Barnes & Noble Bets On Physical Bookstores To Improve Profits

With Barnes & Noble reporting a decline in total revenue for the fiscal year ended Apr. 30, 2016, as well as a series of one-time charges associated with the downsizing of Nook and the separation of Barnes & Noble Education leading to a $24.4 million loss in the year, company executives told investors in a two-hour presentation last week that they see improved profits in the years ahead. If all goes according to plan, B&N EBITDA (earnings before interest, taxes, depreciation, and amortization) will be between $270 million and $310 million in fiscal 2020, up from $186 million in fiscal 2016 (a figure that does not include extraordinary charges).

B&N’s plan to improve earnings is based on growing sales in its physical bookstores as well as via BN.com and shrinking Nook’s losses to under $10 million by 2020. In fiscal 2016, the Nook division had an EBITDA loss of $64.7 million, down from $83.9 million in fiscal 2015. Revenue dropped 27.4%, to $191.5 million, as sales from digital reading devices and content fell.

The retail-store group fared better, although revenue at the stores was $4.03 billion, down 1.9% from fiscal 2015. Comparable store sales were flat in the year, while comp sales excluding Nook products rose 0.4%, slightly behind the 1% increase that B&N had expected. EBITDA in the division was dragged down by a number of one-time charges, including a $20.9 million pension settlement charge connected to the termination of the company’s pension plan. Other charges were a $10.5 million executive severance charge related to the spin-off of Barnes & Noble Education and a $3.8 million publishing contract impairment charge.

In presenting their vision of B&N’s future, executives listed a wide range of initiatives they are undertaking to improve bookstore sales and provided some more details about the company’s four new prototype stores, the first of which will open in Eastchester, N.Y., in October. Additional concept stores, whose footprint will be about 20%–25% smaller than a typical B&N superstore, are planned for Edina, Minn.; Folsom, Calif.; and Loudon County in Virginia.

The centerpiece of the new stores will be an expanded café, which company executives—from CEO Ron Boire on down—said they are extremely excited about. Just before the presentation to investors, B&N promoted Jaime Carey, chief operating officer, to president of the development and restaurant group, underlining the importance of the cafés.

The new cafés will be about twice the size of existing ones and feature table-side service. A new expanded menu is being overseen by an executive chef that will feature “American-style” fare, as well as wine and beer. In addition to boosting sales through the cafés, B&N execs expect that the improved space will drive more customers to the stores and help make each outlet more of a destination for those in the community.

The new stores will also have better seating and more open space than existing stores, and books will be categorized in new ways that will make titles easier to find, according to Mary Amicucci, chief merchandising officer. Despite the expanded café, the stores will still have a broad assortment of books, which will make up about 60% of the store’s revenue. B&N execs said that, depending on the reception to the new cafés, they are prepared to roll out the concept to existing stores, although they declined to say how many stores that may involve.

Another major initiative to boost store sales is growing B&N’s membership base. Members are B&N’s best customers, Boire said, spending more than twice as much as average customers on each transaction with the retailer. To grow its membership ranks, B&N will be experimenting with a number of new offers to increase participation rates and individual member spending. As part of that overall effort, Boire said B&N will integrate the three million members in its Kids’ Club program into the core program.

Throughout the chain, B&N is focusing on making navigating its stores more intuitive in a bid to help with discovery, Amicucci said. The key difference for B&N when it comes to discovery is its 28,000 booksellers, whose recommendations “cannot be replicated by any algorithm,” she said. Amicucci also said B&N is going “hyperlocal” in the current fiscal year and has a remerchandising strategy set for 50 stores for which B&N “will tailor the merchandise layout and assortment based on local customer demand.”

When the presentation turned to Nook, executives said that their short-term strategy involved cutting losses, not growing sales. The company is continuing to outsource more technology functions and is closing its Santa Clara, Calif., and Taipei offices, which will save $13 million. One area within Nook that B&N hopes to expand is Nook Press, its self-publishing business.

Though there appears to be little likelihood the Nook revenue will grow anytime soon, Boire emphasized that B&N has no plans to completely shut down the Nook business, since it remains an important element in B&N’s omnichannel sales approach and has two million “very active” customers. “Walking away is not in our mind-set today,” he said.

B&N CTO Fred Argir was more optimistic about the prospects for BN.com, although he acknowledged that much work still needs to be done. The recently completed overhaul of BN.com’s back end did not address issues concerning the part of the site visible to consumers. Work on that has started with the aim to streamline the buying experience in time for the holiday season. But the financial goal for BN.com in fiscal 2017 is to get back the sales it lost in fiscal 2016. Beyond that, Argir said, the aim “is to get back to a growth rate, because if you remember, [e-commerce] in our business had been declining for several years.” Argir said he expects sales at BN.com to start to improve in the second half of fiscal 2017.

Barnes & Noble Inc. Fiscal 2015–2016 Segment Results

($ in millions)

Sales	Year Ended	Year Ended
Segment	May 2, 2015	Apr. 30, 2016	Change
Retail	$4,108.2	$4,028.6	-1.9%
Nook	$263.8	$191.5	-27.4%
Intercompany Elimination	($74.9)	($56.3)	—
Total	$4,297.1	$4,163.8	-3.1%
EBITDA	Year Ended	Year Ended
Segment	May 2, 2015	apr. 30, 2016	Change
Retail	$317.7	$215.5	-32.2%
Nook	($83.9)	($64.7)	—
Total	$233.8	$150.5	-35.9%

Source: Barnes & Noble

Barnes & Noble, EBITDA Projections, Fiscal 2016–2020*

($ in millions)

Fiscal Year	2016	2017	2020
EBITDA	$186	$200–$250	$270–$310

Barnes & Noble Bets On Physical Bookstores To Improve Profits

New stores with cafés that serve beer and wine are part of the chain’s plans to boost its bottom line