Barnes and Noble 2001 Annual Report Download - page 3

L E T T E R T O O U R S H A R E H O L D E R S c o n t i n u e d
S i n c e re l y,
Leonard Riggio
Chairman
2 0 0 1 A n n u a l R e p o r t ■B a r n e s & N o b l e , I n c .
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over into 2002. The expense reductions helped mitigate the
l o w e r-than-budgeted sales, as bookstore operating pro f i t
came in at $216 million; disappointing, yet a good re s u l t
considering the numbers posted by other re t a i l e r s .
During the year we rolled out our Readers’ AdvantageT M
p rogram (which continues to grow), and by the end of
2001, enrolled nearly two million members who paid
$25.00 to join. We realized at the outset that a marg i n
s h o r tfall would result in the early stages of the pro g r a m
due to the ten percent discount members received, but
believed then, as we do now, that this “loyalty” card
would provide a long-range sales lift and higher pro f i t s
in the future. The program was also intended to mitigate
the negative impact of publishers’ higher pricing and the
d i ff e rential between bookstore pricing and that of
a g g r essive online discounters. As a result, we believe the
nearly two million members we enrolled last year will
outspend non-members sufficiently to produce a positive
delta in gross profit (not gross margin percent) for the
c u r rent year, and will only increase in years to come.
As planned, the pace of store closings at B. Dalton continued
in 2001, as we closed 35 stores, leaving us with a total of
3 0 5 c o m p a red to nearly 600 six years ago. As a re s u l t ,
our mall-store business, whose operating margins have
been declining for the past six years, now constitutes
only eight p e rcent of our total bookstore sales. The
t r a n s f o rmation of our business from a mall-based operator
to a growing enterprise of world-class bookstores is now
v i r tually completed. We are extremely pleased with our
strategic positioning and with the balancing of our re a l
estate port f o l i o .
Within the context of the national retail climate, what
we experienced with our GameStop business was
nothing short of phenomenal. Overall, sales grew by 48
percent to $1.1 billion, with 74 new stores opened for a
total of 1,038 stores. More significantly, we were major
participants in the sale of new platforms (PlayStation 2,
Xbox, Game Boy Advance and GameCube), which
together with the previously “installed base,” brings
this industry to an unprecedented level. The next several
years promise to produce “trailing” software sales, whose
higher margins will nourish our bottom line.
Finally, the rationalization (lower expenses and targeted
marketing) of our Barnes & Noble.com affiliate has
produced a dramatic reduction in net losses, while at
the same time allowed for the continued growth of the
business: sales increased by 8 percent and net operating
losses declined by 38 percent.
The year 2001 also ended with significant impro v e m e n t s
to our balance sheet. Retail earnings before interest,
taxes, depreciation and amoritization (EBITDA) grew
from $381 million in 2000 to $392 million for the
year, with free cash flow of $218 million, compared to
a negative cash flow of $77 million for the previous
y e a r. Our balance sheet was further bolstered by
the GameStop IPO in the first quarter of 2002. These
t a rgeted initiatives, including working capital management
and corporate finance activities, have resulted in our
being in the strongest financial position in the
company’s history. We are well within the appropriate
safety margins in terms of all of our key ratios, and in a
position to negotiate credit facilities to provide upside
support as well as downside protection. Given the
current nature of the debt and equity markets, we
believe we are in an enviable position.
Looking forw a rd to this year, and to the years that
f o l l o w, we are optimistic and encouraged. As always in
the world of retail, and especially as a bookseller in the
midst of an information revolution, we have much work
ahead of us. We are resolved, we are committed, and we
will remain opportunistic. As always, we will strive to
achieve the best business practices, and of course, chart
the best and clearest path to profitable gro w t h .
Our success ultimately depends upon the work of our
dedicated booksellers and the faith of our share h o l d e r s .
Thank you for your support and the import a n t
contributions you continue to make.