Based on the attached annual report for Barnes and Noble:

• What is the ratio of total liability and minority interest to total assets for the last two years
• How does B&N look considering anything over 70 is considered too high

2014 Annual Report C ONTENTS 2 Barnes & Noble 2014 Letter to Shareholders 4 Selected Consolidated Financial Data 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Results of Operations 31 Consolidated Statements of Operations 31 Consolidated Statements of Comprehensive Income (Loss) 32 Consolidated Balance Sheets 33 Consolidated Statements of Changes in Shareholders' Equity 35 Consolidated Statements of Cash Flows 37 Notes to Consolidated Financial Statements 65 Report of Independent Registered Public Accounting Firm 68 Reports of Management 69 Shareholder Information 70 Corporate Information 71 Barnes & Noble Bestsellers 2014 72 Award Winners 1 2 Barnes & Noble, Inc. BAR N ES & N O B LE 2014 LE T T E R T O S H A R E H O LD E R S To Our Shareholders: We went into scal 2014 facing a number of challenges be they industry-wide or unique to our businesses. But, I'm happy to say we ended the year having made great progress on multiple fronts and delivered a solid nancial performance. Overall, Barnes & Noble generated $6.4 billion in total sales for the year. Our balance sheet remains strong, as the Company ended the year with $340 million in cash and no borrowings under our $1 billion credit facility. All three business segments contributed to our success, with Retail and College generating solid results and NOOK signicantly reducing year-over-year losses. Overall, Barnes & Noble generated consolidated annual earnings before interest, taxes, depreciation and amortization (EBITDA) of $251 million, the highest it has been in four years. Our Retail Group had a strong year, generating EBITDA of $354 million. Driving this performance was a popular title line-up across all categories and great execution in our bookstores. In particular, our booksellers, buyers and merchants worked hard to prepare our stores for the holiday season and our customers responded enthusiastically at the cash registers. We saw improved bookstore sales trends during scal 2014, which support industry reports that suggest e-book growth has moderated. As this trend continues, we believe we are well-positioned to serve our customers on multiple platforms. We intend to enhance our multi-platform oering soon with the re-launch of our bn.com E-commerce website later in the summer, with improved search and accuracy, and faster shipping that will enable us to be more ecient and competitive. College also had another solid year, with EBITDA increasing 2.8%, to $115 million, including a $22 million investment in Yuzu, our new digital education platform. College opened 30 new stores, and we see a strong pipeline ahead. The number of new and used titles available for rent increased signicantly, driving textbook rental growth of 61% for the year. Rentals provide a signicant cost savings to students and higher textbook margins for the company. We see signicant opportunities at College going forward. 2014 Annual Report The NOOK management team executed well on its operating and nancial plans, including selling through its device inventory, reducing expenses and exploring opportunities to grow content sales, which led to a $263 million reduction in EBITDA loss. As a result of our rationalization eorts in 2014, we expect a further decrease in EBITDA loss in the NOOK segment in 2015. This scal year NOOK moved from being a device-centric business to one more focused on growing content sales. We are excited about our new partnership with Samsung to create customized tablets that combine Samsung's leading tablet technology with NOOK's awardwinning reading experience. This partnership will enable the Company to reduce its exposure on the hardware production side while allowing NOOK to do what it does best - delivering the best reading experience in the marketplace. In June 2014, Barnes & Noble's Board of Directors authorized management to separate Barnes & Noble's Retail and NOOK Media businesses into two separate public companies. We believe these businesses will have the best opportunity to optimize shareholder value if they are capitalized and operated separately. Our goal is to complete the proposed separation by the end of the rst quarter of next calendar year. We expect our Retail and NOOK Media businesses will continue to have successful long-term business relationships with each other after separation. We are pleased with the progress we made during the year in each of our businesses thanks to the hard work and commitment of our Retail and College booksellers and NOOK employees around the country. I feel condent that we are well positioned to undertake the proposed separation of Retail and NOOK Media but recognize there is much work to be done. As we continue to adapt the structure of our company to the changing marketplace environment and evolving needs of our customers, there is one thing that will not change - our commitment that the Barnes & Noble brand will always stand for the highest quality content delivered wherever, whenever and however our customers choose to connect with us. Sincerely, Leonard Riggio 3 4 Barnes & Noble, Inc. S E LECTED CON S OL IDATED FIN AN CIAL D ATA The selected consolidated nancial data of Barnes & Noble, Inc. and its subsidiaries (collectively, the Company) set forth on the following pages should be read in conjunction with the consolidated nancial statements and notes included elsewhere in this report. The Company's scal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. The Statement of Operations Data for the 53 weeks ended May 3, 2014 (scal 2014), 52 weeks ended April 27, 2013 (scal 2013) and 52 weeks ended April 28, 2012 (scal 2012), and the Balance Sheet Data as of May 3, 2014 and April 27, 2013 are derived from, and are incorporated by reference to, audited consolidated nancial statements which are included elsewhere in this report. The Statement of Operations Data for the 52 weeks ended April 30, 2011 (scal 2011), May 1, 2010 (scal 2010), the Balance Sheet Data as of April 28, 2012, April 30, 2011 and May 1, 2010 are derived from audited consolidated nancial statements not included elsewhere in this report. 2014 Annual Report FISCAL YEAR (In thousands of dollars, except per share data) Fiscal 2014 Fiscal 2013 Fiscal 2012 Fiscal 2011 Fiscal 2010 $ 4,295,110 4,568,243 4,852,913 4,926,834 4,947,469 STATEMENT OF OPERATIONS DATA Sales Barnes & Noble Retail Barnes & Noble Collegea 1,748,042 1,763,248 1,743,662 1,778,159 833,648 NOOK 505,862 780,433 933,471 695,182 105,435 Eliminationb (167,657) (272,919) (400,847) (401,610) (78,798) Total sales 6,381,357 6,839,005 7,129,199 6,998,565 5,807,754 Cost of sales and occupancy 4,523,422 5,156,499 5,211,683 5,197,252 4,120,842 Gross prot 1,857,935 1,682,506 1,917,516 1,801,313 1,686,912 Selling and administrative expenses 1,606,936 1,675,376 1,739,452 1,629,465 1,395,725 216,807 227,134 232,667 228,647 207,774 Operating prot (loss) 34,192 (220,004) (54,603) (56,799) 83,413 Interest expense, net and amortization of deferred nancing feesc (29,507) (35,345) (35,304) (57,350) (28,237) Depreciation and amortization Earnings (loss) before taxes 4,685 (255,349) (89,907) (114,149) 55,176 Income taxes 51,953 (97,543) (25,067) (45,276) 12,422 Earnings (loss) (net of income tax) (47,268) (157,806) (64,840) (68,873) 42,754 Net loss attributable to noncontrolling interestsd Net earnings (loss) attributable to Barnes & Noble, Inc. 37 32 $ (47,268) (157,806) (64,840) (68,836) 42,786 $ (47,268) (157,806) (64,840) (68,873) 42,754 Earnings (loss) attributable to Barnes & Noble, Inc. Earnings (loss) Less loss attributable to noncontrolling interests Net earnings (loss) attributable to Barnes & Noble, Inc. $ (47,268) 37 32 (157,806) (64,840) (68,836) 42,786 Basic earnings per common share Net earnings (loss) attributable to Barnes & Noble, Inc. $ (1.12) (3.02) (1.34) (1.22) 0.75 Net earnings (loss) attributable to Barnes & Noble, Inc. $ (1.12) (3.02) (1.34) (1.22) 0.74 Dividends paid per share $ 0.75 1.00 Basic 58,971 58,247 57,337 56,588 55,344 Diluted 58,971 58,247 57,337 56,588 56,153 Diluted earnings per common share Weighted average common shares outstanding 5 6 Barnes & Noble, Inc. SELEC TED CONSOLIDATED FINANCIAL DATA continued FISCAL YEAR (In thousands of dollars, except per share data) Fiscal 2014 Fiscal 2013 Fiscal 2012 Fiscal 2011 Fiscal 2010 OTHER OPERATING DATA Number of stores Barnes & Noble stores 661 675 691 705 720 Barnes & Noble College 700 686 647 636 637 1,361 1,361 1,338 1,341 1,357 Total Comparable sales increase (decrease) Barnes & Noble Retaile (5.8)% Barnes & Noble Retail Core comparable salesf (3.1)% Barnes & Noble Collegeg (2.7)% Capital expenditures (3.4)% 1.4% 0.7% (4.8)% 0.1% 0.7% (8.3)% (5.3)% (1.2)% (0.3)% (0.8)% (0.2)% $ 134,981 165,835 163,552 110,502 127,779 Total assets $ 3,537,449 3,732,536 3,774,699 3,596,466 3,705,686 Total liabilities $ 2,300,559 2,443,631 2,730,155 2,675,969 2,706,815 BALANCE SHEET DATA Long-term debt $ 77,000 324,200 313,100 260,400 Long-term subordinated noteh $ 127,250 150,000 150,000 150,000 Shareholders' Equity $ 658,696 713,743 852,271 920,497 997,321 a B&N College results are included since the Acquisition on September 30, 2009. b Represents sales from NOOK to B&N Retail and B&N College on a sell through basis. c Amounts for scal 2014, scal 2013, scal 2012, scal 2011 and scal 2010 are net of interest income of $190, $71, $0, $320, and $452, respectively. d Noncontrolling interest represents the 50% outside interest in Begin Smart LLC. During the second quarter of scal 2011, the Company purchased the remaining 50% outside interest in Begin Smart LLC. e Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with Accounting Standards Codication (ASC) 605-25 Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores. f Core comparable store sales, which excludes sales of NOOK product, increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed or relocated stores. g Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with ASC 605-25 Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores. Additionally, for textbook rentals, comparable store sales reects the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period. h See Notes 5 and 19 to the Notes to Consolidated Financial Statements. 2014 Annual Report MANAGEM ENT'S DIS C USSION AN D AN A LY S I S O F FI N A N C I A L C O N D I T I O N A N D R E S U LT S O F OPERATIONS Barnes & Noble, Inc.'s (Barnes & Noble or the Company) scal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. As used in this section, \"scal 2014\" represents the 53 weeks ended May 3, 2014, \"scal 2013\" represents the 52 weeks ended April 27, 2013 and \"scal 2012\" represents the 52 weeks ended April 28, 2012. GE N E RA L Barnes & Noble, one of the nation's largest booksellers,1 is a leading content, commerce and technology company providing customers easy and convenient access to trade books, textbooks, magazines, newspapers and other content across its multi-channel distribution platform. As of May 3, 2014, the Company operated 1,361 bookstores in 50 states, including 700 bookstores on college campuses, and operates one of the Web's largest eCommerce sites and develops digital reading products and operates one of the largest digital bookstores. Given the dynamic nature of the book industry, the challenges faced by traditional booksellers, and the robust innovation pipeline fueling new opportunities in hardware, software and content creation and delivery, Barnes & Noble is utilizing the strength of its retail footprint to bolster its leadership in selling content to drive sales across its multiple channels. Of the 1,361 bookstores, Barnes & Noble Retail (B&N Retail) operates 661 retail bookstores, primarily under the Barnes & Noble Booksellers trade name, and includes the Company's eCommerce site. Barnes & Noble College Booksellers, LLC (B&N College) operates 700 college bookstores at colleges and universities across the United States, of which 155 stores are co-branded with the universities' name and Barnes & Noble name. B&N Retail also includes Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), a leader in general trade book publishing. The NOOK segment represents the Company's digital business, oering digital books and magazines for sale and consumption through the web, NOOK2 reading devices 1 Based upon sales reported in trade publications and public lings. 2 Any reference to NOOK include the Company's NOOK 1st Edition, NOOK Wi-Fi 1st Edition, NOOK Color, NOOK Simple Touch, NOOK Tablet, NOOK Simple Touch with GlowLight, NOOK HD, NOOK HD+ and NOOK GlowLight eReader devices, and each of which include the trademark symbol ( or , as applicable) even if a trademark symbol is not included. and reading software for iOS, Android and Windows 8. The Company employed approximately 34,000 full and parttime employees as of May 3, 2014. Including seasonal and temporary employees, the Company employed approximately 41,000 employees as of May 3, 2014. The Company's principal business is the sale of trade books (generally hardcover and paperback consumer titles), mass market paperbacks (such as mystery, romance, science ction and other popular ction), children's books, eBooks and other digital content, textbooks and course-related materials, NOOK and related accessories, bargain books, magazines, gifts, emblematic apparel and gifts, school and dorm supplies, caf products and services, educational toys & games, music and movies direct to customers through its bookstores or on barnesandnoble.com. The Company also oers a textbook rental option to its customers, as well as digital textbooks and other course materials through a proprietary digital platform (Yuzu). The Company oers its customers a full suite of textbook optionsnew, used, digital and rental. To address dynamic changes in the book selling industry, Barnes & Noble has transformed its business from a storebased model to a multi-channel model centered on its retail stores, Internet and digital commerce. The Company oers readers the option of store visits, eCommerce, and digital delivery of books to devices of their choosing, including the award winning NOOK eReaders. Barnes & Noble's strategy is to: utilize the strong Barnes & Noble brand and retail footprint to attract customers to its multi-channel platform; expand its distribution channels through strategic partnerships with world-class hardware and software companies and retail partners; drive content sales through the web, NOOK Readers and 3rd party devices; use its infrastructure to deliver digital content to customers; and continue to grow campus partnerships including store locations and students served while continuing its investment in the digital higher education business. 7 8 Barnes & Noble, Inc. MANAGEMENT 'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS continued The Company has a multi-channel marketing strategy that deploys various merchandising programs and promotional activities to drive trac to both its stores and website. At the center of this program is the Company's website, barnesandnoble.com. On April 27, 2012, the Company entered into an investment agreement between the Company, Morrison Investment Holdings, Inc. (Morrison) and Microsoft Corporation (Microsoft) pursuant to which the Company would form a Delaware limited liability company (NOOK Media), and transfer to NOOK Media the Company's digital device, digital content and college bookstore businesses and NOOK Media would sell to Morrison, and Morrison would purchase, 300,000 convertible preferred membership interests in NOOK Media (Series A preferred) for an aggregate purchase price of $300.0 million. On October 4, 2012, NOOK Media was formed and the Company sold to Morrison 300,000 convertible preferred membership interests in NOOK Media for an aggregate purchase price of $300.0 million. The convertible preferred membership interests have a liquidation preference equal to Microsoft's original investment. Concurrently with its entry into this agreement, the Company has also entered into a commercial agreement with Microsoft, whereby, among other things, NOOK Media has developed and distributed a Windows 8 application for eReading and digital content purchases, and has entered into an intellectual property license and settlement agreement with Microsoft and Microsoft Licensing GP. As part of the commercial agreement, for each of the rst three years since the launch of the application for Windows 8, NOOK Media received and will continue to receive advance payments of $60.0 million per year from Microsoft. These advance payments are subject to deferral under certain circumstances. Microsoft has paid and is obligated to continue to pay to NOOK Media $25.0 million each year for the rst ve years of the term for purposes of assisting NOOK Media in acquiring local digital reading content and technology development in the performance of NOOK Media's obligations under the commercial agreement. Under the terms of this transaction, NOOK Media was debt-free at inception, except for trade accounts payable and other working capital requirements. Under the limited liability company agreement of NOOK Media, no distributions may be made by NOOK Media without Morrison's approval. On March 10, 2014, the Company entered into an amendment (Amendment) to its existing Commercial Agreement. Pursuant to the Amendment, NOOK Media and Microsoft agreed to co-branding within the Microsoft Consumer Reader for reading content delivered by NOOK Media. The Amendment also provided that subject to certain conditions NOOK Media would be permitted to discontinue distributing the NOOK Windows app and will cooperate in good faith with Microsoft to transition users to the Microsoft Consumer Reader. Microsoft and NOOK Media also agreed to updated revenue sharing to address this possibility. The Amendment also permits NOOK Media to cease eorts with respect to a Windows phone app. On December 21, 2012, NOOK Media entered into an agreement with a subsidiary of Pearson plc (Pearson) to make a strategic investment in NOOK Media. That transaction closed on January 22, 2013, and Pearson invested approximately $89.5 million of cash in NOOK Media at a post-money valuation of approximately $1.789 billion in exchange for convertible preferred membership interests representing a 5% equity stake in NOOK Media. Following the closing of the transaction, the Company owns approximately 78.2% of NOOK Media and Microsoft, which holds convertible preferred membership interests, owns approximately 16.8%. The convertible preferred membership interests have a liquidation preference equal to the original investment. In addition, NOOK Media granted warrants to Pearson to purchase up to an additional 5% of NOOK Media under certain conditions at a pre-money valuation of NOOK Media of approximately $1.789 billion. At closing, NOOK Media and Pearson entered into a commercial agreement with respect to distributing Pearson content in connection with this strategic investment. On December 27, 2013, NOOK Media entered into an amendment to the commercial agreement that extends the term of the agreement and the timing of the measurement period to meet certain revenue share milestones. On June 4, 2014, barnesandnoble.com llc (NOOK Media Sub), a wholly owned subsidiary of NOOK Media and a subsidiary of Barnes & Noble, entered into a commercial agreement (Agreement) with Samsung Electronics America, Inc. (Samsung) relating to tablets. 2014 Annual Report Pursuant to the Agreement, NOOK Media Sub, after good faith consultations with Samsung and subject to Samsung's agreement, will select Samsung tablet devices under development to be customized and co-branded by NOOK Media Sub. Such devices will be produced by Samsung. The co-branded NOOK tablet devices may be sold by NOOK Media through Barnes & Noble retail stores, www.barnesandnoble.com, www.nook.com and other Barnes & Noble and NOOK Media websites. NOOK Media Sub and Samsung have agreed to develop co-branded Samsung Galaxy Tab 4 NOOK tablets as the initial co-branded devices pursuant to the Agreement. NOOK Media Sub has agreed to a minimum purchase commitment of 1,000,000 devices during the rst twelve months after the launch of the initial co-branded NOOK devices; provided that if NOOK Media Sub does not meet certain sales thresholds of the initial co-branded NOOK devices by December 31, 2014, then the twelve month period referred to above shall be extended to fteen months. NOOK Media Sub and Samsung have agreed to coordinate customer service for the co-branded NOOK devices and have both agreed to a license of intellectual property to promote and market the devices. Additionally, Samsung has agreed to fund a marketing fund for the co-branded NOOK devices at the initial launch and for the duration of the Agreement. The Agreement has a two year term, with certain termination rights, including termination (i) by NOOK Media Sub for a Samsung material default; (ii) by Samsung for a NOOK Media Sub material default; (iii) by NOOK Media Sub if Samsung fails to meet its shipping and delivery obligations in any material respect on a timely basis; and (iv) by either party upon insolvency or bankruptcy of the other party. On August 18, 2011, the Company entered into an investment agreement between the Company and Liberty GIC, Inc. (Liberty) pursuant to which the Company issued and sold to Liberty, and Liberty purchased, 204,000 shares of the Company's Series J Preferred Stock, par value $0.001 per share (Preferred Stock), for an aggregate purchase price of $204.0 million in a private placement exempt from the registration requirements of the 1933 Act. The shares of Preferred Stock will be convertible, at the option of the holders, into shares of Common Stock, representing 16.6% of the Common Stock outstanding as of August 29, 2011, (after giving pro forma eect to the issuance of the Preferred Stock), based on the initial conversion rate. The initial conversion rate reects an initial conversion price of $17.00 and is subject to adjustment in certain circumstances. The initial dividend rate for the Preferred Stock is equal to 7.75% per annum of the initial liquidation preference of the Preferred Stock to be paid quarterly and subject to adjustment in certain circumstances. On April 8, 2014, Liberty sold the majority of its shares to qualied institutional buyers in reliance on Rule 144A under the Securities Act and has retained an approximate 10 percent stake of its initial investment. As a result, Liberty will no longer have the right to elect two preferred stock directors to the Company's Board. Additionally, the consent rights and pre-emptive rights to which Liberty was previously entitled ceased to apply. On September 30, 2009, in connection with the closing of the acquisition of B&N College (the Acquisition), the Company issued the sellers (i) a senior subordinated note (the Senior Seller Note) in the principal amount of $100.0 million, with interest of 8% per annum payable on the unpaid principal amount, which was paid on December 15, 2010 in accordance to its scheduled date, and (ii) a junior subordinated note (the Junior Seller Note) in the principal amount of $150.0 million, payable in full on the fth anniversary of the closing of the Acquisition, with interest of 10% per annum payable on the unpaid principal amount. Pursuant to a settlement agreed to on June 13, 2012, the sellers have agreed to waive their right to receive $22.8 million in principal amount (and interest on such principal amount) of the Junior Seller Note. The net short-term payable of $127.3 million is due September 30, 2014 and has been reclassied to a short-term liability accordingly. 9 10 Barnes & Noble, Inc. MANAGEMENT 'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS continued S EGM E N T S The Company identies its operating segments based on the way the business is managed (focusing on the nancial information distributed) and the manner in which the chief operating decision maker interacts with other members of management. The Company's three operating segments are: B&N Retail, B&N College and NOOK. B&N Retail This segment includes 661 bookstores as of May 3, 2014, primarily under the Barnes & Noble Booksellers trade name. These stores generally oer a dedicated NOOK area, a comprehensive trade book title base, a caf, and departments dedicated to Juvenile, Toys & Games, DVDs, Music, Gift, Magazine and Bargain products. The stores also oer a calendar of ongoing events, including author appearances and children's activities. The B&N Retail segment also includes the Company's eCommerce website, barnesandnoble.com, and its publishing operation, Sterling Publishing. Barnes & Noble stores range in size from 3,000 to 60,000 square feet depending upon market size, with an overall average store size of 26,000 square feet. In scal 2014, the Company reduced the Barnes & Noble store base by approximately 400,000 square feet, bringing the total square footage to 17.4 million square feet, a 1.9% decrease from scal 2013. The Company opened three new Barnes & Noble stores in scal 2014, which total 84,000 square feet in size. Each Barnes & Noble store features an authoritative selection of books, ranging from 22,000 to 163,000 titles. The comprehensive title selection is diverse and reects local interests. Bestsellers typically represent between approximately 4% and 6% of Barnes & Noble store sales. Product Master, the Company's proprietary inventory management database, has approximately 16 million titles. By enhancing the Company's existing merchandise replenishment systems, Product Master allows the Company to achieve high in-stock positions and productivity at the store level through eciencies in receiving, cashiering and returns processing. Complementing this extensive on-site selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers at barnesandnoble.com while oering an option to have the book sent to the store or shipped directly to the customer. At the center of this eCommerce program is the Company's website, barnesandnoble.com. Sterling Publishing Sterling Publishing is a leading publisher of non-ction trade titles. Founded in 1949, Sterling publishes a wide range of non-ction and illustrated books and kits across a variety of imprints, in categories such as health & wellness, music & popular culture, food & wine, crafts & photography, puzzles & games and history & current aairs, as well as a large children's line. Sterling, with a solid backlist and robust value publishing program, has a 14,000+ title base of eBooks and print books. In addition, Sterling also distributes 1,000+ titles on behalf of client publishers. B&N College B&N College is one of the largest contract operators of bookstores on college and university campuses across the United States. As of May 3, 2014, B&N College operated 700 stores nationwide. These stores are operated under 448 contracts, which can cover multiple stores and include over 5 million students and faculty. B&N College's customer base, which is mainly comprised of students and faculty, can purchase various items from their campus stores, including textbooks, textbook rentals and course-related materials, emblematic apparel and gifts, trade books, computer products, NOOK products and related accessories, school and dorm supplies, convenience and caf items. B&N College provides extensive textbook rental options to its customers and has expanded its digital textbooks and other course materials through a proprietary digital platform (Yuzu). A signicant number of textbooks are now available in multiple formats: new, used, rental and digital (rental and ownership), resulting in improved choice and substantial student savings. B&N College operates 664 traditional college bookstores and 36 academic superstores, which are generally larger in size, oer cafs and provide a sense of community that engages the surrounding campus and local communities in college activities and culture. The traditional bookstores range in size up to 48,000 square feet. The academic superstores range in size from 8,000 to 111,000 square feet. B&N College generally operates its stores pursuant to multi-year management service agreements under which a school designates B&N College to operate the ocial school bookstore on campus and B&N College provides the school with regular payments that represent a percentage of store sales and, in some cases, include a minimum xed guarantee. 2014 Annual Report B&N College's business strategy is to maintain long-term relationships with colleges and universities by providing high-quality service to college administrators, faculty and students. B&N College is poised for continued growth with approximately 55% of college bookstores in the United States being operated by the educational institutions themselves. B&N College believes it will achieve this by increasing market share through new account acquisition and through strategic planning and outreach with its existing accounts to exploit opportunities and grow market share. NOOK This segment includes the Company's digital business, which includes the Company's eBookstore, digital newsstand and sales of NOOK devices and accessories through B&N Retail, B&N College and third party distribution partners. The underlying strategy of the NOOK business is to oer customers any digital book, newspaper or magazine, anytime, on any device. The Company remains committed to delivering to customers the best digital bookstore experience, while rationalizing its existing cost structure. As part of this commitment, the Company entered into a partnership on June 4, 2014, to develop co-branded Samsung Galaxy Tab 4 NOOK tablets that feature the awardwinning Barnes & Noble digital reading experience. The co-branded devices will combine popular Samsung Galaxy Tab 4 hardware with customized NOOK software to give customers powerful, full-featured tablets that are designed for reading, with easy access to Barnes & Noble's expansive digital collection of more than three million books, leading magazines and newspapers. The companies are expected to introduce the Samsung Galaxy Tab 4 NOOK in a 7-inch version in the U.S. in August 2014. The Company also intends to continue to develop and oer the best black-and-white eReaders on the market, backed by quality customer service and technology support for those devices. The Company will continue to sell through its existing on-hand device inventory as it segues into new products. At the same time, it will continue to leverage all Barnes & Noble retail, digital and partnership assets, as well as existing NOOK customer relationships. The Company intends to continue to provide the resources necessary for quality customer service and support sales of new devices and those in use by NOOK's existing customer base. On June 5, 2014, the Company entered into an Assignment of Lease for its 208,000 square foot Palo Alto, California campus. Employees will be relocated to new state-of-theart facilities totaling 88,000 square feet. NOOK employees will move to a new facility in Santa Clara, California, while Barnes & Noble College's digital education employees will relocate to a facility in Mountain View, California. The relocations are expected to occur by the end of the rst quarter of scal 2015. This action will result in a net reduction of annual occupancy expenses of approximately $9.6 million, reducing the Company's future lease commitments by approximately $102.1 million. In the fourth quarter of scal 2014, the Company recorded an asset impairment charge of $28.4 million related to this relocation. The Company also expects to incur cash closing costs and to adjust lease accounting items in the rst quarter of scal 2015 to reect the impact of these relocations. The digital products group has knowledgeable product development and operational management teams in the areas of reading software, digital content retailing and mobile device development. NOOK's development oce employs experienced engineers in its digital product area. The NOOK digital products management team is currently focused on next generation digital reading products to enhance the reading experience and help consumers discover content in new and interesting ways. The Digital Services team, which includes the Cloud and Commerce groups, is responsible for maintaining and developing the NOOK digital bookstore service. 11 12 Barnes & Noble, Inc. MANAGEMENT 'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS continued R E SULTS OF OP ERATION S Fiscal 2014 Fiscal 2013 Fiscal 2012 Sales (in thousands) Fiscal Year $ 6,381,357 $ 6,839,005 $ 7,129,199 Loss Attributable to Barnes & Noble, Inc. (in thousands) $ (47,268) $ (157,806) $ (64,840) Diluted Loss Per Common Share $ $ $ (1.34) (1.12) (3.02) Comparable Sales Increase (Decrease) Barnes & Noble storesa (5.8)% Barnes & Noble core storesb (3.1)% 0.1% 0.7% Barnes & Noble College storesc (2.7)% (1.2)% (0.3)% 3 2 Barnes & Noble College stores 30 49 32 Total 33 51 32 17 18 14 (3.4)% 1.4% STORES OPENED Barnes & Noble stores STORES CLOSED Barnes & Noble stores Barnes & Noble College stores 16 10 21 Total 33 28 35 Barnes & Noble stores 661 675 691 Barnes & Noble College stores 700 686 647 1,361 1,361 1,338 17.4 17.7 18.0 NUMBER OF STORES OPEN AT YEAR END Total SQUARE FEET OF SELLING SPACE AT YEAR END (in millions) Barnes & Noble stores a Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with ASC 605-25 Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores. b Core comparable store sales, which excludes sales of NOOK products, increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and does not include sales from closed or relocated stores. c Comparable store sales increase (decrease) is calculated on a 52-week basis, including sales from stores that have been open for at least 15 months and all eReader device revenue deferred in accordance with ASC 605-25 Revenue Recognition, Multiple Element Arrangements, and does not include sales from closed or relocated stores. Additionally, for textbook rentals, comparable store sales reects the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period. 2014 Annual Report The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales of the Company: Fiscal Year Sales Fiscal 2014 Fiscal 2013 Fiscal 2012 100.0% 100.0% 100.0% Cost of sales and occupancy 70.9 75.4 73.1 Gross margin 29.1 24.6 26.9 Selling and administrative expenses 25.2 24.5 24.4 Depreciation and amortization 3.4 3.3 3.3 Operating income (loss) 0.5 (3.2) (0.8) Interest expense, net and amortization of deferred nancing fees 0.5 0.5 0.5 Income (loss) before taxes 0.1 (3.7) (1.3) Income taxes 0.8 (1.4) (0.4) (2.3)% (0.9)% Loss (net of income tax) BUSI N E SS O VE RV IE W The Company's nancial performance has been signicantly impacted in recent years by a number of factors, including the expanding digital market, increased online competition and the economic downturn. However, the Company has beneted from reduced physical bookstore competition in the marketplace, the successful execution of new merchandising strategies, its ability to acquire new college contracts, and by expanding its oerings to college students. Additionally, the Company has leveraged its unique assets, iconic brands and reach to become a leader in the distribution of digital content. The Company derives the majority of its sales and net income from its B&N Retail and B&N College stores. B&N Retail comparable store sales beneted as one of B&N Retail's largest competitors in the sale of physical books, Borders Group, Inc. (Borders), completed liquidating all of its stores under Chapter 11 of the Bankruptcy Code in early scal 2012. While the Company expects declining physical book trends to continue industry-wide as consumer spending shifts further online and toward digital products, it expects to be the beneciary of further market consolidation as other non-book retailers reduce their presence in the book category. Additionally, the Company continues to experience positive trends in its Toys & Games business as a result of the successful execution of new merchandising strategies. The Company is making further investments in its retail business this scal year and plans to launch a new eCommerce platform, which it believes will allow it to be more competitive in the marketplace. (0.7)% B&N College provides direct access to a large and welleducated demographic group, enabling the Company to build relationships with students throughout their college years and beyond. The Company also expects to be the beneciary of market consolidation as more and more schools outsource their bookstore management. The Company is in a unique market position to benet from this trend given its full suite of services: bookstore management, textbook rental and digital delivery. The Company is making further investments in its college business, including its most recent launch of Yuzu. The Company believes higher education provides a long-term growth opportunity. NOOK represents the Company's digital business, which includes the Company's eBookstore, digital newsstand and sales of NOOK devices and accessories through B&N Retail, B&N College and third party distribution partners. The underlying strategy of the NOOK business is to oer customers any digital book, newspaper or magazine, anytime, on any device. The Company remains committed to delivering to customers the best digital bookstore experience, while rationalizing its existing cost structure. As part of this commitment, the Company entered into a partnership on June 4, 2014, to develop co-branded Samsung Galaxy Tab 4 NOOK tablets that feature the awardwinning Barnes & Noble digital reading experience. The co-branded devices will combine popular Samsung Galaxy Tab 4 hardware with customized NOOK software to give customers powerful, full-featured tablets that are designed for reading, with easy access to Barnes & Noble's expansive digital collection of more than three million books, leading magazines and newspapers. The companies are expected to 13 14 Barnes & Noble, Inc. MANAGEMENT 'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS continued introduce the Samsung Galaxy Tab 4 NOOK in a 7-inch version in the U.S. in August 2014. The Company also intends to continue to develop and oer the best black-and-white eReaders on the market, backed by quality customer service and technology support for those devices. The Company will continue to sell its existing device inventory through as it segues into new products. At the same time, it will leverage all Barnes & Noble retail, digital and partnership assets, as well as existing NOOK customer relationships. The Company intends to continue to provide the resources necessary for quality customer service and support sales of new devices and those in use by NOOK's existing customer base. On June 5, 2014, the Company entered into an Assignment of Lease for its 208,000 square foot Palo Alto, California campus. Employees will be relocated to new state-of-theart facilities totaling 88,000 square feet. NOOK employees will move to a new facility in Santa Clara, California, while Barnes & Noble College's digital education employees will relocate to a facility in Mountain View, California. The relocations are expected to occur by the end of the rst quarter of scal 2015. This action is expected to result in signicant annual occupancy expense savings. The Company sells digital content in the U.K. directly through its NOOK devices and its nook.co.uk website. The Company plans to continue to expand into additional international markets and believes that its partnership with Microsoft will help foster that expansion. Additionally, the Company believes that its partnership with Pearson will accelerate customer access to digital content by pairing Pearson's leading expertise in online learning with NOOK's expertise in reading technology, online commerce and customer service. The Company believes its footprint of more than 1,300 stores will continue to be a major competitive asset in capturing digital content share. The Company will continue to complement its traditional retail, trade book and college bookstores businesses with its electronic and Internet oerings, using retail stores in attractive geographic markets to promote and sell digital devices and content. Customers can see, feel and experiment with NOOK products in the Company's stores. Although the stores will be just a part of the oering, they will remain a key driver of sales and cash ow as the Company expands its multi-channel relationships with its customers. While the Company may open a few retail stores in new geographic markets, the Company expects to reduce the total net number of retail stores. B&N College expects to increase its college store base. Although the Company believes cash on hand, cash ows from operating activities, funds available from its Credit Facility, cash received and committed to NOOK Media and short-term vendor nancing provide the Company with adequate liquidity and capital resources for seasonal working capital requirements, the Company may raise additional capital to support key strategic initiatives. 5 3 W EEKS EN DED MAY 3 , 2 0 1 4 COMPARED W ITH 52 W EEKS EN DED APRIL 2 7 , 2 0 1 3 Sales The following table summarizes the Company's sales for the 53 weeks ended May 3, 2014 and 52 weeks ended April 27, 2013: 53 Weeks Ended Dollars in thousands B&N Retail B&N College May 3, 2014 $ 4,295,110 1,748,042 % Total 52 Weeks Ended April 27, 2013 % Total 67.3% $ 4,568,243 66.8% 27.4% 25.8% 1,763,248 NOOK 505,862 7.9% 780,433 11.4% Elimination (167,657) (2.6)% (272,919) (4.0)% Total Sales $ 6,381,357 100.0% $ 6,839,005 100.0% The Company's sales decreased $457.7 million, or 6.7%, during scal 2014 to $6.38 billion from $6.84 billion during scal 2013. The decrease by segment is as follows: B&N Retail sales decreased $273.1 million, or 6.0%, to $4.30 billion during the 53 weeks ended May 3, 2014 from $4.57 billion during the 52 weeks ended April 27, 2013, and accounted for 67.3% of total Company sales. The inclusion of the 53rd week contributed $56.6 million in additional sales in scal 2014. The decrease was attributable to a 5.8% decrease in comparable store sales, which decreased sales by $224.6 million, and lower online sales, which declined by $32.3 million. Closed stores decreased sales by $81.8 million, partially oset by new stores that increased sales by $19.0 million. Core comparable store sales, which exclude sales of NOOK products, decreased 3.1% as compared to the prior year. Core comparable store sales were impacted by lower physical book sales, partially oset by stronger sales in the Toys & Games and Gift categories. Core comparable sales were impacted by comparisons to the strong sales of the Fifty Shades and Hunger Games trilogies in the prior year. Excluding these trilogies, core comparable store sales decreased 1.7%. Sales of NOOK products at B&N Retail stores declined on lower device unit volume and lower average selling prices. B&N Retail also includes 2014 Annual Report third-party sales of Sterling Publishing, which declined $6.6 million, or 5.7%, versus the prior year. B&N College sales decreased $15.2 million, or 0.9%, to $1.75 billion during the 53 weeks ended May 3, 2014 from $1.76 billion during the 52 weeks ended April 27, 2013, and accounted for 27.4% of total Company sales. The inclusion of the 53rd week contributed $14.6 million in additional sales in scal 2014. The decrease was primarily due to a comparable store sales decline of 2.7% on lower textbook sales and a higher mix of lower priced used textbook rentals, partially oset by higher general merchandise sales. While comparable store sales percentages are adjusted for the impact of textbook rentals, sales dollars are negatively impacted by the continued growth of textbook rentals, which have a lower price than new or used textbooks, and a portion of rental sales are deferred over the rental period. Comparable sales dollars decreased sales by $73.5 million for the year. Recognition of previously deferred rental revenues increased sales by $2.0 million for the 53 weeks ended May 3, 2014. Closed stores decreased sales by $21.2 million, oset by new store openings, which increased sales by $63.2 million. NOOK sales decreased $274.6 million, or 35.2%, to $505.9 million during the 53 weeks ended May 3, 2014 from $780.4 million during the 52 weeks ended April 27, 2013. The inclusion of the 53rd week contributed $9.2 million in additional sales in scal 2014. Device and accessories sales decreased $211.0 million, or 44.8%, to $260.3 million during the 53 weeks ended May 3, 2014 on lower device unit volume and lower average selling prices. Two new tablet products were launched in scal 2013 versus one new e-Ink product in scal 2014, as the Company sold through most of its existing device inventories at reduced prices. Digital content sales decreased $63.6 million, or 20.6%, to $245.6 million during the 53 weeks ended May 3, 2014. The digital content decrease was primarily due to lower device unit volume throughout the year, lower average selling prices and comparisons to the Fifty Shades and Hunger Games trilogies in the prior year. Excluding the impact of these two trilogies, digital content sales decreased 17.5% during the 53 weeks ended May 3, 2014. The elimination represents sales from NOOK to B&N Retail and B&N College on a sell through basis. The decrease versus prior year was due to the lower device sales at B&N Retail. NOOK sales, net of this elimination, accounted for 5.3% of total Company sales. In scal 2014, the Company opened three and closed 17 Barnes & Noble stores, bringing its total number of B&N Retail stores to 661 with 17.4 million square feet. In scal 2014, the Company added 30 B&N College stores and closed 16, ending the period with 700 B&N College stores. As of May 3, 2014, the Company operated 1,361 stores in the fty states and the District of Columbia. Cost of Sales and Occupancy 53 Weeks Ended Dollars in thousands May 3, 2014 B&N Retail B&N College $2,956,821 % Sales 52 Weeks Ended April 27, 2013 68.8% $ 3,168,520 % Sales 69.4% 1,310,673 75.0% 1,358,172 77.0% NOOK 423,585 83.7% 902,726 115.7% Elimination (167,657) (33.1)% (272,919) (35.0)% Total Cost of Sales and Occupancy $4,523,422 70.9% $ 5,156,499 75.4% The Company's cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation and other operating expenses), rental expense, management service agreement costs with schools, common area maintenance and real estate taxes, partially oset by landlord tenant allowances amortized over the life of the lease. Cost of sales and occupancy decreased $633.1 million, or 12.3%, to $4.52 billion in scal 2014 from $5.16 billion in scal 2013. Cost of sales and occupancy decreased as a percentage of sales to 70.9% in scal 2014 from 75.4% in scal 2013. The decrease by segment is as follows: B&N Retail cost of sales and occupancy decreased as a percentage of sales to 68.8% in scal 2014 from 69.4% in scal 2013. This decrease was attributable to a higher mix of higher margin core products (which excludes NOOK products), increased favorable vendor allowances and settlements, partially oset by expense deleverage against sales decline. B&N College cost of sales and occupancy decreased as a percentage of sales to 75.0% in scal 2014 from 77.0% in scal 2013 due to a favorable sales mix of higher margin textbook rentals and general merchandise, increased textbook rental margin rates, and a $7.7 million favorable LIFO adjustment this year compared to a $2.2 million unfavorable LIFO adjustment last year. These were partially oset by sales deleveraging and higher occupancy costs as a result of contract renewals. 15 16 Barnes & Noble, Inc. MANAGEMENT 'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS continued NOOK cost of sales and occupancy decreased as a percentage of sales to 83.7% in scal 2014 from 115.7% in scal 2013. During scal 2013, the Company recorded $222.2 million of additional inventory related charges, of which $189.7 million was recorded to cost of sales and the remainder related to sales allowances, as the holiday sales shortfall resulted in higher than anticipated levels of nished and unnished goods. The current year includes a reduction in cost of sales of $25.7 million as the Company sold through devices at higher average selling prices than originally anticipated, and also was able to use parts and components, which were previously written down, to build more devices to meet higher than expected demand. The current year also includes $21.8 million of inventory charges to write down device development and other costs reective of changes to the Company's device strategy. Gross Margin 53 Weeks Ended Dollars in thousands B&N Retail B&N College NOOK Total Gross Margin May 3, 2014 $1,338,289 % Sales 52 Weeks Ended April 27, 2013 % Sales 31.2% $ 1,399,723 30.6% 437,369 25.0% 405,076 23.0% 82,277 24.3% (122,293) (24.1)% $1,857,935 29.1% $ 1,682,506 24.6% The Company's consolidated gross margin increased $175.4 million, or 10.4%, to $1.86 billion in scal 2014 from $1.68 billion in scal 2013. This increase was due to the matters discussed above. Selling and administrative expenses decreased $68.4 million, or 4.1%, to $1.61 billion in scal 2014 from $1.68 billion in scal 2013. Selling and administrative expenses increased as a percentage of sales to 25.2% in scal 2014 from 24.5% in scal 2013. The change as a percentage of sales by segment is as follows: B&N Retail selling and administrative expenses increased as a percentage of sales to 22.9% in scal 2014 from 22.4% in scal 2013. This increase was primarily due to deleveraging against the sales decline. B&N College selling and administrative expenses increased as a percentage of sales to 18.5% in scal 2014 from 16.7% in scal 2013. This increase was primarily due to deleveraging against the sales decline as well as continued investments in Yuzu, B&N College's digital education platform. NOOK selling and administrative expenses increased as a percentage of sales to 88.7% in scal 2014 from 70.6% in scal 2013. The current year includes a $28.4 million asset impairment resulting from the relocation of the Palo Alto, CA facility. The prior year included $20.3 million of impairment charges, primarily including goodwill. Excluding these impairment charges, S&A expenses increased to 80.3% from 66.6% primarily due to sales deleverage. Expense dollars declined on lower advertising, consulting, compensation and legal expenses. Depreciation and Amortization 53 Weeks Ended Dollars in thousands Selling and Administrative Expenses 53 Weeks Ended Dollars in thousands B&N Retail May 3, 2014 $ 984,236 B&N Retail 52 Weeks Ended April 27, 2013 % Sales 22.9% $ 1,023,633 22.4% % Sales B&N College 322,819 18.5% 293,618 299,881 88.7% 358,125 70.6% 25.2% $ 1,675,376 24.5% April 27, % Sales 2013 % Sales $ 125,991 2.9% $ 148,855 3.3% B&N College 48,014 2.7% 46,849 2.7% NOOK 42,802 12.7% 31,430 6.2% 3.4% $ 227,134 3.3% Total Depreciation and Amortization $ 216,807 16.7% NOOK 52 Weeks Ended May 3, 2014 Total Selling and Administrative Expenses $ 1,606,936 Depreciation and amortization decreased $10.3 million, or 4.5%, to $216.8 million in scal 2014 from $227.1 million in scal 2013. This decrease was primarily attributable to store closings and fully depreciated assets, partially oset by additional capital expenditures. 2014 Annual Report Operating Prot (Loss) 53 Weeks Ended Dollars in thousands B&N Retail B&N College 52 Weeks Ended May 3, 2014 % Sales April 27, 2013 % Sales $ 228,062 5.3% $ 227,235 NOOK (260,406) Total Operating Prot (Loss) $ 34,192 5.0% 3.8% 66,536 3.7% 64,609 (77.0)% (511,848) (100.9)% 0.5% $ (220,004) (3.2)% The Company's consolidated operating prot increased $254.2 million, or 115.5%, to an operating prot of $34.2 million in scal 2014 from an operating loss of $(220.0) million in scal 2013. This increase was due to the matters discussed above. Interest Expense, Net and Amortization of Deferred Financing Fees 53 Weeks Ended Dollars in thousands Interest Expense, Net and Amortization of Deferred Financing Fees 52 Weeks Ended May 3, 2014 April 27, 2013 % of Change $ 29,507 $ 35,345 In accordance with US GAAP rules on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a particular deferred tax asset will not be realized. As part of this evaluation, the Company reviews all evidence, both positive and negative, to determine if a valuation allowance is needed. The Company's review of positive evidence included the review of feasible tax planning strategies that may be implemented and the reversal of temporary items. The Company determined that there was sucient negative evidence to establish valuation allowances against certain deferred tax assets generated during this scal year, totaling $19.2 million. The Company will monitor the need for additional valuation allowances at each quarter in the future and, if the negative evidence outweighs the positive evidence, an allowance will be recorded. Net Earnings (Loss) 53 Weeks Ended (16.5)% Dollars in thousands Net interest expense and amortization of deferred nancing fees decreased $5.8 million, or 16.5%, to $29.5 million in scal 2014 from $35.3 million in scal 2013. This decrease was due to lower average borrowings in the current year. Income Taxes 53 Weeks Ended Dollars in thousands Income Taxes May 3, Effective 2014 Rate $ 51,953 52 Weeks Ended April 27, Effective 2013 Rate 1,108.9% $ (97,543) 38.2% The Company recorded an income tax provision in scal 2014 of $52.0 million compared with income tax benet of $(97.5) million in scal 2013. The Company's eective tax rate increased to 1,108.9% in scal 2014 compared with 38.2% in scal 2013. The higher eective tax rate in scal 2014 was due primarily to the impacts of valuation allowances, loss allocations within the Company's NOOK Media joint venture and non-deductible expenses, partly oset by R&D tax credits, state loss carryforwards and changes to unrecognized tax benets. Net Loss May 3, 2014 $ (47,268) Diluted EPS 52 Weeks Ended April 27, 2013 Diluted EPS $ (1.12) $ (157,806) $ (3.02) As a result of the factors discussed above, the Company reported a consolidated net loss of $(47.3) million (or $1.12 per diluted share) during scal 2014, compared with consolidated net loss of $(157.8) million (or $3.02 per diluted share) during scal 2013. 5 2 W EEKS EN DED APRIL 2 7 , 2 0 1 3 COMPARED WI TH 52 W EEKS EN DED APRIL 2 8 , 2 0 1 2 Sales The following table summarizes the Company's sales for the 52 weeks ended April 27, 2013 and April 28, 2012: 52 weeks ended Dollars in thousands B&N Retail B&N College NOOK Elimination Total Sales April 27, 2013 % Total April 28, 2012 % Total $ 4,568,243 66.8% $ 4,852,913 68.1% 1,763,248 25.8% 1,743,662 24.4% 780,433 11.4% 933,471 13.1% (272,919) $ 6,839,005 (4.0)% 100.0% (400,847) $ 7,129,199 (5.6)% 100.0% 17 18 Barnes & Noble, Inc. MANAGEMENT 'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS continued The Company's sales decreased $290.2 million, or 4.1%, during scal 2013 to $6.84 billion from $7.13 billion during scal 2012. The increase or decrease by segment is as follows: Cost of Sales and Occupancy B&N Retail sales for the 52 weeks ended April 27, 2013 decreased $284.7 million, or 5.9%, to $4.57 billion from $4.85 billion during the same period one year ago, and accounted for 66.8% of total Company sales. The decrease was primarily attributable to a 3.4% decrease in comparable store sales, which decreased sales by $138.4 million, lower online sales, which declined by $83.5 million, and closed store sales, which decreased sales by $68.0 million. Core comparable store sales, which exclude sales of NOOK products, increased 0.1% as compared to the prior year. Sales of NOOK products declined due to lower unit volume. B&N Retail also includes third-party sales of Sterling Publishing Co., Inc. B&N Retail B&N College sales increased $19.6 million, or 1.1%, to $1.76 billion during the 52 weeks ended April 27, 2013 from $1.74 billion during the 52 weeks ended April 28, 2012. This increase was attributable to a $76.5 million increase in new store sales partially oset by $16.0 million of store closures as well as a comparable store sales decrease of 1.2%, or $41.9 million. While comparable store sales are adjusted for the impact of textbook rentals, total sales dollars are negatively impacted by the continued growth of textbook rentals, which have a lower price than new or used textbooks, and a portion of rental sales are deferred over the rental period. This decrease was partially oset by higher general merchandise sales. NOOK sales decreased $153.0 million, or 16.4%, to $780.4 million during the 52 weeks ended April 27, 2013 from $933.5 million during the 52 weeks ended April 28, 2012. This decrease was primarily due to lower device unit volume and lower average selling prices, partially oset by higher content sales. Digital content sales increased 16.2% during the 52 weeks ended April 27, 2013. The elimination represents sales from NOOK to B&N Retail and B&N College on a sell through basis. In scal 2013, the Company opened two and closed 18 Barnes & Noble stores, bringing its total number of B&N Retail stores to 675 with 17.7 million square feet. In scal 2013, the Company added 49 B&N College stores and closed 10, ending the period with 686 B&N College stores. As of April 27, 2013, the Company operated 1,361 stores in the fty states and the District of Columbia. 52 weeks ended Dollars in thousands April 27, 2013 April 28, 2012 % Sales 69.4% $ 3,398,773 70.0% 1,358,172 77.0% 1,348,351 77.3% NOOK 902,726 115.7% 865,406 92.7% Elimination (272,919) (35.0)% (400,847) (42.9)% B&N College $ 3,168,520 % Sales Total Cost of Sales and Occupancy $ 5,156,499 75.4% $ 5,211,683 73.1% The Company's cost of sales and occupancy includes costs such as merchandise costs, distribution center costs (including payroll, freight, supplies, depreciation and other operating expenses), rental expense, management service agreement costs with schools, common area maintenance and real estate taxes, partially oset by landlord tenant allowances amortized over the life of the lease. Cost of sales and occupancy decreased $55.2 million, or 1.1%, to $5.16 billion, in scal 2013 from $5.21 billion in scal 2012. Cost of sales and occupancy increased as a percentage of sales to 75.4% in scal 2013 from 73.1% in scal 2012. The increase or decrease by segment is as follows: B&N Retail cost of sales and occupancy decreased as a percentage of sales to 69.4% from 70.0% during the same period one year ago. This decrease was attributable to a higher mix of higher margin core products (which exclude sales of NOOK products) and increased vendor allowances. B&N College cost of sales and occupancy decreased as a percentage of sales to 77.0% from 77.3% during the same period one year ago due to a higher mix of higher margin textbook rentals, partially oset by increases in occupancy associated with contract renewals. NOOK cost of sales and occupancy increased as a percentage of sales to 115.7% from 92.7% during the same period one year ago. This increase was attributable to $222.2 million of additional inventory related charges, of which $189.7 million was recorded to cost of sales, as the holiday sales shortfall resulted in higher than anticipated levels of nished and unnished goods. Additional provisions may be required if the Company adopts more aggressive short-term promotional strategies, units turn at slower than historical paces, or permanent price markdowns accelerate. Also contributing to the increase was higher occupancy costs on increased oce space in Palo Alto, CA, partially oset by a higher mix of higher margin content sales. 2014 Annual Report Gross Margin Depreciation and Amortization 52 weeks ended 52 weeks ended Dollars in thousands B&N Retail April 27, 2013 $ 1,399,723 % Sales April 28, 2012 % Sales 30.6% $ 1,454,140 30.0% B&N College 405,076 23.0% 395,311 22.7% NOOK (122,293) (24.1)% 68,065 12.8% $ 1,917,516 26.9% Total Gross Margin $ 1,682,506 24.6% The Company's consolidated gross margin decreased $235.0 million, or 12.3%, to $1.68 billion, in scal 2013 from $1.92 billion in scal 2012. This decrease was due to the matters discussed above. Selling and Administrative Expenses 52 weeks ended Dollars in thousands B&N Retail B&N College NOOK Total Selling and Administrative Expenses April 27, 2013 $ 1,023,633 293,618 358,125 % Sales 22.4% 16.7% 70.6% April 28, 2012 $ 1,130,311 279,364 329,777 Dollars in thousands April 27, 2013 B&N Retail $ 148,855 3.3% $ 162,693 3.4% 46,849 2.7% 45,343 2.6% NOOK 31,430 6.2% 24,631 4.6% 3.3% $ 232,667 3.3% Total Depreciation and Amortization $ 1,739,452 $ 227,134 Depreciation and amortization decreased $5.5 million, or 2.4%, to $227.1 million in scal 2013 from $232.7 million in scal 2012. This decrease was primarily attributable to store closings and fully depreciated assets, partially oset by additional capital expenditures. Operating Prot (Loss) 52 weeks ended % Sales Dollars in thousands April 27, 2013 B&N Retail $ 227,235 23.3% 16.0% 61.9% NOOK 24.5% % Sales B&N College B&N College $ 1,675,376 April 28, 2012 % Sales 24.4% Selling and administrative expenses decreased $64.1 million, or 3.7%, to $1.68 billion in scal 2013 from $1.74 billion in scal 2012. Selling and administrative expenses increased as a percentage of sales to 24.5% in scal 2013 from 24.4% in scal 2012. The increase or decrease by segment is as follows: B&N Retail selling and administrative expenses decreased as a percentage of sales to 22.4% from 23.3% during the same period one year ago primarily due to lower net legal and settlement expenses. B&N College selling and administrative expenses increased as a percentage of sales to 16.7% in scal 2013 from 16.0% in scal 2012. This increase was due to new stores and increased expenses for digital higher education initiatives. NOOK selling and administrative expenses increased as a percentage of sales to 70.6% from 61.9% during the same period one year ago due primarily to decreased sales, the impairment of goodwill and increased costs to support international expansion. Total Operating Loss % Sales 5.0% $ 161,136 3.3% 3.7% 70,604 4.0% (286,343) (53.8)% (3.2)% $ (54,603) 64,609 (511,848) April 28, 2012 % Sales (0.8)% (100.9)% $ (220,004) The Company's consolidated operating loss increased $165.4 million, or 302.9%, to an operating loss of $220.0 million in scal 2013 from an operating loss of $54.6 million in scal 2012. This increase was due to the matters discussed above. Interest Expense, Net and Amortization of Deferred Financing Fees 52 weeks ended Dollars in thousands Interest Expense, Net and Amortization of Deferred Financing Fees April 27, 2013 April 28, 2012 % of Change $ 35,345 $ 35,304 0.1% Net interest expense and amortization of deferred nancing fees remained at at $35.3 million in scal 2013, as interest related to the Microsoft Commercial Agreement nancing transaction was oset by lower average borrowings. 19 20 Barnes & Noble, Inc. MANAGEMENT 'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER ATIONS continued Income Taxes 52 weeks ended Dollars in thousands April 27, 2013 Ef