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Barnes & Noble Inc  (NYSE:BKS)
Q2 2019 Earnings Conference Call
Nov. 20, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Barnes & Noble Fiscal 2019 Second Quarter Earnings Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Andy Milevoj. You may begin.

Andy Milevoj -- Vice President, Investor Relations & Corporate Finance

Good morning, and thanks for joining us on our fiscal 2019 second quarter earnings conference call. This morning, Al Lindstrom will review our second quarter financial results; and Carl Hauch will discuss our new store openings. Len Riggio, Tim Mantel, Bill Wood, and other Members of our Senior Management Team will join us for the question-and-answer session following the prepared remarks.

Before we begin, I'd like to remind you that this call is covered by the Safe Harbor disclaimer contained in our press release and public documents and is the property of Barnes & Noble. It is not for rebroadcast or use by any other party without the prior written consent of Barnes & Noble.

During this call we will issue forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release. The Company disclaims any obligation to update any forward-looking statements that may be discussed during this call.

And now, I'll turn the call over to Al.

Allen Lindstrom -- Chief Financial Officer

Good morning. Today I will provide an overview of our second quarter results, which ended on October 27th. Comparisons are to the prior-year quarter unless otherwise noted. Consolidated sales decreased $20 million or 2.5% to $771 million. Comparable store sales declined 1.4%, our best quarterly comp results in over two years. Books decreased 3% for the quarter, helped by continued strength in hardcovers and the reestablishment of our bargain assortment. We also saw improvements in our trade paper, kids, and young adult category.

Non-books increased 1.9%, led by Toys & Games growth, Cafes, and better gift results. Gross margins decreased $3 million on the lower sales volume, partially offset by higher rates. Margin rates increased 30 basis points for the quarter, as lower store markdowns and decreased online promotions outpaced cost deleverage. The Company reduced expenses by 10% or $26 million during the quarter. These savings were primarily achieved through lower store payroll and to a lesser extent NOOK rationalization and indirect procurement.

On a rate basis, expenses declined 255 basis points despite lower sales. We remain committed to right-sizing our cost structure, while reinvesting in our business to drive top line growth. Examples include the recent launch of our new ad campaign, remerchandising unproductive space to growing categories, and recalibrating our labor model. In addition, we continue to make improvements to our website and recently announced a new NOOK Tablet. To pay for all of this, we will continue to be disciplined in controlling our costs, eyeing further opportunities in the indirect procurement, corporate synergies and supply chain efficiencies.

Lower expenses largely drove a $23 million improvement in EBITDA this quarter. Last year the Company lost $25 million during the quarter, improving to a loss of $2.3 million this year. The consolidated first quarter net loss was $27.4 million or $0.38 a share, as compared to a net loss of $30.1 million or $0.41 a share in the prior year. The effective tax rate was lower than last year, as a result of tax reform and the expected release of previously established valuation allowances.

Turning to the balance sheet, we ended the quarter with borrowings of $278 million under our $750 million credit facility. These levels are commensurate with the seasonality of our business as we build inventory heading into the holiday season. We returned capital to our shareholders via the distribution of $11 million in dividends during the quarter. Capital expenditures were $38 million, as compared to $29 million a year-ago, as we've invested in new stores and merchandising initiatives ahead of the holiday selling season. We expect fiscal '19 CapEx to be within a range of $100 million to $120 million depending on new store openings and strategic initiatives.

Looking ahead, we are maintaining our fiscal '19 earnings range of $175 million to $200 million, excluding unusual or non-recurring items. This outlook is predicated on the continuation of improving sales trends, better gross margins and continued cost controls. We expect comparable store sales to improve as the quarter progresses. Our outlook includes positive comps during the all important holiday period. Our comparable store sales improvements include benefits from favorable year-over-year comparisons for the balance of the quarter, our national ad campaign, a strong publishing season, incremental investments we've made to capture Toys & Games sales, and improved gift assortment, and better in-stock inventory positions. We remain confident that we are taking the right steps to drive improved financial performance and deliver value to our shareholders.

And now, I'll turn the call over to Carl.

Carl Hauch -- Vice President of Stores

Thanks, Al, and good morning everyone. Today, I'd like to take a few moments to discuss our progress on opening new store prototypes in communities across the country, which is something we're all very excited about. Over the last couple of months we've opened up three new stores, including Columbia, Maryland; Vernon Hills, Illinois; and Hackensack, New Jersey. And just this morning, we opened the doors to our latest new store prototype at the Staten Island Mall in New York.

Each of these prototype stores is a modern take on the classic Barnes & Noble bookstore. They feature a smaller footprint and a clean contemporary new design where books take the center stage. Each store has a slightly different approach to the new format, providing us opportunities to evolve based on what we learn. These stores were developed with a modern design esthetic that provides a warm and welcoming atmosphere. They include large book theaters located at the heart of the store, and lower profile book shelves that provide an improved browsing and discovery experience. They also include plenty of comfortable community seating areas where customers can spend time relaxing, meeting with each other and gathering to talk about books. And in addition to the self-service kiosks, our book sellers are equipped with tablets to help assist customers anywhere in the store. To position the Company for growth, we're focused on entering into new markets as well as finding opportunities to relocate within existing markets when exiting a lease. Our new smaller stores provide tremendous flexibility to expand into these new markets as well as reposition within existing markets through smaller footprints.

The new stores we've recently opened range from 17,000 square feet to 20,000 square feet and we are targeting to be closer to 14,000 square feet going forward. Our recent store openings are a great illustration of our future plans. Columbia, Maryland is a brand new market for us and we're thrilled to be serving this community. Vernon Hills, Illinois on the other hand is a perfect example of what we're doing with relocations. We moved from a mall where our lease was ending to a nearby new exciting Lifestyle & Entertainment center. We closed the mall store on a Tuesday evening, and welcomed our customers to the new store the very next day. This is a great example of how we plan to transfer existing sales from our old stores as well as generate a new customer base from new centers. As I said, we've learned a lot from the nine new stores we've opened up over the last couple of years and our team is on the ground pursuing opportunities in markets across the country. We plan to open 10 to 15 new stores in calendar 2019. We hope you will all have an opportunity to visit one of our new stores soon.

Now, I'll turn it over to Andy.

Andy Milevoj -- Vice President, Investor Relations & Corporate Finance

Thanks, Carl. That concludes our prepared remarks this morning. We'll now open the call for questions. Operator, please provide instructions for those interested in asking the question.

Questions and Answers:

Operator

Thank you very much. (Operator Instructions) Our first question will come from John Tinker, Gabelli.

John Tinker -- Gabelli & Company -- Analyst

Good morning. Thank you. Could you just talk a little more about what the new stores cost? And secondly, I'm going to remind everybody, how many leases you have expiring over the next year and sort of give some of expenses to how many new stores you really could open? Thank you.

Allen Lindstrom -- Chief Financial Officer

So, John, it's Al. In terms of cost per new store it's in the range of about $3 million before tenant allowances. And in terms of lease expirations per year, approximately a quarter of our team is up for renewal every year in terms of our lease expirations.

John Tinker -- Gabelli & Company -- Analyst

And so, what would you say the ratio of new stores, in terms of new areas to existing areas will be as you try and downsize the size of your store?

Carl Hauch -- Vice President of Stores

John, this is Carl. And I would say that, a quarter of our new stores that we opened could be targeted in new areas and three quarters are existing relocations. That's rough numbers of course and it's predicated on market opportunities.

John Tinker -- Gabelli & Company -- Analyst

Sorry, and final question if I could. The toy business, and Toys"R"Us looks like it's out of business. And if you visit some of your stores, some people are arguing, you have kept quite a large presence now. How could the toy -- how large does the toy business be for you?

Carl Hauch -- Vice President of Stores

We -- I don't think we've publicly disclosed Andy (ph) or the size of our toys games in a while. I can tell you that we think it's a significant opportunity for holiday, toys comped at double digits in the second quarter and it's strong heading into the holiday season.

Leonard Riggio -- Founder and Chairman

Yeah, this is Len, toy businesses is important to us, because children's business is so important. It's not uncommon to have the kids bringing their parents to the stores. So it's considered a strategic category for us at this point.

John Tinker -- Gabelli & Company -- Analyst

Thank you.

Operator

Thank you. Our next question will come from Ryan Vaughan, Needham. Mr. Vaughan, your line is live, if you would please unmute your phone.

Ryan Vaughan -- Needham & Company, LLC -- Analyst

Sorry about that. Can you hear me now?

Operator

Yes, go ahead.

Ryan Vaughan -- Needham & Company, LLC -- Analyst

Sorry about that. Thank you for taking my call. The question first, just a clarification, Carl, you had mentioned opened up 10 to 15 new stores and I believe you said three quarters of those or approximately three quarters would be replacement locations. And then with a quarter of your base coming up on the existing stores, just wanted a clarification point on what you expect with your existing store base as far as other potential opportunities or closures.

Carl Hauch -- Vice President of Stores

Yeah, most of the stores that are coming up for lease expirations are renewed, the vast majority of our stores are very successful, so we renew those as they come up.

Ryan Vaughan -- Needham & Company, LLC -- Analyst

Great. Let me ask you, last quarter, you had rolled out your by Buy Online, Pick up in Store. I know you had a little bit of an issue early on in the first month. Just we're seeing some nice improvement on the top line. Just curious what you're seeing from the first five or six months of the Buy Online, Pick up in Store, what kind of success you're having there?

Carl Hauch -- Vice President of Stores

As we talked about in the first quarter call, it created some operational issues as you noted, when we first rolled it out. And we've since fixed that and we saw our comps steadily improve in the first quarter and now in the second quarter, you see I think much improved results. I think it's an initiative that is complementary to our business that provides the customer with the best opportunity to pickup the book in the store and take advantage of our footprint throughout the US where they can search online and get into the store and we'll have the book for them. So it certainly has helped I think, our results improved from the first quarter to the second.

Ryan Vaughan -- Needham & Company, LLC -- Analyst

Great. And have you noticed an improvement, I know Len, you had mentioned about you absolutely having to get this right, just on the e-commerce, whether it is an initiative like Buy Online and Pick up in Store, have you seen some signs of improvement on the e-commerce side this quarter versus previous?

Leonard Riggio -- Founder and Chairman

We have a new leadership in the online business and Bill Wood, who is here this morning is our new Chief Digital Officer of -- I have to say for myself, I've never been more optimistic about what we can do with our online, how we can improve our online performance and actually use it as a vehicle which is what it's supposed to be for improving store traffic. We're getting all kinds of letters from customers who have lauded the improvements we made to date. Bill has a new team in there, they are resolved, they're using their heads, they're becoming more customer-centric than we've ever been, more into the customer experience than necessarily the underlining technology.

So I think we have a lot of room for improvement, a lot of room for improvement, I mean, customers love Barnes & Noble, very loyal to us. And our website basically was not satisfactory to them. So I think that the online business is going to improve our store sales. The online performance is going to improve our sales. It's our marketing channel 24/7. As Al told you, the Buy Online, Pick up in the Store is a big part of it, but I think the biggest part of it is creating demand. As you might know, a customer who can access the title and have visibility to the inventory in any one of our 600 plus stores. So they know that the trip is worthwhile because they can check to see if they have the inventories, it's definitely a traffic builder.

Ryan Vaughan -- Needham & Company, LLC -- Analyst

That's great. Let me ask you one last one if it's OK. Just you had mentioned launching the new ad campaign, has that been launched yet or will that be launched during the upcoming weeks?

Tim Mantel -- Chief Merchandising Officer

We've got -- this is Tim Mantel. We've gone to market already. We've been live for about four days in broadcast, and a little over a week in movie theaters and in digital display, and we expect that to continue through Christmas obviously, and during the gift card redemption period as well.

Ryan Vaughan -- Needham & Company, LLC -- Analyst

Excellent. Thank you.

Leonard Riggio -- Founder and Chairman

You should know that the advertising campaign is focusing more on the newer media, than it is on typical broadcast media. The investment is not that great this year. We could amp it up if we see the results approve that they're worthwhile, the campaign is worthwhile. But we're pretty optimistic because we're trying media that we've never tried before, and that seems to be taking. But we'll let you know more I guess after the quarter is over because we think -- I think we can have a continued presence of marketing or advertising presence at least during the holidays for this Company, as long as we're here.

Ryan Vaughan -- Needham & Company, LLC -- Analyst

Great. Thank you very much.

Operator

Thank you very much. Our next question will come from Alex Fuhrman, Craig-Hallum Capital Group.

Alex Fuhrman -- Craig-Hallum Capital Group LLC -- Analyst

Great, thanks very much for taking my question. I wanted to ask about your expectation for positive same-store sales during the holiday season. No question that the results that you just reported here in the second quarter are better than what we've seen in terms of comp store sales for the last couple of years. But obviously, to get to positive territory would be another pretty significant step-up. So, wondering if you can tell us where you expect that to come from. Have you started to see a lift in traffic and sales already just in the week since your TV ad campaign has been out. Curious if you could unpack that for us a little bit more?

Allen Lindstrom -- Chief Financial Officer

So Alex, it's, Al. As we talked about a little bit on my part of the speech, there are a lot of things that I think that are going to lift comparable store sales for the holiday period. It's not just one thing, it's a lot of -- it's a breadth of initiatives that I think will help the overall business, not only for holiday, but beyond. So we talked about benefiting from favorable year-over-year comparisons, we had a tough holiday last year, we're comping against those numbers. Our national ad campaign, which Len was just talking about, we have a great publishing lineup for this holiday period. Obviously, you've seen the press releases come out about Michelle Obama's book, which is doing well for us. We've made incremental investments for Toys & Games to capture those opportunities and those sales, and we think that's going to drive some nice sales results for the holiday season.

We're back in stock on gift, last year, during the holiday period, we cleared out a lot of unproductive product, and this year we're back in terms of those assortments, and we feel like overall we're in a better in-stock inventory position for the organization. So those are the main initiatives that I think will improve comps for the holiday period.

Leonard Riggio -- Founder and Chairman

With less markdowns coming at the end of the season.

Allen Lindstrom -- Chief Financial Officer

With less markdowns and then to what Len was just saying, one of the things that didn't list is our better online presence as well, which we think helps the stores.

Alex Fuhrman -- Craig-Hallum Capital Group LLC -- Analyst

Great. That's helpful. Thanks. And then as you think about just the SG&A cuts in staffing, it seems like you guys did a really good job in the second quarter of controlling expenses. And if I'm understanding your comments in the prepared remarks correctly, it sounds like the bulk of that came from lower staffing in stores. Is that something we should expect to see come down pretty uniformly throughout the year or is that perhaps a bigger opportunity or not as big an opportunity just as you think about your peak seasonal staffing for the holiday season?

Allen Lindstrom -- Chief Financial Officer

So the first and second quarter, we saw significant improvements in our expenses, largely driven by the store labor model initiative. I would expect that over the next quarter, we still expect to see benefits from that, but then you start to cycle it in the fourth quarter. We're reinvesting where we think that there is opportunity to drive top line as well, and there are other opportunities outside of store labor that we're addressing, where we're taking a hard look in indirect procurement, supply chain is a big opportunity for us as well, which is an issue that we're diving into as well.

Carl Hauch -- Vice President of Stores

Yeah, and this is Carl. What I would add is that, it's really important to us that we measure, not only the customer experience, but how we're doing, converting those customers to sales, and we find that despite the lower levels year-over-year, the customer experience has improved and our level of conversion is slightly up for the year. And as Al mentioned, we are really watching this closely and investing where appropriate.

Alex Fuhrman -- Craig-Hallum Capital Group LLC -- Analyst

Great. Thank you very much.

Operator

Thank you. (Operator Instructions) Well speakers, at this time, we have no further questions in the queue. So I'd like to turn this conference back over to Mr. Andy Milevoj. You may begin.

Andy Milevoj -- Vice President, Investor Relations & Corporate Finance

Thank you. And thank you all for joining us on today's call, and for your interest in Barnes & Noble. Our third quarter earnings release will be released on or about February 28th. We're wishing everyone a great holiday season. Thank you.

Operator

Thank you very much. Ladies and gentlemen, at this time this now concludes today's conference. You may disconnect your phone lines, and have a great rest of the week. Thank you.

Duration: 23 minutes

Call participants:

Andy Milevoj -- Vice President, Investor Relations & Corporate Finance

Allen Lindstrom -- Chief Financial Officer

Carl Hauch -- Vice President of Stores

John Tinker -- Gabelli & Company -- Analyst

Leonard Riggio -- Founder and Chairman

Ryan Vaughan -- Needham & Company, LLC -- Analyst

Tim Mantel -- Chief Merchandising Officer

Alex Fuhrman -- Craig-Hallum Capital Group LLC -- Analyst

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