Ladies and gentlemen, thank you for standing by, and welcome to the Barnes & Noble Education Fiscal 2020 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference call over to Tom Donohue, CFO. Thank you. Please go ahead.
Thank you. Good morning, and welcome to our fiscal 2020 second quarter earnings call. Joining us today are Mike Huseby, CEO and Chairman, Barry Brover, VP of Operations, Kanuj Malhotra , President of Digital Student Solutions, as well as other members of our senior management team. Before we begin, I'll remind you that the statements we will 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 for the property of Barnes & Noble Education and are not for rebroadcast or use by any other party without prior consent of Barnes & Noble Education. During this call, we will be making 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. At this time, I'll turn the call over to Mike Huseby.
Thanks, Tom, and thank you all for joining us today. As you saw in this morning's press release, today we announced that BNED's board of directors has approved the engagement of a financial advisor to assist with the evaluation of a range of potential strategic opportunities. This review will help position BNED to be able to deliver more immediate benefits for the institutions and students we serve and allow for the exploration of all strategic paths to enhance shareholder value. The higher ed industry we serve has significantly transformed over the past few years, including the rapid shift to digital, declining enrollments, student retention issues, and an increased focus on affordability.
Our strategic initiatives are centered on addressing affordability, access, and achievement and include growing our high margin DSS business by introducing and scaling bartleby subscriptions, growing our share of course material adoptions through BNC First Day and other new digital models, stabilizing and now increasing revenue from new business wins to grow our footprint of managed stores, and strengthening and growing our general merchandise business. The operational highlights in today's press release provide evidence of our progress on each of these priorities. Our strategy is being validated daily by the markets we serve. However, we need to accelerate the execution of our strategy in order to more rapidly deliver value to our customers and to enhance shareholder value. We believe that more aggressively exploring strategic opportunities will help facilitate this acceleration of value creation.
The past few years have been a disruptive time in the course materials marketplace, as evidenced by trends seen in our own business as well as those disclosed by the large publishers. Course material sales declined 7.7% on a comp basis for the quarter, a slight improvement over the rate of decline in the prior year period. The sales decrease was primarily due to price and volume declines, with approximately 40% of the decline attributable to price declines. We are moving to digital delivery models of course materials as rapidly as the market demands and allows. As we are able to scale digital delivery, we expect our share of courseware delivered to students to increase, while fulfillment costs should ultimately decrease dramatically to mitigate lower unit pricing impacts.
For example, our First Day digital models are now able to very effectively address demands from our campus partners for affordable and accessible courseware while, at the same time, substantially improving the total financial contribution to our schools and to BNED. We continue to see increased market adoption, with revenues from First Day increasing 93% year-over-year. As we saw with certain pilot schools this fall, our new First Day Complete packages and pricing will result in a true win-win-win for our institutional customers and their students, BNED, and the publishing partners who collaborate with us. Students enjoy significant courseware discounts while penetrations approaching 100% of adoptions provide BNED and our campus partners with substantially improved economics. Tom will give more detail on how strong these improvements are.
This past summer, we also announced a new important strategic partnership with VitalSource, which will now power the technology enabling our First Day platform. Transitioning our platform to VitalSource's technology allows us to accelerate and optimize First Day implementations. This partnership drives substantial efficiencies related to the development and maintenance of our platform technology and will enhance value for our partners by offering new functionality and expanded content offerings. Most importantly, it is a true long-term strategic partnership, which allows us to more rapidly and effectively deliver the benefits of First Day packages and pricing to our customers. While digital courseware delivery is increasing, evidence persists that there is still a strong appetite to learn using the physical book. Our annual student pulse survey received responses from more than 100,000 students. 96% of those students told us that they find print textbooks to be a helpful resource.
Our ability to service the full supply chain of both digital and physical courseware. To package them together as we did this past fall in our First Day Complete offerings is a strength that we have that is unmatched by any of our competitors. We are also driving further value for institutions through products and services, such as the introduction this fall of our BNC Adoption and Insights Portal, or AIP, our new internally developed platform for faculty and academic leadership to submit and monitor course material adoptions. Our AIP has had significant benefits for the pilot schools that have been using the platform to date, and has also generated very strong interest with new business opportunities.
Our AIP platform has enhanced the value of our service to clients by significantly streamlining the process of course material selections for faculty and providing much-needed visibility for academic leadership to support compliance, affordability initiatives, and student success. It also provides data to ensure that adoptions are being submitted and recommended in accordance with the affordability and other objectives of the schools that we serve. In the schools where we've implemented AIP, we both collected more course material submissions and received them earlier in the process. As one example, a 4-year public large institution where AIP has been implemented, we've received almost 40% more course material submissions to date. At other institutions, the tool has already helped facilitate a 100% submission rate across all courses.
This will translate into the ability to offer students more affordable content and greater selections in our stores, which we expect to drive unit sale increases for these schools starting in the upcoming spring 2020 term. The value that we provide to institutions is important to focus on as we seek to grow our store footprint, which remains a critical asset in our current and future success. Our access to more than 6 million students, and even more through our e-commerce sites, is an unmatched sales channel for both our retail and DSS businesses, which is why we are focused on expanding our footprint of managed stores. We have made great strides in winning new business this year. Year to date, with five months still remaining in fiscal year 2020, we have contracts to open approximately $97 million in new business gross sales, or $36 million net after store closings.
By comparison, in fiscal 2019, new business gross sales net after store closings were $12.8 million. Within DSS, we saw the power of our footprint throughout the past two rush periods as we've concentrated on the in-store and online sales of our bartleby suite of services. Fiscal year 2020 to date, including the month of November, we gained over 100,000 gross bartleby subscribers, representing over 100% growth compared to approximately 50,000 subscribers gained during the spring 2019 term. Considering that bartleby has been marketed in our footprint for less than a year, we are very encouraged by the continued momentum and the focused effort of our teams to accomplish this important goal. We remain very proud of our differentiation in offering a product more focused on providing how to learn than merely providing answers or shortcuts to the learning process.
With a spring and fall rush period behind us, we have learned a great deal and plan to move forward with even more efficient sales efforts. bartleby is quickly becoming a strong suite of products offered at disruptive price points, and the results we've achieved with bartleby thus far confirms our commitment to our direct-to-student strategy. Additionally, we've seen FTO becoming an increasingly important channel of customer acquisition throughout the fall semester, and we expect this channel to be an increasingly significant source of customer acquisition beyond our physical distribution over the coming quarters. In addition to direct-to-student sales, we have a truly unique opportunity to scale bartleby through institutional offerings, including bundles with our First Day offerings. We've added new dedicated talent to the team, and we look forward to providing updates to you on this exciting initiative.
We feel confident in our ability to scale bartleby, ensuring we are best serving today's students and providing them with academic support anytime and anywhere. Within our stores, we've continued to make enhancements this quarter to ensure we're strengthening our general merchandise business and enhancing the retail experience. We continue to see the success of our concept shops, which are now at more than 70 campuses nationwide. This includes trend-based concept shops such as those centered around game day or graduation, as well as brand-based concept shops such as those featuring Urban Outfitters, live in 10 of our stores, or Champion merchandise. Additionally, we continue to make progress developing our next-gen e-commerce platform, which we expect to fully launch in fiscal 2021.
Our new e-commerce platform will provide a hyper-local, personalized shopping experience for all customers and ensure that we provide a best-in-class omnichannel experience for the campus communities we serve, which should result in increased sales for us and our partners. In a short period of time, BNED has accomplished a tremendous amount and undergone incredible change. As a service provider that exists at the intersection of students, faculty, institutions, and publishers, it has been critical for us to evolve to best serve this industry.
As our value creation centers scale, including high-margin DSS offerings, increased omnichannel general merchandise sales, and scaling more profitable and more affordable digital courseware packages, we expect their contributions to our operating results to first stabilize and then grow our EBITDA, helping to reverse the trend of recent years as EBITDA has declined with courseware sales trends. We are also managing our cost structure as prudently and efficiently as possible with a sense of urgency. We're very confident in the initiatives we've set forth to ensure we can serve the market where it is today and where it's heading in the future. Now our focus is on moving as quickly as possible to implement and scale these initiatives. We believe that by providing greater value to our customers through all our offerings, we will in turn significantly enhance shareholder value.
We've seen the impact of our solutions at each and every campus we serve, and we're helping to drive affordability, access, and achievement. We're all proud to work towards such an important mission. We've already made great strides in driving value for both students and institutions, and now we are poised to have that translate into our operating results going forward and to translate into enhanced shareholder value. With that, I will turn it over to Tom for the financial review.
Thank you, Mike. Please note that the second quarter ended on October 26th, 2019, and consisted of 13 weeks. All comparisons will be to the second quarter of fiscal 2019 unless otherwise noted. Total sales for the quarter were $772.2 million, compared with $814.8 million in the prior year. This decrease of $42.5 million, or 5.2%, was comprised of a $42.1 million decrease from the retail segment and a $0.6 million decrease from the wholesale segment, partially offset by the $0.3 million increase from the DSS segment. Comparable store sales in the retail segment decreased 5.9% for the quarter as compared to a decrease of 5.8% in the prior year period. Comparable course material sales for the quarter decreased 7.7% as compared to a prior year decrease of 8.0%.
Course material sales continue to be impacted by lower average selling prices, with approximately 40% of the decrease in the quarter due to lower pricing. Course material sales were also impacted by enrollment declines and student purchases from publishers directly, as well as other online providers. As we continue to scale our First Day Inclusive Access programs, we expect the model for our course material sales to change and ultimately stabilize. As we move to digital course materials sold through the First Day program, bookstore margins will slightly decrease, but the sell-through will increase from approximately 35% to almost 100%. The commissions we pay to the schools will also decrease. We believe these increases in sell-through and volume will help stabilize the course material declines we've experienced in recent years.
General merchandise comparable store sales for the quarter were essentially flat, decreasing at 0.1%, compared with a 1.8% increase in the prior year. Net sales for the wholesale segment were $40.2 million, a decrease of $0.6 million or 1.5% compared with the prior year period. The decrease is primarily due to the decrease in supply and the decrease in customer demand, including our own retail segment. DSS sales were $5.2 million in the quarter, an increase of $0.3 million or 5.7% as compared to the prior year period. The increase is primarily due to the increase in sales of bartleby subscriptions. As Mike previously stated, as we scale this business, the high margin contributions from DSS will be an important factor in stabilizing and then growing our EBITDA, helping to reverse the trend of recent years of EBITDA declines as it has declined with our courseware sales.
The consolidated gross margin for the quarter was 24.3%, down from 25.9% in the prior year period. This is primarily attributable to the decreases in the retail segment related to the shift to lower margin digital products and higher markdowns, as well as higher costs from our college and university contracts. Selling and administrative expenses in the second quarter decreased by $1.9 million or 1.7% compared to the prior year period. The decrease in the retail segment of $2 million for the quarter was primarily the result of decreases in physical store payroll and operating expenses, as well as corporate payroll, partially offset by increases in infrastructure costs and product development costs. Wholesale expenses decreased in the second quarter by $0.8 million, primarily due to lower payroll expenses and operating expenses.
DSS selling and administrative expenses increased in the quarter by $1.2 million, primarily due to ongoing costs associated with the development of bartleby. Corporate services in the quarter decreased by $0.3 million as a result of lower compensation-related expenses and lower operating expenses. Our cash balance at the end of the quarter was $24.6 million, an increase of $4.6 million as compared to $20 million in the prior year period. There were no outstanding borrowings in the quarter, the same as the prior year. Our current and projected liquidity remains strong despite declining sales trends in physical course materials and the significant investments we are making in strategic change initiatives. We continue to expect free cash flow to be in excess of $25 million to help finance these initiatives. In fiscal 2020, we expect the average debt to be approximately $115 million, compared with $143 million in the prior year.
Our peak borrowings of approximately $200 million were hit during the summer and fully repaid during the fall rush. We expect additional borrowings until the end of the fiscal year in a similar pattern to fiscal 2019. CapEx for the second quarter was $10.9 million, compared with $14.9 million in the prior year. Currently, our retail segment operates 1,436 college, university, and K-12 school bookstores, comprised of 772 physical bookstores and their e-commerce sites, as well as 664 virtual bookstores. As of today, we have contracts to open an additional 21 stores in fiscal 2020, with four additional known closings. This will bring our total physical and virtual store count to 1,453 locations net of closed stores.
While our new stores are typically EBITDA positive when we sign the contracts, it typically takes a new store approximately 18 to 24 months to fully mature to reach a comparative EBITDA margin. For fiscal year 2020, we expect consolidated adjusted EBITDA to be between $80 million-$85 million. Capital expenditures are expected to be in the range of $40 million-$50 million, and we continue to expect free cash flow to be between $25 million and $35 million. The company defines free cash flow as adjusted EBITDA less capital expenditures, cash interest, and cash taxes. With that, we'll open the call for questions. Operator, please provide instructions for those interested in asking a question.
Ladies and gentlemen, to ask a question, please press star one on your telephone keypad. We'll pause for just a moment to compile a Q&A roster. Your first question comes from Ryan MacDonald with Needham. Your line is open.
Good morning, everyone. Thanks for taking my questions. I guess just first off, touching on the strategic review, can you just maybe talk about what you felt really changed in the business, I guess, when we look at the past three, six months versus today to really, I guess, change your viewpoint on pursuing, I guess, or at least considering strategic alternatives?
Hi, Ryan. It's Mike Huseby. I think probably the main thing, and I alluded to it in the quote that we put into the earnings release, is the level of unsolicited inquiries we've had from potential strategic partners, whether they're strategic partners from a commercial sense that would improve our competitive position or financial players. I think all of whom see that based on the public stock price, there's a lot of value in the assets that we have, given the relationships we have with the schools, the contracts, and the terms that we operate under, as well as how MBS and BNC are starting to work together, and how we're putting those two companies together, and then the upside of DSS. They see a lot of upside in the asset. Obviously, the time horizon for that is something we talk about.
That's the main thing, I think, that changed. The volume of those inquiries that we're handling in terms of trying to educate potential strategic partners that can help us accelerate our strategy or pursue other strategic paths has increased. At the board level, our discussion's been, well, because of that, it's probably time for the board to get some independent advice from a financial advisor on the various opportunities and alternatives that are available, as we said in the release. That's probably the main thing that's changed. We haven't changed our strategy. It's the same as it was six months ago. As we said, what also has changed now, I think, is that we actually have things that are done instead of just things we're talking about.
We have tools in place like AIP and offerings in place like First Day Complete that have been piloted, we see how they work and how they can contribute to the financial results and the improvement of our financial results longer term, these new packages and pricing models, as well as some of the DSS part will be starting to scale. Instead of sitting here like we were nine months ago talking about all the great things we can do, we've actually done them now and tested them. We have more interesting things to actually show, specific things to show potential strategic partners. I think the financial advisor, to answer your question, is a board decision that was based on let's put a structure in place to deal with all this. We want management to keep going on doing what it's doing, not be distracted.
Since there is so much interest, let's see what the best way is to optimize shareholder value and accelerate the strategy.
Got it. That's super helpful. Thank you. I guess just switching over into the bartleby business now. Great to see you exceed 100,000 subscribers year to date there. Obviously, you're gaining some nice traction in the marketplace. Can you talk about sort of what you're seeing in terms of mix of how you're attracting students to the platform? Would you say it's more heavily weighted towards online channels, or are you seeing a benefit or impact from the in-store and the college bookstore footprint that you boast?
Hey, Ryan, this is Kanuj. The primary acquisition channel still remains the college stores, which is comprised both of our physical store footprint and sold at point of sale in the stores and the websites we operate on behalf of our school partners. The stores are still the primary source of acquisition. SEO is starting to build, as Mike referred to in his speech. That is a longer-term strategy, and institutional is the other thing we haven't really started to focus on. Right now, it's primarily in-store.
Got it. That's very helpful. Oh, go ahead. In terms of what you're seeing, I guess, obviously it's still very early and sort of as you're building this business, but maybe you can talk about sort of a combination of both spring semester and what you're seeing thus far in fall semester. What are you seeing in terms of sort of usage or average utilization from students with bartleby?
We're seeing increased usage and time on the platform for the active users. We see increased people really focusing on the question and answer capabilities. As you get into exam peak periods, we see very peak usage in and around midterms. Even now, as we're heading into final exam season, you can see the question volumes peak. The usage is continuing to increase, the content library is continuing to increase, and time on site increases. All leading indications and KPIs related to usage are trending very nicely and frankly ahead of where we would have thought.
Excellent. Then just one more from me, and I guess maybe it's more of a broader macro question here. Recently, there was some announced price increases at Cengage, I think in early November, that they were pushing to college bookstores. Can you talk about what sort of impact this could have on the retail business for Barnes & Noble, and how this potentially impacts your viewpoint moving forward on the potential merger between Cengage and McGraw Hill? Thanks.
Yeah, that's a pretty broad question. Involves more than Cengage. Ryan, this is Mike. I'll let Barry chime in on this as well. The publishers and their pricing has been all over the place. There's a lot of competition from different providers that they and we haven't experienced in the past. I think they've tried a lot of different things. I think that this is another example of something they'll try. I don't want to comment on the proposed merger that's under regulatory review between Cengage and McGraw Hill. We're relatively agnostic when it comes to the publishers. Our job really is, we're an extension of the schools that we serve, which they hire us to go out and procure the content. We're an agent of the school. We operate by contract. That's an important thing to understand.
When things come out in the press like they did today, where NACS and others are taking positions on the merger because they're citing some of the practices that Cengage and others are engaging in on pricing, those can be looked at in a number of different ways. Ultimately, the prices can't go down and maintain à la carte pricing forever. That's why First Day and Inclusive Access makes so much sense is that by bundling curriculum into an Inclusive Access solution, the penetrations go up, not just for us, but for the publishing partners that we work with and the schools who share in that revenue. The beautiful thing is that the students end up getting substantial discounts, say 30% discounts on average from what we've seen thus far. It works for everybody.
For a publisher, whether it's Cengage or someone else to say, the bookstore sets the price, that's really not the case. We don't set the price. The price is set by the publisher. We share in the margin and that type of thing. At some point in time, something's got to give if you're going to meet the objectives of affordability for the schools, which we're very focused on. We think the best solution is to try to collaborate with the publishers, as we're doing in many cases, and as our clients are demanding, which is really the important point, is that this is what our customers want. Our customers are under all kinds of financial pressures of their own, and they're under pressures to deliver affordability and better curriculum.
What we're hearing, and we interact with our customers, our schools at the highest levels, including faculty, but also with the administration, the chancellors, the provosts, et cetera, is they want these kinds of packages that gives students substantial discounts. They don't want to have to deal with all the different pricing schemes that various publishers are trying to throw at the students and the faculty, and in many cases, confusing them. It's our challenge to work with the publishers during this changing kind of transformative environment to make sure they understand what our customers want, and that we're representing our customers, and that in our footprint of managed stores, the best thing for them to do is to listen to the customer and work with us.
Excellent. Thank you very much.
Your next question comes from Greg Pendy with Sidoti. Your line is open.
Hey, guys. Thanks for taking my questions. Can you share with us any color, just where community colleges are at within the portfolio? Just assuming they're probably taking a bigger portion or the brunt of the enrollment declines and probably have a lower merchandise mix. Any color there on how that's doing versus the typical, say, four-year colleges?
Yeah. Greg, community colleges continue to be, this is Barry Brover, continue to be in the low 20% of our total portfolio.
Okay.
We've actually seen while enrollments are down in many of our community colleges, we've seen improvements in trends as we've been able to implement significant First Day programs that have really made a difference as far as increasing our market share and growing our course materials business. I think Mike said it well. Our number one-
Priority and focus is developing more affordable solutions for course materials, working with the publishers and with our schools. We've made some tremendous progress this year with the growth of our First Day program and the introduction of our First Day Complete. In meetings with our clients and our customers, we realize that's their number one priority. We believe we have the tools, the systems, and the people, and the wherewithal to be able to respond to that, and ultimately that will drive increased volume, as Tom talked to relative to the future of course materials.
Okay.
Greg. Sorry, Greg, this is Tom, just the community college representative, usually around 25% of the total revenue. It's probably closer to 20% or 21% now.
Okay. I guess just bigger picture, they've been early adopters in some of your offerings, correct?
Yes.
With the terms of Okay, got it. Just moving on to just one more. Just on the textbook solutions, when you said it peaked at 100,000. Any color on maybe writing solutions offerings, where the subscriptions are at on that? Or is that included in the 100,000?
No, it's not included in the 100,000. Just to be clear, the 100,000 is our gross acquisition, so it's not of any churn activity. We haven't disclosed sort of the gross subscriber activity for the overall writing business. We also, just to be clear, the writing solutions business, the essays business we bought with Student Brands is one, we also this semester soft launched part of the writing, and we've had very good reviews, an aggressive marketing push of that should be expected in the spring. We haven't disclosed that number, Greg.
Okay. Perfect. That's helpful. Thanks a lot.
Again, to ask a question, please press star one on your telephone keypad. Your next question comes from Alex Fuhrman with Craig-Hallum Capital. Your line is open.
Hi, thanks for taking my question. Wanted to ask about some of the partnerships that you've launched recently, Urban Outfitters, AT&T, Champion. Can you talk about how some of those partnerships are going, what the potential might be to scale those up to more locations? Then just thinking about your portfolio of college bookstores here, how many of those locations are candidates to have that type of partnership, do you think?
Hi, Alex. It's Barry Brover. I'll just take a shot at it off the bat. Those programs are very exciting for us. The concept shops, which are Champion as well as just graduation and other theme-type merchandise, have done a great job of bringing back excitement through visual merchandising into our stores, increasing foot traffic and giving us great reviews from our clients and our customers, as well as our vendor partners. Urban Outfitters was a great opportunity. It's sitting in 10 stores today. Again, great excitement, great media, great press, traffic in the store. Certainly, you would imagine that resonates very well in a large state or private school. Probably not the most relevant in a community college, but we may have other programs.
We continue to look to expand our network of vendors and suppliers that wanna showcase their product to the 18- to 24-year-old, both in store and online. Are very excited about the impact it's having to our business and how it's transforming the whole retail experience in our stores.
I think to try to answer the question directly, this is Mike. As Barry's saying, he answered it very completely, I think, but that each store is different, each school is different. As you're saying and implying, some larger stores lend themselves to the real estate that's available, et cetera. They lend themselves to partnerships that you don't necessarily, as Barry said, have in other stores. That's the point, is we try to treat each partnership differently in terms of setting very clear targets with them and expectations and KPIs. The expectations I think have been met in every case this year of all the things that we tried. We said in the speech that concept stores are in about 70 stores. That's a pretty good representation of distribution.
We can gather the data and see whether or not we want to expand that into more stores at a different level. For example, a smaller footprint, that type of thing. Yeah.
Yeah, just tagging on to that, Alex Fuhrman, what we're also piloting is a more streamlined version for a community college that has a different customer base. More of a concept and presentation style that's more aligned with a community college customer. Over time, as course materials, the physical footprint required decreases with more things going digitally, it certainly opens up the opportunities, the space for us to be able to bring in more concepts, more products, and really make this a retail destination spot for the community.
Okay, that's really helpful. Thank you.
There are no further questions queued up at this time. I turn the call back over to Tom Donohue.
Thank you for joining today's call. Please note that our next scheduled release will be our fiscal 2020 third quarter earnings call on or about March 3rd, 2020. Thank you. Have a good day.
This concludes today's conference call. You may now disconnect.