Barnes & Noble Education: Demand Rebounding, But Upside Limited (NYSE:BNED)

Investment Thesis: While Barnes & Noble Education may notice a rebound in revenue growth as demand returns to pre-pandemic levels, clear signs of revenue and cash flow growth are likely to be needed to justify any growth from here.

In a previous article back in July, I argued that while Barnes & Noble Education (BNED) may have significant opportunities to rebound in the long run, stocks were too expensive on a profit basis.

Despite the short jump since then, we are seeing a decline in shares by a significant margin:

The purpose of this article is to investigate whether Barnes & Noble Education could get out of here given the recent fall in prices.

Performance

The loss of revenue deepened in 2021 for Barnes & Noble Education as COVID’s continued environment continued to keep personal education attendance lower than it was before the pandemic, and demand for physical education textbooks remained the same until 2022.

One of the key risks that Barnes & Noble Education points out in its latest earnings report is that, “Our wholesale business may be unable to effectively manage inventory levels, which could lead to excess inventory or obsolescence.”

I would like to explore this aspect further by looking at historical inventory figures. Even if demand remains below COVID-19 – a key factor in mitigating this is the extent to which Barnes & Noble Education can optimize its inventories to ensure that the company does not overspend on an offer it cannot subsequently sell.

Quarterly net inventory figures along with total quarterly sales were collected from previous quarterly reports. The average inventory by year was then calculated for four quarters during each year and divided by the total sales recorded in each quarter.

Quarter	Inventory of goods	Total sales by quarter	Average inventory by year	The ratio of average inventories to sales
1st quarter of 2016	$ 766,767,000	$ 238,983,000	$ 513,256,500	214,77%
2nd quarter of 2016	$ 431,023,000	$ 755,864,000		67,90%
3rd quarter of 2016	$ 542,489,000	$ 518,423,000		99.00%
4th quarter of 2016	$ 312,747,000	$ 294,759,000		174.13%
1st quarter of 2017	$ 724,329,000	$ 239,237,000	$ 513,440,750	214.62%
2nd quarter of 2017	$ 401,338,000	$ 770,671,000		66,62%
3rd quarter of 2017	$ 494,032,000	$ 521,624,000		98,43%
4th quarter of 2017	$ 434,064,000	$ 342,830,000		149,77%
1st quarter of 2018	$ 780,414,000	$ 355,711,000	$ 589,164,000	165,63%
2nd quarter of 2018	$ 515,574,000	$ 886,861,000		66,43%
3rd quarter of 2018	$ 614,499,000	$ 603,391,000		97,64%
4th quarter of 2018	446,169,000 dollars	$ 357,654,000		164.73%
1st quarter of 2019	$ 729,877,000	$ 337,484,000	$ 558,931,000	165,62%
2nd quarter of 2019	$ 505,943,000	$ 814,766,000		68,60%
3rd quarter of 2019	$ 579,582,000	$ 550,330,000		101,56%
4th quarter of 2019	$ 420,322,000	$ 334,385,000		167.15%
1st quarter of 2020	717,765,000 dollars	$ 319,657,000	$ 538,096,500	168,34%
2nd quarter of 2020	$ 475,422,000	$ 772,228,000		69,68%
3rd quarter of 2020	530,260,000 dollars	$ 502,292,000		107,13%
4th quarter of 2020	$ 428,939,000	$ 256,886,000		209,47%
1st quarter of 2021	$ 575,246,000	$ 204,014,000	$ 441,661,500	216.49%
2nd quarter of 2021	$ 457,677,000	$ 595,485,000		74,17%
3rd quarter of 2021	$ 452,611,000	$ 411,613,000		107.30%
4th quarter of 2021	$ 281,112,000	$ 222,778,000		198,25%

Source: Inventory and net sales figures taken from historical quarterly Barnes & Noble Education reports. Average inventories and average inventories before sales calculated by the author.

When charting the average inventory-to-sales ratio, we see that despite significant seasonal fluctuations, the moving average for the four periods increased from 125% by 2020 to just under 150%.

If we look at the average stocks of goods by year, we see that in 2021 the company has significantly reduced the level of stocks compared to previous years. However, sales remain well below pre-pandemic levels. For example, total sales in 2021 were just over $ 1.4 billion, and in 2019 – more than $ 2 billion.

While it is encouraging that the company has taken steps to reduce inventory to reduce costs as a result of declining sales – this is somewhat balanced, as reducing inventory to too large a margin would mean that the company will not be able to meet a sudden increase in demand.

Looking forward

From an industry perspective, there are clear signs that distance learning is increasingly being abandoned in favor of a return to personal learning, and nearly 100% of K-12 students in schools in the United States are attending as of last December.

From this perspective, one would expect sales to return to pre-pandemic levels. Although inventory levels declined in 2021 due to declining sales, I don’t expect the company to have difficulty increasing inventory levels to meet renewed demand again.

However, it is clear that cash flows from operating activities have suffered significantly since 2020, and it would be desirable for this figure to bounce back to previous levels to justify stock growth.

In addition, although the company has managed to save cash, the company’s cash reserves still make up a small portion of total current liabilities.

For example, we see that cash and cash equivalents as a percentage of total current liabilities were 2.15% in 2021, slightly higher than 2.03% in 2020.

In addition, we see that long-term borrowing has increased significantly compared to 2020, suggesting that a larger share of revenue growth should be directed to servicing this debt in the future.

Conclusion

Barnes & Noble Education continues to maintain a strong market position in the education sector in the United States.

However, I believe that even with the recent fall in prices and signs of a rebound in demand – it is unlikely that stocks will grow significantly until profits and cash flow begin to bounce significantly, and long-term debt will not show signs of decline.