Barnes & Noble Education: Unlocking Potential Through First Day Programs

Summary:

• Barnes & Noble Education’s First Day Complete program is driving growth, with the potential to significantly boost EBITDA through increased student adoption.
• Strengthened balance sheet supporting future expansion, with significant upside under new management.
• BNED’s stock is undervalued, trading at <4x EV/FY26 EBITDA, with insiders aggressively purchasing shares.
• Potential Russell 2000 addition creates favorable conditions for BNED’s stock.

What you need to know

Barnes & Noble Education (NYSE:BNED) controls a dominant position, operating US campus bookstores in a duopoly with Follett. The company was spun off from Barnes and Noble in 2015, and fell victim to an industry-wide trend of declining textbook sales. In 2020, the company shifted its focus to rapidly expanding its First Day Complete (FDC) program, dubbed “Inclusive Access (IA),” which automatically bundles course material with tuition. IA programs successfully counteracted the ongoing decline in sales and margins, leading to a nearly 100% uplift in gross profit upon FDC conversion for BNED. When universities add FDC, all participants benefit: a) Students enjoy ~50% discount on textbooks, while improving convenience and enhancing educational outcomes; b) University opt-out rates shrink to 20% vs the prior model >70%; and c) Publishers gladly provide discounts, since they achieve higher sell-through rates and greater recurring revenue.

The mutually beneficial nature of the First Day program is driving an accelerated pace of adoption. In FY26, contribution from First Day programs will nearly double from FY24 to ~$800m. BNED’s business transformation is backed by a new CEO, refreshed board of directors, and a significantly improved balance sheet. Insiders are aggressively purchasing shares near current prices, despite already owning 42% of the company through IMMR. Importantly, First Day programs are only 20% penetrated within BNED’s existing physical store network (~800k students), and <6% penetrated in the 13m students that BNED describes as the market opportunity. If BNED converts just 50% of its captive base to FDC, EBITDA would triple to $140m – this is possible over the next few years.

The current year is a product of massive headwinds to the business – Distressed balance sheet, the DOE proposal, and management changes. Despite these challenges, BNED will show substantial, incremental progress: In FY25, EBITDA will grow >40% due to an improved inventory position, ~25% growth in FDC, and >$10m in cost savings measures – but this is just the beginning. Based on our conversations with industry participants and universities, First Day will significantly accelerate in FY26 (May ’25 – April ‘26). Based on our work, the FDC pipeline of students ballooned to well over >1m. BNED’s new management will capitalize on the opportunity with a strengthened balance sheet to support its inventory position and bolster its FDC sales force to convert a very willing university pipeline. One of the largest headwinds in last year’s selling cycle resulted from competitors pointing to BNED’s financial distress and risk of bankruptcy, which will not recur this year. BNED can successfully enroll 400k+ new students in FY26, which should translate to >$40m of incremental EBITDA and leaves ample runway for continued growth at only 30% penetration of its existing base.

Framing the potential

BNED is currently trading at ~3.8x EV/FY26 EBITDA (~20% FCF yield) with opportunities to refinance high-cost debt, further improve cost structure, and rapidly grow its high-quality First Day mix. EBITDA will grow from $45m in FY24 to $65m in FY25 and $100m+ over the next several years with low capex needs ~$20m. At 8.5x EV/FY26 EBITDA, the company would be worth $30/share, representing approximately +215% above current levels in the next 18 months.

Between IMMR, Fanatics, Vital Fundco, Outerbridge, KWM, and other insiders, approximately 85% of shares are closely held with 1.2m of the ~4.5m shares currently short. We believe FY25 will show incremental progress on initiatives, with FY26 showing a substantial acceleration in First Day subscribers. Against this backdrop, the catalyst path in the near term is attractive:

• Russell 2000 Addition: Shares will likely be added back to the Russell 2000 by June ’25. Potentially leading to a massive squeeze as only 5 mill shares are in the float.
• DOE overhang will be removed: Potentially in the next 2 weeks if there was a Trump victory, and elimination of the DOE or a less engaged DOE as it relates to FDC. We note, the election is not certain but point to Trump’s lead in national polls.
• Overreaction to potential dilution: Shares traded down ~30% as a direct result of BNED filing a $40m ATM. We believe this is a classic overreaction. The company has no immediate need for liquidity and is run by aligned, smart capital allocators
• Accelerating FDC Additions: We expect management comments for the Fall ‘25 pipeline will point to a significant acceleration in FDC subscribers for FY26.

Why does this opportunity exist?

BNED needed to address its overleveraged position, which had worsened during the pandemic when college enrollment declined. After engaging advisors to explore strategic alternatives, the prior management team announced a highly dilutive rights offering in April at $5 per share with Immersion (IMMR). While this was insanely unfavorable for existing holders, it does position the company to fully unlock its growth potential and eliminates the need for another offering.

Key Insights

FDC Acceleration Incoming

BNED operates 657 physical and 507 virtual bookstores, which collectively serve >6m students. The company is in the process of converting its captive base to First Day programs. FDC contracts only represent an estimated ~20% of BNED’s current physical base, and management believes they can achieve 100% over time. When schools transition to FDC from the legacy a la carte model, BNED sees an 80% and 100% increase in course material sales and gross profit, respectively. If BNED converted 50% of total physical stores to the FDC model, this would add ~1.2m subscribers, ~$500m revenue, ~$175m of gross profit dollars, and >$100m of EBITDA.

Investors are missing the transition to First Day Programs. We believe BNED was reasonably on track to add >500k students in Fall ’24, after two major headwinds caused universities to defer 1 year: 1) BNED’s need to recapitalize; 2) DOE rule proposal. We expect BNED added ~150k net subscribers so far in FY25, which will translate to revenue growth of ~$70m. BNED is currently adding schools for Fall ’25 to FDC, and think the company can add ~400k students for their Fall ’25 semester. FDC programs will contribute $20m and $50m to gross profit growth in FY25 and FY26, respectively.

First Day programs

In addition to First Day Complete, BNED offers First Day programs, which are by course instead of by school. This program is similar to FDC from a margin perspective and grew 28.7% in Q1 after achieving >20% growth last year. First Day programs should contribute $10m in Gross profit growth in FY 25-26.

Other Materials (a la Carte, General merchandise, Rental)

Legacy a la Carte will decline: The legacy model will continue to decline for 3 reasons: 1) Conversion to First Day Programs, which contribute double the revenue per contract for BNED; 2) Continued shift towards higher margin rental; 3) Pruning of unprofitable store contracts (50 net stores in ‘24), which is largely complete. While this segment declined 14% in FY24, we think declines will be less severe in ’25, due to increased inventory availability and expect sales to decline 10% FY’25 (~$15m of gross profit decline)

General Merchandise will grow: General merchandise sales declined 6% in FY24, stemming from its financial distress, which caused a sub-optimal inventory position. On top of this, the Fanatics partnership commission rates increased (Aug ’23) and the company had to mark down obsolete inventory due to closed stores. In FY25, BNED’s balance sheet can support its inventory needs and grow LSD%. Further, with Fanatics 17% stake in BNED, we think there is room to renegotiate the contract to a fair split – We don’t model this upside, but believe $10m+ of EBITDA benefit if management can successfully renegotiate the contract.

Rental will grow modestly: Despite closing stores, the company’s course material rental income was flat in FY’24, as the company emphasizes rental > sales, where gross margins have consistently remained ~45%.

We expect course material and general merchandise gross profit to grow $10-20m in FY25 and $45m in FY26.

Corporate Savings program ($10m) + Pruning unprofitable contracts ($5-10m)

Management announced a new cost savings program in Q1, with an expected $10m from streamlining staffing levels, and consolidating vendors. This included reducing low impact resources like the company’s IR function & legal expenses. In addition, we believe BNED management recently completed pruning unprofitable contracts that had no clear path to profitability and/or conversion to FDC. This process has taken ~3 years, and BNED will begin returning to growth backed by stronger financials and the widest set of capabilities on the market – As seen with the recent Syracuse win (Link).

We expect SG&A to decline $10-15m in FY25 and grow modestly to support new partners in FY26

In FY24, BNED generated $45m in EBITDA. If we add the low-end of $10m of gross profit growth and the low-end of $10m cost savings, BNED can generate at least $65m in EBITDA in FY25 (45% YoY growth). In FY26, as FDC accelerates, the company can add $45m in gross profit offset by a modest $5m SG&A growth, resulting in $105m in EBITDA (60%+ YoY growth).

Notable Items

Recent $40m Shelf Offering with BTIG – In capable hands with Bill & Eric

Immersion owns ~42% of the company as part of the June transaction*, and is run by savvy investors Bill Martin and Eric Singer, who are doubling down on improving profitability and accelerating its First Day programs. Several shareholders we’ve spoken with have discussed concerns about lack of investor communication. This frustration was most recently felt when BNED filed an ATM for an additional $40m worth of shares through BTIG in September, despite addressing its funding needs in June ’24.

While headlines suggested an equity raise was imminent, to the contrary, we believe this action is purely good housekeeping and the company does not intend to sell shares anywhere near $9, unless it is accretive: 1) insiders bought shares around these prices <2 months ago, and do not want to be diluted; 2) F2Q typically represents BNED’s largest positive swing in working capital ($60-80m); 3) the company has $105m of undrawn capacity on its revolver; 4) Q1 results show the business is on track for >$65m of EBITDA in FY25.

If we assume management decided to sell a portion of the $40m offering at $10, we expect it would have been done to refinance the company’s existing ~10% debt. For instance, if they sold 2m shares at $10, it would result in ~7.5% dilution, reducing average net debt to <$150m. If this allows them to refinance the high-cost debt at 6-7%, it would save ~$6m of interest/year, which would allow the company to pay down debt quicker and increase the value of the equity.

This is a classic overreaction, and increased optionality in the hands of good capital allocators will benefit shareholders over the medium term.

*IMMR Relationship to BNED: IMMR owns ~42% of BNED, Bill Martin and Eric Singer both sit on BNED’s Board. IMMR acquired shares through a $50m cash infusion in addition to agreeing to fully backstop the rights offering ($5).

DOE Overhang – Proposals unlikely to proceed

In January 2024, the US Department of Education (“DOE”) proposed a potential rule change impacting BNED’s innovative and accretive inclusive and equitable access courseware delivery models First Day and First Day Complete. In July, the Biden-Harris administration decided not to proceed with potential changes to IA programs via a Notice of Proposed Rulemaking (NPRM). We believe this decision was a direct response to significant opposition from students, faculty, and administrators across higher education, particularly from key groups like HBCUs, which brought their concerns to the attention of the administration. This resistance essentially led the Department of Education to halt the proposal. As a result, it is highly unlikely that these changes will resurface, regardless of the outcome of the 2024 election. Donald Trump has expressed intentions to eliminate the DOE, while Kamala Harris, is seen as supportive of higher education and unlikely to back policies opposed by HBCUs and the broader university community.

We believe the DOE’s decision to stand down was pushed by the current Administration (vs DOE) in response to feedback from HBCU and community colleges. The current language from the DOE suggests potential future proposals will not be the same as the initial proposed in January 2024:

“Proposed regulations related to State authorization, including State authorization reciprocity agreements, cash management, and accreditation will be published by next year. This schedule allows us to take additional time to carefully consider these important, complicated issues and refine solutions that address important challenges for students while balancing the need for quality oversight and improved student protections with the burden on institutions and changes impacting college accrediting agencies.”

Under the Harris administration, we believe future proposals are unlikely, but if resurfaced, would focus on greater disclosure and education around opt-out programs vs elimination.

Another key factor to consider is the recent SCOTUS ruling in Loper v. Raimondo, which overturned “Chevron deference.” This decision opens the door to potential legal challenges against the DOE’s actions, should they continue (though we don’t anticipate that happening). In our view, few scenarios are likely to result in an “Opt In” outcome by 2026. While the DOE may propose minor adjustments, these are unlikely to significantly impact BNED’s business.

Balance Sheet

BNED currently has $213.7m of net debt, which should fall to ~$150m at the end of 2Q with a +$30m in working capital. We believe $150m is more reflective of the company’s current debt position, given the timing of cash collections.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of IMMR 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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