Barnes and Noble 1999 Annual Report Download - page 32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued 31
52 Weeks Ended January 29, 2000
Compared with
52 Weeks Ended January 30, 1999
Sales
The Company’s sales increased 16.0% during fiscal 1999
to $3.486 billion from $3.006 billion during fiscal 1998.
Contributing to this improvement was a 7.4% increase
attributable to the inclusion of Babbage’s Etc.’s sales for the
fourth quarter of 1999. Babbage’s Etc., one of the nation’s
largest operators of video game and entertainment software
stores, was acquired by the Company on October 28, 1999.
Fiscal 1999 sales from Barnes & Noble “super” stores, which
contributed 80.9% of total sales or 86.5% of total bookstore
sales, increased 12.2% to $2.822 billion from $2.515 billion
in fiscal 1998.
The increase in bookstore sales was primarily attributable to
the 6.1% growth in Barnes & Noble comparable store sales, full
year sales from the 50 new stores opened during fiscal 1998
and the opening of an additional 38 Barnes & Noble stores
during 1999. This increase was partially offset by declining
sales of B. Dalton, due to 89 store closings.
Cost of Sales and Occupancy
The Company’s cost of sales and occupancy includes costs
such as rental expense, common area maintenance, merchant
association dues, lease-required advertising and adjustments
for LIFO.
Cost of sales and occupancy increased to $2.484 billion in
fiscal 1999 from $2.143 billion in fiscal 1998 primarily due to
the inclusion of Babbage’s Etc.’s cost of sales and occupancy
in the fourth quarter of 1999. The Company’s gross margin
rate increased to 28.8% in fiscal 1999 from 28.7% in fiscal
1998. This increase was attributable to improved leverage on
occupancy costs as well as a favorable merchandise mix in the
bookstores, partially offset by lower gross margins in the video
game and entertainment software stores.
Selling and Administrative Expenses
Selling and administrative expenses increased $70.5 million,
or 12.1% to $651.1 million in fiscal 1999 from $580.6 million
in fiscal 1998 partially due to the inclusion of Babbage’s Etc.’s
selling and administrative expenses in the fourth quarter of
1999. Selling and administrative expenses decreased to 18.7%
of sales during fiscal 1999 from 19.3% during fiscal 1998.
Depreciation and Amortization
Depreciation and amortization increased $24.0 million, or 27.1%,
to $112.3 million in fiscal 1999 from $88.3 million in fiscal
1998. The increase was primarily the result of the depreciation
related to Barnes & Noble stores opened during fiscal 1999 and
fiscal 1998, as well as the depreciation on the Company’s
BookMaster system and the inclusion of Babbage’s Etc.’s
fourth quarter depreciation and amortization of $3.6 million.
Pre-Opening Expenses
Pre-opening expenses declined in fiscal 1999 to $6.8 million
from $8.8 million in fiscal 1998 reflecting the opening of fewer
new stores compared with prior years and the first quarter
adoption of Statement of Position 98-5, “Reporting on Costs of
Start-up Activities” (SOP 98-5). SOP 98-5 requires an entity
to expense all start-up activities (as defined) as incurred. Prior
to 1999, the Company amortized costs associated with the
opening of new stores over the respective store’s first 12
months of operations. The Company recorded a one-time
non-cash charge reflecting the cumulative effect of a change
in accounting principle in the amount of $4,500 after taxes,
representing such start-up costs capitalized as of the beginning
of fiscal year 1999. Since adoption, the Company has expensed
all such start-up costs as incurred. The effect of the change in
accounting principle on earnings in 1999 was immaterial.
Operating Profit
Operating profit increased to $232.1 million in fiscal 1999 from
$185.1 million in fiscal 1998. Fiscal 1999 operating profit
includes Babbage’s Etc.’s fourth quarter 1999 operating profit
of $15.4 million. Bookstore operating profit increased 17.1% to
$216.7 million. Bookstore operating margin improved to 6.6%
of sales during fiscal 1999 from 6.2% of sales in fiscal 1998
reflecting better occupancy leverage and a more favorable
product mix.
Interest Expense, Net and Amortization
of Deferred Financing Fees
Interest expense, net of interest income, and amortization of
deferred financing fees decreased 2.5% to $23.8 million in fiscal
1999 from $24.4 million in fiscal 1998 despite the inclusion of
$3.1 million of additional interest expense attributable to the
Babbage’s Etc. acquisition in fiscal 1999. The decline was the
result of strong cash flows and more favorable interest rates
under the Company’s senior credit facility.
Equity in Net Loss of Barnes & Noble.com
As a result of the formation of the limited liability company
with Bertelsmann, the Company began accounting for its
interest in Barnes & Noble.com under the equity method of
accounting as of the beginning of fiscal 1998. The Company’s
equity in the net loss of Barnes & Noble.com for fiscal 1998
was $71.3 million. The Company’s share in the net loss of
Barnes & Noble.com for fiscal 1998 was based on a 100 percent
equity interest for the first three quarters ended October
31, 1998 (the effective date of the limited liability company
agreement), and a 50 percent equity interest beginning on
November 1, 1998 through the end of the fiscal year.