Barnes & Noble Touts Three-Prong Approach

Try as it might, Barnes & Noble has had a hard time convincing investors and analysts that, as reading moves more and more to e-books, there is a place for retailers that derive most their revenue—and profits—from the sale of print books. In a 90-minute presentation October 27, B&N's management team did its best to persuade analysts that the company's dominant position in the traditional bricks-and-mortar field, growing online presence and expanding digital operations will keep it a major factor in bookselling in the future.

CEO Steve Riggio saw the launch of the Nook spurring business at B&N in two ways: serving as a catalyst to drive customers into stores and also serving as a platform that will allow B&N to sell an array of content far beyond a traditional e-book. (See accompanying list of possible digital content that could be sold.) The Nook, Riggio said, will let B&N reach customers who never, or rarely, shop in its stores. The combination of the Nook and store sales will result in B&N getting a greater share of a customer's wallet, Riggio maintained.

During the presentation, B&N didn't make any predictions about how its physical bookstores will fare in the next few years, but did point to some favorable trends, topped by lower rents. COO Mitch Klipper said that in almost all cases B&N is renewing leases at greatly reduced rates, and he expects the company to have flexibility on leases for the next several years. Klipper and other B&N executives also believe that the physical bookstore market is about to undergo a period of consolidation. “There are 1,500 superstores now,” said CFO Joe Lombardi. “There won't be 1,500 in five years.” Within the stores, Klipper said, the children's and teen categories are B&N's two fastest growing segments. To take advantage of that growth, B&N has recently tested the sale of educational games and toys as well as the B&N at School section, which sells a variety of items including workbooks. The tests have been successful, Klipper said, and the company will roll out the categories to all stores in 2010. B&N is continuing to shift the product mix of its DVD and music segment, which now makes up 7%—8% of total store sales. Klipper also noted that since 2002 B&N has been able to increase inventory turns from 2.15 to 2.80, an indication, he said, of an improvement in B&N's supply chain systems.

William Lynch, president of B&N.com, said the company's online business is poised to perform better than it has in the past, noting an acceleration in top-line growth and in customer traffic. B&N.com has brought in new management (Lynch has been there since February) and upgraded its technology team, including opening a development office in Palo Alto, Calif. Lynch said B&N.com's marketplace business has grown in recent months and now has 52 million listings. At present, 90% of listings are for books, music and videos, but B&N is considering adding different product areas not just to marketplace but to B&N.com's regular business as well, Lynch said.

The conference also gave B&N another chance to defend its purchase of Barnes & Noble College Booksellers, which some analysts have questioned. The purchase, Lombardi said, will add to both cash flow and EBITDA (earnings before interest, taxes, depreciation and amortization). The B&N College Booksellers president Max Roberts said the company is well positioned to take advantage of sales of digital materials (17 college stores will sell the Nook) as well as sales over the Internet—e-commerce sales are growing by double digits, Roberts said.

Riggio acknowledged that with a $259 price, the Nook will have a small margin, but he said that will be somewhat offset by the sale of warranties and accessories. He told analysts that he expects that B&N will earn a higher margin on the sale of e-books than print books since e-books have no handling, warehousing, shipping, receiving or pick-and-pack costs. No one asked what he thought a good price for e-books would be.

Barnes & Noble Expiring Leases

Impact of Purchase of B&N College Booksellers ($ in millions)