TABLE OF CONTENTS 2001 Annual Report ■ Barnes & Noble, Inc. 2 L E TTER TO OUR SHAREHOLDERS 4 C O N S O L I DATED FINANCIAL HIGHLIGHTS 5 S E L ECTED CONSOLIDATED FINANCIAL DATA 9 M A N AGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERAT I O N S 23 C O N S O L I DATED STAT E M E N TS OF OPERAT I O N S 24 C O N S O L I DATED BALANCE SHEETS 2 5 C O N S O L I DATED STAT E M E N TS OF CHANGES IN SHAREHOLDERS’ EQ U I TY 2 6 C O N S O L I DATED STAT E M E N TS OF CASH FLOW S 2 7 N OTES TO CONSOLIDATED FINANCIAL STAT E M E N TS 4 6 R E P O RT OF INDEPENDENT CERTIFIED PUBLIC AC C O U N TA N TS 47 SHAREHOLDER INFO R M AT I O N 2 LETTER TO OUR SHAREHOLDERS D EAR SHAREHOLDER: this company had comparable sales increases of 32 percent for the year, and total sales nearly doubled. As In many respects, fiscal 2001 was the most unique in a result, in February 2002, we consummated an initial the history of Barnes & Noble, as well as the entire public offering (IPO) for GameStop and received $250 world of retail. Virtually no one came out of the year million in cash, while still retaining approximately with what they planned going in. 63 percent of the company. This IPO put us in the position to continue to reap the benefits from this Ne v e r theless, in spite of troublesome business conditions, rapidly growing company in a rapidly expanding pa r ticularly during the important holiday season, one industry while, at the same time, we were able to recoup fact remained clear: Barnes & Noble continued to lead more than two-thirds of our initial investment. the book industry in sales, comparable store increa s e s , operating profit and cash flow. We also continued to Although our year did end with mixed results, our balance ou t p e rf o r m the specialty retail industry as well. sheet has been strengthened substantially, and cash flows continue to improve with each passing year. The stage has During the year, 40 new Barnes & Noble stores were been set for much improved expectations for fiscal 2002. opened, bringing our total to 591 stores. As a result of our strong new-store perf o rmance, hundreds of Speaking of which, please permit me to re-introduce our new opportunities for store expansion are now under newly appointed Chief Executive Officer, Steve Riggio, consideration. We believe we are only at the midpoint and Mitchell Klipper, our new Chief Operating Officer. of our national rollout and expect to remain very active They are two of the company’s most seasoned and on this front for many years to come. respected executives, with over 30 years experience between them. They work well together as a team, and While we are growing the number of stores, we are also both are familiar with all phases of our enterprise— growing within the store. New products such as DVDs, retail bookselling, electronic commerce, finance and magazine subscriptions and gifts—and especially book- operations. Steve and Mitchell possess the skills, the related children’s products—show more promise and experience and the commitment to lead our company better results as we roll them out. We also plan to increa s e , for many years to come. commensurate with our growth as a bookseller, our extensive publishing activities with its higher gro s s We could not be more optimistic about the future given margins and greater consumer acceptance due to the our strong management team, growing business, and better values the books re p re s e n t . solid balance sheet. Better yet is the growing reality that Barnes & Noble.com Our financial highlights for fiscal year 2001 follow: (w w w .bn.com) seems to be creating more retail sales rather than less. Perhaps, this is because our Web site serves as a Although we ended fiscal 2000 with a strong increase br oadcast channel for the entire enterprise, attracting tens in comparable sales of 4.9 percent, the effects of the of millions of visitors to our offerings each year, building slowing economy, and later, the terrorist attacks, clearly our brand, and more importa n t l y , our franchise. a ffected sales for 2001. We ended the year with a comparable sales increase of 2.7 perc e nt — g o o d And yes, losses at Barnes & Noble.com are beginning to c o m p a red to most specialty re t a i l e rs —but still about decline sharply, owing to the rigorous cost-rationalization two percent from our expectations. Clearly, the company programs we have established. Our site is effective and made a case for bookselling being less cyclical than other critically acclaimed. It is gaining market share and making retailers; nevertheless, our “boat” remains somewhat seamless our connections to our customers, the largest affected by rising and falling tides. group of loyal book patrons in the world. For these reasons, we began an aggressive cost-cutting Elsewhere at Barnes & Noble, or should I say, central to campaign (of which this less glossy rep o r t is a component) Barnes & Noble’s future plans, has been the remarkable in the middle of the first quarte r . This campaign prod u c e d growth of GameStop, our video-game business. Against about $26 million of a targeted $30 million reduction in the backdrop of declining retail sales all over America, expenses by year-end, with the balance of $4 million rol l i n g LETTER TO OUR SHAREHOLDERS c o n t i n u e d 3 2001 Annual Report ■ Barnes & Noble, Inc. over into 2002. The expense reductions helped mitigate the this industry to an unprecedented level. The next several lo w e r -than-budgeted sales, as bookstore operating prof i t years promise to produce “trailing” software sales, whose came in at $216 million; disappointing, yet a good res u l t higher margins will nourish our bottom line. considering the numbers posted by other ret a i l e r s . Finally, the rationalization (lower expenses and targeted During the year we rolled out our Readers’ AdvantageTM marketing) of our Barnes & Noble.com affiliate has pr ogram (which continues to grow), and by the end of produced a dramatic reduction in net losses, while at 2001, enrolled nearly two million members who paid the same time allowed for the continued growth of the $25.00 to join. We realized at the outset that a margi n business: sales increased by 8 percent and net operating sh o r tfall would result in the early stages of the prog r a m losses declined by 38 percent. due to the ten percent discount members received, but believed then, as we do now, that this “loyalty” card The year 2001 also ended with significant improv e m e n t s would provide a long-range sales lift and higher prof i t s to our balance sheet. Retail earnings before interest, in the future. The program was also intended to mitigate taxes, depreciation and amoritization (EBITDA) grew the negative impact of publishers’ higher pricing and the from $381 million in 2000 to $392 million for the d i ff e rential between bookstore pricing and that of year, with free cash flow of $218 million, compared to ag g r essive online discounters. As a result, we believe the a negative cash flow of $77 million for the previous nearly two million members we enrolled last year will y e a r. Our balance sheet was further bolstered by outspend non-members sufficiently to produce a positive the GameStop IPO in the first quarter of 2002. These delta in gross profit (not gross margin percent) for the ta r geted initiatives, including working capital management cu r rent year, and will only increase in years to come. and corporate finance activities, have resulted in our being in the strongest financial position in the As planned, the pace of store closings at B. Dalton continued company’s history. We are well within the appropriate in 2001, as we closed 35 stores, leaving us with a total of safety margins in terms of all of our key ratios, and in a 30 5 co m p a r ed to nearly 600 six years ago. As a res u l t , position to negotiate credit facilities to provide upside our mall-store business, whose operating margins have support as well as downside protection. Given the been declining for the past six years, now constitutes current nature of the debt and equity markets, we only eight pe r cent of our total bookstore sales. The believe we are in an enviable position. tr a n s f o r mation of our business from a mall-based operator to a growing enterprise of world-class bookstores is now Looking forwa r d to this year, and to the years that vi r tually completed. We are extremely pleased with our fo l l o w , we are optimistic and encouraged. As always in strategic positioning and with the balancing of our rea l the world of retail, and especially as a bookseller in the estate portf o l i o .