Per Bloomberg Business News:
Barnes & Noble (BKS) continues to spin downward, and it wants everyone to know who is to blame. The Nook? Nope. It’s Suzanne Collins, who hasn’t written a single installation of The Hunger Games this year, and E.L. James, who has stopped writing Fifty Shades of Greybooks without any concern for the impact it would have on the bookseller.
On Tuesday the company announced it had lost $87 million in the most recent quarter. Retail revenue, which makes up about 75 percent of its total revenue, dropped 9.9 percent. The company also said Leonard Riggio, its chairman and largest shareholder, was dropping his effort to buy that part of the business. Barnes & Noble’sattempt to grow a Silicon Valley startup—which Riggio did not include in his buyout effort—continues to be a drain on its traditional retail business. Revenue in the Nook portion of the business was down 20.2 percent, with the money it brought in by selling Nook devices falling 23 percent.
Many analysts, and this magazine, figured that Barnes & Noble would bring the effort to an end. Instead, the company says it plans to further integrate its Nook and retail businesses. It thinks that its digital efforts still have potential to bolster its retail business, even if they are burning through cash for now. Barnes & Noble now claims 22 percent of the U.S. e-book market, and says it has sold 10 million Nook devices. “If we want to be in the device business, we have to be in the content business no matter how they’re produced. We think our people can produce better devices than anyone else,” Michael Huseby, company president, told investors in a conference call on Tuesday morning.
Even today, Barnes & Noble should have a natural advantage in the bookselling business, because most readers seem to want a mix of digital and print, says Michael Shatzkin, chief executive of Idea Logical, a consultant for publishers. “Only Barnes & Noble has e-books, print books, online and offline. The challenge for them is to keep the customers as customers change their patterns of consumption,” he says. “It’s very hard to discern, because Amazon (AMZN) buries its numbers so much, but it’s my impression that the gap between Amazon.com and BN.com is growing.”
The company said more than half of the drop in retail sales was basically a hangover following the 2012 binge on The Hunger Games and Fifty Shades of Greytrilogies. And while digital content sales dropped 15.8 percent in the quarter, Barnes & Noble said that, excluding the impact of those titles, they only fell 6.9 percent. Digital content isn’t selling very well because Nooks aren’t selling very well.
It’s not just Barnes & Noble. According to the Association of American Publishers, net sales of trade books in the first quarter of 2013 were down 4.7 percent from a year earlier, with almost all of the losses concentrated in the young adult category. It should go without saying thatFifty Shades of Grey, which wasn’t published in the U.S. until April 2012, is not included in those young adult numbers.
Barnes & Noble said it also expects to see sales lag this quarter, when compared to 2012′s hit-fueled performance. It looks on the horizon and sees John Grisham and Stephen King riding to the rescue with new novels coming later this year. It just has to hope that everyone doesn’t just put them on their Kindles.
“We thank William Lynch for helping transform Barnes & Noble into a leading digital content provider and for leading in the development of our award-winning line of NOOK® products,” said Riggio in a statement. “As the bookselling industry continues to undergo significant transformation, we believe that Michael, Mitchell and Max are the right executives to lead us into the future.”
Other executive changes included the promotions of Allen Lindstrom from v-p and controller to CFO and that of Kanuj Malhotra from v-p of corporate development to CFO of Nook Media LLC.
Lynch’s resignation as CEO, and from the B&N board as well, comes three-and-a-half years after he was appointed to the position and more than four years after he first joined B&N from HSNi to head up Barnes & Noble.com. Lynch was credited with overseeing B&N’s aggressive expansion into device manufacturing and with seeing through Microsoft’s investment in what would become Nook Media. Following disastrous sales of Nook devices over the holidays that continued into 2013, B&N announced in late June it was sharply scaling back its manufacturing efforts, particularly in the tablet area.
Lynch’s departure is sure to increase investor (and publisher) interest on when B&N’s board will make a decision on the offer by Riggio to buy the company’s trade retail stores. In the press release, Riggio said B&N continues to review its strategic plan “and will provide an update when appropriate.”
With losses mounting in its Nook segment, Barnes & Noble reported a net loss of $154.8 million in the fiscal year ended April 27, 2013 compared to a loss of $65.6 million in fiscal 2012. Total sale fell 4.1%, to $6.84 billion. As sales of Nook devices sag, B&N announced that it will be adopting a “partner-centric” model to manufacture its color tablets as part of an effort to significantly cut expenses in the Nook group.
In fiscal 2013, Nook segment sales fell 16.8% (including a 34% decline in the fourth quarter) to $776.2 million. The segment racked up EBITDA losses of $475.4 million compared to $261.7 million last year; $222 million of the fiscal 2013 losses were due to inventory charges. B&N said it will continue to sell existing devices through the 2013 holiday season and will continue to develop its Simple Touch and Glowlight e-readers, the two lines that generate the most content sales, in-house. On the digital content side, sales rose 16.2% for the full year, but were down 8.9% in the fourth quarter due to difficult comparisons with last year’s Fifty Shades and Hunger Games successes. CEO William Lynch repeatedly stressed that the emphasis in the year will be on cutting Nook losses and pointed to the $26 million in expenses it cut in the unit in the fiscal fourth quarter which he said came from reductions in marketing costs, lower headcount, and other savings initiatives. Lynch acknowledged that the losses in the Nook group were “much higher than expected.”
B&N will continue to add content to its digital stores, including apps and e-books, executives said. And a spokesperson said the company still expects to have 10 international Nook stores by the end of 2013.
In retail trade, sales for the full year fell 5.9%, to $4.57 billion although EBITDA rose to $374.2 million from $322.5 million. B&N attributed the decline to a 3.4% drop in comparable store sales (8.8% for the quarter), lower online sales, and store closures. Executives said “core comps”-presumably of books and educational games and toys–“were essentially flat” in the year. B&N closed 18 outlets in fiscal 2013 and opened two leaving it with 675 trade stores at the moment. In fiscal 2014 it will open up to five stores and close 15 to 20.
B&N did not have a positive outlet for fiscal 2014 for the retail stores, forecasting comp declines in the high single digits. College group comps are expected to fall in the low single digits. B&N will spend $75 million on the retail stores in the current year, money that will be spent on new stores and maintenance of existing outlets.
Asked several times by analysts of the status of the discussions with Len Riggio to buy the retail stores, executives had no comment and declined to give a timeframe for when a decision will be made.
Here’s today’s listing from Barnes and Noble:
With Barnes & Noble completing a difficult fiscal 2013 with a bad fourth quarter, publishers are continuing to wonder what is next for the nation’s largest bookstore chain and second largest source of book purchases behind Amazon. While B&N’s results for the full fiscal year were down, what seemed to worry publishers and investors the most was the fourth quarter, when sales in the trade retail and Nook segments were noticeably worse than for the full year.
In the trade stores, total sales fell 10.0% in the fourth quarter with comps down 8.8%, while Nook sales tumbled 34%, including an 8.9% decline in content sales, which still finished up 16.2% for the year. For the full year, retail sales were down 5.9% and Nook sales off 16.8%. The major fourth-quarter sales trends—declining device sales and difficult book comparisons—will continue well into fiscal 2014.
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The biggest problem for B&N at the moment, of course, is Nook Media, which in the course of 15 months has gone from the savior of the company to an albatross. Created with much fanfare, with more than $600 million in financial support from Microsoft in April 2012, Nook Media once again dragged down results at B&N. While one half of Nook Media—the college stores—had a solid fiscal year, the Nook division had a terrible year, reporting an EBITDA loss of $475 million, much higher than the company expected. Even the retail trade stores were hurt by Nook as declining sales of Nook devices were a major contributor to the decline in sales at the stores. Comparable store sales in the year were down 3.6%, but excluding the sale of Nook devices, comps were essentially flat with fiscal 2012.
With executives declining to discuss the status of B&N chairman Len Riggio’s offer to buy the retail trade stores or offer a time frame for when a decision on the deal might be reached, executives did say that they are considering various ways to use the cash the retail stores are expected to generate in fiscal 2014. B&N has fenced in Nook Media’s balance sheet, CEO William Lynch noted, and in any case he expects Nook to continue to be “self financing” by cutting costs, converting existing Nook device inventory into cash, and including cash flow from Barnes & Noble College and cash payments from Microsoft. The $475 million Nook loss includes $222 million in inventory charges, and B&N will continue to sell all existing devices through the holidays, but will look for a partner to manufacture its color tablets, while continuing to develop the Simple Touch and Glowlight readers in-house. The Simple Touch and Glowlight, Lynch noted, drive the majority of content sales that come from devices. In the fourth quarter of fiscal 2013, B&N cut Nook expenses from $78 million to $52 million in part by reducing marketing costs and cutting headcount. More cuts along those lines are expected in the current year.
B&N said it will invest about $33 million in the Nook unit this year and will put more money into its retail trade stores, devoting $75 million in 2014 to cover opening as many as five new stores and to cover upgrades in its existing outlets. The company has 675 trade stores after closing 18 and opening two in fiscal 2013; it will close 15 to 20 in the current year. EBITDA increased at the trade stores despite the decline in sales because of higher sales of higher margin products and “increased vendor allowances,” something that helps explain its still ongoing fight with Simon & Schuster over terms and co-op.
While the outlook for the retail stores is far better than for Nook, that division has its own worries, with the company saying it expects comparable store sales at the stores to decline in high single digits in fiscal 2014 due to difficult comps with Fifty Shades in the first two quarters, “secular industry challenges,” and continued sales declines of devices.
Barnes & Noble Segment Results, Fiscal 2012–2013 (in millions)
Segment 2012 2013 % Chge
Retail $4,852.9 $4,568.2 -5.9%
College 1,743.7 1,763.3 1.1
Nook 933.5 776.2 -16.8
Total 7,129.2 6,839.0 -4.1
Segment 2012 2013 % Chge
Retail $322.5 $374.2 16.0%
College 115.9 111.4 -3.9
Nook (261.7) (475.4) –
Total 176.7 10.3 -94.2
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