin
 
92,714

 
43.5%
 
97,621

 
42.2%
Gross Margin
 
$
441,209

 
24.3%
 
$
454,950

 
24.7%

43


For the 52 weeks ended April 28, 2018, the BNC gross margin as a percentage of sales decreased as discussed below:
Product and other gross margin decreased (40 basis points) due to lower margin rates (35 bps), specifically for general merchandise and used textbooks, which were impacted by publisher price decreases and lower sales of underutilized inventory to third parties compared to the prior year due to inventory transfers to MBS, and an unfavorable sales mix (5 basis points).
Rental gross margin increased (130 basis points), driven primarily by higher rental margin rates (140 basis points) and favorable sales mix (10 basis points), partially offset by increased costs related to our college and university contracts (15 basis points) resulting from contract renewals and new store contracts.
MBS
The cost of sales and gross margin for MBS was $358.2 million or 77.9% of sales and $101.3 million or 22.1% of sales, respectively, during the 52 weeks ended April 28, 2018. The cost of sales and gross margin for MBS was $29.3 million or 86.1% of sales and $4.7 million or 13.9% of sales, respectively, during the 52 weeks ended April 29, 2017. 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.
The margin was impacted by the incremental cost of sales of $3.3 million related to recording MBS inventory at fair value as of the acquisition date. The non-cash fair value inventory adjustment of $3.3 million for MBS was recognized over six months from the date of acquisition and was allocated based on monthly sales. Excluding the $3.3 million inventory fair value amortization, cost of sales and gross margin for MBS was $354.9 million or 77.2% of sales and $104.6 million or 22.8% of sales, respectively, during the 52 weeks ended April 28, 2018.
DSS
Gross margin for the DSS segment was $15.4 million driven primarily by high margin Student Brands subscription service revenue earned from Student Brands acquisition date, August 3, 2017 to April 28, 2018. Operating costs for the Student Brands are recorded as selling and administrative expenses.
Intercompany Eliminations
During the 52 weeks ended April 28, 2018 and April 29, 2017, our sales eliminations were $87.7 million and $5.3 million, respectively. These sales eliminations represent the elimination of MBS sales to BNC and the elimination of BNC commissions earned from MBS.
During the 52 weeks ended April 28, 2018 and April 29, 2017, the cost of sales eliminations were $87.0 million and $4.7 million, respectively. These cost of sales eliminations represent (i) the recognition of intercompany profit for BNC inventory that was purchased from MBS in a prior period that was subsequently sold to external customers during the current period, net of (ii) the elimination of intercompany profit for MBS inventory purchases by BNC that remain in ending inventory at the end of the current period.
The $0.7 million and $0.6 million of gross margin elimination reflects the net impact of the sales eliminations and cost of sales eliminations during the 52 weeks ended April 28, 2018 and April 29, 2017, respectively.
Selling and Administrative Expenses
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 28,
2018
 
% of
Sales
 
April 29,
2017
 
% of
Sales
Selling and Administrative Expenses
 
$
433,746

 
19.7%
 
$
380,793

 
20.3%
During the 52 weeks ended April 28, 2018, selling and administrative expenses increased by $53.0 million, or 13.9%, to $433.7 million from $380.8 million during the 52 weeks ended April 29, 2017. This increase was primarily due to the acquisition of MBS ($41.7 million increase) and DSS ($7.8 million increase). Shared corporate overhead costs previously allocated to MBS prior to the fourth quarter of fiscal year 2018 have been reclassified and are included in selling and administrative expenses in the BNC segment or Corporate Services.
For the BNC segment, selling and administrative expenses increased by $6.6 million, or 1.9%, to $353.7 million from $347.1 million during the 52 weeks ended April 29, 2017. The increase was primarily due a $5.7 million increase in new store payroll and operating expenses (net of closed stores), as a result of a $52.3 million increase in new store sales (net of closed stores), and an increase of $6.6 million in corporate payroll and infrastructure costs, including increased costs associated with Promoversity and LoudCloud digital operations. These increases were partially offset by a $5.7 million decrease in comparable store payroll and operating expenses.

44


For the MBS segment, selling and administrative expenses were $50.0 million, or 10.9% of related sales, compared to $8.3 million, or 24.4% of related sales, during the 52 weeks ended April 29, 2017, which includes the financial results of MBS from the acquisition date, February 27, 2017 to April 29, 2017, their lowest selling period during the fiscal year.
For the DSS segment, selling and administrative expenses were $7.8 million, or 49.8% of sales during the 52 weeks ended April 28, 2018, which includes the financial results of Student Brands from the acquisition date, August 3, 2017 to April 28, 2018.
Corporate Services' selling and administrative expenses decreased by $3.2 million, or 12.6%, to $22.2 million during the 52 weeks ended April 28, 2018 from $25.4 million during the 52 weeks ended April 29, 2017. The decrease was primarily due to savings related to the combining the Chairman and CEO position effective in the second quarter of fiscal year 2018, lower stock-based compensation and bonus expense.
Depreciation and Amortization Expense
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 28,
2018
 
% of
Sales
 
April 29,
2017
 
% of
Sales
Depreciation and Amortization Expense
 
$
65,586

 
3.0%
 
$
53,318

 
2.8%
Depreciation and amortization expense increased $12.3 million, or 23.0%, to $65.6 million during the 52 weeks ended April 28, 2018 from $53.3 million during the 52 weeks ended April 29, 2017. This increase was primarily attributable to incremental depreciation and amortization expense resulting from the acquisitions of MBS and Student Brands associated with the property and equipment and identified intangibles recorded at fair value as of the respective acquisition dates and additional capital expenditures for BNC.
Impairment loss (non-cash)
We completed our annual goodwill impairment test as of the first day of the third quarter of Fiscal 2018. In performing the valuation, we used cash flows that reflected management’s forecasts and discount rates that included risk adjustments consistent with the current market conditions. We estimated the fair value of our reporting units using a weighting of fair values derived from the income approach and the market approach. Based on the results of the test, we recorded a goodwill impairment (non-cash impairment loss) of $313.1 million. For information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.
Restructuring and other charges
Restructuring
In Fiscal 2016, we implemented a plan to restructure our digital education operations and we announced a reduction in staff and closure of the facilities in Mountain View, California, and Redmond, Washington, which was completed during the first quarter of Fiscal 2017. We recorded restructuring costs of $1.8 million during the 52 weeks ended April 29, 2017.
Other Charges
On July 19, 2017, Mr. Max J. Roberts resigned as Chief Executive Officer of the Company and Mr. Michael P. Huseby was appointed to the position of Chief Executive Officer and Chairman of the Board, both effective as of September 19, 2017. During the 52 weeks ended April 28, 2018, we recognized expenses totaling approximately $5.4 million, which is comprised of the severance and transition payments as well as related expenses. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 9. Supplementary Information or the Form 8-K dated July 19, 2017, filed with the SEC on July 20, 2017.
Transaction Costs
Transaction costs were $2.0 million during the 52 weeks ended April 28, 2018 compared to $9.6 million during the 52 weeks ended April 29, 2017. 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.
Operating (Loss) Income
 
 
52 weeks ended
 
52 weeks ended
Dollars in thousands
 
April 28,
2018
 
% of
Sales