B&N Sees Some Positives in Gloomy Second Quarter

Barnes & Noble’s sales for the second quarter of fiscal 2018, which ended Oct. 28, 2017, fell more than analysts expected compared to the similar period last year, and its loss was higher than forecast. Despite the disappointing financial performance, B&N executives said they saw some positive trends that could mean an improved holiday shopping season.

One of those positive trends is that—excluding sales of Harry Potter and the Cursed Child and sales of coloring books from last year’s second quarter—comparable store book sales were flat in the quarter. Actual comp store sales were down 6.3%, with half the decline attributed to Potter’s sales from last year, plus weak sales in nonbook categories.

During a conference call discussing second-quarter results, B&N CEO Demos Parneros said the company has embarked on an “aggressive” push to clean out unproductive, nonreturnable inventory and will be narrowing its assortment of noncore items as well as reemphasizing its commitment to books. Consumer research, Parneros said, has shown that books are what consumers expect to find at B&N. The recommitment to books is a reversal of B&N’s strategy of recent years, under which the chain had added more nonbook items, including educational toys and games, to its product mix. Until recently, nonbook categories had been outselling books.

The push to clear out slow-performing inventory hurt the bottom line in the retail trade group, which had negative EBITDA (earnings before interest, taxes, depreciation, amortization) of $25.2 million in the quarter compared to EBITDA of $3.5 million a year ago. Sales in the retail trade group fell 7.2%. On the other hand, the constant downsizing of the Nook unit boosted its EBITDA to $161,000 in the quarter, despite a 25.7% decline in revenue. B&N said it expects Nook EBITDA to be break even for the full year.

Some other positives Parneros and other execs pointed to included the steady improvement of book sales in the second quarter—a trend that has continued into November. Though store traffic was down again in the quarter, conversion rates—which track the share of store visitors who buy books—rose 2.7% over last year’s second quarter. Parneros also said B&N’s membership drive has had some success and the company now has 6.4 million people enrolled in its membership program.

Parneros noted that B&N has a number of initiatives in the pipeline that he believes will improve the retailer’s performance, but many won’t kick in until next year. He said that the company’s plan continues to be to open more stores than it closes in fiscal 2019, although any new store is likely to be smaller than current outlets. B&N recently opened a 10,000-sq.-ft. test store in Plano, Tex., and a larger test store in Ashburn, Va.

While sales continue to fall, B&N is moving ahead with cost-cutting initiatives that the company expects to save $40 million in fiscal 2018, thereby allowing it to hit its target of $180 million in EBITDA in the year. Halfway through the fiscal year, B&N had negative EBITDA of $13.8 million. Sales were down 7.2% in the first six months of the fiscal year compared to the same period the previous year, and the net loss rose from $34.8 million to $40.9 million. Noting that comp store sales were weak in the last half of fiscal 2017, B&N said it expects comp sales over the next six months to be flat.

Barnes & Noble inc. Segment Results, Second Quarter, Fiscal 2017–2018

($ in millions)

Source: Barnes & Noble