BNED

Thanks operator. Good afternoon, everyone, and welcome to our Fiscal 2024 Second Quarter Earnings Call. Joining us today are Mike Huseby, Chief Executive Officer; Kevin Watson, Chief Financial Officer; and Jonathan Shar, Executive Vice President, BNED’s Retail and President, Barnes & Noble College. As referenced in our second quarter slide presentation, which can be found on our Investor Relations website, I'd like to remind you that statements we make on today's call are covered by the safe harbor disclaimer contained in our press release and public documents. The contents of this call are property of Barnes & Noble Education and are not for rebroadcast or used by any other party without prior written consent of Barnes & Noble Education. During this call, we will make forward-looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any forward-looking statements that may be made or discussed during this call. And now, I'll turn the call over to Mike Huseby. Mike?

Thanks, Hunter. Good afternoon, everyone, and thank you for joining us today. It's my pleasure to provide our earnings commentary today together with Jonathan and to introduce Kevin Watson, our new CFO, who joined BNED in September and is already contributing significantly to BNED's success. One year ago, we announced decisive actions to accelerate our transition to the First Day Complete model and also implemented significant cost reduction and operational efficiency initiatives to improve our profitability. We made substantial progress on these initiatives and our second quarter financial results are further proof points that our strategy is working. Before we get into the details, I'll touch on the key highlights from the quarter. First, I'd like to really thank our teams for their commitment to our company's success and their continued efforts to deliver a great experience to our students, faculty, institutions, administration, parents, alumni and strategic partners. Our team's agility and resilience enabled us to not only deliver a successful Fall rush in a very dynamic operating environment, but also to execute on our strategic initiatives over the last year. I am truly grateful for their hard work and commitment. Second, our innovative Equitable Access Program, First Day Complete, continues to positively impact students, higher education and our business. In the second quarter, FDC revenue increased 52% year-over-year to $136 million, and the combined First Day programs revenue reached $199 million. Our strategic transition to First Day Courseware business model has reached an inflection point. First Day and First Day Complete revenues are approaching 50% of course material revenue. And revenue increases from First Day offerings exceeded the decrease in revenue from the traditional à la carte model by $30 million on a year-to-date basis. This evolution to a subscription like B2B model significantly improves revenue and revenue visibility, which enables us to better align costs with revenue, improve inventory management and operating efficiency and ultimately achieve much higher four wall EBITDA per store. Next, we've improved operational efficiency and maintained top line growth despite operating in 128 fewer stores. We've achieved our planned $30 million to $35 million of annualized cost savings and as a result, consolidated adjusted EBITDA increased 28% to $50.3 million in the second quarter. Looking ahead, we've identified additional opportunities to improve efficiencies further and reduce operating expenses to continue improving our profitability and cash flow. Importantly, the actions we have taken and continue to take position us to deliver more consistent, sustainable and profitable growth in the years ahead. Shifting to our second quarter performance. Total revenue was $610.4 million, increased by $1.7 million or 0.3% compared to the prior year period. The second quarter sales increase is primarily due to the growth of our First Day programs, which increased 39% to $199 million, partially offset by declines in the à la carte courseware sales, including lower sales from a smaller store footprint as we focused on the profitability of our stores. Second quarter adjusted EBITDA from continuing operations of $50.3 million [increased] by $11.1 million or 28.3%, primarily driven by a $13 million decrease in S&A expenses compared to the prior year. Before turning the call over to Jonathan to discuss our Retail segment results, I'll provide a brief comment on the strategic alternatives process. Our Board of Directors continues its ongoing review of a broad range of strategic alternatives available to the company, including, but not limited to, potential capital raises, asset divestitures, sales of business and pursuit of standalone growth plans. We're committed to executing on the best path forward for the company and our stakeholders to maximize value and best position our business for the future. We won't be commenting further on this until the Board of Directors has concluded that disclosure is appropriate or required. Now I'll turn the call over to Jonathan.

Thanks, Mike. Our team delivered a solid second quarter, driven by strong operating performance that enabled us to grow revenue while increasing retail adjusted EBITDA by 23%. Retail revenue growth was driven by course material comparable store sales growth of 5.8%. Our First Day programs, which increased 39% to $199 million, were the primary drivers of this growth. In particular, First Day Complete revenue increased by 52% to $136 million. First Day Complete not only grew in the quarter due to the year-over-year store count growth, but comp FDC stores experienced 6.5% growth in course material sales due to increasing student participation rates, which highlights FDC's positive impact on access, affordability, convenience and academic success. Since we launched First Day Complete, we've transitioned 157 campus stores to our innovative B2B course material model, which this past fall term, encompassed enrollment of nearly 800,000 students. While this is impressive growth, we believe we are just scratching the surface. Our active dialog with institutions and the FDC contracts already signed for spring term '24 and fiscal 2025 suggests that inclusive and equitable access is rapidly becoming the primary course material distribution model. Given the strength of our pipeline, we remain confident in our ability to successfully accelerate the scaling of FDC and the long term growth and sustainable financial benefits of the equitable access model. Turning to general merchandise. Comparable store sales growth declined by 1.7%. The decrease was primarily due to declines in trade books and cafe and convenience items. These two categories were most impacted by the delayed inventory receipts we discussed with you last quarter. Partially offsetting the decline was a 0.5% increase in emblematic sales. During the quarter, the benefits from our Fanatics and Lids relationship were on full display at our schools. For example, at the Ohio State University book store, lines began forming around the block at 4:30 a.m. to participate in an exclusive in-store launch of Ohio State branded lululemon merchandise. I continue to be amazed at how our teams provide our students, parents, faculty staff and alumni with unique products and experiences that raise the bar in differentiating Barnes & Noble College Runbook stores. As we've shared with you before, our commitment to growing profitability is at the heart of our ability to serve our students and institutions in a manner that they deserve and expect. It's been gratifying to see cost discipline, productivity and efficiency embedded into our culture will continue to provide an outstanding experience for our campus partners. As a result, second quarter retail selling and administrative expenses decreased by $12.9 million year-over-year and 210 basis points as a percent of revenue to 12.9% from 15%. Adjusted EBITDA increased by $8.9 million. I'll now turn the call over to Kevin to discuss our financial results in more detail.

Thanks, Jonathan, and good afternoon, everyone. It's great to be on the call with you today. It's been an exciting time since joining Barnes & Noble Education back in September. The momentum behind our shift to a more profitable and predictable FDC model, combined with our focus on operating efficiencies, presents a compelling opportunity to create a sustainable long term value for our stakeholders. As such, I'm looking forward to contributing to the continued success of our transformation. Turning to the fiscal 2024 second quarter results and related matters. Consolidated second quarter revenue from continual operations of $610.4 million grew by 0.3% or $1.7 million. Consolidated adjusted EBITDA grew by 28.3% or $11.1 million to $50.3 million. The combination of top line growth, improving operating efficiencies and further progress on our cost savings initiative actions drove a 180 basis point increase in EBITDA margin to 8.2%. During the quarter, total Retail segment revenue increased by $700,000 or 0.1% to $599.3 million driven by a 5.8% increase in comparable store course material sales, offset by 1.7% decline in comparable store general merchandise sales. Course material sales growth was due to increase in the First Day and First Day Complete revenues, which increased 39% to $199.2 million. With revenues from these subscription like programs approaching 50% of our course material revenues, our course material business is becoming a much more stable and predictable business. Second quarter retail gross profit of $125.5 million decreased by $4 million or 3.1%. Retail gross margin of 20.9% decreased by 70 basis points from the prior year period. Retail gross sale margins decreased due to a decline in course materials gross margin due to higher markdowns, including markdowns related to closing of underperforming and unprofitable stores, as well as higher percentage of lower margin digital course material sales and lower commissions for our emblematic general merchandise. These decreases were partially offset by lower contract costs as a result of the shift to digital and First Day models and the growth of higher margin First Day Complete revenue. Retail EBITDA [increased] by $8.9 million to $48.3 million due primarily to a $12.9 million year-over-year reduction in selling and administrative costs, offset by a $4 million reduction in gross profit. Moving on to wholesale. Sales for the quarter were essentially flat at $21 million. Wholesale gross profit was $6.1 million or 29% of sales in the second quarter of fiscal 2024 compared to $5.5 million or 25.8% of sales in the second quarter of fiscal 2023. The increase in gross profit and gross margin rate was due primarily to lower markdowns and lower product costs, partially offset by increase in the returns and allowances. Wholesale selling and administrative expenses for the quarter decreased by 9.7% to $3.5 million. The decrease was primarily due to cost savings initiatives comprised of lower payroll and an incentive plan compensation expense. The lower S&A drove wholesale non-GAAP adjusted EBITDA to $2.6 million, an increase of $1 million. Moving on to the balance sheet. Our cash balance was $15 million at the end of the quarter with outstanding borrowings of $234 million as compared to borrowings of $250 million in the prior year period and $278 million in the first quarter. CapEx decreased by $5.3 million to $4 million from $9.3 million due primarily to a continued focus to reduce spending and capture additional efficiencies. Regarding guidance, we're maintaining our fiscal 2024 adjusted EBITDA from continuing operations expectation of approximately $40 million. The year-over-year increase in consolidated adjusted EBITDA is expected to be driven by growth in the company's retail segment, primarily due to growth in the company's First Day programs and the impact of the cost reduction actions the company has executed and expects to continue to implement. With that, I'll turn the call over to Mike for closing comments.

Thanks, Kevin. In closing, we had another solid quarter and we are making excellent progress against our strategic priorities. We're all extremely energized by what our team has accomplished in such a short period of time and even more so and where we are headed as a company. We are confident in our strategy, our highly capable and motivated team and our strong competitive position to continue the successful execution of our strategic focus on sustainable and profitable growth. Thank you for participating today. And now I'll turn the call over to the operator so we can take your questions.

[Operator Instructions] Your first question comes from the line of Ryan MacDonald with Needham & Co.

This is Matt Shea on for Ryan. Congrats on the strong quarter here. A couple of questions from me, maybe to start. So nice to see six additional wins for the spring term for the First Day Complete model, but thinking about the rest of the year. Are there additional campuses in the pipeline for spring '24, or is there just not enough time left in the year for those deals to still close? And then thinking about the flip side of that question and depending on the commitment timing, if not spring, are you seeing incremental commitments for fall of 2024, or how is that trending relative to your expectations?

We're actually really excited about the number of transitions we have for spring. It's consistent with past trends. And then the pipeline, we're really encouraged, as we said in our remarks, by the pipeline of schools that have either already committed or are on the verge of committing for a Fall term '24 launch, which would be our fiscal '25. So the pipeline is robust. We're having hundreds of conversations with institutions. And the value proposition of affordability, access, convenience, which ultimately is leading to enhanced student outcomes continues to resonate on campuses throughout the country. So incredibly excited about the pipeline and the accelerated growth of our First Day Complete program.

I mean -- so it sounds like with the conversations or within the remaining university partners, conversations are trending well. But maybe for those that have not yet to make a decision. Is there any sense of mix you have for the customers or university partners that are going to opt out or churn away from the program?

No, not at this point. I think all the conversations are really positive. And I would say it's not a matter of if, it's really a matter of when. And those are detailed discussions we have with each of our campus partners in terms of when we would launch the program, when they communicate tuition and/or fee changes within their academic calendars each year. And so it's incredibly positive. We've had great momentum in terms of what we've done and the number of campuses that we're now running First Day Complete with. And as I said before, we expect that to accelerate going forward.

And then last question for me. Just thinking about some of the newer programs and cohorts this fall, understanding it's no longer an opt-in model, but rather an include or opt-out model. You noted last quarter, it was too early to gauge those opt-out rates in the new cohort of schools. Now that you're a little deeper into the semester, how have those opt-out rates trended and how do those kind of compare to your internal expectations?

We refer to it -- and we did it in our comments as a participation rate and the number of students that are participating, and the participation rates are aligned with and even exceeding our expectations at our schools this Fall. And what we've seen is that, and again, I mentioned this, not only do we see strong participation rates overall, but as schools participate in FDC year-over-year, those participation rates at those schools are actually improving as students who are freshener, sophomore experience FDC, understand the convenience, the affordability aspect, the impact it has on their academic success. And the rates continue to get better with each year for each of those cohorts, which is a really exciting development and even highlights more upside in the First Day Complete model for us and our campus partners.

Our next question comes from the line of Alex Fuhrman with Craig-Hallum Capital.

If I'm not mistaken, I believe you said that First Day Complete dollar revenue growth was more than enough to offset the decline that you saw in the quarter in dollars in à la carte course materials. If I'm not mistaken, I think this is the first time that you guys have said this. Does this more or less mean that you've turned a corner, and from this point going forward, courseware material -- required materials revenue should be growing?

Exactly right, that's -- the numbers I cited were year-to-date, the increases in the First Day and First Day Complete combined program revenues versus the decline. If you look at Y in an axis and think about that on a curve, we have crossed that line now where the model change has inflected at the top line and that top line inflection, reversing the trend of years and years of courseware declines, although we've been able to post some courseware growth because of First Day Complete. It's very clear now that with the acceptance by the market of the equitable access, inclusive access models that when you combine those together that we're reversing that trend of courseware sales declined from à la carte kind of traditional à la carte model, that's just huge. And it's clear evidence that the strategy -- the right strategy is working. And the other benefit is it's a much more predictable revenue stream. So that allows us to rightsize our cost structure and our CapEx with more certainty in advance as we approach each business cycle.

And certainly sounds like a big milestone to have reached that point. So congratulations to you and the whole team that I know has been working on that for years to get to that moment here. Certainly understand that having more predictable and recurring revenue should help you on the cost side. I did want to just ask you about the comment in the press release, I guess, given the nature of how some of these early deals were struck, it sounds like you're not actually collecting any cash until after the drop add dates. Can you just talk to us about that dynamic a little bit more? Does it perhaps counterintuitively mean that you might actually need a larger credit facility over time as First Day Complete becomes a bigger share of revenue and more of the cash collection is deferred to farther into the semester?

I don't think it speaks to the size of the credit facilities and working capital timing issue that we've improved a lot in terms of our ability to collect receivables much more quickly. Under the old traditional model you're collecting at the point of sale at the cash register from students, but you really couldn't predict what that was going to be when you have a contract and in advance, you have a fairly tight range of being able to forecast what the take rates are, what the participation rates are, I should say, you know what the price per credit hour is, becomes much more predictable. And I guess the other thing that I would say about the transition and working capital is that we're really transitioning the company to a B2B revenue model as opposed to B2C. That's what the First Day, First Day Complete really is. So it really lines up the financial model we have with the operating model we have. We're a contract service provider where our real strength is the relationships and the contracts with exclusivity provisions that we enter into with the schools. And so putting that financial model on more of a B2B basis really makes sense, because we're dealing with the school on a business basis and structuring the contracts and transferring that model to more of a we build you school, we collect from you. And they can see the benefit of it, we can see the benefit of it, and it becomes much more of a joint partnership working to optimize that courseware delivery model.

Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now disconnect.

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Barnes & Noble Education Fiscal 2024 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Hunter Blankenbaker, Vice President of Investor Relations, you may begin your conference.

Good morning, and welcome to our fiscal 2024 first quarter earnings call. Joining us today are Mike Huseby, Chief Executive Officer; and Jonathan Shar, Executive Vice President, BNED Retail and President, Barnes & Noble College; Mike Miller, EVP, Corporate Development & Affairs and Chief Legal Officer; and Jason Snagusky, SVP and Treasurer, will also be available during the Q&A session. As referenced in our first quarter slide presentation, which can be found on our Investor Relations website, I'd like to remind you that the statements we make on today's call are covered by the Safe Harbor disclaimer contained in our press release and public documents. The contents of this call are the property of Barnes & Noble Education and are not for rebroadcast or used by any other party without prior written consent of Barnes & Noble Education. During this call, we will make forward-looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any forward-looking statements that may be made or discussed during this call. And now I'll turn the call over to Mike Huseby.

Thanks, Hunter. Good morning, everyone, and thank you for joining us today. Fiscal 2024 is off to a solid start with first quarter consolidated total revenue increasing almost 4% and adjusted EBITDA improving by approximately 22%. Our first quarter results reflect clear evidence that we are executing against our strategic initiatives to deliver profitable growth. Thanks to the focus and dedication of the BNED team, our efforts to drive operational efficiencies and cost reductions are taking hold and our First Day Complete equitable access model continues to demonstrate strong momentum. Before providing a more detailed review of the first quarter, Jonathan and I would like to highlight how the successful execution of these two strategic initiatives are impacting our results. First, I'll discuss our continued focus on operational improvement and efficiency. Within our retail segment, total sales of $245.5 million increased by $9 million or 3.8%. We achieved this growth despite operating 117 fewer stores, including 67 physical and 50 virtual stores versus a year ago, as we focus on winding down underperforming less profitable stores and satellite locations. Gross comparable store sales were up 5.9% driven by strength in course materials, supply products and graduation items. This growth combined with our disciplined cost management drove significant operating leverage. Retail, selling and administrative expense as a percent of revenue decreased by 520 basis points to 28.2% from 33.4% in the prior year period. This improvement is the direct result of our fiscal year 2023 cost restructuring activities, which yielded a $9.8 million year-over-year quarterly reduction in selling and administrative expense. Our store teams are operating with their characteristic commitment and increased focus on cost discipline to achieve these results. During our current fall rush, their performance has been exceptional as they continue to provide an unmatched in-store experience while implementing demanding new productivity standards tied to actively managing variable costs, including deep rigor on staffing levels and optimizing our labor mix of full and part-time team members. Further, our teams have adapted well to make sure our stores are meeting customer needs for fall rush despite the later arrival of certain inventory versus prior years. As we discussed with you last quarter, we successfully closed the amend and extend of our credit facilities on July 28th. These amendments provide us with the necessary financial flexibility and operating runway to actively pursue a more permanent capital structure to complete our business model transformation. However, certain vendors delayed shipping inventory until we received and applied the liquidity enhancements provided by the amendments. Our store teams supported by MBS and our retail shared services teams have been working nonstop to expedite receiving and present such inventory for sale to mitigate any impacts of such delays on our customers or our early rush period sales. Our second key initiative is the acceleration of our Equitable Access program, First Day Complete, which is one of the cornerstones of our long-term profitability growth plan. In the first quarter, First Day Complete revenue increased 55% year-over-year and First Day by course revenue grew 27%. The growth of our First Day models drove total course material sales up by 8.4%. Now I'll turn the call over to Jonathan Shar, President of Retail, to discuss the significant impact First Day Complete is having on students, higher education and on our business.

Thanks, Mike. It's been an exciting fall back-to-school season thus far as we now have a 157 campus stores using our First Day Complete subscription-like model, representing enrollment of nearly 800,000 undergraduate and postgraduate students, a 46% increase over the fall of 2022. Based upon the current pre add/drop enrollment and participation levels, we expect FDC billings for the fall term to be up more than 46%, which will be recognized as GAAP revenue primarily in the second quarter with a smaller relative amount recognized in our third quarter of fiscal year 2024. As I visited many campus stores over the last few weeks, it's clear that FDC, our equitable access model, is having a very positive impact on the student experience, which is why FDC's acceptance in the market has such positive momentum. The marketplace reaction to FDC strongly supports our strategy and conclusion that FDC will be the primary course material distribution model in the near future. As we shared with you last quarter, based on survey results from our Barnes & Noble College Insights platform, students reported overwhelmingly that through First Day Complete, they had a better customer experience, we're better prepared, saved money and ultimately achieved improved academic success. These benefits have been on full display throughout this fall rush. For students, acquiring required textbooks and course materials is one of the first tasks they need to accomplish at the beginning of each new academic term. First Day Complete has turned this initial task list item into a welcoming positive event through the ease of the First Day Complete process, leveraging our proprietary technology and commitment to service. As an example, at Emporia State University, which just launched FDC this fall term, a student nominated the Barnes & Noble College bookstore team for a Heart of a Hornet award which recognizes campus community members that go above and beyond in service excellence for how welcoming quick and easy the FDC program made acquiring course materials. The way First Day Complete has transformed the student experience is striking and provides further motivation to work with all our partner institutions to accelerate their adoptions to the First Day Complete model. We believe we are best positioned to deliver on the Equitable Access Model and continue to be the clear marketplace leader. We've invested in advanced proprietary software, such as our student-facing and personalized FDC customer platform, the adoption and insights portal for faculty and academic leadership and the seamless integrations we have with an institution systems like registration, student information, ERPs, learning management systems and single sign-on. Additionally, MBS is a critical component of our FDC fulfillment engine with unmatched warehousing and logistics capabilities and the industry's largest single source of affordable use textbooks. Being these unique mix of assets and capabilities, coupled with our experience in executing at scale have allowed us to provide flexible and customized solutions for the colleges and universities we serve, enabling us to add a record number of schools to the First Day Complete model this fall. First Day Complete also provides economic benefit to BNED. Since inception, the First Day Complete model has delivered increased predictability, higher revenue and improved gross margins and EBITDA at a school post transition. To demonstrate this, we examined the cohort of stores that transition the First Day Complete in the fall of 2022 from the a-la-carte model in the fall of 2021. On slide nine of our investor presentation, you can see that when a cohort of stores move to the First Day Complete, their course material sales increased by 82% year-over-year due to the ease of the subscription-like service and the much higher sell-through rate versus the a-la-carte model. Taking this a step further, the gross profit dollars of this cohort nearly doubled, increasing by 96% and drove a 200 basis point improvement in the gross profit margin to approximately 31% from 29%. Furthermore, as schools use FDC year after year, we are able to increase student participation rates. And as a result, the gross profit dollars of First Day Complete stores in fall of 2022 that also operated FDC in the fall of 2021 increased by 5.2% in fiscal year 2023. All this, of course, is only possible through the talent and passion of our BNED team. I'd like to recognize and thank some of our outstanding operating executives and their teams, like Brian Stark, Bill Dampier, Celeste Risimini-Johnson, Chris Sackett and others for their outstanding leadership and commitment to serving our clients and customers. It's inspiring to see our team members who are committed to our mission of serving all who work to elevate their lives through education. Now I'll turn the call back over to Mike to review our results in more detail.

Thanks, Jonathan. Turning to a focus on the first quarter results and related matters. Consolidated first quarter revenue from continuing operations of $264.2 million grew by 3.7% or $9.5 million. Consolidated adjusted EBITDA grew by 21.8% or $7.5 million to a negative $26.8 million. As a reminder, our first quarter is a seasonally low volume period primarily consisting of summer classes, graduations and preparation for fall rush. Fiscal 2024 first quarter total retail segment revenue increased by $9 million or 3.8% to $245.5 million driven by an 8.4% increase in course material revenue and strong graduation and supply product sales. Within course material, our total First Day and First Day Complete revenues increased 37%. First quarter retail gross profit of $50.3 million decreased by $3.7 million or 6.9%, while retail gross margin of 20.5% decreased by 230 basis points from the prior year period. Course materials gross margin declined due to higher markdowns, including markdowns related to closed stores as well as a higher percentage of lower-margin digital course material sales. These decreases were partially offset by lower contract costs resulting from contract renewals and a favorable sales mix of higher margin graduation products. Additionally, as noted last quarter, first quarter retail gross margins were impacted by lower contractual commissions for emblematic general merchandise sales as part of the Fanatics and Lids partnership agreement. Effective August 1, 2023, under the terms of the July 2023 term loan credit agreement amendment, the commission rates for emblematic general merchandise increased for an estimated one year period. Each of these trends and margin impacts are reflected in the guidance we have provided. Retail EBITDA increased by $6.1 million to negative $18.9 million due to increased revenue, offset by a lower gross margin as noted and the $9.8 million year-over-year reduction in selling and administrative expense I mentioned earlier. Importantly, we believe we've adjusted and will continue to adjust the cost structure of the retail business to fundamentally change the profit profile of the business. This was evident in our lower volume first quarter, and we expect these expense reduction benefits to continue during our much higher volume second and third quarters. Moving onto wholesale. First quarter sales increased by $1.7 million or 4.6% to $38.8 million. The increase is primarily due to higher gross sales of $5.1 million compared to the prior year period partially offset by higher returns and allowances of $3.4 million. Wholesale gross profit was $5.8 million or 14.9% of sales in the first quarter of fiscal 2024 compared to $6.9 million or 18.6% of sales in the first quarter of fiscal 2023. Gross profit and gross margin rate decreased in the first quarter of fiscal 2024, primarily due to higher product costs and an increase in the returns and allowances, partially offset by lower markdowns. First quarter wholesale selling and administrative expenses decreased by 18% to $3.4 million. This decrease was primarily due to cost savings initiatives comprised of lower payroll and incentive plan compensation expense. Wholesale non-GAAP adjusted EBITDA for the quarter was $2.4 million, down by $360,000 due to the lower gross margin. Moving onto the balance sheet and cash flow. Our cash balance was $7.7 million at the end of the quarter with outstanding borrowings of $278 million as compared to borrowings of $259 million in the prior year period. Cash flow used in operating activities increased due to timing of payables to vendors and increased receivables related to increased adoption of our First Day programs in the summer term. Merchandise inventories were down 17% or $79.4 million to $384.2 million versus the prior year. This reflects the delay in inventory delivery from the first quarter to the second quarter that I discussed earlier. First quarter capital expenditures decreased by $3.3 million to $4.2 million from $7.5 million due primarily to lower store build-out and internal systems spend. Regarding guidance, we're maintaining our fiscal 2024 adjusted EBITDA expectation of approximately $40 million. While the inventory delays during the first two weeks of fall rush resulted in lower sales than expected, we believe the current and expected First Day sales and our disciplined management of store payroll and other costs will limit the financial impact of the delayed inventory receipts. Before closing, I want to thank departing board members Emily Chiu and Dan DeMatteo for their contributions to the company. We are pleased to welcome two new directors Steve Panagos and Ray Wallander to the BNED Board. Both new directors bring fresh perspectives and highly relevant experience to BNED's continued transformation and we look forward to working closely with them. In addition, we are very pleased to announce this morning that Kevin Watson is joining us as our new Executive Vice President and Chief Financial Officer effective tomorrow. As you get to know, Kevin, I'm confident you'll agree that he has a strong addition to our senior management team at a very important time in BNED's strategic transformation. In summary, we had a solid first quarter, and we're encouraged by further scaled proof points that our strategy is working. Our First Day Complete equitable access model is having a significant positive impact on students, institutions and BNED. Our cost reduction and efficiency actions are improving profitability and we are on the path to consistently improving adjusted EBITDA and cash flows. I want to thank our people who daily show through their actions and unwavering commitment to our mission, customers and each other. The field and operating teams that Jonathan mentioned as well as our corporate affairs and legal team under Mike Miller's senior leadership. Our exceptional treasury team, led by Jason Snagusky and Joe Loraine and our finance and accounting teams led by Seema Paul and [indiscernible] have all made significant contributions as have others that are instrumental positioning us for success this fall and beyond. We believe in our opportunity to create value for all stakeholders. Our model transformation has clearly proved that this opportunity is within our grasp at scale. What really excites us is a significant market opportunity that's still in front of us and how well positioned we are to translate that opportunity to increase and sustainable value. I'll now turn the call over to the operator to open the line for questions. Operator?

[Operator Instructions] And your first question comes from the line of Ryan MacDonald from Needham. Your line is open.

Hi. Thanks for taking my questions. Mike maybe just to start on the clarification on the inventory delays. Can you just provide a little more color about where you were feeling that most, whether it was on the course material side around the emblematic or general merchandise side? And what, if any, knock-on effects we should expect as a result of that for the fall rush?

Yes, Ryan, thanks. We wanted to point this out. We don't consider this to be -- have any impact on our guidance for the year, but we did want to mention it because it's probably obvious, if you look at our balance sheet at the end of July, we had a huge payables balance as we are working to complete the amend and extend, which we did on July 28th, it became effective on the 31st when we got our clean opinion from our outside auditors. So there was a lot of pent-up cash that needed to be released to creditors, whether they were trade vendors, partners, whether they were publishers or in general merchandise both. We got that done fairly quickly. And fortunately, the delay was not in the two largest weeks of the first two weeks of August, in other words, they're not the most significant start dates for fall rush. That starts to happen really in the third week and fourth week of August and then you know guys that we have Labor Day and right after like where we are right now. So to answer your question directly, our priority was making sure that we got all the course materials vendors cleared up first. And in general, publishers reacted very swiftly and we're very helpful in terms of getting the inventory released to us. There were other categories of general merchandise that we didn't prioritize quite as highly in terms of trade stores and convenience and food and beverage and that type of thing. But nonetheless we doubled all of it pretty much in the first two weeks of August because we want the in-store experience for the students when they come into a rush to be a complete one. So we didn't want to overplay this. I don't think this is going to have a significant impact on our fall rush financial results or on the year but it's something that was so obvious. We thought we had to mention it. So it's across the board, but we did prioritize moving in courseware and related supplies that kids needed to get back to school or students need to get back to school. And then the other categories of general merchandise, we're being taken care of in parallel, but we're not prioritized in terms of payments quite as highly.

All right. I appreciate the color on that. On First Day Complete, great to see the interesting and good results there. I'm curious, as you've gone into the fall rush here. First, what have opt-in rates looked like amongst the student population on the newer cohort of schools that have started? And then as we think about pipeline development for spring of 2024, how that continues to develop and what you've got kind of lined up for the spring rush as well? Thanks.

Yes. Ryan, it's Jonathan. Thanks for the question. And in the First Day Complete model, there's, just to clarify, there's sort of two models. One is it's built into tuition at certain schools where there isn't an opt-out. And then we have where it's listed as a course charge and students can opt=out of those. So we don't have an opt-in model per se. It's either included or opt-out -- and the -- for the schools that have opt-out, the opt-out period runs through the add/drop period, which we haven't hit at many of the institutions yet, which will come up in the next few weeks. So we don't really know, although the initial view is that participation rates are strong and one of the things we're seeing is the second and third years that an institution runs First Day Complete and there's cohorts that have experienced that, that participate patient rates grow or opt-out rates decline over time. So that's an exciting sort of metric that we're tracking and something that we've seen to be positive so far this year, although we haven't hit those add/drop periods, I don't know for sure where it will land, but some good trends in what we're seeing with First Day Complete is based on the overall experience and impact that it's having on the student experience and driving affordability and providing access to materials for all the students at those institutions.

And maybe just on the second part of that pipeline for spring of '24, how is that looking so far?

Yes. We're in active conversation still with many schools to launch First Day Complete for spring. In fact, we have some signed amendments and agreements already in place. And then we're having still daily hundreds of conversations with schools focused on launching in the next academic year, which will be a year from now in fall of calendar 2024, which is really exciting. So those conversations are active. They have accelerated and we're really optimistic about the continued growth of institutions participating in First Day Complete. And it's really based on the impact that we've seen on student outcomes, access, affordability and convenience.

Excellent. Maybe just one more for me for Mike. I think you talked about 117 fewer stores year-over-year and doing a nice job of driving more profitable business off of -- despite sort of fewer stores. Can you give us a sense of what the runway looks like here for additional store wind-downs? And sort of how much is there left to go in terms of sort of winding down those unprofitable contracts? And when we might sort of hit the trough, I guess, of impact and start to benefit on the other side of this? Thanks.

Yes, it's a great question. It's something that we look at constantly. As you know, Ryan, our overall strategy is based on serving stores profitably. And we're continuing to work with stores to improve profitability. So the trough, as you call it, is really going to be dependent upon our success in converting some stores, many stores to First Day Complete and thereby increasing the profitability, getting it at a level that's a good, long-term, healthy relationship for both us and the school. As you said, our store count was down 117 and that included 67 fiscal 50 virtual stores versus a year ago. So that is evidence that we're following the strategy that's reflected in the results. In terms of giving you guidance on the runway and that type of thing, we're not going to do that, but we'll do it each quarter because of what I just mentioned, it's very dependent upon, and Jon said, as Jon said, we're engaged in a lot of conversations with school still about not just converting to First Day Complete, but the other economic terms that impact our relationship with the commission rate that we pay the schools and we're controlled doing a great job. Our field teams doing a great job of controlling the payroll. So there are different levers we can pull to achieve profitability in stores. And so how successful we are in pulling those levers renewing contracts and making that strategy work is going to answer the question of where is the trough. I mean we expect to go to a lower number of stores next year than where we are this year. But at some point in time, as First Day Complete penetration, as I would call it, our sell-through really becomes a much higher percentage we should start adding back to that number stores at some point. I don't know when that's going to happen. But our expectation is that all stores will be on some form of equitable access at some point in time.

Thanks for taking my questions. I'll hop back in the queue.

Thanks, Ryan.

Your next question comes from the line of Alex Fuhrman from Craig-Hallum Capital Group. Your line is open.

Hey, guys. Thanks for taking my question. Can you talk a little bit about what the impact has been on general merchandise sales at schools that have transitioned the First Day Complete. Has there been any sort of a negative traffic impact just from having fewer students making that first trip to the bookstore to shop for their books? And then would love to just kind of further unpack your comments about driving really strong merchandise sales on a smaller number of bookstores? And can you just kind of help us understand what was driving that increase? Obviously, this is a seasonally slower period of the year for you, but just trying to understand what that's going to look like as we get into the rest of the year?

Alex, it's Mike. I'll make one general comment and then Jon has been spending a lot of time in our stores during rush can pick it up. First off, there aren't fewer students driven to the store through First Day Complete, if anything, there are more. Because most of those programs result in students coming in to pick up their First Day Complete package, of course, we're on or before the First Day. So that as opposed to more of a random who's going to show up when from a student perspective, it's fairly predictable in terms of store traffic, in terms of the scale of students that are showing up to pick up First Day Complete. So and I don't think our results having analyzed this would not indicate that we have any falloff in a general merchandise sale kind of on a per student basis as we change the model then I'll let Jon give more details.

No, that's exactly right. We're actually seeing more students come into the store post transition to First Day Complete based on the fact that we're serving nearly all of the students at that institution. And the primary sort of fulfillment channel is in-store pickup. We can ship the materials to students if they select, but most of them from a convenience standpoint come into the store and pick up their materials or go through the process in real time and have us pick them and sort of box up their materials for them for distribution. So it's actually an opportunity through some of the merchandising strategies and cross merchandising strategies that we have to increase the sales of everything else in the store like general merchandise items that we sell to students as part of that visit. So we're actually optimistic that, that's going to have a positive impact. And just from a store traffic point alone. So we think that the model works well with the other parts of our business that we are looking to continue to drive growth in.

Okay. That's really helpful. And then just the other part of the question, just thinking about the strong merchandise sales despite the pretty significantly smaller number of stores that you were operating during the quarter. I mean can we interpret that to mean that your biggest, most kind of long-standing profitable stores we're experiencing really strong increases in sales during the summer months or was it part of that maybe just driven by the fact that the 100 something stores that you're no longer operating were just pretty small contributors to merchandise?

Yes, I think it's a combination of both of those. And as we called out in some of the prepared remarks, we had very strong summer, early summer first quarter in graduation products, which was somewhat of a surprise to us, quite frankly, we planned on. We did a lot of great things in our merchandising group to make that happen. But if you recall last year in the spring and summer of '22. There are many schools that actually had commencement ceremonies to include more than just one graduating class because of the impacts of COVID and the fact that many schools weren't able to walk graduating classes in prior years. So even with that as a benchmark, the graduation products performed better year-over-year and much better and of course with our expectations. So that was a big part actually of the contribution of general merchandise growth. As it relates to the other categories, we continue to see good performance, but graduation was one that really stood out for us in the first quarter. The other thing I would say is that it impacts both the digital kind of the digital weighting of sales and the margin and also a number of students on campus. There were many schools this year that had online virtual courses this summer more than actually in the number we expected. So even with that and not having as many students on campus for the summer, general merchandise sales did well.

Okay. That's really helpful. Thank you.

And we have reached the end of our question-and-answer session. I will now turn the call back over to Mr. Hunter Blankenbaker for some final closing remarks.

Great. Thank you, Rob. That does conclude our call and we're going to get back to Fall Rush here. We look to -- forward to speaking with you in early December on our second quarter call. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.