BARNES & NOBLE
                 97
                      ANNUAL   REPORT
BARNES & NOBLE 1997
                              FINANCIAL HIGHLIGHTS




                             YEAR-END STOCK PRI...
1997 NEW STORES
               BETHESDA, MD




                                                                          ...
BURLINGTON, VT




               BATON ROUGE, LA




                                                   B     arnes & Nob...
BARNES & NOBLE 1997
                                                                    FINANCIAL HIGHLIGHTS




         ...
LETTER TO OUR
                                                                         SHAREHOLDERS




I
                ...
A BANNER YEAR
                                                                             1997 IN REVIEW




            ...
A BANNER YEAR CONTINUED




                                 handling, freight, scheduling and            we were able to ...
MARCH                                MAY                                JUNE                           AUGUST
1997


     ...
1998
    SEPTEMBER                            OCTOBER                              DECEMBER                           JANU...
A DYNAMIC OUTLOOK
                                                                                        1998 AND BEYOND
...
SELECTED CONSOLIDATED FINANCIAL DATA


     The selected consolidated financial data of Barnes & Noble, Inc. and its wholly...
Selected Consolidated Financial Data continued




FISCAL YEAR                                                            ...
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     The Company’s fiscal year is c...
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




      Complementing it...
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




     The following tab...
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




Depreciation and Amort...
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued




Cost of Sales and Occu...
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  1. 1. BARNES & NOBLE 97 ANNUAL REPORT
  2. 2. BARNES & NOBLE 1997 FINANCIAL HIGHLIGHTS YEAR-END STOCK PRICE RETURN ON BEGINNING EQUITY $31.81 14.2%(2) 12.8% 9.6%(1) $15.56 $13.81 ’95* ’96* ’97 ’96 ’97 ’95 * Adjusted for September ’97 Stock Split. (1) Before restructuring and asset impairment charge. (2) Before extraordinary charge due to the early extinguishment of debt, net of taxes. DILUTED EARNINGS PER COMMON SHARE FREE CASH FLOW Dollars in Millions $47.3 $0.93(2) $0 $0.75 $0.53(1) ($52.3) ($211.8) ’95 ’96 ’97 ’96 ’97 ’95 (1) Before restructuring and asset impairment charge. Free Cash Flow is defined as cash flows from operating activities less capital expenditures. (2) Before extraordinary charge due to the early extinguishment of debt, net of taxes. TABLE OF CONTENTS 1997 New Stores Front Gatefold Letter to Our Shareholders 2 A Banner Year: 1997 In Review 4-6 BarnesandNoble.com 8-9 A Dynamic Outlook: 1998 and Beyond 10 Selected Consolidated Financial Data 11-12 Management’s Discussion and Analysis 13-19 Consolidated Financial Statements 20-23 Notes to Consolidated Statements 24-33 Report of Independent Certified Public Accountants 34 Shareholder Information Back Gatefold Barnes & Noble’s Top-Selling Titles 1997 Back Gatefold Front Cover: Four of the unique bookends available through BarnesandNoble.com and at Barnes & Noble stores. See inside catalogue pages to order.
  3. 3. 1997 NEW STORES BETHESDA, MD W E S T P O R T, C T A s of January 1998, Barnes & Noble operated 483 Barnes & Noble “super” stores and 528 B. Dalton stores in 49 states and the District of Columbia. In 1997, we opened 65 new Barnes & Noble stores and four new B.Dalton stores. Barnes & Noble stores offer UNION STATION, WASHINGTON D.C. an authoritative selection of more than 175,000 titles from more than 10,000 publishers, with an emphasis on small, independent publishers and university presses. Along with the comprehensive in-store selection, each store can fill customers’ special order requests from more than one million books in print. In addition, the wide array offered by our Newsstands has made Barnes&Noble BURLINGTON, VT CORPUS CHRISTI, TX one of the country’s largest retailers of specialty magazines. Our stores provide customers with places to relax and read, comfortable cafés, unique children’s sections, music departments and calendars of events featuring author appear- ances and discussion groups.
  4. 4. BURLINGTON, VT BATON ROUGE, LA B arnes & Noble is committed to talented new writers. In 1990 we established the Discover Great New Writers program as a forum for the works of new and emerging authors. Since then, we’ve had the opportunity to highlight the works of literally hundreds of new writers. We also support our communities through our efforts on behalf of First Book, a national organization dedicated to providing books to children with little or no access NEWPORT NEWS, VA to them outside of school. Through our bookstores, we launch local chapters of First Book, host book parties, and annually give over 50,000 books. We are one of the leading sponsors of Writers Harvest, an annual series of readings held across the country sponsored by Share Our METAIRIE, LA Strength, the nation’s foremost anti-poverty organization.
  5. 5. BARNES & NOBLE 1997 FINANCIAL HIGHLIGHTS Feb. 1, 1997(1) FISCAL YEAR Jan. 31, 1998 Jan. 27, 1996 (Dollars in Millions, except Per Share data) Revenues $2,796.9 $2,448.1 $1,976.9 Operating Profit(2) 147.3 119.7 88.6 Net Earnings(2)(3) 64.7 51.2 34.3 Diluted Earnings Per Common Share(4) 0.93 0.75 0.53 Return On Beginning Equity 14.2% 12.8% 9.6% Represents the 53 weeks ended February 1, 1997. All other years presented represent 52 weeks. (1) Before restructuring and asset impairment charge for the fiscal year ended January 27, 1996. (2) (3) Before extraordinary charge due to the early extinguishment of debt, net of taxes, for the fiscal year ended January 31, 1998. (4) Restated to reflect the effect of a two-for-one stock split on September 22, 1997 and to reflect the adoption of Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” during 1997. TOTAL REVENUES BARNES & NOBLE STORE REVENUES Dollars in Billions Dollars in Billions $2.8 $2.2 $2.4 $2.0 $1.9 $1.3 ’95 ’95 ’96 ’97 ’96 ’97 NET EARNINGS OPERATING PROFIT Dollars in Millions Dollars in Millions $64.7(2) $147.3 $119.7 $51.2 $88.6(1) $34.3(1) ’95 ’96 ’97 ’95 ’96 ’97 (1) Before restructuring and asset impairment charge. (1) Before restructuring and asset impairment charge. (2) Before extraordinary charge due to the early extinguishment of debt, net of taxes. 1
  6. 6. LETTER TO OUR SHAREHOLDERS I first time since the “super” t is fashionable these store rollout began, we have days to ask entrepre- achieved positive cash neurs the“vision” question. flow as a result of strong “What do you see on the dis- comparable store sales tant horizon,” they ask, and and the excellent execu- “What is your vision for the tion of our business plan. future of the company?” We have also lengthened The questions are intuited our lead as the world’s by the assumption that busi- largest bookseller and ness leaders are locked into have emerged as a power- the future by some sort of divine metaphysical ful global brand. For good connection: the size, color and calculus of their measure, we have launched an incredibly effective enterprises always measurable “within the mar- Web site, while at the same time managing to gins”. The present condition of their business is achieve earnings growth of 26 percent. viewed as a temporary aberration; articulation of a All of this is a result of keeping an eye on the business plan becomes the raison d’être of the com- ball as well as foreseeing the future. There is, after pany. Profit models replace profits, and planning all, a distinction between vision and focus. for the present is viewed as an ill-conceived notion. Let me conclude by saying that the successful I respectfully disagree. Let me give you an entrepreneurs of the next millennium will be dedi- example of what I mean. cated to both. By definition they will be leading, not Recently, a journalist asked me the vision following, in every aspect of their enterprise. But at question, “What does the future hold for Barnes & day’s end, their success will be a function of their Noble, now that it has done practically everything focus as much as it is of their vision. possible in bookselling? Will you be opening a Barnes & Noble and BarnesandNoble.com chain of music stores (—No—) or perhaps pioneering are picking up momentum just as the world of com- some innovation in the world of specialty retailing?” merce promises to be as vast and as breathtaking as My answer was simple: “We are barely half the distant horizon. We couldn’t think of a better way through our rollout,” I said, “so we’ve got at place to be at this moment in time. least 500 more stores to open. I mean, is a six-, seven-, even eight-billion dollar business something to shake a stick at these days?” Unsatisfied, the journalist said, “Yes, I realize that’s a lot of business, but what else will you do to occupy your time?” To which I replied, “Well, there is also the LEONARD RIGGIO matter of BarnesandNoble.com, a venture which is as challenging and as promising as anything we’ve Chairman and Chief Executive Officer ever attempted.” Frowning, she said, “You must have some- thing up your sleeve that you’re not willing to tell me about.” CLOCKWISE : LEONARD RIGGIO Chairman and Chief Executive On the pages of this report, we will address Officer MARIE J. TOULANTIS Executive Vice President, Finance some of the information which is “up our sleeve,” STEPHEN RIGGIO Vice Chairman MITCHELL S. KLIPPER President, and some which is right out on the table. For the Barnes & Noble Development 2
  7. 7. A BANNER YEAR 1997 IN REVIEW outstanding year for Barnes & Noble, the world’s largest bookseller, as we continued 1997 was another to outdistance our competition, drawing 14% of the large, robust U.S. consumer book market. In May of 1997, we launched BarnesandNoble.com, extending the global reach of the company and enhancing Fortune 500 our already formidable brand. In April 1998, we were named to the and were ranked eighth in the nation in highest total return to investors. The results of our long-term Seventy-nine percent of our “super” strategies were powerfully stores are now in the comp pool evidenced by: and prospects for further growth are strong. The early performance • Record-breaking revenues of BarnesandNoble.com has been • Strong comparable store sales impressive—1997 revenues for the • Operating profits in each of online business, in operation for four quarters just eight months of the fiscal year, • Positive cash flow nearly doubled in each of its first • Highest-ever net earnings three quarters for a total of $14.6 million. These early revenues fur- The performance of Barnes & ther evidence the power of the Noble stock reflected the market’s Barnes & Noble brand. During recognition of both our strong this launch phase, which was not fundamentals and our future growth supported by advertising expendi- prospects. In fiscal 1997, Barnes tures, customers visited our Web & Noble’s market capitalization site and purchased books largely increased more than $1.1 billion, based on word-of-mouth. and our stock price grew 104%. Operating Profits Revenues and Comparable Store Sales For the first time since the“super” store rollout began in 1990 we Total revenues rose to an all-time posted operating profits in all of our high of $2.797 billion, 14% over fiscal quarters. Operating profit of 1996. Barnes & Noble “super” $147.3 million reflected a 23% store revenues rose 21% to $2.246 increase over 1996, and as a per- billion and contributed 80% of centage of revenues, grew to 5.3% the total. Sales of bestsellers from last year’s 4.9%. represented less than 3% of total The operating profit increase revenues, emphasizing the can be attributed to two major diversity of our title offerings. factors. First, gross margin grew Barnes & Noble comparable 73 basis points primarily as a “super”store sales were up 9.4% in result of our continuing focus on 1997. This performance, among the direct buying, which is facilitated best in the entire retail industry, as by the Barnes & Noble central well as the best in book retailing, distribution center. The distribu- was due to an excellent merchandis- tion center, which opened in ing plan, high in-stock position and September of 1996, has brought enhanced store-level execution. 4
  8. 8. A BANNER YEAR CONTINUED handling, freight, scheduling and we were able to refinance our inventory costs down. We added $190 million, 117⁄8% subordinated five times the capacity of our previ- debt with senior debt. In recognition ous distribution network, thereby of Barnes& Noble’s strong financial broadening title selection and provid- performance, this refinancing was ing just-in-time inventory delivery to completed at significantly lower our stores. A strategic benefit of the spreads and will substantially distribution center is that its nearly decrease annual interest expense. 600,000 titles supply about 90% One of the key indicators of financial of the books purchased through leverage—average debt to earnings BarnesandNoble.com, before interest, taxes, depreciation an important competitive and amortization (EBITDA)— advantage in the e-commerce reduced from 1.98 times to 1.56 arena. Second, operating times, evidencing our strong cash profit improvement is also flow and moderating leverage. attributable to the contin- EBITDA increased 25% ued leveraging of fixed for the fiscal year to $224 million, costs such as selling, general and resulting in an EBITDA margin administrative, rent and pre-opening of 8.0%, the highest we have ever expenses. This leveraging was the recorded. 1997 represents the result of the maturation of the fourth consecutive year of at least TOP: DAVID K. CULLY President, Barnes & Noble stores from 2.3 25% growth in EBITDA. Barnes and Noble Distribution years in 1996 to 2.8 years in 1997. BOTTOM: THOMAS A. TOLWORTHY President, Barnes & Noble Net Earnings Continuing maturation will generate Booksellers further margin expansion as the Consolidated net earnings,before the stores grow to an average age of $11.5 million charge associated with 3.3 years by the end of 1998. the note redemption, increased 26% We easily absorbed the $15.4 to $64.7 million. Adjusting for both million operating loss associated with the net loss of $9.1 million for the start-up of BarnesandNoble.com BarnesandNoble.com’s first year of and have generated 23 consecutive operation and the $11.5 million quarters of operating profit increases. note redemption charge, the consol- The operating profit without idated net earnings would have BarnesandNoble.com would been $73.8 million, the highest in have been $162.7 million, resulting our history. After these in an operating margin of 5.8%. adjustments, consol- CONSOLIDATED EPS OF $0.93 IS COMPRISED OF idated EPS increased THE FOLLOWING: 1997 1996 Positive Cash Flows 24% to $0.93, driving Retail Business $ 1.06 $ 0.75 We generated $47.3 million of free the value of the BarnesandNoble.com (0.13) – cash flow. 1997 marked the first company’s shares to an $ 0.93 $0.75 year in which strong cash flows all-time high. from operating activities exceeded Shareholder Returns capital expenditures since the “super” store rollout began. This In September 1997, Barnes & was due in part to the strong Noble stock split. A purchase of 100 emphasis on inventory management shares for $2,000.00 at the initial facilitated by our new merchandise public offering in 1993 would have replenishment systems. Because of grown to 200 shares worth more record growth, expanded gross than $6,350.00 by the end of fiscal margins, improved operating 1997. This reflected a compound leverage and positive cash flows, annual return of over 30%. 6
  9. 9. MARCH MAY JUNE AUGUST 1997 We go live within AOL’s We launch on the Guests in the Live We partner with Marketplace • First book World Wide Web • Partnerships Author Auditorium: Frank Lycos, the Internet shipped: New Fix It with Microsoft,Hewlett-Packard McCourt, Emeril Lagasse, navigator Yourself Manual & Firefly announced Susan Isaacs E-COMMERCE: AN EXCITING GROWTH OPPORTUNITY online In 1997, another exciting chapter in our history began with the launch of our bookstore. Premiering on America Online in March and on the World Wide Web in May, BarnesandNoble.com quickly established itself as a leading player in the fast-growingworld of e-commerce. BARNESANDNOBLE.COM AND AMERICA ONLINE: A STRATEGIC B uilt by booksellers for book lovers, PARTNERSHIP BarnesandNoble.com makes book buying Last March, we became the easy, fast and fun. Our database of every book exclusive bookseller in America in print is powered by a proprietary search Online’s Marketplace. The AOL engine that allows users to locate books by site provides its members with author, title or subject. access to the proprietary database of BarnesandNoble.com, and To help our customers further tailor their enables us to directly reach a searches, we include book descriptions, reviews well-established online comm- and author interviews on hundred of thousands unity. In December of 1997, of titles, along with recommendations by our BarnesandNoble.com and editors and our online community of readers. America Online significantly expanded their relationship with Lively bulletin boards and reviews enable an exclusive four-year agreement readers to share their opinions about books. that gives BarnesandNoble.com At BarnesandNoble.com, customers can a commanding presence through- shop at the Gift Center, check out Bargain out AOL, and access to its more Books, or keep current with Books in the News. than 12 million members. Through our unique links, AOL’s They can stop in at the Magazine Stand, a members can now easily find titles related to specific Web content, particularly in high-traffic areas such as Personal Finance, Lifestyle and Entertainment. AOL Keyword: BarnesandNoble. 8
  10. 10. 1998 SEPTEMBER OCTOBER DECEMBER JANUARY The Affiliate Network We partner with We enter into a four-year We launch Book Benefits launches with over 40 The New York Times to launch alliance with America Online Network for Non-Profits with strategic partners Microsite • Revenues for the quarter • 600,000th book shipped: Making support from American Express ended November 1st increased Music For The Joy Of It • E-commerce agreement with 86% over prior quarter •1,000th Affiliate: Business Week Disney Online announced STRATEGIC MARKETING ALLIANCES Since the launch of our online bookstore, we have aggressively pursued and won marketing and distri- bution deals with the Web’s leading content, search and commerce sites. These deals serve to extend the reach of BarnesandNoble.com by creating links to high-traffic sites, such as Lycos, CNN Interactive, Discovery Channel Online, ZD Net, Time Inc. New Media, and concession featuring hundreds of the most USA Today. BarnesandNoble.com’s reach popular publications. The Magazine Stand gives was even further extended by the our customers worldwide the ability to subscribe thousands of additional Web sites to magazines at the lowest prices available on that have joined our innovative the Web. affiliate network. All of the affili- From the latest bestsellers and new releases ates earn commissions based upon sales generated from the traffic to diverse titles from small presses and university they direct to our site. publishers, we have more books available for We also entered into an exten- same-day shipping from our warehouse than sive partnership with Disney any online bookseller— currently almost in which BarnesandNoble.com 600,000 titles and growing. is the exclusive bookseller for their site; in addition, we operate In 1997, over 250,000 customers in 149 a Disney bookstore on our countries purchased their books from our own site. online store. The availability of every book in print combined with deep discounts and fast delivery has made BarnesandNoble.com the online global bookseller of choice. 9
  11. 11. A DYNAMIC OUTLOOK 1998 AND BEYOND milestones For 1998 and beyond, Barnes & Noble looks forward to capitalizing on the achieved in 1997. We plan to open approximately sixty new Barnes & Noble stores, continuing sustainedrollouts in retailing history. one of the most S ometime in the fall, we will In 1998 we anticipate contin- reach yet another milestone ued operating profit improvement due to strong comparable store with the opening of the 500th sales and more expense leverage. Barnes & Noble store, an event This will result in accelerating which will be celebrated company- cash flows and will allow us wide. Our first 500 stores repre- to aggressively increase advertising sent the establishment of an expenditures in order to capital- enduring franchise—one we ize on BarnesandNoble.com’s expect will result in increased sales momentum. market share in the years ahead. In 1997 we reinforced our As Barnes & Noble enters excellent existing leadership with 1998, we remain the only book key appointments. Steve Riggio retailer operating through all four became Vice Chairman of the channels of distribution: company. J. Alan Kahn, formerly retail stores, the Internet, President of our affiliate, Barnes 1-800-THE BOOK and & Noble College Bookstores, mail order. Barnes & became Chief Operating Officer; Noble’s singular ability to Marie Toulantis joined as Executive reach consumers through VicePresident of Finance.Jeff Killeen all available channels will was appointed Chief Operating enable us to garner Officer of BarnesandNoble.com. impressive market share growth, We also welcomed Frank particularly in light of favorable O’Neill as President of B. Dalton and improving demographics. Bookseller to lead our ongoing Further, new media like the strategic campaign to focus that CLOCKWISE: MARY ELLEN KEATING Internet are stimulating interest Senior Vice President, Corporate group of stores into a more Communications& Public Affairs in books that will result in an profitable core. Mary Ellen FRANK J. O’NEILL President, expansion of the market. Keating joined as Senior Vice B. Dalton Bookseller J. ALAN Barnes & Noble will continue KAHN Chief Operating Officer President, Barnes & Noble to emphasize the merchandising Corporate Communications and and marketing of books published Public Affairs. under the Barnes & Noble Books We enter 1998 with an imprint. The publishing imprint, expanded management team and in addition to differentiating a sharp, strategic focus on those us from the competition, repre- ventures that will best serve our sents value to our customers, premiere position as the world’s while at the same time creating largest bookseller. We are pleased incremental sales and higher that our efforts have returned sig- margins. BarnesandNoble.com nificant value for our investors in is an important channel for 1997, and look forward to continu- ing to maximize shareholder value. its distribution. 10
  12. 12. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data of Barnes & Noble, Inc. and its wholly owned subsidiaries (collectively, the Company) set forth on the following pages should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of January. The Statement of Operations Data for the 52 weeks ended January 31, 1998 (fiscal 1997), the 53 weeks ended February 1, 1997 (fiscal 1996) and the 52 weeks ended January 27, 1996 (fiscal 1995) and the Balance Sheet Data as of January 31, 1998 and February 1, 1997 are derived from, and are qualified by reference to, audited consolidated financial statements which are included elsewhere in this report. The Statement of Operations Data for the 52 weeks ended January 28, 1995 (fiscal 1994) and January 29, 1994 (fiscal 1993) and the Balance Sheet Data as of January 27, 1996, January 28, 1995 and January 29, 1994 are derived from audited consolidated financial statements not included in this report. Certain prior-period amounts have been reclassified for comparative purposes. FISCAL YEAR 1997 1996 1995 1994 1993 (Thousands of dollars, except per share data) STATEMENT OF OPERATIONS DATA: Revenues Barnes & Noble stores(1) $ 2,245,531 1,861,177 1,349,830 952,697 614,646 B. Dalton stores(2) 509,389 564,926 603,204 646,876 688,220 BarnesandNoble.com 14,601 — — — — Other 27,331 22,021 23,866 23,158 34,520 Total revenues 2,796,852 2,448,124 1,976,900 1,622,731 1,337,386 Cost of sales and occupancy 2,019,291 1,785,392 1,444,555 1,192,123 989,526 Gross profit 777,561 662,732 532,345 430,608 347,860 Selling and administrative expenses 540,423 465,687 383,692 316,457 267,699 Depreciation and amortization 76,951 59,806 47,881 36,617 29,077 Pre-opening expenses 12,918 17,571 12,160 9,021 8,940 Restructuring charge(3) — — 123,768 — — Operating profit (loss) 147,269 119,668 (35,156) 68,513 42,144 Interest expense, net and amortization of deferred financing fees(4) 37,666 38,286 28,142 22,955 25,807 Earnings (loss) before provision (benefit) for income taxes and extraordinary charge 109,603 81,382 (63,298) 45,558 16,337 Provision (benefit) for income taxes 44,935 30,157 (10,322) 20,085 8,584 Earnings (loss) before extraordinary charge 64,668 51,225 (52,976) 25,473 7,753 Extraordinary charge(5) 11,499 — — — — Net earnings (loss)(6) $ 53,169 51,225 (52,976) 25,473 7,753 Earnings (loss) per common share(7) Basic Earnings (loss) before extraordinary charge $ 0.96 0.77 (0.85) 0.42 0.15 Extraordinary charge $ 0.17 — — — — Net earnings (loss) $ 0.79 0.77 (0.85) 0.42 0.15 Diluted Earnings (loss) before extraordinary charge $ 0.93 0.75 (0.85) 0.41 0.15 Extraordinary charge $ 0.17 — — — — Net earnings (loss) $ 0.76 0.75 (0.85) 0.41 0.15 Weighted average common shares outstanding (7) Basic 67,237,000 66,103,000 62,434,000 59,970,000 52,039,000 Diluted 69,836,000 67,886,000 62,434,000 61,560,000 52,255,000 11
  13. 13. Selected Consolidated Financial Data continued FISCAL YEAR 1997 1996 1995 1994 1993 (Thousands of dollars, except per share data) STORE OPERATING DATA: Stores open at end of period Barnes & Noble stores(1) 483 431 358 268 203 B. Dalton stores(2) 528 577 639 698 734 Total 1,011 1,008 997 966 937 Comparable store sales increase (decrease)(8) Barnes & Noble stores(1) 9.4% 7.3% 6.9% 12.6% 8.6% B. Dalton stores(2) (1.1) (1.0) (4.3) (2.3) (0.3) Capital Expenditures $ 121,903 171,885 154,913 88,763 81,116 BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 264,719 212,692 226,500 155,976 182,403 Total assets $ 1,591,171 1,446,647 1,315,342 1,026,418 895,863 Long-term debt, less current portions $ 284,800 290,000 262,400 190,000 190,000 Shareholders’ equity $ 531,755 455,989 400,235 358,173 328,841 (1) Also includes 20 Bookstop and 25 Bookstar stores. (2) Also includes 18 Doubleday Book Shops, nine Scribner’s Bookstores and seven smaller format bookstores operated under the Barnes & Noble trade name repre- senting the Company’s original retail strategy. (3) Restructuring charge includes restructuring and asset impairment losses recognized upon adoption of Statement of Financial Accounting Standards No. 121, “Impairment of Long-Lived Assets and Assets to be Disposed Of.” (4) Interest expense for fiscal 1997, 1996, 1995, 1994, and 1993 is net of interest income of $446, $2,288, $2,138, $3,008 and $1,838, respectively. (5) Reflects a net extraordinary charge during fiscal 1997 due to the early extinguishment of debt, consisting of: (i) a pre-tax charge of $11,281 associated with the redemption premium on the Company’s senior subordinated notes; (ii) the associated write-off of $8,209 of unamortized deferred finance costs; and (iii) the related tax benefits of $7,991 on the extraordinary charge. (6) Net earnings (loss) does not give effect to preferred stock dividends. Holders of the Company’s Series C Preferred Stock were entitled to dividends of $4,466 during fiscal 1993. Such accumulated dividends were paid from the proceeds of the Company’s initial public offering completed on October 4, 1993 (IPO). Accumulated dividends on all other series of preferred stock outstanding were converted into common stock or waived during fiscal 1993. (7) All share and per-share amounts have been restated to give effect to a two-for-one stock split completed by the Company during fiscal 1997, and to reflect the adoption, in fiscal 1997, of Statement of Financial Accounting Standards No. 128, “Earnings per Share” for all periods presented. Fiscal 1993 earnings per share were computed on a pro forma basis and give effect to certain employee stock options using the treasury stock method, the number of shares issued upon the conversions of preferred stock and the exercise of warrants in connection with the IPO and the number of shares issued equal in value to the redemption price of the Series C Preferred Stock, including accumulated and unpaid dividends. (8) Comparable store sales increase (decrease) is calculated on a 52-week basis, and includes sales of stores that have been open for 12 months for B. Dalton stores and 15 months for Barnes & Noble stores (due to the high sales volume associated with grand openings). Comparable store sales for fiscal years 1997 and 1996 include relocated Barnes & Noble stores and exclude B. Dalton stores which the company has closed or has a formal plan to close. 12
  14. 14. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company’s fiscal year is comprised of 52 or 53 weeks, Barnes & Noble stores range in size from 10,000 to 60,000 ending on the Saturday closest to the last day of January. As used square feet depending upon market size, and each store features in this section, “fiscal 1997” represents the 52 weeks ended an authoritative selection of books, ranging from 60,000 to January 31, 1998, “fiscal 1996” represents the 53 weeks ended 175,000 titles. The comprehensive title selection is diverse and February 1, 1997 and “fiscal 1995” represents the 52 weeks ended reflects local interests. To further this diversity, Barnes & Noble January 27, 1996. emphasizes books published by small and independent publishers and university presses. Bestsellers represent only 3% of Barnes & Noble store sales. In addition to the extensive on-site selection, GENERAL each store can fill customers’ special order requests from the more than one million books in print. Barnes & Noble stores opened during fiscal 1997 added Barnes & Noble, Inc. (Barnes & Noble or the Company), the 1.6 million square feet to the Barnes & Noble base, bringing the world’s largest bookseller*, as of January 31, 1998 operates 483 total square footage to 10.8 million square feet, a 16% increase “super” stores, 65 of which were opened in fiscal 1997, under over the prior year. Barnes & Noble stores generated more than the Barnes & Noble Booksellers, Bookstop and Bookstar 80% of the Company’s total revenues in fiscal 1997. The Company trade names, and 528 mall bookstores under the B. Dalton plans to open approximately 60 Barnes & Noble stores in 1998 Booksellers, Doubleday Book Shops and Scribner’s Bookstore which are expected to average 26,000 square feet in size. trade names. Barnes & Noble publishes books under its At the end of fiscal 1997, the Company operated 528 own imprint for exclusive sale through its retail stores and B. Dalton stores in 45 states and the District of Columbia. mail-order catalogs. The Company is also the exclusive bookseller B. Dalton stores employ merchandising strategies that target the in America Online’s Marketplace (keyword: BarnesandNoble) “middle-American” consumer book market, offering a wide range and maintains its own Web site (BarnesandNoble.com), operating of bestsellers and general-interest titles. Doubleday and Scribner’s the “world’s largest bookseller online.” The Company employed bookstores utilize a more upscale format aimed at the “carriage approximately 27,200 full- and part-time booksellers and created trade” in higher-end shopping malls and place a greater emphasis nearly 3,200 new jobs nationwide during fiscal 1997 primarily due on hardcover and gift books. Most B. Dalton stores range in size to its Barnes & Noble store expansion. from 2,800 to 6,000 square feet, and while they are appropriate to Barnes & Noble is the largest operator of book “super” stores the size of adjacent mall tenants, the opening of superstores in in the United States* with 483 Barnes & Noble stores located in 48 nearby locations continues to have a significant impact on states and the District of Columbia as of January 31, 1998. With B. Dalton stores. more than 30 years of bookselling experience, management has a The Company is continuing to execute its strategy to maxi- strong sense of customers’ changing needs and the Company leads mize returns from its B. Dalton division in response to declining book retailing with a “community store” concept. Barnes & sales attributable primarily to superstore competition and, to a Noble’s typical store offers a comprehensive title base, a café, a lesser extent, weaker overall consumer traffic in shopping malls. children’s section, a music department and a calendar of ongoing Part of the Company’s strategy has been to close underperforming events, including author appearances and children’s activities, that stores, which has resulted in the closing of more than 50 B. Dalton make each Barnes & Noble store an active part of its community. stores per year since 1989. Management estimates that as much as 80% of the sales generated The Company has also been expanding the size of some of its by a new Barnes & Noble store is incremental to the community in new B. Dalton stores and is seeking better locations within malls. which the store is located, representing a combination of A new B. Dalton prototype was developed for this purpose in 1993 previously unfulfilled and newly created demand. and, since that time, more than 100 new or converted stores have been opened and are performing, on average, better than the remaining store base. * based upon sales reported in trade publications and public filings 13
  15. 15. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued Complementing its leadership position as the world’s largest RESULTS OF OPERATIONS bookseller, Barnes & Noble is the world’s largest supplier of books The Company’s revenues, operating profit (loss), comparable through catalogs*. The Company mails over 15 million catalogs store sales, store openings, store closings and number of stores each year and maintains a list of over one million customers world- open at year end are set forth below: wide. Barnes & Noble’s extensive catalog mailings have created substantial global name recognition which has benefited both the FISCAL YEAR 1997 1996 1995 retail stores and the online business. (Thousands of dollars) During 1997, the Company, through its wholly owned sub- REVENUES sidiary BarnesandNoble.com Inc., became the exclusive book- Retail Business $ 2,782,251 2,448,124 1,976,900 seller in America Online’s Marketplace, linking the world’s largest BarnesandNoble.com 14,601 — — bookseller with the world’s most popular Internet online service. Total $ 2,796,852 2,448,124 1,976,900 The exclusive four-year agreement gives BarnesandNoble.com OPERATING PROFIT (LOSS) an extensive presence throughout America Online. The Company Retail Business $ 162,664 119,668 (35,156) further extended its brand awareness by launching its own Web BarnesandNoble.com (15,395) — — site (BarnesandNoble.com) through which it has entered into Total $ 147,269 119,668 (35,156) thousands of strategic online alliances and affiliations, including COMPARABLE STORE SALES Lycos, Web Crawler, ZDNet, The New York Times and Disney. The INCREASE (DECREASE)(1) Company believes that it brings significant competitive advan- Barnes & Noble stores(2) 9.4% 7.3% 6.9% tages to the online bookselling market, including its distribution B. Dalton stores(3) (1.1) (1.0) (4.3) expertise, proprietary title database, large customer base and STORES OPENED brand recognition. Barnes & Noble stores(2) 65 91 97 The Company further differentiates its product offerings B. Dalton stores(3) 4 10 10 from those of its competitors by publishing books under its own Total 69 101 107 Barnes & Noble Books imprint for exclusive sale in its retail stores, STORES CLOSED direct-mail catalogs and through BarnesandNoble.com. With Barnes & Noble stores(2) 13 18 7 publishing and distribution rights to over 1,500 titles, Barnes & B. Dalton stores(3) 53 72 69 Noble Books offers customers high-quality books at excellent Total 66 90 76 values and generates attractive gross margins. NUMBER OF STORES OPEN The Company also maintains an equity investment in AT YEAR END Barnes & Noble stores(2) 483 431 358 Chapters Inc., an Ontario company which is publicly traded on B. Dalton stores(3) 528 577 639 the Toronto Stock Exchange. Chapters is the largest book retailer Total 1,011 1,008 997 in Canada and the third largest in North America*, operating 347 SQUARE FEET OF SELLING SPACE bookstores, including 29 superstores, as of the end of fiscal 1997. AT YEAR END (IN MILLIONS) Barnes & Noble stores(2) 10.8 9.3 7.0 B. Dalton stores(3) 2.0 2.2 2.4 Total 12.8 11.5 9.4 (1) Comparable store sales for B. Dalton stores are determined using stores open at least 12 months. Comparable store sales for Barnes & Noble stores are determined using stores open at least 15 months, due to the high sales volume associated with grand openings. Comparable store sales increase (decrease) is computed on a 52-week basis for fiscal 1996. (2) Also includes 20 Bookstop and 25 Bookstar stores. (3) Also includes 18 Doubleday Book Shops, nine Scribner’s Bookstores and seven smaller format bookstores operated under the Barnes & Noble trade * based upon sales reported in trade publications and public filings name representing the Company’s original retail strategy. 14
  16. 16. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued The following table sets forth, for the periods indicated, the 52 WEEKS ENDED JANUARY 31, 1998 COMPARED WITH 53 WEEKS percentage relationship that certain items bear to total revenues of ENDED FEBRUARY 1, 1997 the Company: Revenues FISCAL YEAR 1997 1996 1995 The Company’s revenues increased 14.2% during fiscal 1997 to $2.797 billion from $2.448 billion during fiscal 1996. Fiscal 1996 Revenues 100.0% 100.0% 100.0% includes 53 weeks; excluding the impact of the 53rd Cost of sales week, revenues increased 16.0%. Fiscal 1997 revenues from and occupancy 72.2 72.9 73.1 Barnes & Noble stores, which contributed 80.3% of total Gross margin 27.8 27.1 26.9 revenues, increased 20.7% to $2.246 billion from $1.861 billion Selling and administrative in fiscal 1996. expenses 19.3 19.0 19.4 The increase in revenues was primarily due to the 9.4% Depreciation and increase in Barnes & Noble comparable store sales and the open- amortization 2.8 2.5 2.4 ing of an additional 65 Barnes & Noble stores during 1997. This Pre-opening expenses 0.4 0.7 0.6 increase was slightly offset by declining revenues of B. Dalton Restructuring charge — — 6.3 stores which closed 53 stores and posted a comparable store sales Operating margin(1) 5.3 4.9 (1.8) decline of 1.1%. BarnesandNoble.com, the Company’s new online Interest expense, net subsidiary, also contributed to the increase in revenue, posting and amortization of $14.6 million of revenues during its first partial year deferred financing fees 1.4 1.6 1.4 of operations. Earnings (loss) before provision (benefit) Cost of Sales and Occupancy for income taxes and The Company’s cost of sales and occupancy includes costs extraordinary charge(1) 3.9 3.3 (3.2) such as rental expense, common area maintenance, merchant Provision (benefit) for association dues, lease-required advertising and adjustments income taxes(1) 1.6 1.2 (0.5) for LIFO. Earnings (loss) before Cost of sales and occupancy increased 13.1% during fiscal extraordinary charge(1) 2.3 2.1 (2.7) 1997 to $2.019 billion from $1.785 billion in fiscal 1996 resulting in Extraordinary charge 0.4 — — an increase in the Company’s gross margin rate to 27.8% in fiscal Net earnings (loss) 1.9% 2.1% (2.7)% 1997 from 27.1% in fiscal 1996. The gross margin expansion (1) If operating margin, earnings (loss) before provision (benefit) for income reflects more direct buying, reduced costs of shipping and taxes and extraordinary charge, provision (benefit) for income taxes and handling, and improvements in merchandise mix. earnings (loss) before extraordinary charge were presented before the effects of the restructuring charge of $123,768 during fiscal 1995, the per- centage relationship that these items would bear to total revenues of the Selling and Administrative Expenses Company would be 4.5%, 3.1%, 1.4% and 1.7%, respectively. Selling and administrative expenses increased $74.7 million, or 16.0% to $540.4 million in fiscal 1997 from $465.7 million in fiscal 1996. Selling and administrative expenses increased to 19.3% of revenues during fiscal 1997 from 19.0% during fiscal 1996 primarily as a result of the start -up expenses from BarnesandNoble.com. Excluding BarnesandNoble.com, selling and administrative expenses would have declined to 18.9% of revenues, reflecting operating leverage improvement. 15
  17. 17. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued Depreciation and Amortization Earnings Depreciation and amortization increased $17.2 million, Fiscal 1997 earnings before extraordinary charge increased or 28.8%, to $77.0 million in fiscal 1997 from $59.8 million in $13.4 million, or 26.2%, to $64.7 million (or $0.93 per diluted fiscal 1996. The increase was primarily the result of the new share) from $51.2 million (or $0.75 per diluted share) during Barnes & Noble stores opened during fiscal 1997 and fiscal 1996. fiscal 1996. The extraordinary charge in fiscal 1997 of $11.5 mil- lion equated to $0.17 per diluted share resulting in net earnings Pre-Opening Expenses during fiscal 1997 of $53.2 million (or $0.76 per diluted share). Pre-opening expenses declined in fiscal 1997 to $12.9 million All share and per-share amounts contained in this annual from $17.6 million in fiscal 1996 reflecting fewer new stores report have been restated to reflect a two-for-one split of the compared with prior years. Company’s common stock in September of 1997, and the adoption of Statement of Financial Accounting Standards No. 128, Operating Profit “Earnings per Share” (SFAS 128). Implementation of SFAS 128 Operating profit increased to $147.3 million in fiscal 1997 did not have a material effect on the Company’s diluted earnings from $119.7 million in fiscal 1996. Despite the $15.4 million oper- per share. SFAS 128 requires the disclosure of basic earnings per ating loss from BarnesandNoble.com, operating margin improved share in addition to diluted earnings per share. to 5.3% of revenues during fiscal 1997 from 4.9% of revenues during fiscal 1996. Excluding BarnesandNoble.com, operating 53 WEEKS ENDED FEBRUARY 1, 1997, COMPARED WITH 52 WEEKS margin for the retail business improved to 5.8% of revenues. ENDED JANUARY 27, 1996 Interest Expense, Net and Amortization of Deferred Revenues Financing Fees The Company’s revenues increased 23.8% during fiscal 1996 Interest expense, net of interest income, and amortization of to $2.448 billion from $1.977 billion during fiscal 1995. Fiscal deferred financing fees decreased $0.6 million in fiscal 1997 to 1996 includes 53 weeks; excluding the impact of the 53rd week, $37.7 million from $38.3 million in fiscal 1996. The decline was revenues increased 21.5%. During fiscal 1996, revenues from primarily due to lower borrowings under the Company’s senior Barnes & Noble stores rose 37.9% to $1.861 billion from $1.350 credit facilities. billion during fiscal 1995 and contributed 76.0% of total revenues, Provision for Income Taxes up from 68.3% during fiscal 1995. B. Dalton stores generated revenues of $564.9 million (or 23.1% of total revenues) during Barnes & Noble’s effective tax rate was 41.0% during fiscal fiscal 1996, down from $603.2 million (or 30.5% of total revenues) 1997 compared with 37.1% during fiscal 1996. The fiscal 1996 during fiscal 1995. provision reflected a non-recurring $3.0 million rehabilitation The increase in revenues was primarily attributable to an tax credit. increase in sales from Barnes & Noble stores. The Company Extraordinary Charge opened 91 Barnes & Noble stores and closed 18 during fiscal 1996 (12 of which were relocated), increasing square footage by 33% in As a result of obtaining a new senior credit facility during fiscal 1996. Comparable store sales for Barnes & Noble stores, fiscal 1997, the Company called its outstanding $190 million, 117⁄8 % which excludes the impact of the 53rd week of sales, increased senior subordinated notes on January 15, 1998, at a call premium 7.3% during fiscal 1996, in comparison to 6.9% during fiscal 1995. of 5.9375%. The extraordinary charge reflects (on an after-tax During fiscal 1996, revenues of B. Dalton stores declined, primar- basis) such call premium along with the write-off of related ily due to the 72 store closings and a comparable store sales deferred financing fees. decrease of 1.0%. 16
  18. 18. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued Cost of Sales and Occupancy Interest Expense, Net and Amortization of Deferred Financing Fees The Company’s cost of sales and occupancy includes costs such as rental expense, common area maintenance, merchant Interest expense, net of interest income, and amortization of association dues, lease-required advertising and adjustments deferred financing fees increased $10.2 million, or 36.0%, to $38.3 for LIFO. million during fiscal 1996 from $28.1 million during fiscal 1995. Cost of sales and occupancy increased 23.6% during fiscal The increase resulted from a rise in borrowings under the 1996 to $1.785 billion from $1.445 billion during fiscal 1995, but Company’s credit facility to finance working capital and capital decreased as a percentage of revenues to 72.9% during fiscal expenditures. The impact of the increased borrowings was par- 1996 from 73.1% during fiscal 1995 due to improvements in tially offset by a reduction in the Company’s weighted-average merchandise mix, as well as increases in merchandise margins due interest rate on its short-term borrowings. to more direct purchasing. Excluding the impact of LIFO, cost of Provision (Benefit) for Income Taxes sales and occupancy as a percentage of revenues declined to 72.9% in fiscal 1996 from 73.4% in fiscal 1995. The Company’s income tax provision during fiscal 1996 was $30.2 million compared with $26.1 million in fiscal 1995 (before Selling and Administrative Expenses the effects of the $123.8 million restructuring charge). Barnes & Selling and administrative expenses increased $82.0 million, Noble’s effective tax rate was 37.1% during fiscal 1996 and 43.2% or 21.4% to $465.7 million during fiscal 1996 from $383.7 million during fiscal 1995 (before the effects of the restructuring charge). during fiscal 1995. The Company’s operating leverage continued Such rates exceeded the federal statutory rate primarily due to the to improve as selling and administrative expenses decreased as a combined effects of goodwill amortization and state and local percentage of revenues to 19.0% during fiscal 1996 from 19.4% taxes. The fiscal 1996 provision also reflects a non-recurring during fiscal 1995. $3.0 million rehabilitation tax credit. Depreciation and Amortization Net Earnings (Loss) Depreciation and amortization increased $11.9 million, or As a result of the factors discussed above, the Company’s net 24.9%, to $59.8 million during fiscal 1996 from $47.9 million earnings in fiscal 1996 increased to $51.2 million from $34.3 during fiscal 1995. The increase was primarily a result of the million in fiscal 1995 (before the effects of the $123.8 million addition of 91 Barnes & Noble stores during fiscal 1996. restructuring charge). Fiscal 1996 earnings increased due to the continuing improvement in Barnes & Noble operating profits Pre-Opening Expenses combined with accelerating revenues over which to spread Pre-opening expenses increased $5.4 million, or 44.5%, to overhead costs. $17.6 million during fiscal 1996 from $12.2 million during fiscal Net earnings per diluted share were $0.75 during fiscal 1996 1995. As the Company amortizes pre-opening expenses over the compared with $0.53 during fiscal 1995 (before the effects of the respective store’s first 12 months of operation, the increase reflects restructuring charge). Net earnings increased 49.3% while earn- the opening of 109 new Barnes & Noble stores during the second ings per diluted share increased 41.5% due to an increase in the half of fiscal 1995 and the first half of fiscal 1996 compared with 68 diluted weighted-average shares outstanding to 67.9 million stores in the corresponding period of the previous year. shares during fiscal 1996 from 64.3 million shares during fiscal 1995, reflecting the full-year impact of 5.0 million common shares Operating Profit (Loss) issued in October of 1995. Operating profit, before the effects of the $123.8 million restructuring charge in fiscal 1995, increased $31.1 million, or 35.0% to $119.7 million during fiscal 1996 from $88.6 million during fiscal 1995. As a percentage of revenues, operating profit increased to 4.9% during fiscal 1996 from 4.5% during fiscal 1995 (before the effects of the restructuring charge), reflecting improved operating leverage. 17

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