Barnes & Noble Education - $BNED

A recession-resilient business in an oligopolistic market growing double-digits and trading at just 6.5x forward earnings

Mar 17, 2025

Summary

Barnes & Noble Education ($BNED) operates college bookstores. Historically this has been a challenged industry, and BNED shares have been a disaster. Now, a business model pivot has led to surging profitability and has opened a long runway for future growth. The company drastically reshaped its balance sheet in 2024 and resoundingly put to bed a serious regulatory threat, yet we have so far seen little reaction in the share price. BNED is now a recession-resilient business in an oligopolistic market growing rapidly (I expect 30% EBITDA growth in the next 12mo) and available for a 6.5x unlevered earnings multiple.

Background

Barnes and Noble Education is the (now fully independent) university bookstore division of Barnes & Noble, which was spun out in 2015. I imagine the thinking at the time was that this was a "GoodCo" of sorts, more resistant to the secular ecommerce/digitization headwinds faced by the mainstream retail division. BNED partners with universities to be their official bookstore: today they operate 1164 bookstores across the US (649 physical / 515 virtual stores). The core business line is retailing of branded merchandise and textbooks. The company also has a used textbook exchange, which is declining in relevance thanks to the rise of digital textbooks and competition, and used to operate a digital student tutoring/paper writing business that was impaired by the rise of chatGPT and has since been liquidated. The university bookstore marketplace is oligopolistic, with BNED controlling about 30%, chief-competitor Follett controlling another 30% or so, self-managed bookstores comprising another roughly 30%, and a handful of smaller operators managing 10%. The trend has been towards consolidation, with self-managed ceding share to the scaled operators BNED/Follett.

While the idea at the time of spin may have been that college bookstores would be resilient to the trends of ecommerce/digitization, that has not turned out to be the case, and performance since IPO has been a disaster. A core business line for BNED is the retailing of textbooks, and ecommerce players like Amazon have significantly encroached on its turf. Additionally, textbooks have trended towards digitalization, which has meant that textbook publishers can attempt to build their own digital platforms and sell their books directly to students. Digitalization has also meant rampant piracy. We know piracy must be particularly important as textbook publishers have also faced a shrinking market despite being channel ambivalent.

Salvation for BNED/Follett and the textbook publishers came in the form of "Equitable Access" (EA) programs. These are DEI programs which universities began to adopt in order to deal with the problem that students of lower means more frequently try to get away with not buying assigned course materials (instead attempting to share or forego entirely). Many university administrators believe this behavior is short-sighted, and puts students of lower means at a disadvantage. EA programs resolve this by moving textbook purchases to an opt-out model (meaning students are automatically signed up to buy all assigned materials and must take action to opt out), and rolled the textbook bill, generally a flat fee per credit hour, into the same billing process as tuition. Students then receive all materials for the first day of classes without having to procure them on their own. The opt-out nature of these programs and the bundling of textbook charges with the much larger tuition bills has the effect of drastically increasing the purchase rate of new materials (on the order of 35% -> 80% for campuses that adopt). The greater sell-through has in turn enabled the adopters of these programs to negotiate sizable discounts from textbook publishers (on the order of 30-35%), which further solidifies the appeal of opting in to students.

BNED launched their equitable access programs, "First Day" (FD) and the more expansive "First Day Complete" (FDC), in 2021. The programs saw momentum immediately, and as of the most recent quarter they had rolled 16.4% of the campuses they cover into the First Day Complete program. Since rollout, headline revenue has been broadly stable as the rapid growth of First Day revenues offset declines due to cannibalization of the old model and a concurrent initiative to shutter underperforming locations. Margins, on the other hand, have surged, reflecting the favorable mix shift to FDC: the company has moved smoothly from breakeven on an adjusted EBITDA basis (in FY23 ended in April) to posting 4.7% trailing-12-mo margins in the most recent quarter. A key point with all this is that we no longer need to speculate about whether First Day programs will be popular or whether they will impact profitability. It is now clear that these programs will take material share from the traditional model and that the impact on BNED's financials will be transformative (as it has already been). The only debate is where things will top out - will BNED be able to convert 20%, 30%, 50% or 70% of campuses to FDC?

In early 2024, the Biden Department of Education began an investigation into the opt-out nature of inclusive access programs like FDC, questioning whether an opt-out model led to students overpaying for materials. BNED entered 2024 very levered thanks to the previous industry headwinds and a pair of failed acquisitions. A large chunk of that debt came due in mid-2024 and, thanks to the overhang from the DoE investigation, lenders balked at rolling the debt without extracting significant concessions. BNED had to do a massively dilutive rights offering on top of selling a huge stake at bargain prices to Immersion Corp and rolling the second-lien debt of partners Fanatics and VitalSource into equity. This left Immersion Corp (ticker IMMR), a publicly-traded patent company / investment vehicle, as a ~40% holder of BNED with de facto control. In the second half of 2024, the company launched a pair of ATM offerings to further de-lever, presumably at the behest of IMMR (first announced on 9/19; second on 12/20). These programs were aggressively executed, pressuring shares and annoying bullish shareholders who resent what they view as unnecessary dilution. The offerings had the effect of lowering IMMR's stake to ~32% and significantly de-levering the business.

In December 2024, the DOE ended its investigation into opt-out after strong defense from universities of the programs. It seems unlikely that the Trump administration would refocus on the issue given it is not a very well-known or politically polarized debate. This leaves BNED early into the rollout of its FDC program, with its leverage issues in the past, profitability surging, and the opt-out nature of the programs no longer in question.

First Day Complete – Why is this so much better?

People often describe EA programs as a “win-win-win”. They are a win for students as they get the option (but not the obligation) of purchasing their materials at a ~30% discount, having those materials delivered prior to the first day of classes, and having the bill conveniently rolled into tuition. The programs are a win for universities as they improve performance of lower-income students, increase the cut the university gets of textbook sales through its official bookstore (they get no cut of sales through Amazon, etc!), and improve sales of textbooks generally, which benefits faculty who are authors of textbooks. Finally, the programs are a win for publishers as, despite the discount offered, profitability is still much better on campuses which convert due to the drastic jump in sell-through of new materials. The programs are saving publishers from a piracy-fueled, secular decline in sales. In this respect, the situation is similar to the early days of streamers like Spotify and the effect they had on music publishers. After years of decline, publishers are willing to come to the table and offer lower prices, convenience and flat-rate billing in exchange for a reversal of industry trends. I wouldn’t be surprised if publishers are also thinking that they can shrink the discount in time once the programs have reached saturation and become more entrenched.

Valuation

The most important thing to note here is that BNED profitability is exploding, and the path seems clear for this to continue as FDC penetration continues to rise (remember we are only at 16.4%):

So we have a business that recently cleaned up its balance sheet, which operates in a recession resilient and oligopolistic end market, which is early in the transition to a new business model that is super-charging profitability, and which recently had a major regulatory overhang cleanly lifted. What multiple is that worth? Probably more than the roughly 5x EV/EBITDA multiple currently being assigned on trailing numbers.

Say we want to instead assign a modest 14x multiple on unlevered forward earnings. I am assuming that EBITDA growth continues at the same $ pace as previously (i.e. declining on a % basis). I use $18M for capex even though recent numbers have been lower as the company may increase its pace of opening new stores now that its financial standing has improved. Those assumptions give me this math:

There are a couple items in my EV/net debt calculation that merit further attention. First is the NOL value. I have used the standard US tax rate in calculating estimated unlevered earnings, but BNED should pay significantly lower taxes in the near-term thanks to ~95M of NOLs. They had a much larger NOL number but due to the 2024 recapitalization being considered a change of control they now expect to only be able to utilize $95M. I value these by multiplying by the tax rate and then applying a 35% discount. The second line item of interest, “working capital seasonality” is something that I will address in the next section.

Working Capital & Seasonality

It is worth spending some time on the earnings and working capital seasonality here, as it is somewhat wonky. Naturally, the strongest periods for sales are the beginning of the Fall and Spring academic semesters, with the Fall semester being particularly important. These semesters align with Q2 and Q3 of the companies fiscal calendar, which ends in April. Working capital is an important issue here and it has a different seasonality. The downside of the new FDC model is that the universities only remit the textbook money, which is now collected with tuition, to BNED on a delay from when the sales are made. So BNED ends up having a large working capital build from Q1 → Q3, and then a large release from Q3 → Q4. These swings are very large relative to the size of BNED. The enterprise value here is only ~$400M and I expect to see a $150M release in working capital next quarter! As FDC grows in the mix, I expect the average working capital will probably also rise and absorb some FCF. Thus, while the business has a pretty low capex/EBITDA ratio now that BNED isn’t aggressively pursuing new locations, I have refrained from categorizing the business as capital light because of the working capital issue.

There are a few mitigating points that should be made. First, while this year BNED saw accounts payable and accrued liabilities flattish, it may be expected that in the future these can grow some. The recent financial distress meant that management may have let those accounts get too high and this year they needed to be reset to the economically optimal levels (as with the overall debt level). Second, I suspect that the timing of quarter ends is detrimental to the optics here. While BNED has max receivables at the end of January (Q3), I suspect these are collected long before the end of April when we next get a look (Q4). I suspect that if we could see true average receivables over the course of the year it would be a lower number than simply averaging the 4 quarter end numbers. This is important because we ultimately care about how much interest BNED has to pay because of these receivables. Third, these receivables are ultimately short-term loans to very creditworthy entities. While BNED currently finances them using their expensive revolver facility at SOFR + 3.5%, I suspect they could find a cheaper way of financing such high quality receivables now that their balance sheet is sorted out. At a minimum I would think they can eventually refi their revolver into a lower rate. Fourth, if we examine BNED’s return on incremental invested assets as this new FDC model scales, we see very attractive numbers (I calculate ~25% examining last-12-mo vs the 12mo period proceeding that). Not as good as if it was truly capital light, obviously, but still excellent. And finally, while I expect growing working capital needs to absorb a chunk of FCF in the next few years as rapid growth continues, this will naturally peter out as growth in % space declines.

So how do we handle working capital dynamics in valuation? Naturally we want to smooth through the fluctuations, otherwise the company will look expensive (relatively) after the Q3 results and cheap after the Q4 results. I have modeled out my expectations for each of the 6 working capital drivers, and I calculate an adjustment factor by subtracting the average working capital figure over the next 4 quarters (including most recent quarter) from the current working capital figure. This creates a reduction to net debt after the q3 results and an add-back in other quarters. This is where the $53M figure number comes from in my valuation work in the previous section. After we get next quarters results, this will turn from a reduction of net debt to a large addition (of roughly 100M), insulating my valuation from the large working capital release we should see next quarter.

Catalysts

BNED added to Russell 2000 this year
The working capital release after next quarter’s results are reported, which I believe will give the company the appearance of net cash.
Management has floated the idea of returning to quarterly earnings calls and maybe even a guide in coming quarters which could make the situation appear more institutional and less “wild west”.

Catapult Stocks

Discussion about this post