B&N Execs Tout Promise of Retail-Digital Combination

When the spin-off of its college division is completed later this year, Barnes & Noble plans to sell both print and digital books, B&N Inc. CEO Mike Huseby told analysts during a conference call last week to discuss third-quarter results. Huseby said B&N remains committed to supporting Nook products and that executives believe Nook’s best chance for success comes from leveraging its connection to B&N’s retail stores.

B&N’s trade stores and Nook have “naturally overlapping customers and business partners” that focus on reading, Huseby said. B&N has no plans to sell Nook, and its current plan is to offer customers print and e-books, Huseby elaborated.

The sale of digital content, however, continues to slide, with Nook content sales down 29% in the third quarter (relative to the previous year’s third quarter), to $41 million. Huseby said the Nook team is looking for ways to stabilize, and potentially reverse, the decline in digital content sales in what Huseby acknowledged is a “challenging environment.” But Nook is “integral” to B&N’s business because e-books are important to its customers, Huseby said.

Sales of Nook hardware fell 63% in the same quarter, and the plunge was the main reason for a 0.3% decline in comparable store sales at the trade stores, over the same period last year. Excluding Nook products, comparable store sales in B&N’s core book and nonbook categories rose 1.7% in the third quarter, as the company benefitted from book-buying trends that have led to a more stable print book market overall, Huseby said. Mitch Klipper, CEO of the retail trade group, said business had improved enough at stores that B&N will close only 13 outlets by the end of the fiscal year in April, seven fewer than it had projected at the beginning of the year.

Earnings before interest, depreciation and amortization (EBITDA) fell 0.5% in the third quarter (relative to the same period the previous year) at the retail stores, to $198.6 million, but Huseby said B&N has no plans to cut the company’s store workforce to improve margins. The stores need a “base level” number of employees to provide a good customer experience, and Huseby said B&N needs to grow its top line to improve margins. Indeed, though B&N’s overall bottom line improved in the third quarter (though not as much as analysts had expected), that was due more to cutting Nook’s losses than any sales gains—which only came in B&N’s soon-to-be spun-off college group. The two units that will form B&N Inc., when the college group becomes a standalone company (something B&N hopes will happen by the end of August), had a combined $3.44 billion in sales through the first nine months of fiscal 2015, down 8% from the same period in fiscal 2014. EBITDA, however, jumped 57%, to $219 million, largely because of the cost cutting at Nook.

Barnes & Noble Fiscal Third-Quarter, 2014 v. 2015

(in millions)