Barnes & Noble Education: A Maturing Turnaround Story

Summary:

• BNED shares surged to $13.84 post-DOE regulatory relief but faced volatility due to a $40 million ATM offering, before stabilizing with a strong Fall Quarter preannouncement.
• First Day Complete enrollment grew to 925,000 students, despite significant headwinds, indicating robust demand and the potential for further growth.
• Recent BNED contract awards at Syracuse and North Carolina A&T indicate renewed competitive momentum.
• Despite governance and capital allocation concerns, BNED’s intrinsic value gap should narrow, with a 3-year price target of $68 and a 12-18 month target of $33.

BNED’s Recent Share Price Volatility

Following our July 31st article highlighting the removal of the Department of Education (“DOE”) regulatory overhang on First Day Complete, Barnes & Noble Education (NYSE:BNED) shares experienced significant volatility. The stock initially surged, closing at a high of $13.84 on August 26th, representing 30% appreciation in less than one month. However, this momentum abruptly reversed when BNED filed a $40 million mixed securities shelf on September 4th, followed by a formal agreement with BTIG for an at-the-market (“ATM”) equity offering program. The ATM announcement led to bearish speculation about BNED’s crucial Fall Rush results, causing the stock to pull back to a low of $9.00 on November 4^th (though a discerning eye would have noticed that the prospectus supplement itself contained the datapoint that credit facility borrowings had declined from $222 million on July 31^st to $167 million as of September 20^th, implying a strong quarter).

These concerns were largely dispelled on November 7th, 2024, when BNED preannounced strong results for its FQ2 of Fiscal 2025, which encompassed the pivotal Fall Rush quarter. In its announcement, BNED cited continued growth in First Day revenues and a significant improvement in adjusted EBITDA to the “mid to high $60 million range” from $51 million a year ago, propelling the stock to close at $12.63 on November 8th, representing a 30% one-day surge. Yet, immediately following, BNED pulled back once more to the $10 range as trading volumes remained elevated in the ensuing weeks since the preannouncement, with one likely explanation for the weakness being that BNED is tapping the ATM with BTIG in relatively aggressive fashion (we estimate selling to target ~20 – 25% of ADV with a $10 low):

ATM Size		$40,000,000
Disclosed BTIG adverts		1,200,000.00
Period share sales		5,171,000.00
disclosed % of volume		23%
Period volume weighted average price (VWAP)		$10.65
Amount raised		$12,780,000.00
Amount remaining		$27,220,000.00
Source: Bloomberg Data and Author’s Estimates

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Strategic Initiatives Lead to Continued Financial Improvement

BNED’s improved financial performance can be traced back to its 2022 strategic plan and reorganization, which the Company has summarized as:

1. An increased internal and external focus on the Company’s high growth First Day and First Day Complete courseware initiatives
2. A focus on pruning unprofitable store contracts and better integrating and streamlining its operations
3. Strengthening the balance sheet, which led to the sale of the cash-burning digital student solutions (DSS) segment to Learneo in 2023 (a product line that has since been commoditized by Chat GPT 3.0)
4. Other operational efficiency improvements to improve profitability

These efforts resulted in over $50 million of EBITDA improvement in FY24, with FY25 on track for an additional $30 million of EBITDA improvement based on Fall Rush results.

First Day Complete Grows Despite Strong Headwinds

Despite facing company-specific headwinds due to BNED’s previous financial distress, which may have caused the loss of several large First Day Complete clients including Ivy Tech (~80k students), North Carolina A&T (~14k students), and Wake Tech (~20k students), in addition to the non-conversion of Dallas Colleges (~70k students) to FDC, BNED still managed to grow its FDC Fall calendar 2024 enrollment to 925,000, up from 800,000 in the prior year. Encouragingly, North Carolina A&T has now returned to BNED, citing better alignment with the school’s values in delivering affordable course materials. Syracuse also recently selected BNED to manage its general merchandise and course materials business in a sign of reinvigorated competitive momentum. We expect the tide of competitive losses to end and anticipate that FDC conversions should accelerate from here, particularly since the DOE threat to FDC’s “opt-out” status quo appears increasingly toothless following the backpedaling by the DOE itself in July (discussed in our previous article) and the election of Donald Trump as United States President.

General Merchandise Comparable Store Performance Improves

BNED had a tough FY24 and FQ125 in its merchandise business, but performance there also seems to be improving, as BNED has fully restocked inventory post-refinancing and faces soft FY24 comps that were impacted by stockouts. The Company also continues to build on initiatives to partner with higher value brands like Lululemon, particularly at BNED’s “power conference” clients, and to improve the non-apparel merchandise lineup to be more relevant to today’s students and alumni. Of note, BNED partner and shareholder Lids’ private equity owner Ames Watson recently acquired Champion Sporting Goods, a significant vendor of sports merchandise apparel, which could provide tailwinds to BNED’s merchandise business in the future if Fanatics / Lids provide differentiated access or preferential pricing to BNED through the partnership.

Financial Outlook and Valuation

BNED’s Fall Rush results aligned perfectly with our model, which projects ~$78 million in FY25 EBITDA and over $200 million in FY27 EBITDA. Our updated 3-year price target, based on a 9x EBITDA multiple, is now $68 per share. In the nearer term, applying an 8x EBITDA multiple to our projected FY26 EBITDA of $126 million yields a 12-18 month price target of $33, representing a potential 200% return from today’s $10.94 price. We assume 28.4m shares outstanding and forward net debt outstanding of $77 million and note that this share count could prove too low should BNED fully utilize the ATM with BTIG, which could have the effective of lowering our price target by $1 – $2 / share:

BNED Valuation, $ millions other than ratios and price target
Target EV / EBITDA multiple on FY26	8
FY26e EBITDA	127
Target EV	1013
shares	28.4
net debt average	77
BNED / share	$33
Source: Authors Estimates

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Capital Allocation Questions Persist

Despite the foregoing positives, we believe BNED’s rise has recently been constrained by supply from the ATM offering – whose purpose remains unexplained – and by a general lack of communication with the Street. Of note, BNED did not hold an earnings call for its FQ4 Fiscal 2024 results reported in July or for its FQ1 Fiscal 2025 results reported in September (and in fact reported both quarters with zero advance notice to analysts), and while the Company faces a 10-Q filing deadline for its FQ2 of December 9^th, the Company has not scheduled an earnings call for this quarter either. The higher education sector remains a market in significant flux – particularly for course materials given the potential for artificial intelligence to upend current content production and distribution models – and the Company’s relative silence as to strategy, capital allocation, and other initiatives, could continue to weigh on BNED’s valuation. We note that recently promoted BNED CEO Jonathan Shar has been at the Company since 2018 and was the executive most responsible for spearheading First Day Complete (and was EVP of retail for several years before becoming CEO). We believe Mr. Shar could discuss BNED’s strategy at length on an earnings call and would likely be well received by investors. Somewhat perplexingly, Mr. Shar has still not been appointed to the Company’s Board of Directors, which is controlled by Immersion Corporation.

While shareholders have been left in the dark thus far as to the purpose of the ATM offering, one possible explanation is that, with its recapitalized balance sheet, BNED sees itself as an opportunistic buyer in the M&A market. BNED’s deep relationships with higher-education institutions grant the Company access to key decisionmakers and stakeholders at colleges and universities – access that is coveted but difficult to achieve for small EdTech software and services companies. We believe there is no shortage of potential tuck-in acquisitions for BNED to pursue now that the Company is recapitalized and free cash flow positive and think the ATM could be a precursor to some such transaction. In addition to product and services tuck-ins with a course materials or EdTech focus, horizontal acquisitions of smaller campus store upstarts eCampus and BibliU could make sense, since eCampus was the provider that unseated BNED at Ivy Tech, and BibliU unseated BNED at Wake Tech. In fact, we believe BNED might well have liked to make such acquisitions years ago but was thwarted by its then-high debt load and ongoing lender workout. We firmly believe that BNED has the best equitable access offering in the marketplace and, considering that feedback on eCampus and BibliU has been less than stellar, we think both companies’ sets of clients would likely be better off under BNED ownership.

Conclusion – On Track for Significant Appreciation

As BNED executes on its First Day Complete growth strategy and continues its turnaround, we continue to believe the stock has significant upside potential in both the near and long term driven by growth in EBITDA and free cash flow. Similarly to with Allot Ltd. (ALLT), which we highlighted in a recent article, BNED is amidst a multi-year turnaround story that has passed out of the turnaround phase into the “inflection point” phase that is most profitable for investors. While governance and capital allocation questions may persist, the gap between BNED’s intrinsic value and its share price should narrow considerably over the coming months and years as institutional investors grow better acquainted with this durable and unique growth story.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of BNED either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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