Hello and welcome to today’s Barnes & Noble Education fiscal 2023 second quarter earnings conference call. My name is Bailey and I’ll be the moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the call over to today’s host, Hunter Blakenbaker, Vice President of Investor Relations. Hunter, please go ahead.

Good morning and welcome to our fiscal 2023 second quarter earnings call. Joining us today are Mike Huseby, CEO; Tom Donohue, CFO; Jonathan Schar, Executive Vice President, BNED Retail and President, Barnes & Noble College; and David Henderson, President of MBS. Before we begin the call, I’d like to remind you that statements we make on today’s call are covered by the Safe Harbor disclaimer contained in our press release and public documents. The contents of this call are the property of Barnes & Noble Education and are not for rebroadcast or use by another party without prior written consent of Barnes & Noble Education. During this call, we will make forward-looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any forward-looking statements that may be made or discussed during this call. Now I’ll turn the call over to Mike Huseby.

Thanks Hunter and good morning everyone. As evidenced by our second quarter results, the higher ed industry continues to evolve at a rapid pace and we continue to adapt our offerings to ensure that both BNED and our customers are on a path for mutual success. Given the rapidly evolving market, I’d like to focus my comments today on three areas. First, we’ll provide an overview of our second quarter financial results. During the quarter, our key strategic areas of First Day Complete, or FDC, and general merchandise performed well; however, the traditional à la carte course material model declined at a faster pace than we anticipated. Second, we’ll discuss the significant cost reduction initiatives that we are implementing across our organization. These initiatives involve streamlining our operational structure and aligning our capital allocation decisions to our highest return opportunities that accelerate growth and drive operating efficiencies. Finally, we’ll outline the decisive actions we are taking to accelerate our transition to the FDC model, which removes barriers for students by providing greater access, affordability, convenience and ultimately greater academic success. It also helps colleges and universities meet and exceed their highest priority goals, and for BNED it provides more predictable, higher margin revenue. With that, let’s take a closer look at the second quarter. Our team continued to navigate the ongoing challenges in the higher ed space, particularly the continued negative enrollment trends as well as unprecedented increases in operating and financing costs. The most profound insight we learned acutely from our second quarter results is that even though our First Day Complete model grew significantly, the traditional a la carte course model declined at a faster pace than we anticipated. Factors contributing to this decline included faculty assigning fewer course materials per class and many students electing not to…

Thanks Mike. Please note that the second quarter of fiscal 2023 consisting of 13 weeks ended on October 29, 2022. All comparisons will be to the second quarter of fiscal 2022 unless otherwise noted. Total sales for the quarter were $617.1 million compared with $627 million the prior year. The decline of $9.9 million or 1.6% was comprised of a $10.3 million decrease from the retail segment, a $0.6 million decrease in the wholesale segment, and a $0.2 million increase from the DSS segment. Retail gross comparable store sales decreased 2.2% during the quarter. Gross comparable course material sales were down 4.6% as the broader industry headwinds were mitigated by the rapid growth of our First Day offerings. BNC’s inclusive and equitable access programs increased revenue by 49% to $143.2 million during the quarter as compared to $96 million in the prior year period. Within this, FDC revenues increased 97% to $89.9 million. Gross comparable general merchandise sales increased 4.5%. Our general merchandise business benefited from strength in logo and emblematic sales offset by softness in more expensive items like laptops and tablets. Net sales for the wholesale segment decreased $0.6 million or 2.5% to $21.1 million. The decrease was primarily due to lower gross sales impacted by supply constraints resulting from the lack of textbook purchasing opportunities during the prior fiscal year, the continued shift from physical textbooks to digital products, and lower demand from other third party clients partially offset by lower returns and allowances. DSS sales grew $0.2 million or 2.3% to $8.5 million. The second quarter consolidated gross margin rate was 23.5% compared to 23.2% in the prior year period. This was primarily due to higher retail gross margins which benefited from a favorable sales mix of higher margin general merchandise sales. Our selling and administrative…

[Operator instructions] The first question today comes from the line of Ryan MacDonald from Needham. Please go ahead, your line is now open.

Hi Mike and Tom. Thanks for taking my questions. Maybe a first one on the go-forward plan here. Obviously great to hear about the cost saving initiatives that are going into place, but it sounds like you’re going to be reinvesting a lot of those cost savings and really accelerating the adoption of First Day Complete here. One, can you talk about how you drive that accelerated adoption? Do you have to do anything around incentivization from a pricing perspective with the pipeline of university partners that you have; and two, as you think about accelerating that adoption and getting that adoption two years from now, can you remind us of what the unit economics on First Day Complete are and the confidence you have that this accelerated plan will get us to profitability levels that are above pre-pandemic levels, where they were at? Thanks.

Ryan, it’s Mike. I’ll make some general comments on that first, and then John Schar, who is our President of Retail, can make some additional comments. One thing I would say about the unit economics is that in connection with our fiscal year ’22 earnings release, we did post a fairly detailed review of the economics and how they compare, and we can talk more about it. But I think the main answer to your question is that it’s very, very clear to us that the best model for us to offer to our market for courseware delivery is First Day Complete, and we’ve made a decision that based on the scale we’ve achieved, the conversations we have with the schools that we serve, both First Day Complete and others, that we have to lead the industry towards that model so that we are presenting the best model to customers. We’re not doing this to customers, we’re doing it with them. Whenever you have a transition, and this is -- First Day Complete is essentially a subscription model in many respects in terms of how its offered and how its bundled for student benefit. When you have that kind of a model, you have a responsibility, we have a responsibility as a leader in this industry in terms of serving schools and procuring courseware and the best general merchandise to make sure that we’re doing everything we can to accelerate that model, and that’s what we’re doing. There’s been a very detailed school-by-school analysis of how we go about doing this. John and his team have done a great job working with some -- you know, one outside party to really dive into this and come up with a very detailed plan. We’re already starting to talk to schools and then we’ll broaden that communication in the very, very near future. I’ll ask John to comment on anything further.

Yes, thanks Mike and Ryan. Thank you for the question on First Day Complete. Just stepping back, our fall term that we’re about to conclude is really the first term of significant scale where we’ve executed First Day Complete. 111 of our stores representing almost 550,000 of undergraduate enrollment and really now strong references of institutions across all higher ed sectors -- four year private, four year public, two-year public, large enrollment, small enrollment, liberal arts-based, technical-based and everywhere in between, and we’re seeing significant success really ultimately in student outcomes at those schools. We have implemented research where students are saying their more prepared. This is a model that supports their wellbeing and ultimately their academic success, and it’s based on this, that we feel the impact is going to be even more significant and will continue to accelerate. Only four years ago, we only had four institutions representing almost, I think, 16,000 in undergraduate enrollments, so we’ve been able to scale this in a significant way. We’re also investing and have invested significantly in technology to create a seamless experience and transition to this. We’ve leveraged an institution’s single sign-on system, registration system, student information systems to have a personalized experience, and now we’re investing in more sales, as we said in the remarks, sales, marketing, operational support in addition to technology to allow us to scale, and really it’s allowed us to scale the number of individual conversations we have with institutions to understand how we meet their needs and how we make a bigger impact on the goals that are most important to them, whether that’s driving the four and/or six-year graduation rate, attacking student wellbeing or any other goal. We think we can accomplish that and have the team, the focus and the resources now to really execute that, drive First Day Complete growth for next term, and then the vast majority of our institutions in two years.

Ryan, it’s Mike. One more comment -- I think the flipside of not doing this is evident in the second quarter, and it’s not just its impact on our results, it’s its impact on the students and the schools because the schools share in our economics, and the fact that the à la carte model is declining, it tells us that there are many students, and we know this from our research and conversations, many students just aren’t purchasing the courseware they need to be successful. This model puts the curriculum back in the hands -- the control of that curriculum back in the hands of the schools and the faculty, as opposed to just letting the market cause the chaos it’s going to do as digital increases in terms of its market share. This is a way to have a contract, have a relationship with the school that actually means something to them as well as to us, and helps the students.

That’s helpful color, I appreciate that. Maybe on the cost optimization, Tom, you mentioned that it’s going to be a mix of savings in cost of sales and then S&A. As you looked across retail, wholesale, DSS, can you maybe just help us out and give us a sense of the magnitude of where you’re making the cuts across those three segments as we think about the P&L moving forward?

Yes, thanks Ryan. I haven’t necessarily broken it out. We’re in the process of doing it. It’s a lot of people, it would be people in all three segments, and when you think more on the cost side as opposed to just the people, it’s really switching to the FDC model both in terms of service and support, and really trying to re-focus the capital investment in that area. As we look across, it will certainly be people but it also gets down to the retail level, the store level in terms of store labor and the effects that it has there.

Yes Ryan, it’s Mike. I guess the way I would answer the question without giving the numbers that comprised the total is that -- you know, we talked about each of the business units in the script, and from a relative perspective, the employees impacted are probably more significant on a relative basis at DSS and MBS because -- and there’s some in corporate, but we’re trying to, as we said and as John just said, really focus our investment on our highest return, our core business, and drive our inclusive access model. While there are reductions across the business, the weighting of that really emphasizes focusing the savings in those businesses where we have to really get more rigorous on profitability, and then also have those savings reinvested -- when we say reinvested, we really mean to drive our core business where it’s got the highest ROI.

Makes sense, okay. Maybe just one more from me. Mike, you had talked about in one of your comments that students are just -- you know, an increasing number of students not purchasing the course materials they need. I would think that structurally that would be a bit of a tailwind for the DSS business and the Bartleby business. Just curious what you’re seeing there and maybe what’s causing the slowdown, and are you seeing any improvements in the pipeline here of the school associated Bartleby adoption deals? Thanks.

Yes, thanks. I’ll answer the second question first. In terms of the pipeline for what we’re calling institutional, where we have several schools now signed up, that is continuing. As we’ve said, though, the main emphasis on DSS is really focusing on more rigorous profitability, getting that DSS segment to cash flow breakeven. Within DSS, as you know, there really are two businesses: the Student Brands business, which is growing, and then the Bartleby business, where we tried a lot of things in the fall in terms of new pricing and some new approaches. Some worked well and some didn’t work as well as we thought they would, some of which has to do with the environment we’re in currently, but we learned a lot in the fall and we’re making some significant changes to, I guess I would say, take advantage of the competitive differentiation we have and the ability to offer a different price point in particular, and also leveraging our footprint in a more zealous way in-store and on web than we probably did in the fall. We’re reining in the capex by not taking as broad questions from international sources, really focusing more on the U.S. and our footprint and becoming much more focused on Bartleby in terms of rationalizing the business to fit the current circumstances and our need to grow to focus on profitability. It’s been really set up over the last six months to a year in terms of the activities and intentionally to develop and asset for longer term growth. With our financial capacity and the focus on really the core business, we’re reining in that in a bit. Still have great people working there and I think we have great opportunity to set a foundation that positions us for more growth going forward, but the visitors to the sites were down, and that’s an industry phenomenon. We employ an outside company that tells us about our sites and those that we relatively compete with in this area, and traffic was down across the board, so that’s something we need to work on and have ideas as to how to do it. Very proud of Student Brands also in terms of their turnaround over the last 18 months or so, being led by [indiscernible] and his group, experts in SCO and machine learning. That’s a real gem of an asset that we have within DSS and I think complements what we’re doing in Bartleby and eventually downstream into our core business. We’re focused on a big change in Bartleby and the approach just in the very near term for spring, and hope to see better results. We can’t guarantee that, but we’re focused on it.

Thanks for taking my questions. I’ll hop back in the queue.

Thank you. [Operator Instructions] The next question today comes from the line of Alex Fuhrman from Craig Hallum Capital Group. Please go ahead, your line is now open.

Hey guys, good to talk to you. I wanted to ask about the cost reduction initiative -- it sounds like after the $10 million to $15 million you’re expecting to realize for the remainder of this year, there’s another $20 million that you expect to realize long term. How long do you think it’s going to expect to realize that? Do you think you’re going to see the bulk of that incremental 20 in fiscal ’24, and then Tom, I think you mentioned it’s your intention to reinvest most of these savings into other initiatives, so how should we think about the impact to the P&L of those cost savings?

Yes, thanks Alex. I think the way to think of it is, given that we’re through at this point six months, as we reported, and then obviously through seven months if you count the month of November, the 10 to 15 is really the rest of the run rate basis for FY ‘23, and when you annualize that, you get closer to that 30 to 35. The steps and initiatives are being implemented as we speak -- some has been done, some will continue to be done, and that’s really what our expectation is and you would expect the full annualized effect of that 30 to 35 would be in the ’24 numbers for sure.

Yes Alex, one more comment I would make is that having been through the pandemic and having taken out substantial costs in our shared services and retail right before the pandemic and actually bled into the pandemic in terms of people, we had a perk back on the spring of 2020 where 70 people accepted that. The point is, it’s given us more flexibility in terms of fixed versus variable costs in our labor force so that we can move more quickly now than we could have pre-pandemic, so that’s why we’re confident in the numbers and getting the benefit now, and then the annualized savings. We also have other areas of improvement that we’re looking at that are just costs -- the margin, etc. I don’t want to get into those today that we’re working on, we’re not quantifying any benefits, but we’re not standing still with these actions and these numbers. We’re going to continue to look at ways to protect and improve the margin of what we offer as well.

Yes, and Alex, in terms of reinvesting, it’s really to support the initiatives, with the highest priority being the conversion of schools to First Day Complete.

Okay, that’s really helpful. Thank you both.

Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. There are no additional questions waiting at this time, so I’d like to pass the conference back over to Hunter Blakenbaker for any closing remarks. Please go ahead.

Great, thank you Bailey, and thanks everyone for joining us today and for your continued interest in BNED. As a reminder, our fiscal third quarter earnings will be in early March. Thanks everyone for joining.

This concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.