Nook Sales Down Last Quarter – B&N is Doomed

Barnes & Noble released their end of year financial statements today and it looks like they better start planning their going out of business sale. While most segments of B&n saw modest increases last quarter, the revenue B&N Nook division dropped by 10% when compared to the same period last year. This could be the beginning of the end of B&N.

Do you know what? I'm kidding. The above paragraph is written to tweak the nose of the several readers who believe I won't pass up a chance to bash B&N. Aside from the Nook revenues B&N actually had a decent year - especially for a recession year.

And even the Nook news was not all bad. Digital content sales were up 65% last quarter as well as nearly doubled that of 2011 as a whole. What's more, digital content now accounts for over half of Nook revenues. That's a turning point for B&N, and it couldn't have come soon enough.

Because Nook sales really are down. Of course, we could already guess that from the frequent sales. I mean, they had 2 buy one get one sales in the past few months.  The first was a good deal; the second was worrisome. And today B&N confirmed the drop in revenues and explained why the refurbs keep getting out on sale. They have lots of returns from retail partners - more than they can refurbish and turn around right away.

It looks to me like B&N is now stuck in the same market glut of gadgetry as all the other manufacturers. There's so many gadgets on the market and it's so easy to return them that there's a high flip rate of new owners trying a device and then taking it back.

Check out most any of the online retail sites and you'll see the same thing. Right alongside the new gadgets you'll find pretty much the same selection of refurbished units, some of which are cheap and in virtually the same condition.

See, there's a reason why B&N tried to sell off the Nook division, and there's a reason why no one wanted to buy it. Gadget making has become an industry with razor thin margins (unless you're Apple), and B&N's margins are even thinner than most.

press release:

Barnes & Noble, Inc. BKS -4.00% today reported sales and earnings for its fiscal 2012 fourth quarter and full year ended April 28, 2012. The company also announced that it recently completed the evaluation of its reporting segments and will now report results for a separate "NOOK" operating segment. BN.com, previously a separate reporting segment, will now be included in the Retail segment.

Fourth quarter consolidated revenues increased 0.4% to $1.4 billion as compared to the prior year. The consolidated fourth quarter earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $11.1 million improved 51% as compared to the prior year. The consolidated fourth quarter net loss improved 3% as compared to the prior year to $57.7 million, or $1.08 per share.

For fiscal 2012, consolidated revenues increased 2% to $7.1 billion as compared to the prior year. Fiscal 2012 consolidated EBITDA increased 5% to $171.4 million. Included in these results are pre-tax legal and settlement-related net expenses of $20.7 million, and $14 million relating to patent litigation with Microsoft, which as announced on April 30, 2012, has been settled. The fiscal 2012 consolidated net loss improved 7% as compared to the prior year to $68.9 million, or $1.41 per share.

The company's effective tax rate was 27% for the quarter and 29% for the full year due primarily to a $5.9 million compensation-related permanent tax difference charge related to prior periods, which was charged to the current period. The impact of this charge to fourth quarter and full year earnings per share was $0.10.

"We grew our business in 2012 while continuing to make the necessary investments for the future of the business," said William Lynch, Chief Executive Officer of Barnes & Noble. "In digital, our NOOK content sales continued to explode with 119% year-on year growth. In the quarter we also announced a historic new partnership with Microsoft that will include a significant investment in Newco, and that will capitalize the company to fuel continued growth in digital and international expansion. Lastly, we announced NOOK Simple Touch with GlowLight, that we started shipping in the first quarter of fiscal 2013, which has quickly become the highest rated eReader in the market. At retail, we had a terrific year growing comparable bookstore sales 4.5% for the quarter and 1.4% for the year, a result of our effective new merchandising efforts and continued industry consolidation. As we look out to fiscal 2013, we feel the company is strategically well positioned to grow value for shareholders."

Fourth Quarter 2012 Results from Operations

Segment results for the fiscal 2012 and fiscal 2011 fourth quarters are as follows:

                                            Revenues                                     EBITDA
                          --------------------------------------------  ----------------------------------------
        $ in millions                              Increase/(Decrease)                       Increase/(Decrease)
                            Q4 2012     Q4 2011       $          %       Q4 2012   Q4 2011      $          %
                          ----------  ----------  --------  ----------  --------  --------  --------  ----------
        Retail            1,053       1,048         5         0.5 %      66        36        30        82.9 %
        College             228         216        12         5.7 %       0       (11)      12       101.6 %
        NOOK                164         183       (19)     -10.5 %     (77)     (47)     (30)     -64.3 %
        Elimination (1)     (64)       (71)       7        -9.7 %     n/a       n/a       n/a         n/a
                          ----- ---   ----- ---   ---       ----- ---   ---       ---       ---       -----
        Total             1,380       1,375         5         0.4 %     (11)     (22)      11        50.5 %
                          =====       =====       ===       ===== ===   === ===   === ===   ===       ===== ===
        (1)  Represents the elimination of intercompany sales from NOOK to
             Barnes & Noble Retail and Barnes & Noble College on a sell through
             basis.

Fiscal 2012 Results from Operations

Segment results for fiscal year 2012 and fiscal year 2011 are as follows:

                                             Revenues                                          EBITDA
                          -----------------------------------------------  -----------------------------------------------
        $ in millions                                 Increase/(Decrease)                              Increase/(Decrease)
                           Fiscal 2012   Fiscal 2011      $         %       Fiscal 2012   Fiscal 2011      $         %
                          ------------  ------------  --------  ---------  ------------  ------------  --------  ---------
        Retail            4,853         4,927         (74)     -1.5 %       317           259          58       22.4 %
        College           1,744         1,778         (34)     -1.9 %       116           113           3        2.2 %
        NOOK                933           695         238       34.3 %      (262)        (209)       (53)     25.1 %
        Elimination (1)    (401)        (402)         1       -0.2 %       n/a           n/a         n/a        n/a
                          ----- -----   ----- -----   ---       ---- ---   -----         -----         ---       ----
        Total             7,129         6,999         131        1.9 %       171           163           8        4.9 %
                          =====         =====         ===       ==== ===   =====         =====         ===       ==== ===
        (1)  Represents the elimination of intercompany sales from NOOK to
             Barnes & Noble Retail and Barnes & Noble College on a sell through
             basis.

Retail

As a result of the change in segment reporting, the Retail segment now includes results from the Barnes & Noble bookstores and BN.com. Retail sales were $1.1 billion for the quarter and $4.9 billion for the full year, increasing 0.5% for the quarter while decreasing 1.5% for the fiscal year. Comparable bookstore sales increased 4.5% for the quarter and 1.4% for the full year, as compared to the prior year periods. Comparable bookstore sales benefited from the liquidation of Borders' bookstores during fiscal 2012, increased sales of NOOK products, and a strong title lineup including The Hunger Games and Fifty Shades of Grey trilogies. Core comparable bookstore sales, which exclude sales of NOOK products, increased 6.9% for the quarter and 0.7% for the full year. BN.com sales continued to decline for the quarter as well as the fiscal year.

College

The College segment, which includes results from the Barnes & Noble College bookstores, had revenues of $228 million for the quarter and $1.7 billion for the full year, increasing 5.7% for the quarter and decreasing 1.9% for the year, as compared to the prior year. As compared to the year ago period, fourth quarter sales were positively impacted by the recognition of textbook rental sales deferred from the third quarter. However, full year sales were lower as compared to a year ago, due to a shift from selling new and used textbooks to lower priced textbook rentals. Comparable College store sales decreased 2.2% for the quarter and 0.3% for the full year, as compared to the prior year periods. College comparable store sales reflect the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period.

NOOK

The NOOK segment, which consists of the company's digital business (including Readers, digital content and accessories), had revenues of $164 million for the quarter and $933 million for the full year. NOOK segment comparable sales increased 1% for the fourth quarter while increasing 45% for the full year, as compared to the prior year periods. Device sales declined during the fourth quarter due to higher third-party channel partner returns, lower selling volume and lower average selling prices. In order to optimize the supply chain for new products, the company took back NOOK Simple Touch inventory following the previously announced holiday sales shortfall. Digital content sales increased 65% for the fourth quarter and 119% for the full year on a comparable basis, growing comparable digital content sales to $483 million for the full year. Digital content sales are defined to include digital books, digital newsstand, and the apps business.

Comparable NOOK sales reflect the actual selling price for digital books sold under the agency model rather than solely the commission received. Additionally, such sales include all deferred NOOK device revenues, and device sales to third-party channel partners on a "sell-in" basis net of estimated returns.

Newco Separation

On April 30th, the company announced that it has formed a strategic partnership with Microsoft to form a new subsidiary, Newco, which is comprised of the company's NOOK digital and College businesses. The company continues to be actively engaged in the formation of Newco and is in the process of implementing the work necessary to complete the separation and close the Microsoft transaction.

Conference Call

A conference call with Barnes & Noble, Inc.'s senior management will be webcast beginning at 10:00 A.M. ET on Tuesday, June 19, 2012, and is accessible at www.barnesandnobleinc.com/webcasts .

Barnes & Noble, Inc. will report fiscal 2013 first quarter earnings on or about August 21, 2012.

About Nate Hoffelder (11588 Articles)
Nate Hoffelder is the founder and editor of The Digital Reader:"I've been into reading ebooks since forever, but I only got my first ereader in July 2007. Everything quickly spiraled out of control from there. Before I started this blog in January 2010 I covered ebooks, ebook readers, and digital publishing for about 2 years as a part of MobileRead Forums. It's a great community, and being a member is a joy. But I thought I could make something out of how I covered the news for MobileRead, so I started this blog."

9 Comments on Nook Sales Down Last Quarter – B&N is Doomed

  1. digital reader fan // 19 June, 2012 at 10:22 am // Reply

    ha ha, pretty funny you tricked me.

  2. digital reader fan // 19 June, 2012 at 10:37 am // Reply

    Does anyone think if they got rid of/sold the razor thin hardware division they could still keep the 50% nook revenue stream? Could they keep the 65% Digital content sales were up swing? I wonder if B&N would be better or worse off. It’s interesting. Makes me think if the printer business model. Low margin hardware in return for the ink sale income stream.

    • Very unlikely.
      The only thing that makes the gadget part a viable business is the digital content revenue stream.

    • Apple showed with consumer devices software (and content) have to be closely integrated with hardware. This is why Microsoft (mostly a software company) has produced its own tablet Surface; strategically it needs to do it, or be shut out.

      This is also why Kobo was sold to Japanese content provider Rakuten was sold by its former owner Chapters-Indigo.

      The Kobo example is instructive for B&N. Chapters pockets weren’t big enough to field a competitive hardware/software “ecosystem”, so it had to sell to keep Kobo viable.

      B&N’s (only) hope it to integrate closely with Microsoft. If that doesn’t happen, the prognosis could be grim.

  3. I would be worried if Nook book sales and pbook sales were down. That Nook device sales are down can also be a positive — no need to sell devices at either razor thin margins or at a loss. I wouldn’t be surprised to learn that Amazon’s device sales are also down. In B&N’s case, and I suspect in Amazon’s too, the release of new devices provides a sales spurt but most people do not replace well-functioning devices with new devices simply because a new device has been introduced.

    I’m still using a 4.5-year-old Sony 505 and a 1.5-year-old Sony 950. I would not have bought the Nook Tablet I am using had the decision been mine. Not because there is anything wrong with the Nook but because there is nothing wrong with either of my Sonys and I only use the devices to read. As I have mentioned previously, the Nook Tablet was a gift from my wife, but she bought it for me because there was a big sale on it with a New York Times subscription and she thought I would like color. Had she asked, I would have said I could get the NYT subscription for the same price on my Sonys and color isn’t needed, but she didn’t ask. I suspect that a lot of device owners are like me — no need to buy a new one yet.

    • I kind of agree with you. If Amazon introduces a whole new line of Kindles this year, like last year, will people clamor to buy them if they are not that much better?

      The same thing goes for the Nook Tablet. If they make a new one for this holiday season, do people really need to replace their previous one. With the added speed and processing power of the Nook Tablet, it was better than the Nook Color. But what would compel people to buy a new one. If they do not make a new one this year, the only way to sell much more devices will hinge on price.

  4. There is a device glut. I expect Microsoft to put Nook Software on Windows 8 and point readers there just like Apple puts iBooks software on the iPad by default. A lot of people already have a general purpose tablet, why buy a specialized ereader?

  5. I wonder if the e-ink e-reader market has been saturated in the US?

    I also agree with Richard Adin’s point about people not needing to replace their device yet. I predict more low device sales for both Kindle and Nook e-ink readers in the upcoming year unless a substantial improvement is made in e-ink.

  6. Its not surprising that nook sales are down while content sales are up. When the Nook Color came out there were almost no satisfactory 7″ tablets on the market. Now you can get a 7″ color tablet from any of several major manufacturers for the same price or even less than the original Nook Color price. You can add a Nook app to any of these devices so there’s no need to buy the more restrictive Nook hardware anymore. If the Nook hardware line is to survive long-term it must do so as an open system that isn’t so tightly controlled by B&N.

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