Barnes & Noble Education Keeps Facing a Tough Market

By Dan Caplinger Markets Fool.com

Getting a college education is expensive, and college bookstore operator Barnes & Noble Education (NYSE: BNED) has to deal with the financial challenges of its customers along with changing enrollment patterns at the colleges and universities that it serves. Recently, the college retailer has faced tough conditions in its core business, and coming into Tuesday's fiscal third-quarter financial report, B&N Education investors were hoping only for modest sales gains and a reversal from last year's loss. For its part, B&N Education did earn a profit, but sales were stagnant, and tough retail conditions show no signs of letting up.

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Let's look more closely at Barnes & Noble Education to see how it did and what's ahead for the rest of the year and beyond.

Image source: Barnes & Noble Education.

How Barnes & Noble Education fared during the quarter

Barnes & Noble Education's fiscal third-quarter results once again showed the weak conditions in the industry. Sales of $521.6 million were up less than 1% compared to last year's fiscal third quarter, falling well short of the 4% growth rate that investors had wanted to see. Adjusted net income of $4.05 million was down by more than 30% from year-ago levels, and the resulting $0.08 per share in adjusted earnings compared unfavorably with the $0.15 consensus forecast among those following the stock.

Looking more closely at the numbers, B&N Education keeps facing bad news with some of its most important metrics. Comparable-store sales plunged, posting a decline of 4.9% and accelerating from the pace of its drop from earlier in the fiscal year. Lower textbook sales drove the downward figures in comps, but B&N Education also said that later school openings caused some sales to extend beyond the end of the quarter, watering down Spring Rush period results. Moreover, the company identified that many students have consistently waited until later in the quarter to purchase course materials. Yet even when you factor in parts of the month of February, comps were still down substantially. Sales of general merchandise were roughly flat from year-ago levels.

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Operationally, B&N Education has continued to try to take steps to find success. It completed its expansion of its price match program to all of its textbook stores, hoping to stem the tide of sales moving toward competing online retailers. B&N Education's web sales for textbook and general merchandise offerings climbed, helping to offset falling sales in stores. Moreover, more clients are using the B&N Education Courseware platform, and the retailer is looking forward to fall's back-to-school season for the full impact of that move.

Still, B&N Education CEO Max Roberts noted how hard things have been for the company. "The trends we saw in the second quarter continued," Roberts said, "including lower enrollments, a competitive market for textbook sales, and a soft retain environment." He also noted the retailer's efforts to help make learning more affordable as key drivers for customer retention.

Can B&N Education pass its next test?

Looking forward, B&N Education is taking more aggressive action. In Roberts' words, "We remain confident in our ability to capitalize on expected long-term industry trends, including future enrollment growth, an increasing focus on affordability, and the evolution toward digital solutions." The company also believes that it can build market share as more school source out their retail operations.

Along with the earnings report, B&N Education said today that it bought MBS Textbook Exchange for roughly $174 million in cash. MBS is a key contractor for virtual bookstores and has one of the largest used textbook wholesale businesses in the nation. MBS serves more than 700 virtual bookstores with e-commerce services, and it has relationships with more than 3,700 brick-and-mortar college bookstores, including B&N Education's 770 stores. B&N Education sees synergies from managing inventory and procurement in the textbook space, and it believes that the move will give customers even more choices to find the course materials they need more affordably and effectively.

Yet Barnes & Noble Education still sees tough times lasting throughout the remainder of the fiscal year. Total revenue will climb by 2.5%, down from its previous guidance of 3% to 4%. Comparable sales will likely drop 3%, which is the bottom end of its previous range.

B&N Education has a lot of work to do, and investors won't be happy until the college retailer makes good on its promises to tap its market to the fullest extent possible. The MBS acquisition is an interesting strategic move for the company, but the onus will be on B&N Education to prove that it will be profitable and encourage growth in the long run.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.