B&N Tries Keeping It Together

Ever since Barnes & Noble announced the $600 million–plus investment by Microsoft and the creation of Nook Media in April 2012, the conventional wisdom within the industry and among financial analysts was that the company was headed for a split, whereby Nook Media would be carved out from the retail trade stores. That sentiment was heightened in February when B&N chairman Len Riggio said he was planning to make an offer for the retail stores. But last week, the retailer announced that its focus will be to keep the company intact, although executives did admit that, for the last 18 months, most of their energy has been directed at looking at how the company would be split. “We spent substantial time and resources last year preparing our individual businesses to operate independently in anticipation of the potential for their separation,” Michael Huseby, president of Barnes & Noble Inc. and CEO of Nook Media, said on a conference call discussing first-quarter results, before adding, “Our focus going forward will be on providing customers with a more integrated Barnes & Noble and Nook experience.”

The change in direction followed news that Riggio had dropped plans to buy the retail business, and the decision to keep the company intact also reflects the hard reality of the current bookselling business—any company that wants to be a significant player in selling e-books needs to offer consumers digital reading devices as well, something also acknowledged by executives in the conference call. “If we want to be in the content business, we need to be in the device business,” Huseby said.

That equation, of course, has proved successful for Amazon and Apple, as both companies have used strong sales of devices to grab more e-book market share. It is also why B&N executives stressed that after selling 10 million Nook devices it is staying in the device business and will continue to design and produce new black & white e-readers as well as color tablets, with one new device set to be released by the holiday season. Executives emphasized that contrary to the impression given earlier that B&N was looking to outsource its tablet design, it is keeping that function in its Palo Alto, Calif., offices, noting that it was not the quality of the devices that has caused large losses at Nook, but misreading demand in the last two holidays.

Even as it was pledging to cut losses at Nook, B&N said it is also looking to overhaul its underperforming BN.com Web site and would continue to invest in its retail stores. CEO of retail Mitch Klipper said the revamped Web site will launch next year and will “enhance our search and accuracy, provide faster shipping, and yield some cost savings.” Executives went to great pains to ensure analysts that Nook Media would remain self-funding and that cash generated by the stores would not be used to underwrite the Nook business.

First-quarter results pointed to the challenges the company faces in righting the Nook business while keeping the retail trade stores operating profitably. First-quarter sales in the Nook segment fell 20.2%, to $153 million, as sales of devices and content both declined. Device and accessory sales fell 23.1%, to $84 million, for the quarter, while digital content sales declined 15.8%, to $69 million. (B&N also disclosed for the first time digital revenues: device revenue was $470 million and digital content sales were $310 million for fiscal 2013.) The company attributed the decline in content to lower device unit volumes and the absence this year of the Fifty Shades and Hunger Games phenomena. Excluding the impact of these two trilogies, digital content sales decreased 6.9%.

The decline in Shades and Hunger Games sales also hurt results at the stores, but not as much as on the Nook side. According to B&N, the 9.9% total decline in the retail trade business was primarily a result of a 9.1% comparable-bookstore sales decline, store closures, and lower online sales. Core-comparable bookstore sales, which exclude sales of Nook products, decreased 7.2% for the quarter and, excluding the impact of Shades and Hunger Games, core-comparable sales fell 2.9% during the quarter.

One thing some publishers have said that Riggio and his new management team will need to fix is the divide between the digital and the retail trade groups that sprung up under former CEO William Lynch as he pushed the company deeper into the device business. The strategy now, Huseby said, is to “increase all categories of our content revenue. We are working on innovative ways to sell content to our existing customers and are exploring new markets.”

B&N First-Quarter Results, 2013–2014 (in millions)