March 1, 2013 by newsgetting
Calling Nook sales over the holiday period an “obvious disappointment,” the bookseller’s chief executive, William Lynch, said the company was taking “significant actions to right size investments” in its digital hardware division through steep cuts in advertising and the manufacturing of devices. Mr. Lynch made his remarks in a conference call with analysts shortly after Barnes & Noble reported a 26 percent decline in the fiscal third quarter for the Nook segment, which includes digital tablets and e-readers.
The retrenching of the Nook unit represents a setback to the Barnes & Noble plan to build up its device business as a way of staying competitive in the rapidly changing e-book market. Last year, the company separated the division from the rest of its operations and struck deals with Microsoft and Pearson for hundreds of millions of dollars in financing — signs that it viewed its digital business as the linchpin of future growth.
But the Nook, while drawing favorable reviews, failed to gain traction against more popular tablets like Amazon’s Kindle Fire and Apple’s iPad, and its performance over the 2012 holiday season was tepid. Barnes & Noble warned last month that Nook sales for the quarter would fall below expectations, and executives hinted recently that the strategy of operating in the highly competitive tablet space had run its course.
“The Nook is not a failure, not technically,” said James McQuivey, an analyst at Forrester Research. “If you go back two years and ask the Nook product managers how many Nooks they would want to sell by now, I bet they have blown past that number. The problem is the fact that the overall tablet market has actually blown way past the Nook’s performance.”
While saying that Barnes & Noble remained committed to the tablet and e-reader market, Mr. Lynch said the company would adjust its strategy quickly. “We are not going to continue doing what we’re doing,” he said in the conference call.
The results announced Thursday underscored the challenges. The company said that Nook revenue declined to $316 million for the quarter that ended Jan. 26, from $426 million over the same period a year ago. Losses in the unit increased to $190 million, from $83 million last year, as measured before interest, taxes, depreciation and amortization.
Over all, the company had a net loss in the quarter of just over $6 million, compared with net income of $52 million a year ago. Revenue in all three major units — Nook, retail and college — was down.
The losses were largely because of lower-than-anticipated sales, inventory charges and higher operating expenses because of advertising costs, the company said.
Mr. Lynch said Thursday that a reformulated Nook strategy would focus more on digital content like e-books and magazines, sales of which increased by 6.8 percent in the quarter. He also said the company planned to be a leader in “digital education” and that it expected that to be a growth area.
In the call with analysts, Mr. Lynch was pressed on whether Barnes & Noble’s digital content was really proprietary. Mr. Lynch acknowledged that what the bookseller possessed was the ability to sell publishers’ content, but he insisted that it was “a strategic asset that is hard to replicate.”
Wall Street seemed heartened by the company’s acknowledgment that it needed to recalibrate its device business, perhaps anticipating that it would accelerate a breakup of the device and retail units. Shares of Barnes & Noble rose 3.35 percent, to close at $15.74.
The company said that there was clear evidence that digital trade book sales were “flattening,” meaning that the bookseller’s physical retail position would be strong in the future. Mr. Lynch said Barnes & Noble continued to take market share from other physical book retailers. The company also promoted prototypes for new stores to be opened in malls and the growth of the college bookstore business.
Combined with the announcement on Monday that Leonard Riggio, the company’s chairman and largest shareholder, was considering purchasing the retail segment, the news added a positive gloss to the brick-and-mortar business that it had not had for some time.
That notion got some support with the earnings report. Retail sales fell just more than 10 percent in the quarter, largely because of the closing of some unprofitable stores. But Barnes & Noble had largely anticipated the lower revenue and despite the sales decline, retail profits increased 7.3 percent, to $212 million, in part because of higher sales margins and “expense management,” the company said.
Despite the shift in digital strategy, Mr. Lynch emphasized that the company was not abandoning the Nook division.
“Nook Media has been financing itself since October of 2012 due to the strong investment partners we’ve been able to attract in Microsoft and Pearson,” he said. He added that the Nook segment and the physical stores drove traffic to each other and needed to remain in partnership.
But analysts sounded a skeptical note. “Barnes & Noble stands at a fork in the road and rather than choose one path, it will likely need to split into two companies and let the retail business go down one path while freeing the Nook division to go down another,” said Mr. McQuivey, of Forrester. “There’s no guarantee that either path will lead to the promised land, but the two units are facing such different challenges and such unique prospects that it doesn’t make sense for them to try to work together to solve such different problems.”
By Leslie Kaufman – New York Times