SEC Company Response from Barnes & Noble Education, Inc. (BNED) (CIK 0001634117) (BNED) — Jun 12, 2017
Barnes & Noble Education, Inc. (BNED) (CIK 0001634117)
Date: June 12, 2017 · CIK: 0001634117 · Accession: 0001634117-17-000063
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-37499
Referenced dates: May 25, 2017
Letter
VIA EDGAR CORRESPONDENCE AND HAND DELIVERY Office of Consumer Products United States Securities and Exchange Commission Division of Corporation Finance Form 10-K for Fiscal Year Ended April 30, 2016 Form 10-Q for Fiscal Quarter Ended January 28, 2017 Response Dated May 2, 2017 File No. 001-37499
Dear Ms. Thompson:
As Chief Financial Officer of Barnes & Noble Education, Inc. (the “Company”), I am responding to your letter dated May 25, 2017 (the “Comment Letter”) to Max J. Roberts, the Company’s Chief Executive Officer. To facilitate your review, each comment in the Comment Letter is set forth below in bold type and my corresponding response appears below it in ordinary type.
Because of the commercially sensitive nature of certain of the information contained herein, the Company requests confidential treatment under 17 C.F.R. §200.83 for selected portions of this letter. For the Staff’s reference, the Company has enclosed a copy of its letter to the Office of Freedom of Information and Privacy Act with this copy of the correspondence marked to show the portions redacted from the version filed via EDGAR and for which the Company is requesting confidential treatment in accordance with Rule 83 of the Commission’s Rules on Information and Requests (17 C.F.R. §200.83) (“Rule 83”).
Please promptly inform the Company of any request for the confidential material submitted herewith made pursuant to the Freedom of Information Act or otherwise so that the Company may substantiate the foregoing request for confidential treatment in accordance with Rule 83. Any such notice may be directed to Barry Brover at Barnes & Noble Education, Inc., 120 Mountain View Blvd., Basking Ridge, New Jersey 07920 or at (908) 991-2640.
Confidential Treatment Requested by Barnes & Noble Education, Inc.
99C-001
Pursuant to 17 C.F.R. § 200.83
In addition, in response to the Staff's comment 2, we are providing the Staff on a supplemental basis with certain of the information requested (the "Supplemental Information") together with the paper copy of this letter that is being delivered by messenger. We request, pursuant to Rule 12b-4 promulgated under the Securities Exchange Act of 1934, as amended, that the Staff shred the Supplemental Information once the Staff has completed its review and, by separate letter, are also requesting that such Supplemental Information be protected from public disclosure pursuant to 17 C.F.R. §200.83.
Form 10-K for Fiscal Year Ended April 30, 2016
Item 8. Financial Statements and Supplementary Data
Note 2. Summary of Significant Accounting Policies
Revenue Recognition and Deferred Revenue, page 55
1.
We note your response to comment 3. Please clarify why you recognize digital textbook rental revenues at the time of sale rather than over the rental period. In doing so, ensure you explain why you believe your digital and physical textbook rental revenue recognition policies should differ under GAAP and how the day one receipt of the rental fee represents the culmination of the earning process.
Response:
While we generally refer to the delivery of a digital product that grants access to an eTextbook for a defined period of time as a digital eTextbook rental, the transaction shares greater similarity to the sale of an eTextbook than it does to the rental of a physical textbook. A physical textbook rental requires us to deliver a copy of the textbook to a student at the start of the rental period, which they must return to us at the end of the defined rental term. Once returned, we process the return into our inventory and close out the rental. At the time a physical textbook rental is returned, we continue to own the used physical textbook and can rent or sell the same textbook in the future. For a physical textbook rental, a student has the option to purchase the textbook rental at the end of the rental term, at which time we process the sale. If the student does not return the physical textbook rental at the end of the rental period they are charged a return penalty fee.
Conversely, the digital eTextbook rental and digital eTextbook sale share the same source data and product interface with the only distinction between the two products being the length of time a customer is granted access to the content. The digital eTextbook rental has a defined period of time, typically 180 days after the date of purchase, through which the student will be able to access the content, while a digital eTextbook sale is available to the student for an indefinite period of time. In either case, there is no further action required on either the students’ part or our part once the eTextbook is delivered to the student’s Yuzu® account. Further, our policy is that we do not offer refunds on digital content once it has been delivered to the student. We cannot re-rent or resell the digital eTextbook rental by reissuing the same access code and the student does not have the option to purchase the digital eTextbook rental at the end of the rental period.
The ongoing support efforts for hosting and delivery of eTextbooks (either sale or rental) has been outsourced to a third party and the costs associated with the delivery and any ongoing commitments were determined to be immaterial. We further note that the total revenue recognized for digital eTextbook rentals was less than [***]% of our revenues in both Fiscal 2016 and Fiscal 2017. As noted above, we view the transaction for the digital eTextbook rental to be economically similar to the sale of a digital eTextbook due to the minimal variation with regards to the earnings process for those respective products, in comparison to the differences identified above for the rental of physical textbooks. Therefore, we believe it is appropriate that the rental revenue recognition policies for physical textbook rentals and digital eTextbook rentals differ under GAAP and that the day one receipt of the digital eTextbook rental fee represents the culmination of the earnings
Confidential Treatment Requested by Barnes & Noble Education, Inc.
99C-001
Pursuant to 17 C.F.R. § 200.83
process, as it is the point in time when the student obtains access to the digital content and no further material efforts remain undelivered on our part.
Form 10-Q for Fiscal Quarter Ended January 28, 2017
Note 2. Summary of Significant Accounting Policies
Goodwill, page 10
2.
We note your response to comment 7. In order that we can more fully understand and evaluate your response regarding how you determined the fair value of your single reporting unit in your goodwill impairment analysis, please provide the following information:
Note: We provide the following responses to address each of the specific bulleted questions noted.
•
Tell us in more detail how you determined the fair value of your reporting unit at the valuation date. Discuss the material assumptions you relied upon in estimating future cash flows and how you determined the discount rate used. Ensure your response addresses how you determined each of the assumptions utilized was appropriate.
Response:
The fair value of our reporting unit was determined considering both the income approach, specifically the discounted cash flow method, and market approach, specifically the market comparable and market transaction approaches. Given the lack of pure play comparable companies and the limited number of market transactions, the market approaches were considered solely as a measure of reasonableness of the conclusion derived from the income approach. As a result, the fair value of our reporting unit was determined using the income approach which requires the preparation of cash flow projections for the next five fiscal years based upon known or historical trends, as well as anticipated future strategy impacts, which we refer to as our Five Year Plan. The Five Year Plan was prepared as of November 1, 2016 and reflected relevant market, industry and economic data as well as current business performance and expectations going-forward. The process for building the Five Year Plan begins with reviewing general industry data and current business data. See Appendix A for industry and company information.
We consider the following to be material assumptions relied upon for estimating future cash flows for our Five Year Plan and the income approach:
•
Revenue and margin results at our current and new physical bookstore locations;
•
Growth of our digital product offerings; and
•
The discount rate used in determining the fair value of the reporting unit.
Revenue and margin results at our current and new physical bookstore locations
When estimating our future cash flows, we focus on maintaining revenue and margin results for our physical bookstore locations (comparable stores) and the growth of our base business by adding new physical bookstore locations (net new business). We primarily focus on sales growth, margin rates and operating expenses. The following are the key assumptions and historical averages:
Confidential Treatment Requested by Barnes & Noble Education, Inc.
99C-001
Pursuant to 17 C.F.R. § 200.83
Current and New Physical Bookstore Locations
Material Assumptions
5 Yr Plan Assumptions
3 Yr Historical Avg.
Comp Store Sales Growth Rate
[***]
[***]
Annual Net New Stores Revenue
[***]
[***]
Gross Margin Rate
[***]
[***]
Operating Expense (% of Revenue)
[***]
[***]
The foundation of our business is our experience with operating and managing all aspects of the campus bookstore, including marketing of textbooks and general merchandise. For comparable store business, we evaluate factors, such as current trends related to college and university enrollment (by type of higher educational institution) which are projected to increase long term, general retail industry trends, and trends related to the overall economy. We also evaluate average units sold and price trends for products (such as textbooks and general merchandise). For example, the growth rate for textbooks has declined by [***]% over the last three years, but general merchandise growths rates have increased by [***]% during the same period. For our consolidated comparable stores, we assumed revenue growth rates that were [***] and operating expenses that were [***] to projected revenues. Operating expenses are generally [***] as a percentage of revenue with minimal increases for payroll merit increases and increases to occupancy rates charged when a contract is renewed. Our comparable stores gross margin is projected to [***] over the Five Year Plan based on the product mix, as we continue to [***]. We believe that the estimated growth rates, margin and operating expense rates are reasonable based on our history of operating and managing campus bookstores.
Based on the anticipated continuing trend towards outsourcing in the campus bookstore market, we aggressively pursue opportunities and bid on new contracts. When we build our Five Year Plan, we make assumptions related to expected net new business growth based on our history of winning new contracts and our experience opening new stores. In Fiscal 2017 and Fiscal 2016, net new business was approximately $[***] million and $[***] million, respectively. We believe that the annual net new store sales included within our Five Year Plan are reasonable based on our demonstrated history of winning new contracts.
Growth of our digital product offerings
At the end of Fiscal 2016, in conjunction with the March 2016 acquisition of LoudCloud Systems, Inc., we expanded our digital operations to include digital products and services as follows:
•
Digital courseware offerings for introductory general education courses that leverages OER content into a solution intended to ease the adoption of such material by faculty and lowers the costs of course material for students;
•
Other digital products, [***]; and
•
A predictive analytics solution, LoudSight, and a learning management system (“LMS”) for competency-based learning solutions.
The implementation of our digital strategy relies on leveraging our core bookstore relationships to help accelerate the adoption of our new digital products and services and to minimize the amount of selling and marketing expenses we otherwise would incur to promote these new offerings.
For our digital products, we can achieve high margins due to the low upfront fixed development costs as we scale the business. Our cost structure is primarily comprised of our existing LoudCloud developer operations, primarily in India, and costs associated with our LoudCloud US salesforce and related marketing efforts. Technology products are highly scalable and once we reach a certain level of economies of scale, the incremental revenue generated will be at higher operating margins. While we are building a cost structure to
Confidential Treatment Requested by Barnes & Noble Education, Inc.
99C-001
Pursuant to 17 C.F.R. § 200.83
support the anticipated growth over the five year period, we are leveraging our existing technology and capabilities acquired with LoudCloud, as well as our existing salesforce at our 770 physical stores to minimize marketing and promotion expenses.
The primary assumptions we relied upon in estimating future cash flows are outlined below.
Courseware
Courseware
Material Assumptions
5 Yr Plan Assumptions
Courseware Sales Growth Range
[***]
Courseware Gross Margin Range
[***]
Courseware Operating Expense Range
[***]
We have created [***] general education introductory courses using OER content (which we have piloted with favorable results) and we plan to develop another [***] similar general education high volume courses. The key drivers of our sales growth, gross margin and operating expense assumptions for courseware include the number of faculty that adopt the courseware product, the average number of courses per professor, the average students per course, the average selling price, content development costs, and operating expenses.
We plan to offer our courseware to the [***] faculty members at the 770 schools where we operate the campus bookstore to drive adoptions, as well as reach additional faculty outside of our existing BNED network. We estimate over [***] faculty members (at BNED and non-BNED colleges) will adopt our courseware product by Year 5. This represents less than [***]% of the faculty network at schools where we already operate the bookstore and a significantly smaller percentage of the 1.6 million faculty members teaching post-secondary education. We estimate that each faculty member teaches an average of [***] courses per semester with an average of [***] students per course, which we believe is a conservative estimate for large introductory courses. We estimate over [***] students will utilize our courseware product by Year 5, or approximately [***]% of our 5 million students at the colleges we operate as of the Fall 2016 (excluding projected increases in enrollment and projected new stores over the long term). We believe our estimates with regard to the number of professors and student that will purchase/utilize the courseware offering represent a very small and attainable portion of the population seeking to utilize OER content.
The gross margin for courseware is primarily driven by the amortization of course development costs which are approximately $[***] per course based on historical information. These costs are generally
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CORRESP 1 filename1.htm Document FOIA CONFIDENTIAL TREATMENT REQUESTED CERTAIN PORTIONS OF THIS LETTER AS FILED VIA EDGAR HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE OMITTED PORTIONS, WHICH HAVE BEEN REPLACED WITH THE FOLLOWING PLACEHOLDER “[***]” June 12, 2017 VIA EDGAR CORRESPONDENCE AND HAND DELIVERY Ms. Jennifer Thompson Accounting Branch Chief Office of Consumer Products United States Securities and Exchange Commission Division of Corporation Finance 100 F Street, N.E. Washington, D.C. 20549 RE: Barnes & Noble Education, Inc. Form 10-K for Fiscal Year Ended April 30, 2016 Form 10-Q for Fiscal Quarter Ended January 28, 2017 Response Dated May 2, 2017 File No. 001-37499 Dear Ms. Thompson: As Chief Financial Officer of Barnes & Noble Education, Inc. (the “Company”), I am responding to your letter dated May 25, 2017 (the “Comment Letter”) to Max J. Roberts, the Company’s Chief Executive Officer. To facilitate your review, each comment in the Comment Letter is set forth below in bold type and my corresponding response appears below it in ordinary type. Because of the commercially sensitive nature of certain of the information contained herein, the Company requests confidential treatment under 17 C.F.R. §200.83 for selected portions of this letter. For the Staff’s reference, the Company has enclosed a copy of its letter to the Office of Freedom of Information and Privacy Act with this copy of the correspondence marked to show the portions redacted from the version filed via EDGAR and for which the Company is requesting confidential treatment in accordance with Rule 83 of the Commission’s Rules on Information and Requests (17 C.F.R. §200.83) (“Rule 83”). Please promptly inform the Company of any request for the confidential material submitted herewith made pursuant to the Freedom of Information Act or otherwise so that the Company may substantiate the foregoing request for confidential treatment in accordance with Rule 83. Any such notice may be directed to Barry Brover at Barnes & Noble Education, Inc., 120 Mountain View Blvd., Basking Ridge, New Jersey 07920 or at (908) 991-2640. Confidential Treatment Requested by Barnes & Noble Education, Inc. 99C-001 Pursuant to 17 C.F.R. § 200.83 1 In addition, in response to the Staff's comment 2, we are providing the Staff on a supplemental basis with certain of the information requested (the "Supplemental Information") together with the paper copy of this letter that is being delivered by messenger. We request, pursuant to Rule 12b-4 promulgated under the Securities Exchange Act of 1934, as amended, that the Staff shred the Supplemental Information once the Staff has completed its review and, by separate letter, are also requesting that such Supplemental Information be protected from public disclosure pursuant to 17 C.F.R. §200.83. Form 10-K for Fiscal Year Ended April 30, 2016 Item 8. Financial Statements and Supplementary Data Note 2. Summary of Significant Accounting Policies Revenue Recognition and Deferred Revenue, page 55 1. We note your response to comment 3. Please clarify why you recognize digital textbook rental revenues at the time of sale rather than over the rental period. In doing so, ensure you explain why you believe your digital and physical textbook rental revenue recognition policies should differ under GAAP and how the day one receipt of the rental fee represents the culmination of the earning process. Response: While we generally refer to the delivery of a digital product that grants access to an eTextbook for a defined period of time as a digital eTextbook rental, the transaction shares greater similarity to the sale of an eTextbook than it does to the rental of a physical textbook. A physical textbook rental requires us to deliver a copy of the textbook to a student at the start of the rental period, which they must return to us at the end of the defined rental term. Once returned, we process the return into our inventory and close out the rental. At the time a physical textbook rental is returned, we continue to own the used physical textbook and can rent or sell the same textbook in the future. For a physical textbook rental, a student has the option to purchase the textbook rental at the end of the rental term, at which time we process the sale. If the student does not return the physical textbook rental at the end of the rental period they are charged a return penalty fee. Conversely, the digital eTextbook rental and digital eTextbook sale share the same source data and product interface with the only distinction between the two products being the length of time a customer is granted access to the content. The digital eTextbook rental has a defined period of time, typically 180 days after the date of purchase, through which the student will be able to access the content, while a digital eTextbook sale is available to the student for an indefinite period of time. In either case, there is no further action required on either the students’ part or our part once the eTextbook is delivered to the student’s Yuzu® account. Further, our policy is that we do not offer refunds on digital content once it has been delivered to the student. We cannot re-rent or resell the digital eTextbook rental by reissuing the same access code and the student does not have the option to purchase the digital eTextbook rental at the end of the rental period. The ongoing support efforts for hosting and delivery of eTextbooks (either sale or rental) has been outsourced to a third party and the costs associated with the delivery and any ongoing commitments were determined to be immaterial. We further note that the total revenue recognized for digital eTextbook rentals was less than [***]% of our revenues in both Fiscal 2016 and Fiscal 2017. As noted above, we view the transaction for the digital eTextbook rental to be economically similar to the sale of a digital eTextbook due to the minimal variation with regards to the earnings process for those respective products, in comparison to the differences identified above for the rental of physical textbooks. Therefore, we believe it is appropriate that the rental revenue recognition policies for physical textbook rentals and digital eTextbook rentals differ under GAAP and that the day one receipt of the digital eTextbook rental fee represents the culmination of the earnings Confidential Treatment Requested by Barnes & Noble Education, Inc. 99C-001 Pursuant to 17 C.F.R. § 200.83 2 process, as it is the point in time when the student obtains access to the digital content and no further material efforts remain undelivered on our part. Form 10-Q for Fiscal Quarter Ended January 28, 2017 Note 2. Summary of Significant Accounting Policies Goodwill, page 10 2. We note your response to comment 7. In order that we can more fully understand and evaluate your response regarding how you determined the fair value of your single reporting unit in your goodwill impairment analysis, please provide the following information: Note: We provide the following responses to address each of the specific bulleted questions noted. • Tell us in more detail how you determined the fair value of your reporting unit at the valuation date. Discuss the material assumptions you relied upon in estimating future cash flows and how you determined the discount rate used. Ensure your response addresses how you determined each of the assumptions utilized was appropriate. Response: The fair value of our reporting unit was determined considering both the income approach, specifically the discounted cash flow method, and market approach, specifically the market comparable and market transaction approaches. Given the lack of pure play comparable companies and the limited number of market transactions, the market approaches were considered solely as a measure of reasonableness of the conclusion derived from the income approach. As a result, the fair value of our reporting unit was determined using the income approach which requires the preparation of cash flow projections for the next five fiscal years based upon known or historical trends, as well as anticipated future strategy impacts, which we refer to as our Five Year Plan. The Five Year Plan was prepared as of November 1, 2016 and reflected relevant market, industry and economic data as well as current business performance and expectations going-forward. The process for building the Five Year Plan begins with reviewing general industry data and current business data. See Appendix A for industry and company information. We consider the following to be material assumptions relied upon for estimating future cash flows for our Five Year Plan and the income approach: • Revenue and margin results at our current and new physical bookstore locations; • Growth of our digital product offerings; and • The discount rate used in determining the fair value of the reporting unit. Revenue and margin results at our current and new physical bookstore locations When estimating our future cash flows, we focus on maintaining revenue and margin results for our physical bookstore locations (comparable stores) and the growth of our base business by adding new physical bookstore locations (net new business). We primarily focus on sales growth, margin rates and operating expenses. The following are the key assumptions and historical averages: Confidential Treatment Requested by Barnes & Noble Education, Inc. 99C-001 Pursuant to 17 C.F.R. § 200.83 3 Current and New Physical Bookstore Locations Material Assumptions 5 Yr Plan Assumptions 3 Yr Historical Avg. Comp Store Sales Growth Rate [***] [***] Annual Net New Stores Revenue [***] [***] Gross Margin Rate [***] [***] Operating Expense (% of Revenue) [***] [***] The foundation of our business is our experience with operating and managing all aspects of the campus bookstore, including marketing of textbooks and general merchandise. For comparable store business, we evaluate factors, such as current trends related to college and university enrollment (by type of higher educational institution) which are projected to increase long term, general retail industry trends, and trends related to the overall economy. We also evaluate average units sold and price trends for products (such as textbooks and general merchandise). For example, the growth rate for textbooks has declined by [***]% over the last three years, but general merchandise growths rates have increased by [***]% during the same period. For our consolidated comparable stores, we assumed revenue growth rates that were [***] and operating expenses that were [***] to projected revenues. Operating expenses are generally [***] as a percentage of revenue with minimal increases for payroll merit increases and increases to occupancy rates charged when a contract is renewed. Our comparable stores gross margin is projected to [***] over the Five Year Plan based on the product mix, as we continue to [***]. We believe that the estimated growth rates, margin and operating expense rates are reasonable based on our history of operating and managing campus bookstores. Based on the anticipated continuing trend towards outsourcing in the campus bookstore market, we aggressively pursue opportunities and bid on new contracts. When we build our Five Year Plan, we make assumptions related to expected net new business growth based on our history of winning new contracts and our experience opening new stores. In Fiscal 2017 and Fiscal 2016, net new business was approximately $[***] million and $[***] million, respectively. We believe that the annual net new store sales included within our Five Year Plan are reasonable based on our demonstrated history of winning new contracts. Growth of our digital product offerings At the end of Fiscal 2016, in conjunction with the March 2016 acquisition of LoudCloud Systems, Inc., we expanded our digital operations to include digital products and services as follows: • Digital courseware offerings for introductory general education courses that leverages OER content into a solution intended to ease the adoption of such material by faculty and lowers the costs of course material for students; • Other digital products, [***]; and • A predictive analytics solution, LoudSight, and a learning management system (“LMS”) for competency-based learning solutions. The implementation of our digital strategy relies on leveraging our core bookstore relationships to help accelerate the adoption of our new digital products and services and to minimize the amount of selling and marketing expenses we otherwise would incur to promote these new offerings. For our digital products, we can achieve high margins due to the low upfront fixed development costs as we scale the business. Our cost structure is primarily comprised of our existing LoudCloud developer operations, primarily in India, and costs associated with our LoudCloud US salesforce and related marketing efforts. Technology products are highly scalable and once we reach a certain level of economies of scale, the incremental revenue generated will be at higher operating margins. While we are building a cost structure to Confidential Treatment Requested by Barnes & Noble Education, Inc. 99C-001 Pursuant to 17 C.F.R. § 200.83 4 support the anticipated growth over the five year period, we are leveraging our existing technology and capabilities acquired with LoudCloud, as well as our existing salesforce at our 770 physical stores to minimize marketing and promotion expenses. The primary assumptions we relied upon in estimating future cash flows are outlined below. Courseware Courseware Material Assumptions 5 Yr Plan Assumptions Courseware Sales Growth Range [***] Courseware Gross Margin Range [***] Courseware Operating Expense Range [***] We have created [***] general education introductory courses using OER content (which we have piloted with favorable results) and we plan to develop another [***] similar general education high volume courses. The key drivers of our sales growth, gross margin and operating expense assumptions for courseware include the number of faculty that adopt the courseware product, the average number of courses per professor, the average students per course, the average selling price, content development costs, and operating expenses. We plan to offer our courseware to the [***] faculty members at the 770 schools where we operate the campus bookstore to drive adoptions, as well as reach additional faculty outside of our existing BNED network. We estimate over [***] faculty members (at BNED and non-BNED colleges) will adopt our courseware product by Year 5. This represents less than [***]% of the faculty network at schools where we already operate the bookstore and a significantly smaller percentage of the 1.6 million faculty members teaching post-secondary education. We estimate that each faculty member teaches an average of [***] courses per semester with an average of [***] students per course, which we believe is a conservative estimate for large introductory courses. We estimate over [***] students will utilize our courseware product by Year 5, or approximately [***]% of our 5 million students at the colleges we operate as of the Fall 2016 (excluding projected increases in enrollment and projected new stores over the long term). We believe our estimates with regard to the number of professors and student that will purchase/utilize the courseware offering represent a very small and attainable portion of the population seeking to utilize OER content. The gross margin for courseware is primarily driven by the amortization of course development costs which are approximately $[***] per course based on historical information. These costs are generally