Annual Reports

  • 10-K (Jun 27, 2014)
  • 10-K (Jul 29, 2013)
  • 10-K (Jun 27, 2012)
  • 10-K (Aug 26, 2011)
  • 10-K (Jun 29, 2011)
  • 10-K (Jun 30, 2010)

 
Quarterly Reports

 
8-K

 
Other

Barnes & Noble 10-K 2010
Sections of the Company's Annual Report

Exhibit 13.1

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data of Barnes & Noble, Inc. and its subsidiaries (collectively, the Company) set forth on the following pages should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. On September 29, 2009, the Board of Directors of Barnes & Noble, Inc. authorized a change in the Company’s fiscal year end from the Saturday closest to the last day of January to the Saturday closest to the last day of April. The change in fiscal year, which became effective on September 30, 2009 upon the closing of the acquisition of Barnes & Noble College Booksellers, Inc. (B&N College) by Barnes & Noble, Inc. (the Acquisition), gives the Company and B&N College the same fiscal year. The change was intended to better align the Company’s fiscal year with the business cycles of both Barnes & Noble, Inc. and B&N College. As a result of the change in fiscal year, the Company’s 2010 fiscal year began on May 3, 2009 and ended on May 1, 2010 (fiscal 2010).

The Statement of Operations Data for the 52 weeks in fiscal 2010, the 13 weeks ended May 2, 2009 (transition period), 52 weeks ended January 31, 2009 (fiscal 2008), and 52 weeks ended February 2, 2008 (fiscal 2007) and the Balance Sheet Data as of May 1, 2010, May 2, 2009 and January 31, 2009 are derived from, and are qualified by reference to, audited consolidated financial statements which are included elsewhere in this report. The Statement of Operations Data for the 53 weeks ended February 3, 2007 (fiscal 2006) and 52 weeks ended January 28, 2006 (fiscal 2005) and the Balance Sheet Data as of February 2, 2008, February 3, 2007 and January 28, 2006 are derived from audited consolidated financial statements not included in this report. The Statement of Operations Data for the 13 weeks ended May 3, 2008 are derived from unaudited consolidated financial statements which are included elsewhere in this report. The Balance Sheet Data as of May 3, 2008 are derived from unaudited consolidated financial statements not included in this report.

 

F-1


Fiscal Year

(In thousands of dollars, except per share data)

   Fiscal 2010     13 Weeks
ended
May 2,
2009
    13 Weeks
ended
May 3,
2008
    Fiscal 2008     Fiscal 2007    Fiscal 2006    Fiscal 2005  

STATEMENT OF OPERATIONS DATA:

                

Sales

                

Barnes & Noble stores

   $ 4,320,303      989,149      1,024,667      4,525,020      4,648,409    4,533,912    4,356,611   

Barnes & Noble.com

     572,763      93,075      100,254      466,082      476,870    433,425    439,657   

Barnes & Noble College

     836,458      —        —        —        —      —      —     

Other(a)

     81,040      22,928      30,961      130,702      161,395    172,281    197,664   
                                          

Total sales

     5,810,564      1,105,152      1,155,882      5,121,804      5,286,674    5,139,618    4,993,932   

Cost of sales and occupancy

     4,133,819      773,491      807,915      3,540,596      3,679,845    3,534,097    3,455,536   
                                          

Gross profit

     1,676,745      331,661      347,967      1,581,208      1,606,829    1,605,521    1,538,396   
                                          

Selling and administrative expenses

     1,392,207      286,554      303,863      1,251,524      1,225,791    1,178,038    1,112,005   

Depreciation and amortization

     207,774      45,879      41,314      173,557      168,600    166,581    169,354   

Pre-opening expenses

     3,518      2,472      4,537      12,796      10,387    12,897    10,938   
                                          

Operating profit (loss)

     73,246      (3,244   (1,747   143,331      202,051    248,005    246,099   

Interest income (expense), net and amortization of deferred financing fees(b)

     (28,237   (199   807      (2,344   7,483    1,680    (1,296
                                          

Earnings (loss) from continuing operations before taxes

     45,009      (3,443   (940   140,987      209,534    249,685    244,803   

Income taxes

     8,365      (1,374   (374   55,591      74,623    100,499    99,758   
                                          

Earnings (loss) from continuing operations (net of income tax)

     36,644      (2,069   (566   85,396      134,911    149,186    145,045   

Earnings (loss) from discontinued operations (net of income tax)(c)

     —        (654   (1,658   (9,506   888    1,341    1,636   
                                          

Net earnings (loss)

     36,644      (2,723   (2,224   75,890      135,799    150,527    146,681   

Loss attributable to noncontrolling interests(d)

     32      30      —        30      —      —      —     
                                          

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 36,676      (2,693   (2,224   75,920      135,799    150,527    146,681   
                                          

Earnings (loss) attributable to Barnes & Noble, Inc.

                

Earnings (loss) from continuing operations

   $ 36,644      (2,069   (566   85,396      134,911    149,186    145,045   

Less loss attributable to noncontrolling interests

     32      30      —        30      —      —      —     
                                          

Earnings (loss) from continuing operations attributable to Barnes & Noble, Inc.

   $ 36,676      (2,039   (566   85,426      134,911    149,186    145,045   
                                          

Basic earnings per common share(e)

                

Earnings (loss) from continuing operations attributable to Barnes & Noble, Inc.

   $ 0.64      (0.04   (0.01   1.50      2.07    2.24    2.11   

Earnings (loss) from discontinued operations attributable to Barnes & Noble, Inc.

     —        (0.01   (0.03   (0.17   0.01    0.02    0.02   
                                          

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 0.64      (0.05   (0.04   1.33      2.08    2.26    2.14   
                                          

Diluted earnings per common share(e)

                

Earnings (loss) from continuing operations attributable to Barnes & Noble, Inc.

   $ 0.63      (0.04   (0.01   1.46      1.99    2.14    2.00   

Earnings (loss) from discontinued operations attributable to Barnes & Noble, Inc.

     —        (0.01   (0.03   (0.17   0.01    0.02    0.02   
                                          

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 0.63      (0.05   (0.04   1.29      2.00    2.16    2.02   
                                          

Dividends paid per share

   $ 1.00      0.25      0.15      0.90      0.60    0.60    0.30   
                                          

Weighted average common shares outstanding

                

Basic

     55,344      54,759      57,614      55,207      63,662    65,212    67,560   

Diluted

     56,153      54,759      57,614      56,529      66,221    68,388    71,336   

 

F-2


Fiscal Year

(In thousands of dollars, except per share data)

   Fiscal 2010     13  Weeks
ended
May 2,
2009
    13  Weeks
ended
May 3,
2008
    Fiscal 2008     Fiscal 2007     Fiscal 2006     Fiscal 2005  

OTHER OPERATING DATA:

              

Number of stores

              

Barnes & Noble stores

     720      726      717      726      713      695      681   

Barnes & Noble College

     637      —        —        —        —        —        —     

B. Dalton stores

     —        51      83      52      85      98      118   
                                            

Total

     1,357      777      800      778      798      793      799   
                                            

Comparable sales increase (decrease)

              

Barnes & Noble stores(f)

     (4.8 )%    (5.7 )%    (1.5 )%    (5.4 )%    1.8   (0.3 )%    2.9

Barnes & Noble.com(g)

     24.0   (7.2 )%    7.2   (1.3 )%    13.4   (1.1 )%    5.0

Barnes & Noble College stores(h)

     (0.3 )%    —        —        —        —        —        —     

Capital expenditures(i)

     127,779      22,822      38,278      192,153      193,958      176,040      182,698   

BALANCE SHEET DATA:

              

Total assets

   $ 3,705,686      2,664,279      2,779,006      2,877,864      3,141,247      3,084,456      3,024,674   

Long-term debt

   $ 260,400      —        86,700      —        —        —        —     

Long-term subordinated note(j)

   $ 150,000      —        —        —        —        —        —     

 

(a) Includes primarily third-party sales of Sterling Publishing Co., Inc., a wholly-owned subsidiary of the Company, and B. Dalton store sales.

 

(b) Amounts for fiscal 2010, the transition period, the 13 weeks ended May 3, 2008, fiscal 2008, 2007, 2006 and 2005 are net of interest income of $452, $211, $1,369, $1,518, $9,169, $5,292 and $6,615, respectively.

 

(c) Represents the results of Calendar Club for all periods presented.

 

(d) Noncontrolling interest represents the 50% outside interest in Begin Smart LLC.

 

(e) On February 1, 2009, the Company adopted ASC 260-10-45, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, whereby the Company’s unvested restricted shares and shares issuable under the Company’s deferred compensation plan are considered participating securities. The Company has retroactively applied the provisions of ASC 260-10-45 to the financial information included for the 13 weeks ended May 3, 2008 and fiscal years 2008, 2007, 2006 and 2005.

 

(f) Comparable store sales increase (decrease) is calculated on a 52-week basis (with the exception of those presented for the 13 weeks ended May 2, 2009 and May 3, 2008), and includes sales from stores that have been open for at least 15 months and does not include closed or relocated stores.

 

(g) Comparable online sales increase (decrease) have been adjusted from prior year results to conform with the fiscal 2010 presentation.

 

(h) Comparable store sales increase (decrease) is calculated since Acquisition and includes sales from stores that have been open for at least 15 months and does not include closed or relocated stores.

 

F-3


(i) Excludes Calendar Club capital expenditures of $308, $1,988, $2,551, $3,333, and $4,469, for the 13 weeks ended May 3, 2008, fiscal 2008, 2007, 2006, and 2005, respectively.

 

(j) See Note 4 to the Notes to Consolidated Financial Statements.

 

F-4


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On September 29, 2009, the Board of Directors of Barnes & Noble, Inc. (Barnes & Noble or the Company) authorized a change in the Company’s fiscal year end from the Saturday closest to the last day of January to the Saturday closest to the last day of April. The change in fiscal year, which became effective on September 30, 2009 upon the closing of the acquisition of Barnes & Noble College Booksellers, Inc. (B&N College) by Barnes & Noble (the Acquisition), gives the Company and B&N College the same fiscal year. The change was intended to better align the Company’s fiscal year with the business cycles of both Barnes & Noble and B&N College. Accordingly, the Company’s fiscal 2010 year began on May 3, 2009 following a 13 week transition period ended May 2, 2009. As used in this section, “fiscal 2010” represents the 52 weeks ended May 1, 2010, “transition period” represents the 13 weeks ended May 2, 2009, “fiscal 2008” represents the 52 weeks ended January 31, 2009, and “fiscal 2007” represents the 52 weeks ended February 2, 2008.

General

Barnes & Noble, the nation’s largest bookseller1, is a leading content, commerce and technology company that provides customers easy and convenient access to books, magazines, newspapers and other content across its multi-channel distribution platform. As of May 1, 2010, the Company operated 1,357 bookstores in 50 states, including 637 bookstores on college campuses, and one of the Web’s largest eCommerce sites, which includes the development of digital content products and software. Given the dynamic nature of the book industry, the challenges faced by traditional booksellers, and the robust innovation pipeline fueling new opportunities in hardware, software and content creation and delivery, Barnes & Noble is utilizing the strength of its retail footprint to bolster its leadership and fuel sales growth across multiple channels.

Of the 1,357 bookstores, 720 operate primarily under the Barnes & Noble Booksellers trade name (eight of which were opened during fiscal 2010). B&N College, a wholly-owned subsidiary of Barnes & Noble, operates 637 college bookstores serving nearly four million students and faculty members at colleges and universities across the United States. barnesandnoble.com llc (Barnes & Noble.com) encompasses one of the Web’s largest eCommerce sites, Barnes & Noble eBookstore, Barnes & Noble eReader software, and the Company’s devices and other hardware support. Through Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), the Company is a leading general trade book publisher. The Company employed approximately 40,000 full- and part-time employees as of May 1, 2010.

The Company’s principal business is the sale of trade books (generally hardcover and paperback consumer titles, mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, eReaders and related accessories, bargain books, magazines, gifts, café products and services, music and movies direct to customers through its bookstores or on Barnes & Noble.com. Bestsellers (the “top ten” highest selling hardcover fiction and hardcover non-fiction) typically represent between 3% and 5% of Barnes & Noble store sales.

As a result of the Acquisition of B&N College, the Company sells textbooks and course-related materials, emblematic apparel and gifts, trade books, school and dorm supplies, and convenience and café items on college and university campuses. B&N College’s sales account for approximately 14% of the Company’s fiscal 2010 sales. B&N College sales are from the September 30, 2009 Acquisition date. On a full year basis the Company expects B&N College to represent approximately 25% of total Company sales. During fiscal 2010, B&N College operated approximately 16% of the bookstores on college and university campuses throughout the nation.

 

 

1

Based upon sales reported in trade publications and public filings.

 

F-5


Segments

The Company performed an evaluation on the effect of the Acquisition on the identification of operating segments, considering the way the business is managed (focusing on the financial information distributed) and the manner in which the chief operating decision maker interacts with other members of management. As a result of this assessment, the Company has determined that it has two operating segments: B&N Retail and B&N College. B&N Retail refers to Barnes & Noble excluding B&N College. The Company will continue to evaluate the effect of its recent change in management structure, as disclosed in the Company’s Current Report on Form 8-K filed with the United States Securities and Exchange Commission (SEC) on March 18, 2010, on the identification of operating segments and reporting units in future filings.

B&N Retail

To address dynamic changes in the book selling industry, Barnes & Noble is repositioning its business from a store-based model to a multi-channel model centered in internet and digital commerce.

In July 2009, Barnes & Noble launched one of the world’s largest eBookstores and digital newsstand, which allows customers to purchase over one million eBooks, newspapers and magazines. Barnes & Noble’s eBookstore is available on a wide range of digital platforms, including NOOK™, iPad™, iPhone®, iPod touch® and select BlackBerry® and Motorola™ smartphones, as well as most laptops or full-sized desktop computers. Barnes & Noble has implemented innovative features on its digital platform to ensure that customers have a seamless experience across their devices.

In October 2009, Barnes & Noble launched NOOK™, the Company’s proprietary eReader, which is sold at Barnes & Noble retail stores, Barnes & Noble.com, Best Buy and BestBuy.com.

Barnes & Noble is currently the only enterprise to offer readers the option of store visits, eCommerce, and digital delivery of books to Barnes & Noble-branded devices or other devices of their choosing.

Barnes & Noble’s digital strategy is to:

 

   

use its infrastructure to deliver digital content to customers wirelessly and online;

 

   

utilize the strong Barnes & Noble brand and retail footprint to attract customers to its multi-channel platform;

 

   

develop innovative technology; and

 

   

expand its distribution channels through strategic partnerships with world-class hardware and software companies.

Barnes & Noble’s typical retail store offers a comprehensive title base, eReaders and staff who can assist customers with digital content, a café, a children’s section, a music/DVD department, a newsstand and a calendar of ongoing events, including author appearances and children’s activities, which make each Barnes & Noble store an active part of its community. The Company’s leading “community store” concept complements its eCommerce platform, Barnes & Noble.com, which offers direct home delivery of millions of books, music CDs, DVDs/BluRay discs and other related items, which include complementary categories such as toys, games, electronics and gift items.

 

F-6


Barnes & Noble stores range in size from 3,000 to 60,000 square feet depending upon market size, with an overall average store size of 26,000 square feet. In fiscal 2010, the Company reduced the Barnes & Noble store base by 0.1 million square feet, bringing the total square footage to 18.7 million square feet, a 1.5% decrease from fiscal 2008. Each store features an authoritative selection of books, ranging from 20,000 to 200,000 unique titles. The comprehensive title selection is diverse and tailored to each store location to reflect local interests. In addition, Barnes & Noble emphasizes books published by small and independent publishers and university presses. Bestsellers (the “top ten” highest selling hardcover fiction and hardcover non-fiction titles) typically represent between 3% and 5% of Barnes & Noble sales. Complementing this extensive in-store selection, all Barnes & Noble stores provide customers with on-site access to the millions of books available to online shoppers while offering an option to have the book sent to the store or shipped directly to the customer through Barnes & Noble.com’s delivery system. All Barnes & Noble stores are equipped with the Company’s proprietary BookMaster in-store operating system, which enhances the Company’s merchandise-replenishment system, resulting in high in-stock positions and productivity at the store level through efficiencies in receiving, cashiering and returns processing. The Company is in the process of integrating the BookMaster system used in each store with Barnes & Noble.com so that its customers share the same experience across both channels.

The Company has a multi-channel marketing strategy that deploys various merchandising programs and promotional activities to drive traffic to both its stores and website. At the center of this program is Barnes & Noble.com, which receives over 450 million visits annually, ranking it among the top 15 multi-channel retailer websites in terms of traffic, as measured by Comscore Media Metrix. Barnes & Noble.com leverages the power of the Barnes & Noble brand to offer online customers a premier destination for books, eBooks, magazines, toys & games, music, DVD and BluRay, video games, and related products and services. In fiscal 2010, Barnes & Noble.com also became a leader in eBooks, offering over one million titles in its eBooks store and launching the award winning NOOK™, the world’s most advanced eBook reader, that features groundbreaking lending technology, a color touchscreen and lets readers download books in seconds.

As a result of this reach, the Company believes that the website provides significant advertising power which would be valued in the tens of millions of dollars if such advertising were placed with third-party websites with comparable reach. In this way, Barnes & Noble.com serves as both the Company’s direct-to-home delivery service and as an important broadcast channel and advertising medium for the Barnes & Noble brand. For example, the online store locator at Barnes & Noble.com receives millions of customer visits each year providing store hours, directions, information about author events and other in-store activities. Similarly, in Barnes & Noble stores, NOOK™ customers can access free Wi-Fi connectivity; enjoy the “Read In Store” feature to browse many complete eBooks for free, and the “More In Store” program, which offers free, exclusive content and special promotions.

The Company’s multi-channel marketing strategy enables it to have consistent cross-channel promotions which are primarily communicated via email. In addition, Barnes & Noble.com is an important component in the Barnes & Noble Member Program.

 

F-7


Fictionwise

On March 4, 2009, the Company acquired Fictionwise, Inc. (Fictionwise), a leader in the eBook marketplace. The acquisition provided a core component to the Company’s overall digital strategy, enabling the launch of one of the world’s largest eBookstores on July 20, 2009. The eBookstore on Barnes & Noble.com enables customers to buy eBooks and read them on a wide range of platforms, including NOOK™, the Company’s eBook reader, iPhone® and iPod touch®, BlackBerry® and Motorola™ smartphones, as well as most laptops or full-sized desktop computers.

Tikatok

On September 24, 2009, the Company acquired the assets of Tikatok Inc. (Tikatok). Tikatok is an online platform where parents and their children and others can write, illustrate, and publish stories into hardcover and paperback books. On its website, Tikatok makes available, among other things, its patent-pending StorySparks™ system, which helps to walk children through the process of creating and writing stories and expands the Company’s reach to additional parents, educators and librarians.

Sterling Publishing

The Company’s subsidiary Sterling Publishing is a leading publisher of non-fiction trade titles. Founded in 1949, Sterling publishes a wide range of non-fiction and illustrated books and kits across a variety of imprints, in categories such as health & wellness, music & popular culture, food & wine, crafts & photography, puzzles & games and history & current affairs, as well as a large and growing presence in children’s books. In addition, there are over 500 titles in the Barnes & Noble Classics and its Library of Essential Reading series. Sterling also recently introduced ecosystem—a comprehensive assortment of hard- and flexi-cover notebooks, journals and planners. Ecosystem products are 100% made in the USA from 100% recycled paper.

Sterling’s mission is to publish high-quality books that educate, entertain, and enrich the lives of its readers, who deserve the best quality, content and design. Among its best-selling titles are Paul McKenna’s I Can Make You Thin, Kevin Zraly’s Windows on the World Complete Wine Course, Peter Yarrow & Lenny Lipton’s Puff, the Magic Dragon, Terry Walters’s Clean Food, and Cosmopolitan Magazine’s The Cosmo Kama Sutra.

B&N College

On September 30, 2009, the Company acquired B&N College, one of the largest contract operators of bookstores on college and university campuses across the United States. In addition to the bookstores, B&N College operates a corporate website, www.bncollege.com. As of May 1, 2010, College operated 637 stores nationwide serving nearly four million students and faculty members. The company’s customer base, which is mainly comprised of students and faculty, can purchase various items from their campus stores, including textbooks and course-related materials, emblematic apparel and gifts, trade books, eReaders, school and dorm supplies, and convenience and café items. B&N College sells new and used textbooks in campus bookstores and online. In fiscal 2011, B&N College will offer a textbook rental option to its customers, as well as electronic textbooks and other course materials through a proprietary digital platform. B&N College offers its customers a full suite of textbook options: new, used, digital and rental.

 

F-8


B&N College operates 616 traditional college bookstores and 21 academic superstores, which are generally larger in size, offer cafés and provide a sense of community that engages the surrounding campus and local communities in college activities and culture. The traditional bookstores range in size from 500 to 48,000 square feet. The academic superstores range in size from 11,000 to 75,000 square feet.

B&N College generally operates its stores pursuant to multi-year management service agreements under which a school designates B&N College to operate the official school bookstore on campus and B&N College provides the school with regular payments that typically represent a percentage of store sales with a minimum fixed guarantee.

B&N College’s business strategy is to maintain long-term relationships with colleges and universities by providing high-quality service to college administrators, faculty and students.

The Company believes that the key elements that will determine the success of the B&N College stores are:

 

   

Conversion of more institutionally run college bookstores to contract-managed stores;

 

   

Opening College Superstores in select markets; and

 

   

Optimizing comparable store sales through:

 

   

Growth in enrollments;

 

   

Expanding local and internet marketing;

 

   

Increasing web sales of textbooks and other collegiate merchandise; and

 

   

New merchandising initiatives to roll out additional products and services to B&N College’s locations.

 

F-9


Results of Operations

 

           13 Weeks Ended        

Fiscal Year

   Fiscal 2010     May 2, 2009     May 3, 2008     Fiscal 2008     Fiscal 2007  

Sales (in thousands)

   $ 5,810,564      1,105,152      1,155,882      5,121,804      5,286,674   

Earnings (Loss) From Continuing Operations Attributable to Barnes & Noble, Inc. (in thousands)

   $ 36,676      (2,039   (566   85,426      134,911   

Diluted Earnings (Loss) Per Common Share From Continuing Operations

   $ 0.63      (0.04   (0.01   1.46      1.99   

Comparable Sales Increase (Decrease)

          

Barnes & Noble stores(a)

     (4.8 )%    (5.7 )%    (1.5 )%    (5.4 )%    1.8

Barnes & Noble.com(b)

     24.0   (7.2 )%    7.2   (1.3 )%    13.4

Barnes & Noble College stores(c)

     (0.3 )%    —        —        —        —     

Stores Opened

          

Barnes & Noble stores

     8      6      11      35      31   

Barnes & Noble College(d)

     11      —        —        —        —     

B. Dalton stores

     —        —        —        —        —     
                                

Total

     19      6      11      35      31   
                                

Stores Closed

          

Barnes & Noble stores

     18      6      7      22      13   

Barnes & Noble College(d)

     6      —        —        —        —     

B. Dalton stores

     47      1      2      33      13   
                                

Total

     71      7      9      55      26   
                                

Number of Stores Open at Year End

          

Barnes & Noble stores(e)

     720      726      717      726      713   

Barnes & Noble College

     637      —        —        —        —     

B. Dalton stores

     —        51      83      52      85   
                                

Total

     1,357      777      800      778      798   
                                

Square Feet of Selling Space at Year End (in millions)

          

Barnes & Noble stores(e)

     18.7      18.8      18.3      18.7      18.2   

B. Dalton stores

     —        0.2      0.3      0.2      0.3   
                                

Total

     18.7      18.9      18.6      18.9      18.5   
                                

 

(a) Comparable store sales increase (decrease) is calculated on a 52-week basis (with the exception of those presented for the 13 weeks ended May 2, 2009 and May 3, 2008), and includes sales of stores that have been open at least 15 months and does not include closed or relocated stores.

 

(b) Comparable online sales increase (decrease) is calculated by adjusting the prior year results to conform with the fiscal 2010 presentation.

 

(c) Comparable store sales increase (decrease) is calculated since Acquisition and includes sales from stores that have been open for at least 15 months and does not include closed or relocated stores.

 

(d) Represents the number of B&N College stores opened and closed since the Acquisition date.

 

(e) Includes the four B. Dalton stores converted to B&N Bookseller stores at February 1, 2010.

 

F-10


The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company:

 

          13 Weeks Ended        

Fiscal Year

  Fiscal 2010     May 2, 2009     May 3, 2008     Fiscal 2008     Fiscal 2007  

Sales

  100.0   100.0   100.0   100.0   100.0

Cost of sales and occupancy

  71.1      70.0      69.9      69.1      69.6   
                             

Gross margin

  28.9      30.0      30.1      30.9      30.4   

Selling and administrative expenses

  24.0      25.9      26.3      24.4      23.2   

Depreciation and amortization

  3.6      4.2      3.6      3.4      3.2   

Pre-opening expenses

  0.1      0.2      0.4      0.2      0.2   
                             

Operating margin (loss)

  1.3      (0.3   (0.2   2.8      3.8   

Interest income, net and amortization of deferred financing fees

  0.5      —        0.1      —        0.1   
                             

Earnings (loss) from continuing operations before taxes

  0.8      (0.3   (0.1   2.8      4.0   

Income taxes

  0.1      (0.1   —        1.1      1.4   
                             

Earnings (loss) from continuing operations (net of income tax)

  0.6   (0.2 )%    —     1.7   2.6

Business Overview

Over the past two years, the Company’s financial performance has been adversely impacted by a number of factors, including the economic downturn, increased competition and the expanding digital market.

The Company’s core business is the operation of Barnes & Noble retail stores, from which it derives the majority of its sales and net income. Comparable store sales have declined in recent years due to lower consumer traffic as a result of the factors noted above. Even as the economy improves, the Company expects these trends to continue as consumer spending patterns shift toward internet retailers and digital content. The Company faces increasing competition from the expanding market for electronic books, or “eBooks”, eBook readers and digital distribution of content.

Despite these challenges, the Company believes it has attractive opportunities for future development.

The Company plans to leverage its unique assets, iconic brands and reach to become a leader in the distribution of digital content, as well as increase the online distribution of physical books. In 2009, the Company entered the eBook market with its acquisition of Fictionwise, a leader in the eBook marketplace, and the popularity of its eBook site continues to grow. In addition, the Company launched the NOOK™ eReader, which has become its single best-selling product.

As digital and electronic sales become a larger part of its business, the Company believes its footprint of more than 1,300 stores will continue to be a major competitive asset. The Company plans to integrate its traditional retail, trade book and college bookstores businesses with its electronic and internet offerings, using retail stores in attractive geographic markets to promote and sell digital devices and content. Customers can see, feel and experiment with the NOOK™ in the Company’s stores.

 

F-11


Although the stores will be just a part of the offering, they will remain a key driver of sales and cash flow as the Company expands its multi-channel relationships with its customers. The Company does not expect to open retail stores in new geographic markets or expand the total number of retail stores in the near future.

Although the Company believes cash on hand, cash flows from operating activities, funds available from its senior credit facility and short term vendor financing provide the Company with adequate liquidity and capital resources for seasonal working capital requirements, the Company may raise additional capital to support the growth of online and digital businesses.

52 Weeks Ended May 1, 2010 Compared with 52 Weeks Ended January 31, 2009

Sales

The following table summarizes the Company’s sales for the 52 weeks ended May 1, 2010 and January 31, 2009:

 

     52 weeks ended  

Dollars in thousands

   May 1,
2010
   % Total     January 31,
2009
   % Total  

B&N Retail Segment

          

B&N Stores

   $ 4,320,303    74.4   $ 4,525,020    88.3

B&N.com

     572,763    9.9     466,082    9.1

Other

     81,040    1.4     130,702    2.6
                          

B&N Retail Segment Total

   $ 4,974,106    85.6   $ 5,121,804    100.0
                          

B&N College Segment

     836,458    14.4     —      0.0
                          

Total Sales

   $ 5,810,564    100.0   $ 5,121,804    100.0
                          

The Company’s sales increased $688.8 million, or 13.4%, during fiscal 2010 to $5.81 billion from $5.12 billion during fiscal 2008. This increase was primarily attributable to the following:

 

   

Barnes & Noble store sales for fiscal 2010 decreased $204.7 million, or 4.5%, to $4.32 billion from $4.53 billion during fiscal 2008, and accounted for 74.4% of total Company sales. The 4.5% decrease in Barnes & Noble store sales was primarily attributable to a 4.8% decrease in comparable store sales, calculated on a 52-week basis comparing fiscal 2010 to the 52 weeks ended May 2, 2009, which decreased sales by $199.3 million, and by closed stores that decreased sales by $89.9 million, offset by new Barnes & Noble stores that contributed to an increase in sales of $113.4 million. The 4.8% decrease in comparable store sales was primarily due to the 5.7% decline in store traffic in fiscal 2010 compared to the 52 weeks ended May 2, 2009, which contributed to lower transaction volumes, as well as decreases in comparable music and audio department sales caused by industry trends toward electronic downloads, offset by sales of NOOK™ at Barnes & Noble stores.

 

   

Barnes & Noble.com sales increased $106.7 million, or 22.9%, to $572.8 million during fiscal 2010 from $466.1 million during the fiscal 2008. This increase to sales was primarily due to the launch of NOOK™ and other digital product sales, as well as the promotional launch of “everyday low pricing” (EDLP), which also led to increased traffic to the website.

 

F-12


   

B&N College contributed $836.5 million in sales since the Acquisition on September 30, 2009. Comparable sales for B&N College decreased 0.3% during this time and were primarily attributable to modest declines in textbook and trade book sales affected by general economic conditions, the decrease in educational funding for colleges and universities and increased competition.

 

   

Other includes B. Dalton sales. As of January 31, 2010, all but four B. Dalton stores were closed. The Company has converted the four remaining B. Dalton stores to B&N Bookseller stores.

In fiscal 2010, the Company opened eight Barnes & Noble stores and closed 18, bringing its total number of Barnes & Noble stores to 720 with 18.7 million square feet. Since the date of Acquisition, the Company added 11 B&N College stores and closed six, ending the period with 637 B&N College stores. As of May 1, 2010, the Company operated 1,357 stores in the fifty states and the District of Columbia.

Cost of Sales and Occupancy

 

     52 weeks ended  

Dollars in thousands

   May 1,
2010
   % Sales     January 31,
2009
   % Sales  

B&N Retail Segment

   $ 3,474,525    69.9   $ 3,540,596    69.1

B&N College Segment

     659,294    78.8     —      0.0
                          

Total Cost of Sales and Occupancy

   $ 4,133,819    71.1   $ 3,540,596    69.1
                          

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation and other operating expenses), rental expense, and common area maintenance, partially offset by landlord tenant allowances amortized over the life of the lease.

Cost of sales and occupancy increased $593.2 million, or 16.8%, to $4.13 billion in fiscal 2010 from $3.54 billion in fiscal 2008. Cost of sales and occupancy increased as a percentage of sales to 71.1% in fiscal 2010 from 69.1% during fiscal 2008. B&N Retail Segment cost of sales and occupancy increased as a percentage of sales to 69.9% from 69.1% during the 52 weeks ended May 1, 2010 and January 31, 2009, respectively. This increase was primarily attributable to higher online sales due to the promotional launch of EDLP, NOOK™ and eBook sales, offset by reductions in returns to suppliers due to tighter inventory purchasing controls and reductions in the Company’s distribution center average cost per unit processed, as well as lower freight costs in general.

Selling and Administrative Expenses

 

     52 weeks ended  

Dollars in thousands

   May 1,
2010
   % Sales     January 31,
2009
   % Sales  

B&N Retail Segment

   $ 1,240,039    24.9   $ 1,251,524    24.4

B&N College Segment

     152,168    18.2     —      0.0
                          

Total Selling and Administrative Expenses

   $ 1,392,207    24.0   $ 1,251,524    24.4
                          

 

F-13


Selling and administrative expenses increased $140.7 million, or 11.2%, to $1.39 billion in fiscal 2010 from $1.25 billion in fiscal 2008. Selling and administrative expenses decreased as a percentage of sales to 24.0% in fiscal 2010 from 24.4% during fiscal 2008. B&N Retail Segment selling and administrative expenses increased as a percentage of sales to 24.9% during the 52 weeks ended May 1, 2010 from 24.4% during the 52 weeks ended January 31, 2009. This increase was primarily due to $10.4 million of Acquisition-related costs, increased resources into the Company’s digital strategies and the deleveraging of fixed expenses with the negative comparable store sales, offset by a $6.7 million benefit related to an insurance settlement.

Depreciation and Amortization

 

     52 weeks ended  

Dollars in thousands

   May 1,
2010
   % Sales     January 31,
2009
   % Sales  

B&N Retail Segment

   $ 182,911    3.7   $ 173,557    3.4

B&N College Segment

     24,863    3.0     —      0.0
                          

Total Depreciation and Amortization

   $ 207,774    3.6   $ 173,557    3.4
                          

Depreciation and amortization increased $34.2 million, or 19.7%, to $207.8 million in fiscal 2010, from $173.6 million in fiscal 2008. During the 52 weeks ended May 1, 2010, B&N Retail Segment depreciation and amortization increased $9.4 million, or 5.4%, to $182.9 million from $173.6 million during the 52 weeks ended January 31, 2009. This increase was primarily due to the shift in capital expenditures from new store openings to existing store maintenance and technology investments that have shorter economic lives.

Pre-opening Expenses

 

     52 weeks ended  

Dollars in thousands

   May 1,
2010
   % Sales     January 31,
2009
   % Sales  

B&N Retail Segment

   $ 3,461    0.1   $ 12,796    0.2

B&N College Segment

     57    0.0     —      0.0
                          

Total Pre-opening Expenses

   $ 3,518    0.1   $ 12,796    0.2
                          

Pre-opening expenses decreased $9.3 million, or 72.5%, in fiscal 2010 to $3.5 million from $12.8 million in fiscal 2008. This decrease was primarily the result of the lower volume of Barnes & Noble new store openings.

Operating Profit

 

     52 weeks ended  

Dollars in thousands

   May 1,
2010
   % Sales     January 31,
2009
   % Sales  

B&N Retail Segment

   $ 73,170    1.5   $ 143,331    2.8

B&N College Segment

     76    0.0     —      0.0
                          

Total Operating Profit

   $ 73,246    1.3   $ 143,331    2.8
                          

 

F-14


The Company’s consolidated operating profit decreased $70.1 million, or 48.9%, to $73.2 million in fiscal 2010 from $143.3 million in fiscal 2008. This decrease in operating profit was primarily due to the matters discussed above.

Interest Expense, Net and Amortization of Deferred Financing Fees

 

     52 weeks ended  

Dollars in thousands

   May 1,
2010
   January 31,
2009
   % of Change  

Interest Expense, Net and Amortization of Deferred Financing Fees

   $     28,237    $ 2,344    1,104.7
                    

Net interest expense and amortization of deferred financing fees increased $25.9 million, or 1,104.7%, to $28.2 million in fiscal 2010 from $2.3 million in fiscal 2008. This increase in interest expense was primarily due to the interest expense related to the notes issued in connection with the Acquisition of B&N College.

Income Taxes

 

     52 weeks ended  

Dollars in thousands

   May 1,
2010
   Effective Rate     January 31,
2009
   Effective Rate  

Income Taxes

   $     8,365    18.6   $ 55,591    39.4
                          

Income taxes were $8.4 million in fiscal 2010 compared with $55.6 million in fiscal 2008. The Company’s effective tax rate in fiscal 2010 decreased to 18.6% compared with 39.4% during fiscal 2008. The decrease in the effective tax rate was due primarily to the recognition of previously unrecognized tax benefits for years settled with the applicable tax authorities. This benefit was partially offset by additional accruals for subsequent years’ unrecognized tax benefits.

Loss from Discontinued Operations

On February 25, 2009, the Company sold its interest in Calendar Club to Calendar Club and its chief executive officer for $7.0 million, which was comprised of $1.0 million in cash and $6.0 million in notes. Calendar Club is no longer a subsidiary of the Company and the results of Calendar Club have been classified as discontinued operations in all periods presented. Accordingly, the Company reported a $9.5 million loss from discontinued operations for the 52 weeks ended January 31, 2009.

 

F-15


Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests was $0.03 million during fiscal 2010 and fiscal 2008, and relates to the 50% outside interest in Begin Smart LLC.

Net Earnings Attributable to Barnes & Noble, Inc.

 

     52 weeks ended

Dollars in thousands

   May 1,
2010
   Diluted EPS    January 31,
2009
   Diluted EPS

Net Earnings Attributable to Barnes & Noble, Inc.

   $ 36,676    $ 0.63    $ 75,920    $ 1.29
                           

As a result of the factors discussed above, the Company reported consolidated net earnings of $36.7 million (or $0.63 per diluted share) during fiscal 2010, compared with consolidated net earnings of $75.9 million (or $1.29 per diluted share) during fiscal 2008.

13 Weeks Ended May 2, 2009 Compared with 13 Weeks Ended May 3, 2008

Sales

The following table summarizes the Company’s sales for the 13 weeks ended May 2, 2009 and May 3, 2008:

 

     13 weeks ended  

Dollars in thousands

   May 2,
2009
   % Total     May 3,
2008
   % Total  

B&N Retail Segment

          

B&N Stores

   $ 989,149    89.5   $ 1,024,667    88.6

B&N.com

     93,075    8.4     100,254    8.7

Other

     22,928    2.1     30,961    2.7
                          

Total Sales

   $ 1,105,152    100.0   $ 1,155,882    100.0
                          

During the 13 weeks ended May 2, 2009, the Company’s sales decreased $50.7 million, or 4.4%, to $1.11 billion from $1.16 billion during the 13 weeks ended May 3, 2008. This decrease was primarily attributable to the following:

 

   

Barnes & Noble store sales for the 13 weeks ended May 2, 2009 decreased $35.5 million, or 3.5%, to $989.1 million from $1.02 billion during the 13 weeks ended May 3, 2008, and accounted for 89.5% of total Company sales. The 3.5% decrease in Barnes & Noble store sales was primarily attributable to a 4.9% decrease in transaction volume driven by a decline in traffic stemming from general economic conditions, which resulted in a 5.7% decrease in comparable store sales or $54.6 million, and closed stores that decreased sales by $23.4 million, offset by new Barnes & Noble store sales of $42.2 million. The 5.7% decrease in comparable store sales was also attributable to the decrease in comparable music and audio department sales caused by industry trends toward electronic downloads.

 

   

Barnes & Noble.com sales decreased $7.2 million, or 7.2%, to $93.1 million during the 13 weeks ended May 2, 2009 from $100.3 million during the 13 weeks ended May 3, 2008. This decrease was primarily due to lower conversion ratio, which measures the ratio of online orders to visits. The decrease was also due to lower average online order values.

 

F-16


   

Other includes B. Dalton sales. B. Dalton sales decreased $5.3 million, or 32.7%, to $10.8 million during the 13 weeks ended May 2, 2009 from $16.1 million during the 13 weeks ended May 3, 2008. This decrease was primarily attributable to the closing of 32 B. Dalton stores over the prior 12 months.

During the 13 weeks ended May 2, 2009, the Company opened six Barnes & Noble stores and closed six, bringing its total number of Barnes & Noble stores to 726 with 18.8 million square feet. The Company closed one B. Dalton store, ending the period with 51 B. Dalton stores and 0.2 million square feet. As of May 2, 2009, the Company operated 777 stores in the fifty states and the District of Columbia.

Cost of Sales and Occupancy

 

     13 weeks ended  

Dollars in thousands

   May 2,
2009
   % Sales     May 3,
2008
   % Sales  

Cost of Sales and Occupancy

   $     773,491    70.0   $     807,915    69.9
                          

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation and other operating expenses), rental expense and common area maintenance, partially offset by landlord tenant allowances amortized over the life of the lease.

During the 13 weeks ended May 2, 2009, cost of sales and occupancy decreased $34.4 million, or 4.3%, to $773.5 million from $807.9 million during the 13 weeks ended May 3, 2008. As a percentage of sales, cost of sales and occupancy increased slightly to 70.0% from 69.9% the same period one year ago. This increase was primarily attributable to the deleveraging of fixed occupancy costs on the negative comparable store sales, partially offset by lower distribution expenses as well as merchandising and supply chain initiatives.

Selling and Administrative Expenses

 

     13 weeks ended  

Dollars in thousands

   May 2,
2009
   % Sales     May 3,
2008
   % Sales  

Selling and Administrative Expenses

   $     286,554    25.9   $     303,863    26.3
                          

Selling and administrative expenses decreased $17.3 million, or 5.7%, to $286.6 million during the 13 weeks ended May 2, 2009 from $303.9 million during the 13 weeks ended May 3, 2008. During the 13 weeks ended May 2, 2009, selling and administrative expenses decreased as a percentage of sales to 25.9% from 26.3% during the prior year period. During the 13 weeks ended May 3, 2008, the Company incurred an $8.3 million charge for a settlement with the State of California regarding the collection of sales and use taxes on sales made by Barnes & Noble.com from 1999 to 2005. Excluding this charge, selling and administrative expenses increased as a percentage of sales to 25.9% from 25.6% the same period one year ago. This increase was primarily due to the deleveraging of fixed expenses with the negative comparable store sales, offset in part by planned cost reductions.

 

F-17


Depreciation and Amortization

 

     13 weeks ended  

Dollars in thousands

   May 2,
2009
   % Sales     May 3,
2008
   % Sales  

Depreciation and Amortization

   $  45,879    4.2   $  41,314    3.6
                          

During the 13 weeks ended May 2, 2009, depreciation and amortization increased $4.6 million, or 11.0%, to $45.9 million from $41.3 million during the 13 weeks ended May 3, 2008. This increase was primarily due to depreciation on additional capital expenditures for existing store maintenance, technology investments and new store openings.

Pre-opening Expenses

 

     13 weeks ended  

Dollars in thousands

   May 2,
2009
   % Sales     May 3,
2008
   % Sales  

Pre-opening Expenses

   $  2,472    0.2   $ 4,537    0.4
                          

Pre-opening expenses decreased $2.1 million, or 45.5%, to $2.5 million during the 13 weeks ended May 2, 2009 from $4.5 million for the 13 weeks ended May 3, 2008. This decrease was primarily the result of the timing and volume of new store openings.

Operating Loss

 

     13 weeks ended  

Dollars in thousands

   May 2,
2009
   % Sales     May 3,
2008
   % Sales  

Operating Loss

   $ (3,244)    (0.3 )%    $ (1,747)    (0.2 )% 
                      

The Company’s consolidated operating loss increased $1.5 million, or 85.7%, to $3.2 million during the 13 weeks ended May 2, 2009 from $1.7 million during the 13 weeks ended May 3, 2008. This increase was primarily due to the negative comparable store sales, as well as the matters discussed above.

Interest Income (Expense), Net and Amortization of Deferred Financing Fees

 

     13 weeks ended  

Dollars in thousands

   May 2,
2009
   May 3,
2008
   % of Change  

Interest Income (Expense), Net and Amortization of Deferred Financing Fees

   $ (199)    $ 807    (124.7 )% 
                

 

F-18


Net interest (expense) income and amortization of deferred financing fees decreased $1.0 million, or 124.7%, to ($0.2) million during the 13 weeks ended May 2, 2009 from $0.8 million during the 13 weeks ended May 3, 2008. The decrease in interest income was primarily due to lower investment rates.

Income Taxes

 

     13 weeks ended  

Dollars in thousands

   May 2,
2009
    Effective Rate     May 3,
2008
    Effective Rate  

Income Taxes

   $ (1,374   39.9   $ (374   39.8
                            

Income tax benefit during the 13 weeks ended May 2, 2009 was $1.4 million compared with $0.4 million during the 13 weeks ended May 3, 2008. The Company’s effective tax rate was 39.9% and 39.8% for the 13 weeks ended May 2, 2009 and May 3, 2008, respectively.

Loss from Discontinued Operations

On February 25, 2009, the Company sold its interest in Calendar Club to Calendar Club and its chief executive officer for $7.0 million, which was comprised of $1.0 million in cash and $6.0 million in notes. As a result of this transaction and the operating loss to the date of the sale, the Company incurred a non-cash after-tax charge of approximately $0.7 million during the 13 weeks ended May 2, 2009, compared with $1.7 million during the 13 weeks ended May 3, 2008. Calendar Club is no longer a subsidiary of the Company and the results of Calendar Club have been classified as discontinued operations in all periods presented.

Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests was $0.03 million during the 13 weeks ended May 2, 2009 and relates to the Company’s 50% outside interest in Begin Smart LLC.

Net Loss Attributable to Barnes & Noble, Inc.

 

     13 weeks ended  

Dollars in thousands

   May 2,
2009
    Diluted EPS     May 3,
2008
    Diluted EPS  

Net Loss Attributable to Barnes & Noble, Inc.

   $ (2,693   $ (0.05   $ (2,224   $ (0.04
                                

As a result of the factors discussed above, the Company reported a consolidated net loss of $2.7 million (or $0.05 per diluted share) during the 13 weeks ended May 2, 2009, compared with a consolidated net loss of $2.2 million (or $0.04 per diluted share) during the 13 weeks ended May 3, 2008.

 

F-19


52 Weeks Ended January 31, 2009 Compared with 52 Weeks Ended February 2, 2008

Sales

The following table summarizes the Company’s sales for the 52 weeks ended January 31, 2009 and February 2, 2008:

 

     52 weeks ended  

Dollars in thousands

   January 31,
2009
   % Total     February 2,
2008
   % Total  

B&N Retail Segment

          

B&N Stores

   $ 4,525,020    88.3   $ 4,648,409    87.9

B&N.com

     466,082    9.1     476,870    9.0

Other

     130,702    2.6     161,395    3.1
                          

Total Sales

   $ 5,121,804    100.0   $ 5,286,674    100.0
                          

During fiscal 2008, the Company’s sales decreased $164.9 million, or 3.1%, to $5.12 billion from $5.29 billion during fiscal 2007. This decrease was primarily attributable to the following:

 

   

Barnes & Noble store sales decreased $123.4 million, or 2.7%, during fiscal 2008 to $4.53 billion from $4.65 billion during fiscal 2007 and accounted for 88.3% of total Company sales. The 2.7% decrease in Barnes & Noble store sales was primarily attributable to a 5.2% decrease in transaction volume driven by a decline in traffic stemming from general economic conditions, which contributed to a 5.4% decrease in comparable store sales or $237.7 million, and closed stores that decreased sales by $101.3 million, offset by new Barnes & Noble store sales of $208.5 million. The 5.4% decrease in comparable store sales was also due to a decrease in comparable music and audio department sales caused by industry trends toward electronic downloads.

 

   

Barnes & Noble.com sales decreased $10.8 million, or 2.3%, during fiscal 2008 to $466.1 million from $476.9 million during fiscal 2007. This decrease was primarily attributable to a 1.3% decrease in comparable sales or $6.1 million. The 1.3% decrease in comparable sales was primarily due to a decrease in traffic.

 

   

Other includes B. Dalton sales. B. Dalton sales decreased $17.0 million, or 20.1%, during fiscal 2008 to $67.5 million from $84.5 million during fiscal 2007. This decrease was primarily attributable to the closing of 33 B. Dalton stores during fiscal 2008.

In fiscal 2008, the Company opened 35 Barnes & Noble stores and closed 22, bringing its total number of Barnes & Noble stores to 726 with 18.7 million square feet. The Company closed 33 B. Dalton stores, ending the period with 52 B. Dalton stores and 0.2 million square feet. As of January 31, 2009, the Company operated 778 stores in the fifty states and the District of Columbia.

Cost of Sales and Occupancy

 

     52 weeks ended  

Dollars in thousands

   January 31,
2009
   % Sales     February 2,
2008
   % Sales  

Cost of Sales and Occupancy

   $ 3,540,596    69.1   $ 3,679,845    69.6
                          

The Company’s cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation and other operating expenses), rental expense and common area maintenance, partially offset by landlord tenant allowances amortized over the life of the lease.

 

F-20


Cost of sales and occupancy decreased $139.2 million, or 3.8%, to $3.54 billion in fiscal 2008 from $3.68 billion in fiscal 2007. As a percentage of sales, cost of sales and occupancy decreased to 69.1% in fiscal 2008 from 69.6% in fiscal 2007. This decrease was primarily attributable to reduced promotional markdowns, better product mix and increased volume through the Company’s distribution centers, which more than offset the deleveraging of fixed occupancy costs on the negative comparable store sales.

Selling and Administrative Expenses

 

     52 weeks ended  

Dollars in thousands

   January 31,
2009
   % Sales     February 2,
2008
   % Sales  

Selling and Administrative Expenses

   $  1,251,524    24.4   $ 1,225,791    23.2
                          

Selling and administrative expenses increased $25.7 million, or 2.1%, to $1.25 billion in fiscal 2008 from $1.23 billion in fiscal 2007. As a percentage of sales, selling and administrative expenses increased to 24.4% in fiscal 2008 from 23.2% in fiscal 2007. Included in selling and administrative expenses in fiscal 2008 were an $11.7 million impairment charge for property and equipment, an $8.3 million charge for the settlement with the State of California regarding the collection of sales and use taxes on sales made by Barnes & Noble.com from 1999 to 2005, $4.1 million of severance related to the elimination of certain corporate office expenses and a $3.0 million charge related to a management resignation. Included in selling and administrative expenses in fiscal 2007 were legal costs of $11.1 million, and an impairment charge of $5.9 million, offset by a $6.4 million gain in insurance proceeds from the Hurricane Katrina settlement. Excluding these charges, selling and administrative expenses increased in fiscal 2008 as a percentage of sales to 23.9% from 23.0% in fiscal 2007. This increase was primarily due to the deleveraging of fixed expenses with the negative comparable store sales.

Depreciation and Amortization

 

     52 weeks ended  

Dollars in thousands

   January 31,
2009
   % Sales     February 2,
2008
   % Sales  

Depreciation and Amortization

   $  173,557    3.4   $  168,600    3.2
                          

Depreciation and amortization increased $5.0 million, or 2.9%, to $173.6 million in fiscal 2008 from $168.6 million in fiscal 2007. The increase was primarily due to the depreciation on additional capital expenditures for existing store maintenance, technology investments and new store openings, offset by $2.6 million of accelerated depreciation in fiscal 2007 related to an Internet distribution center closing.

Pre-opening Expenses

 

      52 weeks ended  

Dollars in thousands

   January 31,
2009
   % Sales     February 2,
2008
   % Sales  

Pre-opening Expenses

   $ 12,796    0.2   $ 10,387    0.2
                          

Pre-opening expenses increased $2.4 million, or 23.2%, in fiscal 2008 to $12.8 million from $10.4 million in fiscal 2007. This was primarily the result of the timing of new store openings.

 

F-21


Operating Profit

 

     52 weeks ended  

Dollars in thousands

   January 31,
2009
   % Sales     February 2,
2008
   % Sales  

Operating Profit

   $ 143,331    2.8   $ 202,051    3.8
                          

The Company’s consolidated operating profit decreased $58.7 million, or 29.1%, to $143.3 million in fiscal 2008 from $202.0 million in fiscal 2007. This decrease in operating profit was primarily due to the negative comparable store sales, as well as the matters discussed above.

Interest Income (Expense), Net and Amortization of Deferred Financing Fees

 

     52 weeks ended

Dollars in thousands

   January 31,
2009
    February 2,
2008
   % of Change

Interest Income (Expense), Net and Amortization of Deferred Financing Fees

   $ (2,344   $  7,483    (131.3%)
                   

Net interest income (expense) and amortization of deferred financing fees decreased $9.8 million, or 131.3%, to ($2.3) million in fiscal 2008 from $7.5 million in fiscal 2007. The decrease was primarily due to the utilization of cash to buy back shares under the Company’s repurchase program during the first quarter of fiscal 2008, as well as the decline in operating profit discussed above.

 

F-22


Income Taxes

 

     52 weeks ended

Dollars in thousands

   January 31,
2009
   Effective Rate    February 2,
2008
   Effective Rate

Income Taxes

   $ 55,591    39.4%    $ 74,623    35.6%
                       

Income tax expense during fiscal 2008 was $55.6 million compared with $74.6 million in fiscal 2007. The Company’s effective tax rate was 39.4% and 35.6% during fiscal 2008 and 2007, respectively. The provision for income taxes for fiscal 2007 included a tax benefit of $10.3 million resulting from previously unrecognized tax benefits for which the statute of limitations expired in fiscal 2007.

Earnings (Loss) from Discontinued Operations

On February 25, 2009, the Company sold its interest in Calendar Club to Calendar Club and its chief executive officer for $7.0 million, which was comprised of $1.0 million in cash and $6.0 million in notes. As a result of this transaction and the operating loss to the date of the sale, the Company recorded an after tax charge of $9.7 million related to the write down in fiscal 2008. The results of Calendar Club have been classified as discontinued operations in all periods presented.

Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests was $0.03 million during the 52 weeks ended January 31, 2009 and relates to the 50% outside interest in Begin Smart LLC.

Net Earnings Attributable to Barnes & Noble, Inc.

 

     52 weeks ended

Dollars in thousands

   January 31,
2009
   Diluted EPS    February 2,
2008
   Diluted EPS

Net Earnings Attributable to Barnes & Noble, Inc.

   $  75,920    $ 1.29    $  135,799    $ 2.00
                           

As a result of the factors discussed above, the Company reported consolidated net earnings attributable to Barnes & Noble, Inc. of $75.9 million (or $1.29 per diluted share) during fiscal 2008, compared with consolidated net earnings attributable to Barnes & Noble, Inc. of $135.8 million (or $2.00 per diluted share) during fiscal 2007.

Seasonality

The B&N Retail business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the third fiscal quarter, which includes the holiday selling season. The B&N College business is also seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase textbooks for the upcoming semesters.

 

F-23


Liquidity and Capital Resources

For the B&N Retail business, working capital requirements are generally at their highest in the Company’s fiscal quarter ending on or about January 31 due to the higher payments to vendors for holiday season merchandise purchases. For the B&N College business, working capital requirements are typically highest in the second and third fiscal quarters, when college students generally purchase textbooks for the upcoming semesters and lowest in the first and fourth fiscal quarters. In addition, the Company’s sales and merchandise inventory levels will fluctuate from quarter to quarter as a result of the number and timing of new store openings.

Cash and cash equivalents on hand, cash flows from operating activities, funds available under its credit facility and short-term vendor financing continue to provide the Company with liquidity and capital resources for store expansion, seasonal working capital requirements and capital investments. The Company regularly evaluates its capital structure and conditions in the financing markets to ensure it maintains adequate flexibility to successfully execute its business plan.

Cash Flow

Cash flows provided from operating activities were $125.8 million, ($146.7) million, ($158.8) million, $376.2 million and $429.0 million during fiscal 2010, the transition period, the 13 weeks ended May 3, 2008, fiscal 2008 and 2007, respectively. The decrease in cash flows provided from operating activities in fiscal 2010 and fiscal 2008 were primarily due to lower earnings as a result of negative comparable store sales.

Capital Structure

Strong cash flows from operations and a continued emphasis on working capital management strengthened the Company’s balance sheet in fiscal 2010.

On September 30, 2009, in connection with the closing of the Acquisition described in Note 4 to the Consolidated Financial Statements contained herein, the Company issued the Sellers (i) a senior subordinated note in the principal amount of $100.0 million, payable in full on December 15, 2010, with interest of 8% per annum payable on the unpaid principal amount, and (ii) a junior subordinated note in the principal amount of $150.0 million, payable in full on the fifth anniversary of the closing of the Acquisition, with interest of 10% per annum payable on the unpaid principal amount. On December 22, 2009, the Company consented to the pledge and assignment of the Senior Seller Note by the Sellers as collateral security.

On September 30, 2009, the Company entered into a credit agreement (the Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, under which the lenders committed to provide up to $1.0 billion in commitments under a four-year asset-backed revolving credit facility (the Credit Facility) and which is secured by eligible inventory and accounts receivable and related assets. Borrowings under the Credit Agreement are limited to a specified percentage of eligible inventories and accounts receivable and accrue interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the Credit Agreement). In addition, the Company has the option to request the increase in commitments under the Credit Agreement by up to $300 million subject to certain restrictions.

 

F-24


The Credit Agreement includes a fixed charge coverage ratio requirement which would be triggered if Availability (as defined in the Credit Agreement) were to fall below (a) the greater of (i) 15% of the Loan Cap (as defined in the Credit Agreement) or (ii) $110 million. In addition, the Credit Facility contains covenants that limit, among other things, the Company’s ability to incur indebtedness, create liens, make investments, make restricted payments, merge or acquire assets, and contains default provisions that are typical for this type of financing, among other things.

The Credit Facility replaces the Company’s prior $850 million credit agreement (Prior Credit Facility) which had a maturity date of July 31, 2011, as well as B&N College’s $400 million credit agreement which had a maturity date of November 13, 2011. The remaining unamortized deferred costs of $0.8 million relating to the Company’s Prior Credit Facility was deferred and will be amortized over the four-year term of the Credit Facility.

The Prior Credit Facility had a maturity date of July 31, 2011 and could have been increased to $1.0 billion under certain circumstances at the option of the Company. The Prior Credit Facility had an applicable margin that was applied to loans and standby letters of credit ranging from 0.500% to 1.000% above the stated Eurodollar rate. A fee was paid on commercial letters of credit ranging from 0.2500% to 0.5000%. In addition, a commitment fee ranging from 0.100% to 0.200% was paid on the unused portion of the Prior Credit Facility. In each case, the applicable rate was based on the Company’s consolidated fixed charge coverage ratio. Proceeds from the Prior Credit Facility were used for general corporate purposes, including seasonal working capital needs.

Selected information related to the Company’s Credit Facility and Prior Credit Facility (in thousands):

 

     Fiscal
2010
    13  weeks
ended
May 2,
2009
   13  weeks
ended
May 3,
2008
    Fiscal
2008
    Fiscal
2007
 

Credit facility at period end

   $ 260,400      —      86,700      —        —     

Average balance outstanding during the period

   $ 107,504      —      12,064      63,871      1,392   

Maximum borrowings outstanding during the period

   $ 512,500      —      98,800      199,900      37,600   

Weighted average interest rate during the period (a)

     4.38   —      18.20   6.05   173.16

Interest rate at end of period

     4.13   —      5.00   —        —     

 

(a) The fiscal 2007 interest rate, as well as the interest rate for the 13 weeks ended May 3, 2008, is higher than the fiscal 2008 interest rate due to the lower average borrowings and the fixed nature of the amortization of the deferred financing fees and commitment fees. Excluding the deferred financing fees and the commitment fees in the 13 weeks ended May 3, 2008 and fiscal 2007, the weighted average interest rate was 5.14% and 7.51%, respectively.

Fees expensed with respect to the unused portion of the Credit Facility and Prior Credit Facility were $4.2 million, $0.3 million, $0.3 million, $1.0 million and $1.0 million, during fiscal 2010, the transition period, the 13 weeks ended May 3, 2008, fiscal 2008 and 2007, respectively. The increase in commitment fees in fiscal 2010 was related to the Company’s Credit Agreement entered into on September 30, 2009 in connection with the Acquisition.

The Company has no agreements to maintain compensating balances.

 

F-25


Capital Investment

Capital expenditures for continuing operations were $127.8 million, $22.8 million, $38.3 million, $192.2 million and $194.0 million during fiscal 2010, the transition period, the 13 weeks ended May 3, 2008, fiscal 2008 and 2007, respectively. Capital expenditures planned for fiscal 2011 primarily relate to the maintenance of existing stores and system enhancements for the retail and college stores and the Company’s digital initiatives and website. The capital expenditures are projected to be in the range of $150.0 million to $200.0 million for fiscal 2011, although commitment to many of such expenditures has not yet been made.

Based on planned operating levels and capital expenditures for fiscal 2011, management believes cash and cash equivalents on hand, cash flows generated from operating activities, short-term vendor financing and borrowing capacity under the Credit Facility will be sufficient to meet the Company’s working capital and debt service requirements, and support the development of its short- and long-term strategies for at least the next 12 months. However, the Company may determine to raise additional capital to support the growth of online and digital businesses.

On May 15, 2007, the Company announced that its Board of Directors authorized a stock repurchase program for the purchase of up to $400.0 million of the Company’s common stock. The maximum dollar value of common stock that may yet be purchased under the current program is approximately $2.5 million as of May 1, 2010.

Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. As of May 1, 2010, the Company has repurchased 33,284,610 shares at a cost of approximately $1.1 billion under its stock repurchase programs. The repurchased shares are held in treasury.

 

F-26


Contractual Obligations

The following table sets forth the Company’s contractual obligations as of May 1, 2010 (in millions):

 

Contractual Obligations

   Payments Due by Period
     Total    Less Than
1 Year
   1-3 Years    3-5 Years    More Than
5 Years

Long-term debt

   $ 260.4    $ —      $ —      $ 260.4    $ —  

Capital lease obligations

     6.0      1.7      3.0      1.3      —  

Operating lease obligations (a)

     2,299.4      439.9      711.4      506.8      641.3

Purchase obligations

     38.9      25.4      12.8      0.7      —  

Interest obligations (b)

     105.7      35.5      45.5      24.7      —  

Short-term note payable

     100.0      100.0      —        —        —  

Other long-term liabilities reflected on the Company’s balance sheet under GAAP (c)

     150.0      —        —        150.0      —  
                                  

Total

   $ 2,960.4    $ 602.5    $ 772.7    $ 943.9    $ 641.3
                                  

 

(a) Excludes obligations under store leases for insurance, taxes and other maintenance costs, which obligations totaled approximately 15% of the minimum rent payments under those leases.

 

(b) Represents commitment fees related to the Company’s Credit Facility, as well as interest obligations on the Seller Notes issued in connection with the Acquisition.

 

(c) Excludes $15.3 million of unrecognized tax benefits for which the Company cannot make a reasonably reliable estimate of the amount and period of payment. See Note 13 to the Notes to Consolidated Financial Statements.

See also Note 12 to the Notes to Consolidated Financial Statements for information concerning the Company’s Pension and Postretirement Plans.

Off-Balance Sheet Arrangements

As of May 1, 2010, the Company had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Impact of Inflation

The Company does not believe that inflation has had a material effect on its net sales or results of operations.

 

F-27


Certain Relationships and Related Transactions

See Note 22 to the Notes to Consolidated Financial Statements.

Critical Accounting Policies

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments with respect to certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under both the first-in, first-out (FIFO) basis and the last-in, first-out (LIFO) basis. The Company uses the retail inventory method for 98% of the Company’s merchandise inventories. As of May 1, 2010, May 2, 2009 and January 31, 2009, 87%, 100% and 100%, respectively, of the Company’s inventory on the retail inventory method was valued under the FIFO basis. B&N College’s textbook and trade book inventories are valued using the LIFO method, where the related reserve was not material to the recorded amount of the Company’s inventories or results of operations.

Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate the non-returnable inventory reserve. However, if assumptions based on the Company’s history of liquidating non-returnable inventory are incorrect, it may be exposed to losses or gains that could be material. A 10% change in actual non-returnable inventory would have affected net earnings by approximately $1.7 million in fiscal 2010.

The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate shortage rates. However, if Company’s estimates regarding shortage rates are incorrect, it may be exposed to losses or gains that could be material. A 10% change in actual shortage rates would have affected net earnings by approximately $1.4 million in fiscal 2010.

 

F-28


Stock-Based Compensation

The calculation of stock-based employee compensation expense involves estimates that require management’s judgment. These estimates include the fair value of each of the stock option awards granted, which is estimated on the date of grant using a Black-Scholes option pricing model. There are two significant inputs into the Black-Scholes option pricing model: expected volatility and expected term. The Company estimates expected volatility based on traded option volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period. See Note 3 to the Consolidated Financial Statements for a further discussion on stock-based compensation.

The Company does not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions used to determine stock-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company may be exposed to changes in stock-based compensation expense that could be material. If actual results are not consistent with the assumptions used, the stock-based compensation expense reported in the Company’s financial statements may not be representative of the actual economic cost of the stock-based compensation. A 10% change in the Company’s stock based compensation expense for the year ended May 1, 2010 would not have had a material impact on the Company’s results of operations in fiscal 2010.

Other Long-Lived Assets

The Company’s other long-lived assets include property and equipment and amortizable intangibles. At May 1, 2010, the Company had $812.0 million of property and equipment, net of accumulated depreciation, and $266.1 million of amortizable intangible assets, net of amortization, accounting for approximately 29.1% of the Company’s total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Accounting Standards Codification (ASC) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10). The Company evaluates long-lived assets for impairment at the individual Barnes & Noble store level, except for B&N College long-lived assets, which are evaluated for impairment at the university contract combined store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses included in selling and administrative expenses totaled $12.1 million, $0.02 million, $11.7 million and $5.9 million during fiscal 2010, the transition period, fiscal 2008 and 2007 and are related to individual store locations. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate long-lived asset impairment losses. However, if actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, the Company may be exposed to losses that could be material. A 10% decrease in the Company’s estimated discounted cash flows would not have had a material impact on the Company’s results of operations in fiscal 2010.

 

F-29


Goodwill and Unamortizable Intangible Assets

At May 1, 2010, the Company had $528.5 million of goodwill and $314.9 million of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 22.8% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets, requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company completed its annual goodwill impairment test in November 2009 and determined that no impairment charge was necessary. The Company performs a two-step process for impairment testing of goodwill as required by ASC 350-30. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company has noted no subsequent indicators of impairment. The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets and determined that no impairment was necessary. Changes in market conditions, among other factors, could have a material impact on these estimates. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate goodwill and unamortizable intangible asset impairment losses. However, if actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, the Company may be exposed to losses that could be material. A 10% decrease in the Company’s estimated discounted cash flows would have no impact on the Company’s results of operations.

Gift Cards

The Company sells gift cards which can be used in its stores or on Barnes & Noble.com. The Company does not charge administrative or dormancy fees on gift cards, and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Over time, some portion of the gift cards issued is not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in income on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. If actual redemption patterns vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. Through fiscal 2010, the Company also sold online gift certificates for use solely on Barnes & Noble.com, which were treated the same way as gift cards. The Company recognized gift card breakage of $21.3 million, $5.4 million, $5.2 million, $21.4 million, and $19.7 million during fiscal 2010, the transition period, the 13 weeks ended May 3, 2008, fiscal 2008 and fiscal 2007, respectively. The Company had gift card liabilities of $291 million, $274 million and $321 million, as of May 1, 2010, May 2, 2009 and January 31, 2009, respectively, which amounts are included in accrued liabilities. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to recognize revenue associated with gift cards. However, if estimates regarding the Company’s history of gift card breakage are incorrect, it may be exposed to losses or gains that could be material. A 10% change in the Company’s gift card breakage rate at May 1, 2010 would have affected net earnings by approximately $2.1 million in fiscal 2010.

 

F-30


Income Taxes

Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, tax issues may arise where the ultimate outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various tax authorities. Consequently, changes in the Company’s estimates for contingent tax liabilities may materially impact the Company’s results of operations or financial position. A 1% variance in the Company’s effective tax rate would not have had a material impact to the Company’s results of operations in fiscal 2010.

Recent Accounting Pronouncements

In June 2009, the FASB issued ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162. The ASC identifies itself as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States (GAAP). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC does not change GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as authoritative in their own right. ASUs will only serve to update the ASC, provide background information regarding the guidance, and provide the basis for conclusions on the change(s) in the ASC. Effective September 15, 2009, all public filings of the Company reference the ASC as the sole source of authoritative literature.

In April 2009, the FASB issued ASC 855-10-05, Subsequent Events (ASC 855-10-05), which provides guidance to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. ASC 855-10-05 is effective for interim and annual periods ending after June 15, 2009. The Company adopted ASC 855-10-05 at May 3, 2009 and the adoption had no impact on the Company’s financial position, results of operations and cash flows.

In April 2009, the FASB issued ASC 825-10, Interim Disclosures about Fair Value of Financial Instruments (ASC 825-10). ASC 825-10 amends ASC 825-10, Disclosures About Fair Value of Financial Instruments, and requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. ASC 825-10 also amends ASC 270-10, Interim Financial Reporting, and requires those disclosures in summarized financial information at interim reporting periods. ASC 825-10 is effective for interim reporting periods ending after June 15, 2009. The Company adopted ASC 825-10 at May 3, 2009. The carrying amounts of Cash and Cash Equivalents, Receivables and Accounts Payable approximate fair value due to the short-term maturities of these financial instruments. The Company believes that its Credit Facility (see Note 3) approximates fair value since interest rates are adjusted to reflect current rates. The Company believes that the terms and conditions of the Seller Notes (defined below) are consistent with comparable market debt issues.

 

F-31


In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements—a Consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, Revenue Arrangements with Multiple Deliverables. The revised guidance addresses how to separate deliverables, and how to measure and allocate arrangement consideration. Vendors often provide multiple products or services to customers. Because products and services are often provided at different points in time or over different time periods within the same contractual arrangement, this guidance enables vendors to account for products or services separately rather than as a combined unit.

In October 2009, the FASB issued ASU No. 2009-14, Software (ASC 985) – Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 amends the scope of software revenue guidance in ASC 985-605, Software-Revenue Recognition, affecting vendors that sell or lease tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole. ASU No. 2009-14 does not affect software revenue arrangements that do not include tangible products. They also do not affect software revenue arrangements that include services if the software is essential to the functionality of those services.

ASU 2009-13 and ASU 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these amendments to prior fiscal years is optional. Early adoption of these standards may be elected. The Company has early adopted ASU 2009-13 and ASU 2009-14 at November 1, 2009. See Note 1 for the Company’s revenue recognition policy. Retrospective application does not apply to the Company because the initial sales of products that contain multiple elements were sold in the fiscal quarter of adoption.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and Level 2 fair value measurements and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and Level 3 fair value measurements. ASU 2010-06 also includes conforming amendments to employers’ disclosures about postretirement benefit plan assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The Company adopted ASU 2010-06 at January 31, 2010 and the adoption had no impact on the Company’s financial position, results of operations and cash flows.

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (ASU 2010-09) – Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 amends the April 2009 accounting and disclosure guidance for subsequent events. The updated guidance revised certain terms and definitions of the original guidance and requires the Company to evaluate subsequent events through the date the financial statements are issued, rather than the date the financial statements are available to be issued. This amendment is effective immediately.

 

F-32


Disclosure Regarding Forward-Looking Statements

This report may contain certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act)) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including, among others, the general economic environment and consumer spending patterns, decreased consumer demand for the Company’s products, low growth or declining sales and net income due to various factors, possible disruptions in the Company’s computer systems, telephone systems or supply chain, possible risks associated with data privacy, information security and intellectual property, possible work stoppages or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, higher-than-anticipated store closing or relocation costs, higher interest rates, the performance of the Company’s online, digital and other initiatives, the performance and successful integration of acquired businesses, the success of the Company’s strategic investments, unanticipated increases in merchandise, component or occupancy costs, unanticipated adverse litigation results or effects, the results or effects of any governmental review of the Company’s stock option practices, product and component shortages, and other factors which may be outside of the Company’s control, including those factors discussed in detail in Item 1A, “Risk Factors,” in the Company’s Form 10-K for the fiscal year ended May 1, 2010, and in the Company’s other filings made hereafter from time to time with the SEC. 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 the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company undertakes 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 Annual Report.

 

F-33


CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share data)

   Fiscal 2010     13 Weeks
Ended

May 2, 2009
    Fiscal 2008     Fiscal 2007

Sales

   $ 5,810,564      1,105,152      5,121,804      5,286,674

Cost of sales and occupancy

     4,133,819      773,491      3,540,596      3,679,845
                        

Gross profit

     1,676,745      331,661      1,581,208      1,606,829
                        

Selling and administrative expenses

     1,392,207      286,554      1,251,524      1,225,791

Depreciation and amortization

     207,774      45,879      173,557      168,600

Pre-opening expenses

     3,518      2,472      12,796      10,387
                        

Operating profit (loss)

     73,246      (3,244   143,331      202,051
                        

Interest income (expense), net and amortization of deferred financing fees

     (28,237   (199   (2,344   7,483
                        

Earnings (loss) from continuing operations before taxes

     45,009      (3,443   140,987      209,534

Income taxes

     8,365      (1,374   55,591      74,623
                        

Earnings (loss) from continuing operations (net of income tax)

     36,644      (2,069   85,396      134,911

Earnings (loss) from discontinued operations (net of income tax)

     —        (654   (9,506   888
                        

Net earnings (loss)

     36,644      (2,723   75,890      135,799

Net loss attributable to noncontrolling interests

     32      30      30      —  
                        

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 36,676      (2,693   75,920      135,799
                        

Earnings (loss) attributable to Barnes & Noble, Inc.

        

Earnings (loss) from continuing operations

   $ 36,644      (2,069   85,396      134,911

Less loss attributable to noncontrolling interests

     32      30      30      —  
                        

Net earnings (loss) from continuing operations attributable to Barnes & Noble, Inc.

   $ 36,676      (2,039   85,426      134,911
                        

Basic earnings per common share

        

Earnings (loss) from continuing operations attributable to Barnes & Noble, Inc.

   $ 0.64      (0.04   1.50      2.07

Earnings (loss) from discontinued operations attributable to Barnes & Noble, Inc.

     —        (0.01   (0.17   0.01
                        

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 0.64      (0.05   1.33      2.08
                        

Diluted earnings per common share

        

Earnings (loss) from continuing operations attributable to Barnes & Noble, Inc.

   $ 0.63      (0.04   1.46      1.99

Earnings (loss) from discontinued operations attributable to Barnes & Noble, Inc.

     —        (0.01   (0.17   0.01
                        

Net earnings (loss) attributable to Barnes & Noble, Inc.

   $ 0.63      (0.05   1.29      2.00
                        

Weighted average common shares outstanding

        

Basic

     55,344      54,759      55,207      63,662

Diluted

     56,153      54,759      56,529      66,221

See accompanying notes to consolidated financial statements.

 

F-34


CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share data)

   May 1, 2010     May 2, 2009     January 31, 2009  

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 60,965      86,594      281,608   

Receivables, net

     106,576      70,721      80,998   

Merchandise inventories

     1,370,111      1,233,756      1,203,471   

Prepaid expenses and other current assets

     181,825      121,563      121,102   

Current assets of discontinued operations

     —        —        30,199   
                    

Total current assets

   $ 1,719,477      1,512,634      1,717,378   
                    

Property and equipment:

      

Land and land improvements

     8,618      9,298      9,298   

Buildings and leasehold improvements

     1,212,567      1,102,439      1,096,801   

Fixtures and equipment

     1,594,048      1,331,524      1,385,454   
                    
     2,815,233      2,443,261      2,491,553   

Less accumulated depreciation and amortization

     2,003,199      1,642,517      1,670,839   
                    

Net property and equipment

     812,034      800,744      820,714   
                    

Goodwill

     528,541      254,842      240,008   

Intangible assets, net

     580,962      82,691      83,443   

Other noncurrent assets

     64,672      13,368      8,000   

Noncurrent assets of discontinued operations

     —        —        8,321   
                    

Total assets

   $ 3,705,686      2,664,279      2,877,864   
                    

Liabilities and Shareholders’ Equity

      

Current liabilities:

      

Accounts payable

   $ 868,976      698,315      746,599   

Accrued liabilities

     755,432      587,454      704,343   

Short-term note payable

     100,000      —        —     

Current liabilities of discontinued operations

     —        —        18,807   
                    

Total current liabilities

     1,724,408      1,285,769      1,469,749   
                    

Long-term debt

     260,400      —        —     

Deferred taxes

     311,607      79,369      79,170   

Other long-term liabilities

     505,903      387,318      393,006   

Noncurrent liabilities of discontinued operations

     —        —        12,713   

Shareholders’ equity:

      

Common stock; $.001 par value; 300,000 shares authorized; 88,993, 88,225 and 87,681 shares issued, respectively

     89      88      88   

Additional paid-in capital

     1,286,215      1,274,454      1,262,358   

Accumulated other comprehensive loss

     (13,212   (12,015   (14,503

Retained earnings

     681,082      697,042      721,200   

Treasury stock, at cost, 33,285, 33,148 and 33,066 shares, respectively

     (1,052,356   (1,049,328   (1,047,529
                    

Total Barnes & Noble, Inc. Shareholders’ equity

     901,818      910,241      921,614   
                    

Noncontrolling interest

     1,550      1,582      1,612   
                    

Total shareholders’ equity

     903,368      911,823      923,226   
                    

Commitments and contingencies

     —        —        —     
                    

Total liabilities and shareholders’ equity

   $ 3,705,686      2,664,279      2,877,864   
                    

 

F-35


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In thousands)

        Barnes & Noble, Inc. Shareholders’ Equity        
    Noncontrolling
Interest
    Common
Stock
  Additional
Paid-In
Capital
    Accumlated
Other
Comprehensive
Losses
    Retained
Earnings
    Treasury
Stock at
Cost
    Total  

Balance at February 3, 2007

  $ —        85   1,169,167      (7,086   600,404      (597,705   $ 1,164,865   

Comprehensive earnings

             

Net earnings

    —        —     —        —        135,799      —          —     

Other comprehensive earnings (loss), net of tax (See Note 14):

             

Foreign currency translation

    —        —     —        73      —        —          —     

Minimum pension liability

    —        —     —        (2,510   —        —          —     
                   

Total comprehensive earnings

    —        —     —        —        —        —          133,362   

Exercise of 1,852 common stock options

    —        2   31,216      —        —        —          31,218   

Stock options and restricted stock tax benefits

    —        —     15,792      —        —        —          15,792   

Stock-based compensation expense

    —        —     17,168      —        —        —          17,168   

Cash dividend paid to stockholders

    —        —     —        —        (39,342   —          (39,342

Treasury stock acquired, 6,941 shares

    —        —     —        —        —        (248,343     (248,343
                                           

Balance at February 2, 2008

    —        87   1,233,343      (9,523   696,861      (846,048     1,074,720   

Comprehensive earnings:

             

Net earnings (loss)

    (30   —     —        —        75,920      —          —     

Other comprehensive

earnings (loss), net of tax

(See Note 14):

             

Foreign currency translation

    —        —     —        (3,352   —        —          —     

Minimum pension liability

    —        —     —        (1,628   —        —          —     

Total comprehensive earnings

    —        —     —        —        —        —          70,910   
                   

Exercise of 488 common stock options

    —        1   9,661      —        —        —          9,662   

Stock options and restricted stock tax benefits

    —        —     (1,195   —        —        —          (1,195

Stock-based compensation expense

    —        —     20,549      —        —        —          20,549   

Begin Smart LLC Acquisition (See Note 16)

    1,642      —     —        —        —        —          1,642   

Cash dividend paid to stockholders

    —        —     —        —        (51,581   —          (51,581

Treasury stock acquired, 6,604 shares

    —        —     —        —        —        (201,481     (201,481
                                           

Balance at January 31, 2009

    1,612      88   1,262,358      (14,503   721,200      (1,047,529     923,226   

 

F-36


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In thousands)

         Barnes & Noble, Inc. Shareholders’ Equity        
   Noncontrolling
Interest
    Common
Stock
   Additional
Paid-In
Capital
    Accumlated
Other
Comprehensive
Losses
    Retained
Earnings
    Treasury
Stock  at
Cost
    Total  

Balance at January 31, 2009

     1,612      88    1,262,358      (14,503   721,200      (1,047,529     923,226   

Comprehensive earnings

               

Net loss

     (30   —      —        —        (2,693   —          —     
                     

Total comprehensive loss

     —        —      —        —        —        —          (2,723

Exercise of 280 common stock options

     —        —      5,519      —        —        —          5,519   

Stock options and restricted stock tax benefits

     —        —      (2,090   —        —        —          (2,090

Stock-based compensation expense

     —        —      3,900      —        —        —          3,900   

Sale of Calendar Club (See Note 17)

     —        —      4,767      2,488      (7,255   —          —     

Cash dividend paid to stockholders

     —        —      —        —        (14,210   —          (14,210

Treasury stock acquired, 83 shares

     —        —      —        —        —        (1,799     (1,799
                                             

Balance at May 2, 2009

     1,582      88    1,274,454      (12,015   697,042      (1,049,328     911,823   

Comprehensive earnings:

               

Net earnings (loss)

     (32   —      —        —        36,676      —          —     

Other comprehensive earnings (loss), net of tax (See Note 14)

               

Minimum pension liability

     —        —      —        (1,197   —        —          —     
                     

Total comprehensive earnings

     —        —      —        —        —        —          35,447   

Exercise of 313 common

stock options

     —        1    4,362      —        —        —          4,363   

Stock options and restricted stock tax benefits

     —        —      (3,557   —        —        —          (3,557

Stock-based compensation expense

     —        —      15,723      —        —        —          15,723   

Sale of Calendar Club (See Note 17)

     —        —      (4,767   —        4,767      —          —     

Cash dividend paid to stockholders

     —        —      —        —        (57,403   —          (57,403

Treasury stock acquired, 137 shares

     —        —      —        —        —        (3,028     (3,028
                                             

Balance at May 1, 2010

   $ 1,550      89    1,286,215      (13,212   681,082      (1,052,356   $ 903,368   
                                             

See accompanying notes to consolidated financial statements.

 

F-37


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Fiscal Year

(In thousands)

   Fiscal 2010     13 Weeks
Ended
May 2,
2009
    Fiscal 2008     Fiscal 2007  

Cash flows from operating activities:

        

Net earnings (loss)

   $ 36,644      (2,723   75,890      135,799   

Net earnings (loss) from discontinued operations

     —        (654   (9,506   888   
                          

Net earnings (loss) from continuing operations

     36,644      (2,069   85,396      134,911   

Adjustments to reconcile net earnings (loss) from continuing operations to net cash flows from operating activities:

        

Depreciation and amortization (including amortization of deferred financing fees)

     214,464      46,426      174,104      169,145   

Stock-based compensation expense

     15,723      3,900      20,549      17,168   

Property and equipment impairment charge

     12,102      —        11,715      5,876   

Deferred taxes

     (57,170   1,306      (430   11,593   

Decrease (increase) in other long-term liabilities

     (35,222   (6,441   7,590      (2,858

(Gain) loss on disposal of property and equipment

     2,388      (29   4,625      2,927   

Changes in operating assets and liabilities, net

     (60,703   (189,811   72,700      90,251   
                          

Net cash flows provided by (used in) operating activities

     128,226      (146,718   376,249      429,013   
                          

Cash flows from investing activities:

        

Acquisition of Barnes & Noble College Booksellers, Inc (net of cash acquired)

     (185,928   —        —        —     

Acquisition of Tikatok Inc. (net of cash acquired)

     (2,261   —        —        —     

Acquisition of Fictionwise

     —        (15,729   —        —     

Purchases of property and equipment

     (127,779   (22,822   (192,153   (193,958

Net (increase) decrease in other noncurrent assets

     (3,568   87      (723   (523

Insurance proceeds from property claims

     —        —        —        4,666   

Payments on GameStop note receivable

     —        —        —        12,173   
                          

Net cash flows used in investing activities

     (319,536   (38,464   (192,876   (177,642
                          

Cash flows from financing activities:

        

Net increase in credit facility

     260,400      —        —        —     

Proceeds from exercise of common stock options

     4,363      5,519      9,662      31,218   

Excess (reversal) tax benefit from stock-based compensation

     (1,582   312      869      15,792   

Purchase of treasury stock

     (3,028   (1,799   (201,481   (248,343

Cash dividends paid to shareholders

     (57,403   (14,210   (51,581   (39,342

Financing fees paid related to debt used to acquire Barnes & Noble College Booksellers, Inc.

     (37,069   —        —        —     
                          

Net cash flows provided by (used in) financing activities

     165,681      (10,178   (242,531   (240,675
                          

Cash flows from discontinued operations

        

Operating cash flows

     —        (654   7,242      4,880   

Investing cash flows

     —        1,000      (738   (2,849

Financing cash flows

     —        —        (818   (1,162
                          

Net cash flows from discontinued operations

     —        346      5,686      869   
                          

Net (decrease) increase in cash and cash equivalents

     (25,629   (195,014   (53,472   11,565   

Cash and cash equivalents at beginning of year

     86,594      281,608      335,080      323,515   
                          

Cash and cash equivalents at end of year

   $ 60,965      86,594      281,608      335,080   
                          

Changes in operating assets and liabilities, net:

        

Receivables, net

     119,358      10,150      13,881      3,037   

Merchandise inventories

     228,822      (30,285   154,699      (12,436

Prepaid expenses and other current assets

     (56,675   (462   (1,985   (4,425

Accounts payable and accrued liabilities

     (352,208   (169,214   (93,895   104,075   
                          

Changes in operating assets and liabilities, net

   $ (60,703   (189,811   72,700      90,251   
                          

 

F-38


CONSOLIDATED STATEMENT OF CASH FLOWS

 

Supplemental cash flow information:

           

Cash paid (received) during the period for:

           

Interest paid (received)

   $ 12,305    73    1,812    (8,251

Income taxes (net of refunds)

   $ 31,461    37,735    50,383    60,716   

Supplemental disclosure of subsidiaries acquired:

           

Assets acquired (net of cash acquired)

   $ 1,416,134    18,501    —      —     

Liabilities assumed

     1,227,945    2,772    —      —     
                       

Cash paid

   $ 188,189    15,729    —      —     
                       

Noncash activities:

           

Note receivable on sale of Calendar Club

   $ —      6,000    —      —     

Notes payable on acquisition of Barnes & Noble College Booksellers, Inc

   $ 250,000    —      —      —     

 

F-39


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars, except per share data)

For the 52 weeks ended May 1, 2010 (fiscal 2010), the 13 weeks ended May 2, 2009 (transition period), the 52 weeks ended January 31, 2009 (fiscal 2008) and the 52 weeks ended February 2, 2008 (fiscal 2007).

 

  1. Summary of Significant Accounting Policies

Business

Barnes & Noble, Inc. (Barnes & Noble or the Company), the nation’s largest bookseller2, is a leading content, commerce and technology company that provides customers easy and convenient access to books, magazines, newspapers and other content across its multi-channel distribution platform. As of May 1, 2010, the Company operated 1,357 bookstores in 50 states, including 637 bookstores on college campuses and one of the Web’s largest eCommerce sites, which includes the development of digital content, products and software. Given the dynamic nature of the book industry, the challenges faced by traditional booksellers, and the robust innovation pipeline fueling new opportunities in hardware, software and content creation and delivery, Barnes & Noble is utilizing the strength of its retail footprint to bolster its leadership and fuel sales growth across multiple channels.

Of the 1,357 bookstores, 720 operate primarily under the Barnes & Noble Booksellers trade name (eight of which were opened during the 52 weeks ended May 1, 2010 (fiscal 2010)). Barnes & Noble College Booksellers, LLC (B&N College), a wholly-owned subsidiary of Barnes & Noble, operates 637 college bookstores serving students and faculty members at colleges and universities across the United States. barnesandnoble.com llc (Barnes & Noble.com) encompasses one of the Web’s largest eCommerce sites, Barnes & Noble eBookstore, Barnes & Noble eReader software, and the Company’s devices and other hardware support. Through Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), the Company is a leading general trade book publisher.

The Company’s principal business is the sale of trade books (generally hardcover and paperback consumer titles, excluding educational textbooks and specialized religious titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, eBooks and other digital content, eReaders and related accessories, bargain books, magazines, gifts, café products and services, music and movies direct to customers through its bookstores or on Barnes & Noble.com.

As a result of the acquisition of B&N College (the Acquisition), the Company sells textbooks and course-related materials, emblematic apparel and gifts, trade books, school and dorm supplies, and convenience and café items on college and university campuses. B&N College’s sales account for approximately 14% of the Company’s fiscal 2010 sales. B&N College sales are from the September 30, 2009 Acquisition date. On a full year basis the Company expects B&N College to represent approximately 25% of total Company sales.

 

 

2

Based upon sales reported in trade publications and public filings.

 

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Consolidation

The consolidated financial statements include the accounts of Barnes & Noble, Inc. and its wholly and majority-owned subsidiaries. Investments in affiliates in which ownership interests range from 20% to 50%, are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company consolidates a variable interest entity in which the Company absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership.

The Company performed an evaluation on the effect of the Acquisition on the identification of its operating segments, considering the way the business is managed (focusing on the financial information distributed) and the manner in which its chief operating decision maker interacts with other members of management. As a result of this assessment, the Company has determined that it now has two operating segments: B&N Retail and B&N College. The Company will continue to evaluate the effect of its recent change in management structure on the identification of operating segments and reporting units in future filings.

Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.

Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under both the first-in, first-out (FIFO) basis and the last-in, first-out (LIFO) basis. The Company uses the retail inventory method for 98% of the Company’s merchandise inventories. As of May 1, 2010, May 2, 2009 and January 31, 2009, 87%, 100% and 100%, respectively, of the Company’s inventory on the retail inventory method was valued under the FIFO basis. B&N College’s textbook and trade book inventories are valued using the LIFO method, where the related reserve was not material to the recorded amount of the Company’s inventories or results of operations.

Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory.

The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.

 

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Property and Equipment

Property and equipment are carried at cost, less accumulated depreciation and amortization. For financial reporting purposes, depreciation is computed using the straight-line method over estimated useful lives. For tax purposes, different methods are used. Maintenance and repairs are expensed as incurred, while major maintenance and remodeling costs are capitalized. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases. Capitalized lease acquisition costs are being amortized over the lease terms of the underlying leases. Costs incurred in purchasing management information systems are capitalized and included in property and equipment. These costs are amortized over their estimated useful lives from the date the systems become operational.

Other Long-Lived Assets

The Company’s other long-lived assets include property and equipment and amortizable intangibles. At May 1, 2010, the Company had $812.0 million of property and equipment, net of accumulated depreciation, and $266.1 million of amortizable intangible assets, net of amortization, accounting for approximately 29.1% of the Company’s total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Accounting Standards Codification (ASC) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10). The Company evaluates long-lived assets for impairment at the individual Barnes & Noble store level, except for B&N College long-lived assets, which are evaluated for impairment at the school contract combined store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses included in selling and administrative expenses totaled $12,102, $0, $11,715 and $5,876 during fiscal 2010, the transition period, fiscal 2008 and 2007, respectively, and are related to individual store locations.

Goodwill and Unamortizable Intangible Assets

The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets.

At May 1, 2010, the Company had $528.5 million of goodwill and $314.9 million of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 22.8% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets, requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company completed its annual goodwill impairment test in November 2009 and determined that no impairment charge was necessary. The Company performs a two-step process for impairment testing of goodwill as required by

 

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ASC 350-30. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company has noted no subsequent indicators of impairment. The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. The Company also completed its annual impairment tests for its other unamortizable intangible assets by comparing the estimated fair value to the carrying value of such assets and determined that no impairment was necessary. Changes in market conditions, among other factors, could have a material impact on these estimates.

Deferred Charges

Costs incurred to obtain long-term financing are amortized over the terms of the respective debt agreements using the straight-line method, which approximates the interest method. Unamortized costs included in other noncurrent assets as of May 1, 2010, May 2, 2009 and January 31, 2009 were $32,428, $1,071 and $1,208, respectively. Amortization expense included in interest and amortization of deferred financing fees was $5,925, $137, $547 and $546 during fiscal 2010, the transition period, fiscal 2008 and 2007, respectively. The increase in deferred charges related to long-term financing as well as related amortization expense is a result of the new credit agreement entered into on September 30, 2009 (see Note 3).

Revenue Recognition

Revenue from sales of the Company’s products is recognized at the time of sale, other than those with multiple elements. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience and industry standards. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company’s sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses.

In accordance with ASC 605-25, Revenue Recognition, Multiple Element Arrangements and Accounting Standards Updates (ASU) 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible product’s functionality, undelivered software elements that relate to the tangible product’s essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price.

The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis, as well as AT&T wireless access and wireless connectivity with the purchase of NOOK™ from the Company. Using the relative selling price described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK™ and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS and the AT&T wireless access is deferred and recognized on a straight-line basis over the 2-year estimated life of NOOK™.

 

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The Company records revenue from sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent, on a net basis. All other revenue is recognized on a gross basis.

The Barnes & Noble Member Program entitles Members to receive the following benefits: 40% discount off the current hardcover Barnes & Noble store bestsellers, 20% discount off all adult hardcover books, 10% discount off Barnes & Noble sale price of other eligible items, unlimited free express shipping on orders made on Barnes & Noble.com, as well as periodic special promotions at Barnes & Noble stores and online at Barnes & Noble.com. The annual fee of $25.00 is non-refundable after the first 30 days. Revenue is recognized over the twelve-month period based upon historical spending patterns for Barnes & Noble Members.

Advertising Costs

The costs of advertising are expensed as incurred during the year pursuant to ASC 720-35, Advertising Costs. Advertising costs charged to selling and administrative expenses were $33,304, $5,478, $28,772 and $27,158 during fiscal 2010, the transition period, fiscal 2008 and 2007, respectively.

The Company receives payments and credits from vendors pursuant to co-operative advertising and other programs, including payments for product placement in stores, catalogs and online. In accordance with ASC 605-50-25-10, Customer’s Accounting for Certain Consideration Received from a Vendor, the Company classifies certain co-op advertising received as a reduction in costs of sales and occupancy. The gross advertising expenses noted above were completely offset by allowances received from vendors and the excess allowances received were recorded as a reduction of cost of goods sold or inventory, as appropriate.

Closed Store Expenses

When the Company closes or relocates a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements and, when a store is closed prior to the expiration of the lease, a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $4,503, $3,236, $11,875 and $9,378 during fiscal 2010, the transition period, fiscal 2008 and 2007, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations.

Net Earnings (Loss) Per Common Share

Basic earnings per share represent net earnings (loss) attributable to common shareholders divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of the Company’s outstanding stock options. The Company’s unvested restricted shares and common shares issuable under the Company’s deferred compensation plan are deemed participating securities and are excluded from the dilutive impact of common equivalent shares outstanding under the two-class method since these shares are entitled to participate in dividends declared on common shares. Under the two-class method, earnings (loss) attributable to unvested restricted shares and common shares issuable under the Company’s deferred compensation plan are excluded from net earnings (loss) attributable to common shareholders for purposes of calculating basic and diluted earnings (loss) per common share. See Note 11 for further information regarding the calculation of basic and diluted earnings (loss) per common share.

 

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Income Taxes

The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance, if determined to be necessary.

Stock-Based Compensation

The calculation of stock-based employee compensation expense involves estimates that require management’s judgment. These estimates include the fair value of each of the stock option awards granted, which is estimated on the date of grant using a Black-Scholes option pricing model. There are two significant inputs into the Black-Scholes option pricing model: expected volatility and expected term. The Company estimates expected volatility based on traded option volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period. See Note 7 to the Consolidated Financial Statements for a further discussion on stock-based compensation.

Gift Cards

The Company sells gift cards which can be used in its stores or on Barnes & Noble.com. The Company does not charge administrative or dormancy fees on gift cards, and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Over time, some portion of the gift cards issued is not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in income on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. If actual redemption patterns vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. Through fiscal 2010, the Company also sold online gift certificates for use solely on Barnes & Noble.com, which were treated the same way as gift cards. The Company recognized gift card breakage of $21,328, $5,432, $21,369, and $19,714 during fiscal 2010, the transition period, fiscal 2008 and fiscal 2007, respectively. The Company had gift card liabilities of $290,578, $274,030 and $321,224, as of May 1, 2010, May 2, 2009 and January 31, 2009, respectively, which amounts are included in accrued liabilities.

 

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Reclassifications

Certain prior-period amounts have been reclassified for comparative purposes to conform with the fiscal 2010 presentation.

 

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Reporting Period

On September 30, 2009, the Board of Directors of Barnes & Noble authorized a change in the Company’s fiscal year end from the Saturday closest to the last day of January to the Saturday closest to the last day of April. The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The reporting periods ended May 1, 2010, May 2, 2009, January 31, 2009 and February 2, 2008 contained 52 weeks, 13 weeks, 52 weeks and 52 weeks, respectively.

Recent Accounting Pronouncements

In June 2009, the FASB issued ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162. The ASC identifies itself as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States (GAAP). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC does not change GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as authoritative in their own right. ASUs will only serve to update the ASC, provide background information regarding the guidance, and provide the basis for conclusions on the change(s) in the ASC. Effective September 15, 2009, all public filings of the Company will reference the ASC as the sole source of authoritative literature.

In April 2009, the FASB issued ASC 855-10-05, Subsequent Events (ASC 855-10-05), which provides guidance to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. ASC 855-10-05 is effective for interim and annual periods ending after June 15, 2009. The Company adopted ASC 855-10-05 at May 3, 2009 and the adoption had no impact on the Company’s financial position, results of operations and cash flows.

In April 2009, the FASB issued ASC 825-10, Interim Disclosures about Fair Value of Financial Instruments (ASC 825-10). ASC 825-10 amends ASC 825-10, Disclosures About Fair Value of Financial Instruments, and requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. ASC 825-10 also amends ASC 270-10, Interim Financial Reporting, and requires those disclosures in summarized financial information at interim reporting periods. ASC 825-10 is effective for interim reporting periods ending after June 15, 2009. The Company adopted ASC 825-10 at May 3, 2009.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements—a Consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, Revenue Arrangements with Multiple Deliverables. The revised guidance addresses how to separate deliverables, and how to measure and allocate arrangement consideration. Vendors often provide multiple products or services to customers. Because products and services are often provided at different points in time or over different time periods within the same contractual arrangement, this guidance enables vendors to account for products or services separately rather than as a combined unit.

 

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In October 2009, the FASB issued ASU No. 2009-14, Software (ASC 985) – Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 amends the scope of software revenue guidance in ASC 985-605, Software-Revenue Recognition, affecting vendors that sell or lease tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole. ASU No. 2009-14 does not affect software revenue arrangements that do not include tangible products. They also do not affect software revenue arrangements that include services if the software is essential to the functionality of those services.

ASU 2009-13 and ASU 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these amendments to prior fiscal years is optional. Early adoption of these standards may be elected. The Company has early adopted ASU 2009-13 and ASU 2009-14 at November 1, 2009. See Note 1 for the Company’s revenue recognition policy. Retrospective application does not apply to the Company because the initial sales of products that contain multiple elements were sold in the fiscal quarter of adoption.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and Level 2 fair value measurements and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and Level 3 fair value measurements. ASU 2010-06 also includes conforming amendments to employers’ disclosures about postretirement benefit plan assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The Company adopted ASU 2010-06 at January 31, 2010 and the adoption had no impact on the Company’s financial position, results of operations and cash flows.

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (ASU 2010-09) – Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 amends the April 2009 accounting and disclosure guidance for subsequent events. The updated guidance revised certain terms and definitions of the original guidance and requires the Company to evaluate subsequent events through the date the financial statements are issued, rather than the date the financial statements are available to be issued. This amendment is effective immediately.

 

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  2. Transition Period