Barnes & Noble at the Crossroads

Barnes & Noble is facing its most tumultuous period since Len Riggio began building the retailer some 40 years ago. The company is dealing with the dual issues of evaluating an offer from Riggio to acquire the still-profitable retail trade stores, while also searching for a model to turn around its money-losing Nook Media group.

In the third quarter, which ended January 31, the Nook segment’s EBITDA loss more than doubled over the third quarter of fiscal 2012 to $190.4 million, while the retail store’s EBITDA rose 7.3%, to $212.0 million. With respect to the Nook, CEO William Lynch said, “We are not going to continue doing what we’re doing,” in a conference call at which he discussed the third-quarter results. The revenue shortfall in the segment was entirely due to disappointing sales of Nook devices, which Lynch acknowledged suffered from competition from larger companies’ multifunctional tablets. While he stopped short of saying that B&N will discontinue making Nook devices, he said the company will quickly implement cost-cutting measures to “right size” the Nook operations. The Nook segment, comprised of devices and content, is on track to lose $375 million in the fiscal year ending April 30, and B&N’s goal is to make Nook Media (which consists of Nook plus the college stores) EBITDA positive “in a reasonable period.”

In addition to cutting costs, which will almost certainly involve layoffs at B&N’s Palo Alto, Calif., office, Lynch said the company is still positioned to scale the sale of digital content. Pointing to the 6.8% increase in digital content sales in the third quarter, Lynch noted, it is possible to grow content sales without hardware. Although Lynch said more details on remaking Nook are to come, he added that B&N is in discussions with different parties to leverage the company’s technology and content platform to sell digital content through partnerships. Two avenues that Lynch did mention for increasing e-book sales are the development of more iOS and Android reading apps and the expansion of the Nook e-bookstore into 10 countries by the summer. A third digital growth initiative is in education, and announcements in that area will be made soon, Lynch said. He added that he isn’t too concerned about price erosion in the e-book market, noting that since the end of the agency agreements, e-book prices have only dipped slightly.

The growth rate of e-book sales has definitely slowed, Lynch observed, and while that could slow the growth of the Nook e-bookstore, it will help B&N’s bricks-and-mortar stores. During the call there were no new details on Riggio’s proposal to buy the retail stores, but Lynch emphasized the strong cash position of the stores, which were able to increase earnings despite a 10% sales decline. The drop in store sales was largely tied to a decline in sales of Nook devices; comp store sales were down a total of 7.3% in the quarter compared to a year earlier. Excluding Nook devices, though, core products (books, educational toys, and games) were down just 2.2%. Lynch said B&N is also “repositioning” BN.com, which is now under the direction of Jaime Carey, B&N’s chief merchant, who is looking at all aspects of the site, including its assortment and pricing. There are no plans, however, to accelerate the closing of B&N outlets, despite a recent Wall Street Journal story to that affect. B&N’s Mitch Klipper said the company, which now has 677 outlets, has been closing 12–20 stores annually—it closed 14 in the just-concluded quarter—and likely will shut down 15–20 annually in the years ahead, but the company has plans to open three to five new stores in fiscal 2014.

Barnes & Noble Third Quarter Segment Result (in millions)

Source: Barnes & Noble