Barnes & Noble Education, Inc. 10-Q

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations Unless the context otherwise indicates, references to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc. or “BNED”, a Delaware corporation. References to “Barnes & Noble College” or “BNC” refer to our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our subsidiary MBS Textbook Exchange, LLC. Overview Description of Business Barnes & Noble Education, Inc. (“BNED”) is one of the largest contract operators of physical and virtual bookstores for college and university campuses and K-12 institutions across the United States. We are also one of the largest textbook wholesalers, inventory management hardware and software providers, and a leading provider of digital education solutions. We operate 1,429 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content and tools within a dynamic omnichannel retail environment. Additionally, we offer direct-to-student products and services to help students study more effectively and improve academic performance. The strengths of our business include our ability to compete by developing new products and solutions to meet market needs, our large operating footprint with direct access to students and faculty, our well-established, deep relationships with academic partners and stable, long-term contracts and our well-recognized brands. We expect to continue to introduce scalable and advanced digital solutions focused largely on the student, expand our e-commerce capabilities and accelerate such capabilities through our recent merchandising partnership with Fanatics Retail Group Fulfillment, LLC, Inc. (“Fanatics”) and Fanatics Lids College, Inc. (“FLC”) (collectively referred to herein as the “FLC Partnership”), increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect general merchandise sales to increase over the long term, as our product assortments continue to emphasize and reflect changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, which we expect to be further enhanced and accelerated through the FLC Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our logo and emblematic general merchandise business. We believe the Barnes & Noble brand (licensed from our former parent) along with our subsidiary brands, BNC and MBS, are synonymous with innovation in bookselling and campus retailing, and are widely recognized and respected brands in the United States. Our large college footprint, reputation, and credibility in the marketplace not only support our marketing efforts to universities, students, and faculty, but are also important to our relationship with leading publishers who rely on us as one of their primary distribution channels, and for being a trusted source for students in our direct-to-student digital solutions business. For additional information related to our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. Wolfram|Alpha Agreement During the first quarter of Fiscal 2022, we launched Math Solver , a new bartleby ® product feature that is powered by Wolfram|Alpha best-in-class computation engine. Math Solver allows students to access an interactive digital calculator that provides real-time, step-by-step explanations for even the most advanced math problems in subjects such as Algebra, Pre-Calc, Calculus. Partnership with Fanatics and FLC In December 2020, we entered into the FLC Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our general merchandise business. Fanatics’ cutting-edge e-commerce and technology expertise offers our campus stores expanded product selection, a world-class online and mobile experience, and a progressive direct-to-consumer platform. Coupled with FLC, the leading standalone brick and mortar retailer focused exclusively on licensed fan and alumni products, our campus stores have improved access to trend and sales performance data on licensees, product styles, and design treatments. We maintain our relationships with campus partners and remain responsible for staffing and managing the day-to-day operations of our campus bookstores. We also work closely with our campus partners to ensure that each campus store maintains unique aspects of in-store merchandising, including localized product assortments and specific styles and designs that reflect each campus’s brand. We leverage Fanatics’ e-commerce technology and expertise for the operational management of the emblematic merchandise and gift sections of our campus store websites. FLC manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores. 20 Table of Contents In December 2020, Fanatics, Inc. and Lids Holdings, Inc. jointly made a strategic equity investment in BNED. On April 4, 2021, as contemplated by the FLC Partnership's merchandising agreement, we sold our logo and emblematic general merchandise inventory to FLC, which was finalized during the first quarter of Fiscal 2022. As contemplated by the FLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products during the first quarter of Fiscal 2022. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis in the prior year. For additional information, see Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories . COVID-19 Business Impact Our business experienced an unprecedented and significant negative impact as a result of COVID-19 related campus store closures. Beginning in March 2020, colleges and universities nationwide began to close their campuses in light of safety concerns and as a result of local and state issued stay-at-home orders. By mid-March, during our Fiscal 2020 fourth quarter, we closed the majority of our physical campus stores to protect the health and safety of our customers and employees. While our campus stores were closed, we continued to serve institutions and students through our campus websites, providing free shipping on all orders and an expanded digital content offering to provide immediate access to course materials to students at our campuses that closed due to COVID-19. We developed and implemented plans to safely reopen our campus stores based on national, state and local guidelines, as well as the campus policies set by the school administration. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations . Although most schools expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities and events, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine when our operations can begin returning to normal levels of business. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations. For additional information, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021 . Segments We have three reportable segments: Retail, Wholesale and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, continue to be presented as “Corporate Services”. We identify our segments in accordance with the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance. The following summarizes the three segments. For additional information about each segment's operations, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021 . Retail Segment The Retail Segment operates 1,429 college, university, and K-12 school bookstores, comprised of 784 physical bookstores and 645 virtual bookstores. Our bookstores typically operate under agreements with the college, university, or K-12 schools to be the official bookstore and the exclusive seller of course materials and supplies, including physical and digital products. The majority of the physical campus bookstores have school-branded e-commerce sites which we operate independently or along with our merchant partners, and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. The Retail Segment also offers inclusive access programs, in which course materials are offered at a reduced price through a fee charged by the institution or included in tuition, and delivered to students on or before the first day of class. Additionally, the Retail Segment offers a suite of digital content and services to colleges and universities, including a variety of open educational resource-based courseware. Wholesale Segment The Wholesale Segment is comprised of our wholesale textbook business and is one of the largest textbook wholesalers in the country. The Wholesale Segment centrally sources, sells, and distributes new and used textbooks to approximately 3,200 physical bookstores (including our Retail Segment's 784 physical bookstores) and sources and distributes new and used textbooks to our 645 virtual bookstores. Additionally, the Wholesale Segment sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 400 college bookstores. 21 Table of Contents DSS Segment The Digital Student Solutions (“DSS”) Segment includes direct-to-student products and services to assist students to study more effectively and improve academic performance. The DSS Segment is comprised of the operations of Student Brands, LLC, a leading direct-to-student subscription-based writing services business, and bartleby ® , a direct-to-student subscription-based offering providing textbook solutions, expert questions and answers, writing and tutoring. Corporate Services represents unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources. Seasonality Our business is highly seasonal. Our quarterly results also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. For our retail operations, sales are generally highest in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials, and lowest in the first and fourth fiscal quarters. Sales attributable to our wholesale business are generally highest in our first, second and third quarter, as it sells textbooks and other course materials for retail distribution. For our DSS segment, or direct-to-student business, sales and operating profit are realized relatively consistently throughout the year. Trends, Competition and Other Business Conditions Affecting Our Business The market for educational materials is undergoing unprecedented change. As tuition and other costs rise, colleges and universities face increasing pressure to attract and retain students and provide them with innovative, affordable educational content and tools that support their educational development. Current trends, competition and other factors affecting our business include: • Overall Economic Environment, College Enrollment and Consumer Spending Patterns. Our business is affected by the impact of the COVID-19 pandemic, the overall economic environment, funding levels at colleges and universities, by changes in enrollments at colleges and universities, and spending on course materials and general merchandise. • Impact of the COVID-19 Pandemic : The COVID-19 pandemic has materially and adversely impacted certain segments of the U.S. economy, with legislative and regulatory responses including unprecedented monetary and fiscal policy actions across all sectors, and there is significant uncertainty as to timing of stabilization and recovery, including the ability to gain adequate herd-immunity levels through vaccine programs and their resilience to future virus variants. Many colleges and K-12 schools have been required to cease in-person classes in an attempt to limit the spread of the COVID-19 virus and ensure the safety of their students. Although many academic institutions have reopened, they are considering alternatives to traditional in-person instruction, including online learning and significantly reduced classroom sizes. Additionally, while many athletic conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company’s high-margin general merchandise business. • Economic Environment : Retail general merchandise sales are subject to short-term fluctuations driven by the broader retail environment. • Enrollment Trends: The growth of our business depends on our ability to attract new customers and to increase the level of engagement by our current student customers. We continue to see downward enrollment trends and shrinking resources from state and federal government for colleges and universities. Enrollment trends, specifically at community colleges, generally correlate with changes in the economy and unemployment factors, e.g. low unemployment tends to lead to low enrollment and higher unemployment rates tend to lead to higher enrollment trends, as students generally enroll to obtain skills that are in demand in the workforce. Enrollment trends have been negatively impacted overall by COVID-19 concerns at physical campuses. A significant reduction in U.S. economic activity and increased unemployment could lead to decreased enrollment and consumer spending. Additionally, enrollment trends are impacted by the dip in the United States birth rate resulting in fewer students at the traditional 18-24 year-old college age. Online degree program enrollments continue to grow, even in the face of declining overall higher education enrollment. • Increased Use of Online and Digital Platforms as Companions or Alternatives to Printed Course Materials. Students and faculty can now choose from a wider variety of educational content and tools than ever before, delivered across both print and digital platforms. 22 Table of Contents • Increasing Costs Associated with Defending Against Security Breaches and Other Data Loss, Including Cyber-Attacks. We are increasingly dependent upon information technology systems, infrastructure and data. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. We continue to invest in data protection and information technology to prevent or minimize these risks and, to date, we have not experienced any material service interruptions and are not aware of any material breaches. • Distribution Network Evolving. The way course materials are distributed and consumed is changing significantly, a trend that is expected to continue. The market for course materials, including textbooks and supplemental materials, is intensely competitive and subject to rapid change. • Disintermediation . We are experiencing growing competition from alternative media and alternative sources of textbooks and other course materials. In addition to the official physical or virtual campus bookstore, course materials are also sold through off-campus bookstores, e-commerce outlets, digital platform companies, publishers, including Cengage, Pearson and McGraw Hill, bypassing the bookstore distribution channel by selling or renting directly to students and educational institutions, and student-to-student transactions over the Internet. • Supply Chain and Inventory. Since the demand for used textbooks has historically been greater than the available supply, our financial results are highly dependent upon Wholesale’s ability to build its textbook inventory from suppliers in advance of the selling season. Recently, the impact of fewer students on campus due to COVID-19 has significantly impacted our on-campus buyback programs which supplies Wholesale’s used textbook inventory for future selling periods. Some textbook publishers have begun to supply textbooks pursuant to consignment or rental programs which could impact used textbook supplies in the future. Additionally, Wholesale is a national distributor for rental textbooks offered through McGraw-Hill Education's and Pearson Education’s consignment rental program, both of which are relatively nascent. • Price Competition. In addition to the competition in the services we provide to our customers, our textbook and other course materials business faces significant price competition. Students purchase textbooks and other course materials from multiple providers, are highly price sensitive, and can easily shift spending from one provider or format to another. • A Large Number of Traditional Campus Bookstores Have Yet to be Outsourced. • Outsourcing Trends. We continue to see the trend towards outsourcing in the campus bookstore market and also continue to see a variety of business models being pursued for the provision of course materials (such as inclusive access programs and publisher subscription models) and general merchandise. • New and Existing Bookstore Contracts. We expect awards of new accounts resulting in new physical and virtual store openings will continue to be an important driver of future growth in our business. We also expect that certain less profitable or essential bookstores we operate may close. Such stores could be included in contracts for stores we operate that may be deemed non-essential; and such stores could be operated by others or independently by schools. The scope of any such store closures remains uncertain, although we are not aware, at this time, of any significant volume of stores which we operate that are likely to close or have informed us of upcoming closures. For additional discussion of our trends and other factors affecting our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year ended May 1, 2021. Elements of Results of Operations Our condensed consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). The results of operations reflected in our consolidated financial statements are presented on a consolidated basis. All material intercompany accounts and transactions have been eliminated in consolidation. Our sales are primarily derived from the sale of course materials, which include new, used and digital textbooks, and at college and university bookstores which we operate, we sell high margin general merchandise, including emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. Our rental income is primarily derived from the rental of physical textbooks. We also derive revenue from other sources, such as sales of inventory management, hardware and point-of-sale software, direct-to-student subscription-based services, and other services. Our cost of sales primarily includes costs such as merchandise costs, textbook rental amortization, content development cost amortization, warehouse costs related to inventory management and order fulfillment, insurance, certain payroll costs, and management service agreement costs, including rent expense, related to our college and university contracts and other facility related expenses. 23 Table of Contents Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include long-term incentive plan compensation expense and general office expenses, such as merchandising, procurement, field support, finance and accounting, and operating costs related to our direct-to-student subscription-based services business. Shared-service costs such as human resources, legal, treasury, information technology, and various other corporate level expenses and other governance functions, are not allocated to any specific reporting segment and are recorded in Corporate Services as discussed in the Overview - Segments discussion above. Results of Operations - Summary 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Sales: Product sales and other $ 227,770 $ 193,210 Rental income 13,024 10,804 Total sales $ 240,794 $ 204,014 Net loss $ (44,346) $ (46,652) Adjusted Earnings (non-GAAP) (a) $ (40,014) $ (41,716) Adjusted EBITDA (non-GAAP) (a) Retail $ (19,622) $ (40,640) Wholesale 6,414 12,966 DSS 1,692 1,664 Corporate Services (7,444) (5,244) Elimination (5,537) (6,763) Total Adjusted EBITDA (non-GAAP) $ (24,497) $ (38,017) (a) Adjusted Earnings and Adjusted EBITDA are non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below. The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales: 13 weeks ended July 31, 2021 August 1, 2020 Sales: Product sales and other 94.6 % 94.7 % Rental income 5.4 5.3 Total sales 100.0 100.0 Cost of sales: Product and other cost of sales (a) 76.5 85.8 Rental cost of sales (a) 50.7 68.4 Total cost of sales 75.1 84.9 Gross margin 24.9 15.1 Selling and administrative expenses 35.8 34.3 Depreciation and amortization expense 5.2 6.9 Restructuring and other charges 1.1 2.8 Operating loss (17.2) % (28.9) % (a) Represents the percentage these costs bear to the related sales, instead of total sales. 24 Table of Contents Results of Operations - 13 weeks ended July 31, 2021 compared with the 13 weeks ended August 1, 2020 13 weeks ended, July 31, 2021 Dollars in thousands Retail Wholesale DSS Corporate Services Eliminations Total Sales: Product sales and other $ 197,445 $ 44,484 $ 8,303 $ — $ (22,462) $ 227,770 Rental income 13,024 — — — — 13,024 Total sales 210,469 44,484 8,303 — (22,462) 240,794 Cost of sales: Product and other cost of sales 155,722 34,079 1,273 — (16,913) 174,161 Rental cost of sales 6,604 — — — — 6,604 Total cost of sales 162,326 34,079 1,273 — (16,913) 180,765 Gross profit 48,143 10,405 7,030 — (5,549) 60,029 Selling and administrative expenses 68,365 3,991 6,447 7,444 (12) 86,235 Depreciation and amortization expense 9,407 1,300 1,899 18 — 12,624 Sub-Total: $ (29,629) $ 5,114 $ (1,316) $ (7,462) $ (5,537) (38,830) Restructuring and other charges 2,623 Operating loss $ (41,453) 13 weeks ended, August 1, 2020 Dollars in thousands Retail Wholesale DSS Corporate Services Eliminations Total Sales: Product sales and other $ 147,972 $ 80,294 $ 5,872 $ — $ (40,928) $ 193,210 Rental income 10,804 — — — — 10,804 Total sales 158,776 80,294 5,872 — (40,928) 204,014 Cost of sales: Product and other cost of sales 135,254 63,537 1,126 — (34,152) 165,765 Rental cost of sales 7,387 — — — — 7,387 Total cost of sales 142,641 63,537 1,126 — (34,152) 173,152 Gross profit 16,135 16,757 4,746 — (6,776) 30,862 Selling and administrative expenses 56,985 3,791 4,036 5,244 (13) 70,043 Depreciation and amortization expense 10,570 1,295 2,165 33 — 14,063 Sub-Total: $ (51,420) $ 11,671 $ (1,455) $ (5,277) $ (6,763) (53,244) Restructuring and other charges 5,671 Operating loss $ (58,915) Sales The following table summarizes our sales for the 13 weeks ended July 31, 2021 and August 1, 2020: 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 % Product sales and other $ 227,770 $ 193,210 17.9% Rental income 13,024 10,804 20.5% Total Sales $ 240,794 $ 204,014 18.0% 25 Table of Contents Sales increased by $36.8 million, or 18.0%, to $240.8 million during the 13 weeks ended July 31, 2021 from $204.0 million during the 13 weeks ended August 1, 2020. The sales increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. The first quarter is typically a low revenue quarter, consisting primarily of summer courses. The components of the variances for the 13 week periods are reflected in the table below. Sales variances 13 weeks ended Dollars in millions July 31, 2021 August 1, 2020 Retail Sales New stores $ 10.3 $ 7.9 Closed stores (4.5) (5.1) Comparable stores (a) 44.6 (106.6) Textbook rental deferral 0.2 (6.4) Service revenue (b) 2.3 (4.7) Other (c) (1.2) (1.0) Retail sales subtotal: $ 51.7 $ (115.9) Wholesale Sales $ (35.8) $ 8.0 DSS Sales $ 2.4 $ 0.5 Eliminations (d) $ 18.5 $ (8.2) Total sales variance: $ 36.8 $ (115.6) (a) Effective April 2021, as contemplated by the FLC Partnership's merchandising agreement, logo and emblematic general merchandise sales were fulfilled by FLC. During the first quarter of Fiscal 2022, as contemplated by the FLC Partnership's e-commerce agreement, we began to transition certain of our e-commerce sites to Fanatics e-commerce sites for logo and emblematic products. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic general merchandise sales on a gross basis in the prior year period. For Comparable Store Sales details, see below. (b) Service revenue includes brand partnerships, shipping and handling, and revenue from other programs. (c) Other includes inventory liquidation sales to third parties, marketplace sales and certain accounting adjusting items related to return reserves, and other deferred items. (d) Eliminates Wholesale sales and service fees to Retail and Retail commissions earned from Wholesale. See discussion of intercompany activities and eliminations below. Retail Retail sales increased by $51.7 million, or 32.6%, to $210.5 million during the 13 weeks ended July 31, 2021 from $158.8 million during the 13 weeks ended August 1, 2020. Retail added 53 new stores and closed 41 stores (not including temporary store closings due to COVID-19) during the 13 weeks ended July 31, 2021, ending the period with a total of 1,429 stores. 13 weeks ended July 31, 2021 August 1, 2020 Number of Stores: Physical Virtual Physical Virtual Number of stores at beginning of period 769 648 772 647 Opened 30 23 24 40 Closed 15 26 24 17 Number of stores at end of period 784 645 772 670 Product and other sales for Retail for the 13 weeks ended July 31, 2021 increased by $49.5 million, or 33.5% to $197.5 million from $148.0 million during the 13 weeks ended August 1, 2020. The sales increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. Product and other sales are impacted by comparable store sales (as noted in the chart below), new store openings and store closings, as well as the impact from the COVID-19 pandemic. Sales were impacted by the temporary store closings due to the COVID-19 pandemic in the prior year, as well as the impact of fewer students returning to campus, as many schools 26 Table of Contents implemented a remote learning model and curtailed on-campus classes and activities. While many big-conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company’s general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. First Day (our inclusive access program), digital and eTextbook revenue increased, due to a shift to lower cost options and more affordable solutions, including digital offerings. First Day sales increased approximately 200% compared to the prior year period. To supplement the Total Sales table presented above in accordance with generally accepted accounting principles (“GAAP”), the Company uses the non-GAAP financial measure of Retail Gross Comparable Store Sales. Retail Gross Comparable Store Sales (non-GAAP) includes sales from physical and virtual stores that have been open for an entire fiscal year period and does not include sales from closed stores for all periods presented. As contemplated by the FLC Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo and emblematic general merchandise sales to FLC and Fanatics. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the prior year period. For Retail Gross Comparable Store Sales (non-GAAP), sales for logo and emblematic general merchandise fulfilled by FLC, Fanatics and digital agency sales are included on a gross basis. We believe the current Retail Gross Comparable Store Sales (non-GAAP) calculation method reflects the manner in which management views comparable sales, as well as the seasonal nature of our business. Retail Gross Comparable Store Sales (non-GAAP) variances for Retail by category for the 13 week periods are as follows: Retail Gross Comparable Store Sales (non-GAAP) variances 13 weeks ended Dollars in millions July 31, 2021 August 1, 2020 Textbooks (Course Materials) $ 23.1 21.9 % $ (11.3) (10.1) % General Merchandise 48.6 118.4 % (87.6) (68.3) % Trade Books 1.9 151.1 % (7.7) (85.2) % Total Retail Gross Comparable Store Sales (non-GAAP) $ 73.6 49.8 % $ (106.6) (42.8) % Rental income for Retail for the 13 weeks ended July 31, 2021 increased by $2.2 million, or 20.5% to $13.0 million from $10.8 million during the 13 weeks ended August 1, 2020. Rental income is impacted by comparable store sales, new store openings and store closings. The increase in rental income is primarily due to increased rental activity due to the temporary store closings due COVID-19 pandemic in the prior year discussed above. Wholesale Wholesale sales decreased by $35.8 million, or 44.6% to $44.5 million during the 13 weeks ended July 31, 2021 from $80.3 million during the 13 weeks ended August 1, 2020. The decrease is primarily due to decreased gross sales impacted by the COVID-19 pandemic, a decrease in customer demand resulting from a shift in buying patterns from physical textbooks to digital products, and lower demand from other third-party clients, partially offset by a lower returns and allowances. During the prior year period, the Wholesale operations assumed direct-to-student fulfillment of course material orders for the Retail Segment campus bookstores that were not fully operational due to COVID-19 campus store closures, whereas the sales shifted back to the physical bookstores in the current period. DSS DSS total sales increased by $2.4 million, or 41.4% to $8.3 million during the 13 weeks ended July 31, 2021 from $5.9 million during the 13 weeks ended August 1, 2020. Sales increased primarily due to an increase in subscription sales. Cost of Sales and Gross Margin Our cost of sales decreased as a percentage of sales to 75.1% during the 13 weeks ended July 31, 2021 compared to 84.9% during the 13 weeks ended August 1, 2020. Our gross margin increased by $29.2 million, or 94.5%, to $60.0 million, or 24.9% of sales, during the 13 weeks ended July 31, 2021 from $30.9 million, or 15.1% of sales during the 13 weeks ended August 1, 2020. During the 13 weeks ended July 31, 2021, we recognized a merchandise inventory loss of $0.4 million in cost of goods sold in the Retail Segment discussed below. Excluding the merchandise inventory loss, cost of goods sold and gross margin was 74.9% and 25.1%, respectively, of sales during the 13 weeks ended July 31, 2021 compared to 84.9% and 15.1%, respectively, of sales during the 13 weeks ended August 1, 2020. For additional information, see Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies - Merchandise Inventories. 27 Table of Contents Retail The following table summarizes the Retail cost of sales for the 13 weeks ended July 31, 2021 and August 1, 2020: 13 weeks ended Dollars in thousands July 31, 2021 % of Related Sales August 1, 2020 % of Related Sales Product and other cost of sales $ 155,722 78.9% $ 135,254 91.4% Rental cost of sales 6,604 50.7% 7,387 68.4% Total Cost of Sales $ 162,326 77.1% $ 142,641 89.8% The following table summarizes the Retail gross margin for the 13 weeks ended July 31, 2021 and August 1, 2020: 13 weeks ended Dollars in thousands July 31, 2021 % of Related Sales August 1, 2020 % of Related Sales Product and other gross margin $ 41,723 21.1% $ 12,718 8.6% Rental gross margin 6,420 49.3% 3,417 31.6% Gross Margin $ 48,143 22.9% $ 16,135 10.2% For the 13 weeks ended July 31, 2021, the Retail gross margin as a percentage of sales increased as discussed below: • Product and other gross margin increased (1,250 basis points), driven primarily by higher margin rates (1,215 basis points) due to lower inventory reserves and lower markdowns and a favorable sales mix (160 basis points) due to higher general merchandise sales, partially offset by higher contract costs as a percentage of sales related to our college and university contracts (90 basis points) resulting from contract renewals and new store contracts, and an inventory merchandise loss of $0.4 million (30 basis points) related to the final sale of our logo and emblematic general merchandise inventory below cost to FLC. • Rental gross margin increased (1,765 basis points), driven primarily by lower contract costs as a percentage of sales related to our college and university contracts (1,215 basis points) and higher rental margin rates (690 basis points), partially offset by an unfavorable rental mix (140 basis points). Wholesale The cost of sales and gross margin for Wholesale were $34.1 million, or 76.6% of sales, and $10.4 million, or 23.4% of sales, respectively, during the 13 weeks ended July 31, 2021. The cost of sales and gross margin for Wholesale was $63.5 million or 79.1% of sales and $16.8 million or 20.9% of sales, respectively, during the 13 weeks ended August 1, 2020. The gross margin rate increased during the 13 weeks ended July 31, 2021 primarily due to lower markdowns and a favorable sales mix, partially offset by the unfavorable impact of returns and allowances. DSS The gross margin for the DSS segment was $7.0 million, or 84.7% of sales, during the 13 weeks ended July 31, 2021 and $4.7 million, or 80.8% of sales, during the 13 weeks ended August 1, 2020. The high gross margins are driven primarily by high margin subscription service revenue earned. Intercompany Eliminations During the 13 weeks ended July 31, 2021 and August 1, 2020, our sales eliminations were $(22.5) million and $(40.9) million, respectively. These sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale. During the 13 weeks ended July 31, 2021 and August 1, 2020, the cost of sales eliminations were $(16.9) million and $(34.2) million, respectively. These cost of sales eliminations represent (i) the recognition of intercompany profit for Retail inventory that was purchased from Wholesale in a prior period that was subsequently sold to external customers during the current period and the elimination of Wholesale service fees charged for fulfillment of inventory for virtual store sales, net of (ii) the elimination of intercompany profit for Wholesale inventory purchases by Retail that remain in ending inventory at the end of the current period. 28 Table of Contents During the 13 weeks ended July 31, 2021 and August 1, 2020, the gross margin eliminations were $(5.5) million and $(6.8) million, respectively. The gross margin eliminations reflect the net impact of the sales eliminations and cost of sales eliminations during the above mentioned reporting periods. Selling and Administrative Expenses 13 weeks ended Dollars in thousands July 31, 2021 % of Sales August 1, 2020 % of Sales Total Selling and Administrative Expenses $ 86,235 35.8% $ 70,043 34.3% During the 13 weeks ended July 31, 2021, selling and administrative expenses increased by $16.2 million, or 23.1%, to $86.2 million from $70.0 million during the 13 weeks ended August 1, 2020. The variances by segment are as follows: Retail During the 13 weeks ended July 31, 2021, Retail selling and administrative expenses increased by $11.4 million, or 20.0%, to $68.4 million from $57.0 million during the 13 weeks ended August 1, 2020. This increase was primarily due to a $12.1 million increase in stores payroll and operating expenses including comparable stores, virtual stores and new/closed stores payroll and operating expenses, partially offset by a $0.8 million decrease in corporate payroll, infrastructure and product development costs. The payroll increase is primarily related to the impact from re-opening stores that had temporarily closed due to the COVID-19 pandemic in the prior year. Wholesale Wholesale selling and administrative expenses increased by $0.2 million, or 5.3%, to $4.0 million from $3.8 million during the 13 weeks ended August 1, 2020. The increase in selling and administrative expenses was primarily driven by higher compensation-related expense and higher operating expenses. DSS During the 13 weeks ended July 31, 2021, DSS selling and administrative expenses increased by $2.4 million, or 59.7%, to $6.4 million from $4.0 million during the 13 weeks ended August 1, 2020. The increase in costs was primarily driven by higher operating costs invested in the business to continue to increase sales. Corporate Services During the 13 weeks ended July 31, 2021, Corporate Services' selling and administrative expenses increased by $2.2 million, or 42.0%, to $7.4 million from $5.2 million during the 13 weeks ended August 1, 2020. The increase was primarily due to higher compensation-related expense and higher operating expenses. Depreciation and Amortization Expense 13 weeks ended Dollars in thousands July 31, 2021 % of Sales August 1, 2020 % of Sales Total Depreciation and Amortization Expense $ 12,624 5.2% $ 14,063 6.9% Depreciation and amortization expense decreased by $1.4 million, or 10.2%, to $12.6 million during the 13 weeks ended July 31, 2021 from $14.1 million during the 13 weeks ended August 1, 2020. The decrease was primarily attributable to lower depreciable assets and intangibles due to the store impairment loss recognized during the third quarter of Fiscal 2021. Restructuring and other charges During the 13 weeks ended July 31, 2021, we recognized restructuring and other charges totaling $2.6 million comprised primarily of $1.5 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($2.4 million is included in accrued liabilities in the consolidated balance sheet as of July 31, 2021), $1.0 million for professional service costs related to restructuring, process improvements, costs related to development and integration associated with the FLC Partnership, and shareholder activist activities, and $0.1 million related to liabilities for a facility closure. During the 13 ended August 1, 2020, we recognized restructuring and other charges totaling $5.7 million comprised of $3.4 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($10.6 million is included in accrued liabilities in the consolidated balance sheet as of August 1, 2020), and $2.1 million for professional service costs related to restructuring, process improvements, and shareholder activities, and $0.2 million related to liability for a facility closure. 29 Table of Contents Operating Loss 13 weeks ended Dollars in thousands July 31, 2021 % of Sales August 1, 2020 % of Sales Total Operating Loss $ (41,453) (17.2)% $ (58,915) (28.9)% Our operating loss was $(41.5) million during the 13 weeks ended July 31, 2021, compared to an operating loss of $(58.9) million during the 13 weeks ended August 1, 2020. The decrease in operating loss is due to the matters discussed above. For the 13 weeks ended July 31, 2021, excluding the $0.4 million of merchandise inventory loss and the $2.6 million of restructuring and other charges, discussed above, operating loss was $(38.4) million (or (15.9)% of sales). For the 13 weeks ended August 1, 2020, excluding the $5.7 million of restructuring and other charges, discussed above, operating loss was $(53.2) million (or (26.1)% of sales). Interest Expense, Net 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Interest Expense, Net $ 2,494 $ 2,653 Net interest expense decreased by $0.2 million, or 6.0%, to $2.5 million during the 13 weeks ended July 31, 2021 from $2.7 million during the 13 weeks ended August 1, 2020. The decrease was primarily due to lower borrowings compared to the prior year. Income Tax Expense (Benefit) 13 weeks ended Dollars in thousands July 31, 2021 Effective Rate August 1, 2020 Effective Rate Income Tax Expense (Benefit) $ 399 (0.9)% $ (14,916) 24.2% We recorded an income tax expense of $0.4 million on a pre-tax loss of $(43.9) million during the 13 weeks ended July 31, 2021, which represented an effective income tax rate of (0.9)% and we recorded an income tax benefit of $(14.9) million on a pre-tax loss of $(61.6) million during the 13 weeks ended August 1, 2020, which represented an effective income tax rate of 24.2%. The effective tax rate for the 13 weeks ended July 31, 2021 is lower as compared to the comparable prior year due to the assessment of the realization of deferred tax assets. Net Loss 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Net loss $ (44,346) $ (46,652) As a result of the factors discussed above, net loss was $(44.3) million during the 13 weeks ended July 31, 2021, compared with net loss of $(46.7) million during the 13 weeks ended August 1, 2020. Adjusted Earnings (non-GAAP) is $(40.0) million during the 13 weeks ended July 31, 2021, compared with $(41.7) million during the 13 weeks ended August 1, 2020. See Adjusted Earnings (non-GAAP) discussion below. Use of Non-GAAP Measures - Adjusted Earnings, Adjusted EBITDA and Free Cash Flow To supplement our results prepared in accordance with generally accepted accounting principles (“GAAP”), we use the measure of Adjusted Earnings, Adjusted EBITDA, and Free Cash Flow, which are non-GAAP financial measures under Securities and Exchange Commission (the “SEC”) regulations. We define Adjusted Earnings as net income adjusted for certain reconciling items that are subtracted from or added to net income. We define Adjusted EBITDA as net income plus (1) depreciation and amortization; (2) interest expense and (3) income taxes, (4) as adjusted for items that are subtracted from or added to net income. We define Free Cash Flow as Adjusted EBITDA less capital expenditures, cash interest and cash taxes. To properly and prudently evaluate our business, we encourage you to review our condensed consolidated financial statements included elsewhere in this Form 10-K, the reconciliation of Adjusted Earnings to net income and the reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure presented in accordance with GAAP, set 30 Table of Contents forth in the tables below. All of the items included in the reconciliations below are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. These non-GAAP financial measures are not intended as substitutes for and should not be considered superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of these non-GAAP financial measures may be different from similarly named measures used by other companies, limiting their usefulness for comparison purposes. We review these non-GAAP financial measures as internal measures to evaluate our performance and manage our operations. We believe that these measures are useful performance measures which are used by us to facilitate a comparison of our on-going operating performance on a consistent basis from period-to-period. We believe that these non-GAAP financial measures provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone, as they exclude certain items that do not reflect the ordinary earnings of our operations. Our Board of Directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance, for evaluating on a quarterly and annual basis actual results against such expectations, and as a measure for performance incentive plans. We believe that the inclusion of Adjusted Earnings and Adjusted EBITDA results provides investors useful and important information regarding our operating results. We believe that Free Cash Flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements and assists investors in their understanding of our operating profitability and liquidity as we manage the business to maximize margin and cash flow. Adjusted Earnings (non-GAAP) 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Net loss $ (44,346) $ (46,652) Reconciling items, after-tax (below) 4,332 4,936 Adjusted Earnings (non-GAAP) $ (40,014) $ (41,716) Reconciling items, pre-tax Merchandise inventory loss (a) $ 434 $ — Content amortization (non-cash) 1,275 1,164 Restructuring and other charges (a) 2,623 5,671 Reconciling items, pre-tax 4,332 6,835 Less: Pro forma income tax impact (a)(b) — 1,899 Reconciling items, after-tax $ 4,332 $ 4,936 (a) See Management Discussion and Analysis and Results of Operations discussion above. (b) Represents the income tax effects of the non-GAAP items. Adjusted EBITDA (non-GAAP) 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Net loss $ (44,346) $ (46,652) Add: Depreciation and amortization expense 12,624 14,063 Interest expense, net 2,494 2,653 Income tax expense (benefit) 399 (14,916) Merchandise inventory loss (a) 434 — Content amortization (non-cash) 1,275 1,164 Restructuring and other charges (a) 2,623 5,671 Adjusted EBITDA (non-GAAP) (a) $ (24,497) $ (38,017) (a) See Management Discussion and Analysis and Results of Operations discussion above. 31 Table of Contents The following is Adjusted EBITDA by segment for the 13 weeks ended July 31, 2021 and August 1, 2020. Adjusted EBITDA - by Segment 13 weeks ended July 31, 2021 Dollars in thousands Retail Wholesale DSS Corporate Services Elimination (b) Total Sales $ 210,469 $ 44,484 $ 8,303 $ — $ (22,462) $ 240,794 Cost of sales (a) 161,726 34,079 164 — (16,913) 179,056 Gross profit 48,743 10,405 8,139 — (5,549) $ 61,738 Selling and administrative expenses 68,365 3,991 6,447 7,444 (12) 86,235 Adjusted EBITDA (non-GAAP) $ (19,622) $ 6,414 $ 1,692 $ (7,444) $ (5,537) $ (24,497) Adjusted EBITDA - by Segment 13 weeks ended August 1, 2020 Dollars in thousands Retail Wholesale DSS Corporate Services Elimination (b) Total Sales $ 158,776 $ 80,294 $ 5,872 $ — $ (40,928) $ 204,014 Cost of sales (a) 142,431 63,537 172 — (34,152) 171,988 Gross profit 16,345 16,757 5,700 — (6,776) 32,026 Selling and administrative expenses 56,985 3,791 4,036 5,244 (13) 70,043 Adjusted EBITDA (non-GAAP) $ (40,640) $ 12,966 $ 1,664 $ (5,244) $ (6,763) $ (38,017) (a) For the 13 weeks ended July 31, 2021, gross margin excludes $0.2 million and $1.1 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. For the 13 weeks ended July 31, 2021, gross margin also excludes a merchandise inventory loss of $0.4 million in the Retail Segment. For the 13 weeks ended August 1, 2020, gross margin excludes $0.2 million and $1.0 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. (b) See Management Discussion and Analysis and Results of Operations discussion above. Free Cash Flow (non-GAAP) 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Adjusted EBITDA (non-GAAP) $ (24,497) $ (38,017) Less: Capital expenditures (a) 11,370 7,055 Cash interest 1,682 1,960 Cash taxes 254 5,937 Free Cash Flow (non-GAAP) $ (37,803) $ (52,969) (a) Purchases of property and equipment are also referred to as capital expenditures. Our investing activities consist principally of capital expenditures for contractual capital investments associated with renewing existing contracts, new store construction, digital initiatives and enhancements to internal systems and our website. The following table provides the components of total purchases of property and equipment: Capital Expenditures 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Physical store capital expenditures $ 3,893 $ 3,137 Product and system development 3,624 2,325 Content development costs 2,847 1,076 Other 1,006 517 Total Capital Expenditures $ 11,370 $ 7,055 32 Table of Contents Liquidity and Capital Resources Our primary sources of cash are net cash flows from operating activities, funds available under our credit agreement and short-term vendor financing. As of July 31, 2021, we had $203.7 million outstanding borrowings under the Credit Agreement. See Financing Arrangements discussion below. COVID-19 Business Impact Our business experienced an unprecedented and significant negative impact as a result of COVID-19 related campus store closures. Beginning in March 2020, colleges and universities nationwide began to close their campuses in light of safety concerns and as a result of local and state issued stay-at-home orders. By mid-March, during our Fiscal 2020 fourth quarter, we closed the majority of our physical campus stores to protect the health and safety of our customers and employees. While our campus stores were closed, we continued to serve institutions and students through our campus websites, providing free shipping on all orders and an expanded digital content offering to provide immediate access to course materials to students at our campuses that closed due to COVID-19. We developed and implemented plans to safely reopen our campus stores based on national, state and local guidelines, as well as the campus policies set by the school administration. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including the Delta variant, on enrollments, university budgets, athletics and other areas that directly affect our business operations . Although most schools currently expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities and events, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine when our operations can begin returning to normal levels of business. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations. For additional information, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021 . We believe that our future cash from operations, access to borrowings under the Credit Facility, FILO Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our future capital requirements will depend on many factors, including, but not limited to, the economy and the outlook for and pace of sustainable growth in our markets, the levels at which we maintain inventory, the number and timing of new store openings, and any potential acquisitions of other brands or companies including digital properties. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private financing of debt or equity. Our access to, and the availability of, financing in the future will be impacted by many factors, including the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms. Sources and Uses of Cash Flow 13 weeks ended Dollars in thousands July 31, 2021 August 1, 2020 Cash, cash equivalents, and restricted cash at beginning of period $ 16,814 $ 9,008 Net cash flows used in operating activities (17,462) (53,149) Net cash flows used in investing activities (11,020) (7,140) Net cash flows provided by financing activities 24,885 59,518 Cash, cash equivalents, and restricted cash at end of period $ 13,217 $ 8,237 Cash Flow from Operating Activities Our business is highly seasonal. For our retail operations, cash flows from operating activities are typically a source of cash in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials for the upcoming semesters based on the typical academic semester. For our wholesale operations, cash flows from operating activities are typically a source of cash in the second and fourth fiscal quarters, as payments are received from the summer and winter selling season when they sell textbooks and other course materials for retail distribution. For both retail and wholesale, cash flows from operating activities are typically a use of cash in the fourth fiscal quarter, when sales volumes are materially lower than the other quarters. For our DSS segment, cash flows are not seasonal as cash flows from operating activities are typically consistent throughout the year. Our quarterly cash flows also may fluctuate depending on the timing of the start of the various school’s semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. 33 Table of Contents Cash flows used in operating activities during the 13 weeks ended July 31, 2021 were $(17.9) million compared to $(53.1) million during the 13 weeks ended August 1, 2020. This decrease in cash used in operating activities of $35.2 million was primarily due to higher earnings in the current year period compared to the prior year period, and changes in working capital. As discussed above, our operations were highly impacted by COVID-19 related campus store closures in the prior year period. Cash Flow from Investing Activities Cash flows used in investing activities during the 13 weeks ended July 31, 2021 were $(11.0) million compared to $(7.1) million during the 13 weeks ended August 1, 2020. The increase in cash used in investing activities is primarily due to higher capital expenditures and contractual capital investments associated with content development, digital initiatives, enhancements to internal systems and websites, renewing existing contracts and new store construction. Capital expenditures totaled $11.4 million and $7.1 million during the 13 weeks ended July 31, 2021 and August 1, 2020, respectively. Cash Flow from Financing Activities Cash flows provided by financing activities during the 13 weeks ended July 31, 2021 were $24.9 million compared to $59.5 million during the 13 weeks ended August 1, 2020. This net change of $34.6 million is primarily due to lower net borrowings under the credit agreement. Financing Arrangements We have a credit agreement (the “Credit Agreement”), amended March 31, 2021 and March 1, 2019, under which the lenders committed to provide us with a 5-year asset-backed revolving credit facility in an aggregate committed principal amount of $400 million (the “Credit Facility”). We have the option to request an increase in commitments under the Credit Facility of up to $100 million, subject to certain restrictions. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. The agreement includes an incremental first in, last out seasonal loan facility (the “FILO Facility”) for a $100 million incremental facility maintaining the maximum availability under the Credit Agreement at $500 million. On March 31, 2021, we were granted a waiver to the availability test condition to the current draw under the FILO Facility. During the 13 weeks ended July 31, 2021, we borrowed $71.7 million and repaid $45.6 million under the Credit Agreement, with $203.7 million of outstanding borrowings as of July 31, 2021, comprised of $153.7 million and $50.0 million under the Credit Facility and FILO Facility, respectively. During the 13 weeks ended August 1, 2020, we borrowed $186.7 million and repaid $126.8 million under the Credit Agreement, with $234.6 million of outstanding borrowings as of August 1, 2020, comprised entirely of outstanding borrowings under the Credit Facility. As of both July 31, 2021 and August 1, 2020, we have issued $4.8 million in letters of credit under the Credit Facility. For additional information including interest terms and covenant requirements related to the Credit Facility and FILO Facility, refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. Income Tax Implications on Liquidity As of July 31, 2021, other long-term liabilities includes $25.3 million related to the long-term tax payable associated with the LIFO reserve. The LIFO reserve is impacted by changes in the consumer price index ("CPI") and is dependent on the inventory levels at the end of our tax year (on or about January 31st) which is in the middle of our second largest selling cycle. At the end of the most recent tax year, inventory levels declined as compared to the prior year resulting in approximately $0.7 million of the income taxes associated with the LIFO reserve becoming currently payable. Given recent trends relating to the pricing and rental of textbooks, management believes that an additional portion of the remaining long-term tax payable associated with the LIFO reserve could become payable within the next twelve months. We are unable to predict future trends for CPI and inventory levels, therefore it is difficult to project with reasonable certainty how much of this liability will become payable within the next twelve months. We have filed our federal income tax returns for the tax year ended January 2021, as well claims for refunds for cash taxes paid in prior years. We expect to receive an aggregate refund of approximately $30.5 million. Share Repurchases On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $50 million, in the aggregate, of our outstanding Common Stock. The stock repurchase program is carried out at the direction of management (which may include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. During the 13 weeks ended July 31, 2021, we did not repurchase any of our Common Stock under the stock repurchase program. As of July 31, 2021, approximately $26.7 million remains available under the stock repurchase program. 34 Table of Contents During the 13 weeks ended July 31, 2021, we repurchased 130,135 shares of our Common Stock outside of the stock repurchase program in connection with employee tax withholding obligations for vested stock awards. Contractual Obligations Our projected contractual obligations are consistent with amounts disclosed in Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. Off-Balance Sheet Arrangements As of July 31, 2021, we have no off-balance sheet arrangements as defined in Item 303 of Regulation S-K. Critical Accounting Policies Our policies regarding the use of estimates and other critical accounting policies are consistent with the disclosures in Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. Disclosure Regarding Forward-Looking Statements This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and information relating to us and our business that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. When used in this communication, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “will,” “forecasts,” “projections,” and similar expressions, as they relate to us or our management, identify forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Such statements reflect our current views with respect to future events, the outcome of which is subject to certain risks, including, among others: • risks associated with COVID-19 and the governmental responses to it, including its impacts across our businesses on demand and operations, as well as on the operations of our suppliers and other business partners, and the effectiveness of our actions taken in response to these risks; • general competitive conditions, including actions our competitors and content providers may take to grow their businesses; • a decline in college enrollment or decreased funding available for students; • decisions by colleges and universities to outsource their physical and/or online bookstore operations or change the operation of their bookstores; • implementation of our digital strategy may not result in the expected growth in our digital sales and/or profitability; • risk that digital sales growth does not exceed the rate of investment spend; • the performance of our online, digital and other initiatives, integration of and deployment of, additional products and services including new digital channels, and enhancements to higher education digital products, and the inability to achieve the expected cost savings; • the risk of price reduction or change in format of course materials by publishers, which could negatively impact revenues and margin; • the general economic environment and consumer spending patterns; • decreased consumer demand for our products, low growth or declining sales; • the strategic objectives, successful integration, anticipated synergies, and/or other expected potential benefits of various acquisitions, may not be fully realized or may take longer than expected; • the integration of the operations of various acquisitions into our own may also increase the risk of our internal controls being found ineffective; • changes to purchase or rental terms, payment terms, return policies, the discount or margin on products or other terms with our suppliers; • our ability to successfully implement our strategic initiatives including our ability to identify, compete for and execute upon additional acquisitions and strategic investments; 35 Table of Contents • risks associated with operation or performance of MBS Textbook Exchange, LLC’s point-of-sales systems that are sold to college bookstore customers; • technological changes; • risks associated with counterfeit and piracy of digital and print materials; • our international operations could result in additional risks; • our ability to attract and retain employees; • risks associated with data privacy, information security and intellectual property; • trends and challenges to our business and in the locations in which we have stores; • non-renewal of managed bookstore, physical and/or online store contracts and higher-than-anticipated store closings; • disruptions to our information technology systems, infrastructure and data due to computer malware, viruses, hacking and phishing attacks, resulting in harm to our business and results of operations; • disruption of or interference with third party web service providers and our own proprietary technology; • work stoppages or increases in labor costs; • possible increases in shipping rates or interruptions in shipping service; • product shortages, including decreases in the used textbook inventory supply associated with the implementation of publishers’ digital offerings and direct to student textbook consignment rental programs, as well as the risks associated with the impacts that public health crises may have on the ability of our suppliers to manufacture or source products, particularly from outside of the United States; • changes in domestic and international laws or regulations, including U.S. tax reform, changes in tax rates, laws and regulations, as well as related guidance; • enactment of laws or changes in enforcement practices which may restrict or prohibit our use of texts, emails, interest based online advertising, recurring billing or similar marketing and sales activities; • the amount of our indebtedness and ability to comply with covenants applicable to any future debt financing; • our ability to satisfy future capital and liquidity requirements; • our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms; • adverse results from litigation, governmental investigations, tax-related proceedings, or audits; • changes in accounting standards; and • the other risks and uncertainties detailed in the section titled “Risk Factors” in Part I - Item 1A in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Form 10-Q. Item 3: Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the items discussed in Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.