1 Main Capital: Barnes & Noble Education ($BNED) Investment Case – Q2 2024
Investment Highlight: Barnes & Noble Education (BNED)
1 Main Capital Management presents an analysis of $BNED, a new opportunistic investment in their portfolio.
Business Overview
- Largest operator of college bookstores in the US with 1,245 stores (55% physical / 45% virtual)
- Serves nearly 6 million students
- Spun out of Barnes & Noble in 2015
Market Position
- Faced increasing competitive pressures from eTextbooks, rentals, and piracy since the spin-off
- Launched First Day Complete (FDC) program to address these challenges
Competitive Advantages
- First Day Complete (FDC) Program:
- Provides students with required course materials before the first day of class at below-market rates
- Automatic enrollment with less than 20% opt-out rate
- 30-50% discount for students
- 80% course material revenue uplift and 100% gross profit uplift for BNED upon adoption
- Win-Win Solution:
- Students benefit from discounts and improved educational outcomes
- Publishers benefit from higher sell-through rates
- Schools benefit from improved student outcomes and revenue-tied rent from BNED
Growth Runway
- FDC revenue growth from $100 million two years ago to nearly $300 million in the most recent fiscal year
- Potential for EBITDA to increase into the hundreds of millions of dollars, up from $40 million currently
Market Dynamics and Opportunities
- Accelerating pace of FDC adoption
- Recapitalization through a rights offering at 5c per share, diluting existing shareholders but providing growth capital
- New equity coming in at 8x EBITDA, an attractive multiple given the FDC-related growth opportunity
Valuation and Investment Strategy
- 1 Main Capital initially invested 50 basis points at 23c per share
- Received rights to invest up to an additional 3.5% of the fund’s capital at 5c per share
- Capitalized on a temporary price spike to exit initial investment at 3x entry price
- Repurchased shares after price decline, currently representing approximately 3% of the fund’s capital
Other Key Points
- Expectation of benefits from BNED’s growth plan execution in coming years
- Potential for re-inclusion in the Russell 2000 index mid-next year
- 100:1 reverse stock split implemented after the deal
1 Main Capital Management expresses optimism about BNED’s future performance, citing the company’s improved balance sheet and ability to invest aggressively in the FDC program. The fund manager believes this position will benefit from the company’s execution of its growth plan in the coming years.
Click here for the full pro investor letter.
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