Good afternoon. Thank you for attending today's Barnes & Noble Education Fiscal 2023 third quarter Earnings Conference Call. My name is Hannah, and I will be your 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 one on your telephone keypad. I would now like to pass the conference over to our host, Hunter Blankenbaker, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to our fiscal 2023 third quarter earnings call. Joining us today are Mike Huseby, CEO, Tom Donohue, CFO, Jonathan Shar, 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. Contents of this call are the property of Barnes & Noble Education and are not for rebroadcast or use by any other 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. Thank you for joining us today. I want to start today's call by thanking our BNED team members. When I consider our journey over the last three years, the operating environment has been anything but predictable or easy. While we are certainly seeing some green shoots, we are still well below pre-pandemic enrollment levels. Nonetheless, our teams have adapted and responded with resolve and innovation to an array of challenges and actions we have taken to meet them, including a significant reduction to our headcount in December. Despite the uncertain macro environment and specific challenges we address, our team continues to rise to the occasion every single day to deliver for the students, educators, and institutions we serve. I'm both grateful and proud of our people and their tremendous efforts.
Through their efforts, we continue to innovate and adapt our unique platform to the rapidly changing higher education market. As we discussed with you last quarter, we did not see the expected improvements in the operating environment in the fall rush period and recognized the need to take swift and decisive actions. We began undertaking a broad set of measures to manage our cost structure and improve our execution. While some of the strategic initiatives we are implementing will take time and results won't be linear, we are taking the appropriate actions to deliver consistent and profitable long-term growth. Our third quarter results reflect the early benefits of these actions. We delivered consolidated top line growth of 11%, expanded our gross margins, and significantly grew adjusted EBITDA on a year-over-year basis.
First Day Complete revenue grew 76%, and we've made meaningful progress in the discussions with our institutional partners to accelerate market adoption of the FDC model. Before providing more detail on those discussions, let's review our high-level financial results. Total retail segment revenue increased 12.4% to $421.2 million, fueled by strong First Day Complete, First Day by Course, and general merchandise sales. The traditional à la carte course material model continued to decline, albeit at a much slower rate than we saw in the fall 2022 rush. Special recognition goes to our in-store teams that continue to explore ways to improve execution to drive sales. This includes providing better in-store support, partnering on collecting more adoptions, enhanced content sourcing through MBS, and significant system enhancements to receive and fulfill orders faster. Results on a same-store basis were encouraging.
Total retail gross cost of sales increased 5.9%. Course material same-store sales grew 7.4%, driven by the continued momentum of our First Day Complete offering. General merchandise same-store sales increased 2.3%, aided by strong performance in logo general merchandise and cafe and convenience. Third quarter retail EBITDA was $6.2 million, a $21.6 million year-over-year increase. As we announced last quarter, we are taking decisive and aggressive actions to significantly adjust staffing and related costs based on the trends we experienced in the fall rush. This quarter, we saw the initial and partial quarterly positive impact of these cost savings initiatives, which we began implementing in December. We continue to focus on reducing costs and operating more efficiently.
DSS revenues decreased 4.5% to $9 million as we shifted our priorities to optimize return on our existing assets with a much more rigorous approach to profitability. The team has executed quickly and well on our initiatives to optimize our marketing spend, drive improved conversion rates and lower content development costs while investing in the continued optimization of our SEO capabilities. Within our U.S. Bartleby operations, after several months of declining traffic and lower growth subs, January subscriber growth was positive. As well publicized recently, the learning market is evolving at a rapid pace. Within DSS, we're focused on building differentiated capabilities, leveraging our years of AI experience. We continue to use AI to enrich and curate content, to provide contextually relevant results to learners, to optimize the teaching path for our subject matter experts, and to do demand analysis at scale.
For example, we are using OpenAI's API to help our experts answer questions faster and at a lower cost. We're harnessing the power of large language models, including GPT-3, to create tools that will guide a student through their own writing experience and teach them to be better writers. We strongly believe that the future of AI in higher education is to support a student's learning journey, but never to substitute for it. Moving on to wholesale. Revenue increased 5.2% during the quarter after more than two years of decline. During the quarter, we saw an easing of supply constraints and more textbook purchasing opportunities, enabling us to fill increasing demand at BNC and other bookstores.
Additionally, we believe the recent consolidation in the wholesale textbook market provides a larger opportunity for MBS to meet the continued demand of physical coursework materials and further highlights the unique competitive differentiation that MBS's wholesale capabilities provide to BNED. Now let's take a deeper look at First Day Complete, our number one strategic priority. In December, we kicked off a journey to accelerate the transition of the schools we serve to our subscription-like FDC model. While we are still relatively early in this process, I'd like to provide some color on our conversations. The FDC strategy and overall communication plan has created urgency and prioritized discussions on campuses across our footprint. We are in active dialogues with hundreds of institutional partners regarding First Day Complete, and we're encouraged by the progress we're making.
We plan to provide more specificity on our expected fall 2023 First Day Complete enrollment growth in connection with our year-end earnings release in June. Some schools where we require a fall of 2023 FDC launch have committed to FDC but have asked us to defer its adoption until the fall of 2024, primarily due to their internal process and governance constraints. In cases where we could run the store at an acceptable profitability level, we're working with these schools to provide a bridge year to make the transition in fall 2024. As expected, certain schools chose not to make the transition to FDC with us. We're taking a disciplined approach to protect the integrity of the FDC conversion strategy, and accordingly, we are winding down our relationships with these schools that have a different vision for their institution.
In fiscal 2024, our total store count is expected to be lower than today, but our store platform will be more profitable and better positioned for future growth. Our commitment to growing profitability is the key to strengthening our ability to serve our students and institutions in a manner that they deserve and expect. We remain confident in our ability to successfully accelerate the scaling of our FDC model and the long-term growth and sustainable financial benefits of the equitable access model. In summary, after the initial round of conversations with schools, we are confident that accelerating the shift to FDC is the right move for all parties. The access, achievement, mental health, and affordability benefits to students are clear.
The economic benefits that institutions receive are compelling, and the much more predictable higher-margin revenue growth is a critical part of BNED's successful path forward with our institutional partners, whose success and ours are truly shared. In closing, our third quarter provides evidence that we are moving in the right direction and regaining positive momentum. We're highly focused on improving our operational and financial performance as we continue to put the most significant of our environmental operating challenges of the last several years in our rearview mirror. We will always have headwinds such as the broader issues facing all businesses today that we need to diligently manage. However, as we finish fiscal 2023 and look ahead to fiscal 2024, we are in a much improved position than we were the last three years.
I am confident that the actions we are taking, along with the progress we have made, put us on the right trajectory to achieve more predictable and sustainable growth and profitability. I'm excited about the road in front of us as we continue to build a stronger, more resilient, and more profitable business model and company aimed at unlocking long-term value for our shareholders. I'll turn the call over to Tom to discuss the quarter in more detail.
Thanks, Mike. Please note that the third quarter of fiscal 2023, consisting of 13 weeks, ended on January 28th, 2023. All comparisons will be to the third quarter of fiscal 2022, unless otherwise noted. Total consolidated sales for the quarter were $447.1 million, an 11% increase. The Retail and Wholesale segment sales increased 12.4% and 5.2% respectively, while the DSS segment sales decreased by 4.5%. Retail gross comparable store sales increased 5.9% during the quarter. Gross comparable course material sales were up 7.4%, driven by the rapid growth of our First Day offerings.
BNC's inclusive and equitable access programs increased revenue by 59% to $121 million during the quarter, as compared to $76.1 million in the prior year period. Within this, FDC revenues increased 76% to $67 million. Gross comparable general merchandise sales increased 2.3%. General merchandise sales benefited from strength in logo and emblematic sales as well as cafe and convenience. Net sales for the wholesale segment increased 5.2% to $38.9 million. The increase was primarily due to a slight easing of supply constraints, which improved our ability to meet customer demand. The increase was offset by higher returns and allowances, as well as the continued shift from physical textbooks to digital products. DSS sales of $9 million decreased by $0.4 million or 4.5%.
As Mike discussed, the DSS team has taken a more rigorous approach to profitable growth and cash generation. As a result of the operating model changes we made in December, DSS reached cash flow breakeven in January. We expect to maintain this discipline and continue to achieve free cash flow breakeven in fiscal 2024. Third quarter consolidated gross profit was $104.2 million, an increase of 19.8%. Consolidated gross margin rate was 23.3% compared to 21.6% in the prior year period. This was primarily due to higher retail gross margins, which benefited from an increase in higher margin FDC and general merchandise sales. Consolidated selling and administrative expenses were down $2 million.
Consolidated selling and administrative expenses as a percentage of revenue decreased to 22.3% from 25.2% in the prior year. The decrease is to lower payroll and compensation expense for long-term incentive awards, as well as a partial quarter benefit from the actions to optimize our cost structure and streamline our operations that we announced in December. Since initiating the cost reduction activities in December, we achieved approximately $7 million-$8 million of run rate savings in the third quarter compared to our prior plan, which assumed a return to a more normal, higher volume operating environment. We continue to expect $30 million-$35 million in annualized run rate savings once fully implemented, which includes $10 million-$15 million in FY 2023. We recorded a restructuring charge of $6 million, primarily related to severance and other termination benefits.
$1.5 million of the charge was in retail, $0.9 million was in wholesale, $1.8 million was in the DSS segment, and $1.7 million was in corporate services. During the quarter, we evaluated our store-level long-lived assets in the retail segment for impairment. As a result of this impairment testing, we recognized a $6 million non-cash charge. Moving on to the balance sheet. Our cash balance was $11.1 million at the end of the quarter, with outstanding borrowings of $285.6 million, as compared to borrowings of $200.4 million in the prior year period. Receivables increased to $277.5 million, a $27.3 million increase from the prior year.
This increase is mostly due to the timing of receivables associated with the significant growth of our First Day offerings, as schools generally remit payment for students enrolled in First Day courses after the student drop/add date. As a result, the third fiscal quarter, which has been a source of cash, has shifted to the fourth quarter. As noted in our press release, we worked with our existing bank group to amend and extend our existing asset-backed facility and term loan. The ABL maturity was extended through August of 2024. The term loan was extended through December of 2024. CapEx for the quarter was $6.3 million, a $5.8 million decrease from the prior period. This decrease was due to reduced store build-out and product and system development.
At the end of the quarter, our retail segment operated 1,388 college, university, and K-12 school bookstores, comprised of 785 physical bookstores and their e-commerce sites, as well as 603 virtual bookstores. As we continue to execute on our FDC strategy and simplify our cost structure to create a more efficient operating model, our total store count is expected to be lower than today, but our store platform will be more profitable and better positioned for future growth. Moving to guidance. Given our results to date and our expectations for the fourth quarter, we continue to expect FY 2023 adjusted EBITDA of $20 million-$30 million. With that, we will open the call for questions. Operator, please provide instructions for those interested in asking a question.
Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Ryan MacDonald with Needham. You may proceed.
Hi, Mike and Tom. Thanks for taking my questions and congrats on a nice quarter here. Great to see all the progress that's being made. You know, wanted to start on First Day Complete. You know, in the investor presentation, a lot of great detail in terms of the number of potential students and sort of the market opportunity there. As you think about sort of the strategy for accelerating the adoption in the cohorts, you know, can you talk about sort of how quickly you think you can move, you know, each of the cohorts to First Day Complete?
Then, you know, if we think about that four million students that you mentioned in the, in the presentation, that is sort of the potential opportunity, you know, how much of that do you expect to be able to retain as you kinda make this transition?
Hey, Ryan, it's Jonathan Shar. Thanks for the question. We're really excited about the progress we're making on First Day Complete, the growth we've had to date, and then all of the conversations we're having post the launch of our acceleration strategy. You know, I think from just highlighting where we're at and where we're going broadly, you know, we're having substantive conversations with, like, hundreds of institutions on First Day Complete. It's really exciting to see the alignment on how the model can really enhance student outcomes and support their key objectives of driving greater affordability, convenience, and access for their students. We're excited about that. It's really, as we announced, a multiyear journey.
Our focus is on driving the majority of our institutions to that model for fall term of 2024 or fiscal 2025. We're confident we're making great progress against that, and the cohorts strategy has been really effective. We're excited about that, excited about where we're going. We've seen many of the institutions that we're marching towards and focused on a fall 2023 launch, really excited about the model, really happy with the service and support and product assortment that we're providing for their campus and campus community. As Mike mentioned, asked for a bridge to be able to get through the consensus building and the governance that's required and approvals that are required to move to this subscription-like model for course material acquisition and distribution.
We've been able to do that and move folks over via bridge to something that's profitable, for running the store in an acceptable level of profitability and a great sort of sign of partnership, and then allow us to work with those schools to implement the model for the following semester. Making really good progress, on all of that and, continue to have great conversations every day with our institutions and prospective institutions about the model.
Ryan, it's Mike. I'd just add one thing. Your question about how many in the illustrative slide in the investor presentation, we use four million. If you look at the footnote, it kind of explains why that's four. It's a ballpark area. We knew when we launched this strategy of requiring many schools to go to First Day Complete on a more accelerated basis because the à la carte model just wasn't working for them or for us, quite frankly, that we were going to lose some of those schools. That's positioning us, as I said in my comments, to have a platform of schools, whether it's more or less students, that's much more profitable.
We anticipate that the platform will go down from where it is today, but then we expect to be able to build it back up on a different basis. The bridge here that John's describing is evidence that we're not gonna shoot ourselves in the foot, so to speak. If there are situations where we can manage through one more year for some schools because they just can't get there in a year and have a very profitable relationship for a year by, for example, not paying any commission or charging a management fee or whatever it is that gets worked out with each of the schools because there's so many discussions and they're each different. You know, we're not doing this to the schools, we're doing this with them, and that requires conversation, each one of their preferences.
Yeah, I don't think we can give you a number about how many of the four million will be there in fall of 2023 or 2024, but very confident it's gonna be a more profitable, sustainably profitable company with this approach.
Super helpful color. I appreciate it. As we think about, I guess, the pathway to getting the in terms of the transition process, what sort of timeline are we looking at for the full transition to be reflected? I know you talked about, you know, getting schools that are interested, giving them up until, say, fall of 2024, which is in your fiscal 2025. There's a bit of a runway on that. In terms of the schools that are unwilling, how quickly do you think that those come out of the model as we start to think about over the next 12 to 24 months?
I think that there's some that are already coming out of the model that we've notified, exercised, you know, communication with as we have the right to under our contracts. Some have already moved in anticipation of going to a different solution than fall of 2023. Many went under proposal this past year, and we're still involved in part of the conversations that John's talking about, you know, are in that proposal stage.
Yeah. Ryan, it's Jonathan. Not all of our stores are targeted for FDC or that is the priority conversation. We have many stores within our portfolio that, you know, are performing really well. We're driving a high sell-through against enrollment on course materials to date and driving significant GM sales, as we showed in the place we grew our general merchandise sales, logo products, cafe convenience were the drivers of that. It's not every school in the portfolio that is in a cohort for conversion to FDC. I just wanna make that clear. It is the majority of our institutions.
Then new businesses. We have new business that's coming into the company using an FDC model from day one. Some of that's happened. You know, in the spring, University of Memphis would have been an example of that. They were a new client that we picked up, and they started with us from day one using First Day Complete. That's our objective. You know, our real objective is to get as many schools using this model because it's the best model for students, it's the best model for the schools, it's the best model for us and the publishers. Using a model that allows you to sustain the level of service that you want and give students that improvement in access and outcomes is really what we should be all about.
That's our mission. The fact that it benefits us financially really just manifests that, you know, it's the right thing for us to be doing.
No, it's really helpful clarification. I appreciate that. Maybe one more for me, just shifting to the DSS segment. You know, it's interesting to hear that you talk about how you're sort of integrating and utilizing ChatGPT and starting to try to, like, weave that into the offering. I'm curious, as you think about the Bartleby business and then the broader DSS business, we've obviously seen a pretty wide adoption usage among students of ChatGPT. Curious if you're what you're seeing from a competitive perspective there or if that's driving any pressures of students sort of only using GPT versus, you know, the Bartleby study tool or other study tools. What are you seeing sort of in that segment of the business? Thanks.
Well, obviously, I think there's been you can't turn on any kind of a media outlet without seeing some form of discussion, you know, almost every hour about OpenAI and ChatGPT 3. Every competitor in this space, Bartleby itself, Student Brands in particular, so there's a lot of application for OpenAI that, you know, for example, Student Brands has been building into their product, you know, for some time. DSS is pivoting, I would say, quickly to incorporate ChatGPT and other large language models into the mix. It helps to drive speed and efficiency. It also reduces costs and our subject matter experts when they're entering, you know, questions for Bartleby subscribers on Q&A. Partial answer to your question is that we did have positive subscriber growth for Bartleby in January.
We talked a lot about the direction it was taking last year and how we pivoted Bartleby to a much more very sharp focus on profitability, efficiency, and kinda getting back to some more of the basics on pricing, competition, and that type of thing. You know, we'll have some information coming out, some news coming out about some products we've developed for helping faculty to identify, you know, uses of OpenAI through a plagiarism detection tool that Student Brands is actually in the process of releasing. There'll be a separate discussion of that in the media next week. We didn't wanna tell it today. We just didn't wanna bury it. It's such an important announcement.
Yeah, I think that you'll find that OpenAI's been around for a while. ChatGPT is a phenomenon. It's got, what, 100 million users in two months. I think that's gonna affect everybody's traffic across their websites that has a competitive product for some time. I think we feel, you know, comfortable and confident in the value proposition that we have being different enough than just kind of a plain vanilla OpenAI ChatGPT use case so that we see tremendous value in incorporating that technology into what we already do.
Excellent. Thanks, Mike. I'll hop back in the queue.
Thanks, Ryan.
Thank you, Mr. MacDonald. The next question comes from the line of Alex Fuhrman with Craig-Hallum. You may proceed.
Hey, guys. Thanks for taking my question. You know, as you kind of move to this all First Day Complete model, can you give us a sense of, at this point, how many schools have said they're definitely not going in that direction? You know, as you kind of move through this transition, is there an opportunity to maintain perhaps a scaled-down relationship with some of these schools, you know, whether that means opening a virtual bookstore or selling general merchandise, or is it really more, you know, you're just gonna be walking away from some of these less profitable relationships and really focusing on the best ones?
I think, Alex, Mike, I think we'll answer the question more specifically in June when we have a real tally of, you know, what the efforts are in terms of how many schools we're gonna have for fall of 2023 on First Day Complete. Perhaps those that, you know, that, the store count, so to speak, and those that didn't go that way that have a different vision, et cetera. I don't think we're gonna get into that today because it's really in process. We're not trying to be evasive on that. It's just, it's true that there are so many conversations that are in process still that have to be resolved.
In terms of your other question, second part of your question, yes, there are different ways to skin the cat, so to speak, to achieve profitability. Quite frankly, many of the stores, and we try to manage our business on a portfolio basis, many of the stores that we were, you know, requiring consider going to FDC in fall of 2023 very strongly requiring it or we exited the relationship are probably not those stores where it's gonna make sense for us to try to carve out some kind of, you know, other partial relationship in hopes of making them profitable. It's possible, but you know, as John said, there are some that are going through a bridge year, which is a different story, where they're gonna agree to go to First Day Complete in fall of 2024.
In the bridge year, we'll go to some kind of an economic change that will allow us to, you know, service them and be profitable. I don't think, you know, there's a possibility that some could go to a virtual-only, but most of these are gonna be model shifts. They may not be in fall of 2023, but they'll be in fall of 2024, or we'll be exiting.
Yeah, or, you know, out further, Alex, it's Jonathan. I think the positives that positive outcome of the acceleration of the conversations and hundreds of conversations we've had is that there's not a lot of marketplace resistance in terms of the value proposition of equitable access in First Day Complete. There seems to be pretty universal alignment on that. It's just about the prioritization from a campus perspective. That's what we're trying to help those campuses do is drive urgency and drive prioritization to be able to implement the new model. So, I'm really encouraged about the alignment, the impact we can make on student outcomes and supporting providing a more affordable solution for students and institutions. It is a important topic on all campuses.
It's really about partnering with our institutions, helping guide that discussion, moving them to a solution that ultimately is gonna have a really significant impact, whether that's, a much more convenient model that supports greater student well-being, affordability, or just access to materials and having materials on day one that's driving improved academic success at an institution. I think it's really about partnership, driving people, supporting the process and getting to end goal where there's a lot of sort of mutual alignment on the value proposition and ability to shift this model.
Okay. That's really helpful. Thank you. Then if I could just ask one more. You know, it looks like if you just kinda strip out what you've reported and what you're guiding to, you're looking for Adjusted EBITDA in Q4 to be more than it has in Q3, which typically, you know, not always, but, you know, for the most part over the last five, 10 years, that has not been the case. Are we still kind of in this post-COVID reopening period where your typical seasonality maybe doesn't apply? Or can we maybe interpret that to mean that maybe some of your efforts to enhance profitability are working and should carry forward into next year?
Yeah, Alex, Mike, couple things. First off, you know, the FDC program has scaled quite a bit year-over-year, and some of that revenue does fall into the fourth quarter, the way that, you know, the way that it sells and the way that it gets earned and booked. Then the other part of it is, as you said, you know, the cost management measures we disclosed, the in-year benefit we estimated to be something like $10 million-$15 million, with about $7 million-$8 million this quarter, Tom. That's kicking in for a full quarter for the first time in the fourth quarter. You know, we're continuing to take measures beyond what we did in December that will help the impact the fourth quarter as well. Tom, you might wanna comment.
Yeah. No, Mike, that's right. Alex, I think, you know, given where we are in a year, we still feel confident we're within the range, but we might be towards the lower end of it.
Okay. That's really helpful. Thank you, guys.
Thank you, Mr. Fuhrman. Once again, to ask a question, please press star one. There are no additional questions waiting at this time, I will pass the call back to Hunter Blankenbaker for any further remarks.
Okay, great. Thanks, Hannah, and thanks, everyone, for joining us today and certainly for your continued interest in BNED. As a reminder, our fourth quarter earnings will be in late June. Thanks again for joining today.
That concludes today's Barnes & Noble Education Fiscal 2023 Third Quarter Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.