Barnes & Noble, the (currently) largest bookstore chain in the US, released their q3 financial report today and the news is actually worse than I expected.
Overall company revenues down last quarter:
Third quarter consolidated revenues were $2.2 billion, a decrease of 8.8% as compared to the prior year. Third quarter consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) were $55 million, as compared to $150 million a year ago. Third quarter consolidated net losses were $6.1 million, as compared to net earnings of $52 million a year ago.
B&N attributed much of the loss to losses on the Nook hardware, but even the retail stores did poorly:
The Retail segment, which consists of the Barnes & Noble bookstores and BN.com businesses, had revenues of $1.5 billion for the quarter, decreasing 10.3% over the prior year. This decrease was attributable to a 7.3% decline in comparable store sales, store closures and lower online sales.
Curiously enough, B&N also reported that when the Nook losses were factored out, the retail stores were only down 2.2%. Albatross, much?
The College store revenues were also down a couple percent, but not enough to be panicked over:
The College segment, which consists of the Barnes & Noble College bookstores business, had revenues of $517 million, decreasing 1.6% as compared to a year ago. Comparable College store sales decreased 5.2% for the third quarter as compared to the prior year period, as the back-to-school rush season extended past the close of the company’s third fiscal quarter.
But Nook, now that is the interesting news. B&N reported that the Nook division had revenues of $316 million for the quarter, and that it lost $190 million versus $83 million compared to the previous year. That revenue figure represents a decline of over a quarter from the same period a year ago. B&N is blaming the decrease on the fact they sold fewer Nook devices compared to last year.
Damn. Their sales didn't just decrease; Nook hardware sales must have fallen off of a cliff. The number of units sold probably was cut in half (if not more) in order to account for such a severe drop.
What's even worse is that B&N also mentions that they took back $21 million in "channel partner returns" and also had to pay those partners another $15 million in promotional allowances. There's also $59 million of additional inventory charges for stock B&N bought but could not sell, so it seems the crack I made a couple days ago about B&N's after-Christmas clearance sales wasn't a joke; it's true.
Not only did B&N have to accept back something like 50 to 100 thousand unsold units, they also had to pay for the privilege of their partners not selling them. And they still have to do something about the 200 to 300 thousand unsold units they already had on hand. Ouch.
But don't worry, digital content sales were up 6.8% for the third quarter over the prior year. And B&N has a plan: they're going to shrink the Nook division just like they are planning to get rid of their excess stores.
In response to the device sales shortfall over the holiday season, NOOK is calibrating its business model and has implemented a cost reduction program that the company projects will significantly reduce NOOK’s expenses.
“In terms of the NOOK Media business, we’ve taken significant actions to begin to right size our cost structure in the NOOK segment, while also taking a large markdown on NOOK devices in order to enhance our ability to achieve our estimated sales plans in subsequent quarters,” said William Lynch, Chief Executive Officer of Barnes & Noble. “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."
Some are going to assume that B&N plans to cut staff, reduce development funds, but not actually give up on the Nook hardware (not so long as B&N can keep finding suckers to feed the money pit that is Nook Media), but I'm not sure that's what B&N is saying here.
Oh, they're still looking for suckers, but there's another point about how B&N might be buying hardware.
B&N has been a hot topic on this blog, and there's been a lot of debate in the comments about B&N and what B&N's frequent sales of refurbs meant. One idea we came up with was that B&N might have been creating problems for themselves by buying Nook hardware from suppliers with the same mindset as they would use in buying books from publishers.
Big booksellers like B&N can buy books at very favorable terms and return them if they don't sell. This sometimes leads the booksellers to overstocking a title before returning the copies they can't sell.
There's a chance that B&N was using that same model for buying Nook hardware, which is a mistake because B&N can't send the hardware back to the manufacturer. B&N is in effect their own supplier; the manufacturer is merely a contractor.
If our theory is correct then it would explain the excess returns from B&N's retail partners reported in this post and it would also explain the frequent sale of refurbs as well as the pair of BOGO sales we saw last Spring.
I do hope the theory is correct because it would mean that there is a not so difficult fix to the excess hardware problem. But even if it is correct I'm not sure the Nook can be saved. The best thing that B&N could say about the Nook today was that digital content sales didn't completely suck.
Yes, digital revenues increased 7%, but that is not good news compared to the rest of the market; both Kobo and Amazon reported significantly better news for 2012. Amazon was up 70% in ebook sales and Kobo was up 143% in total revenues.
Both of those ebookstores are growing steadily; Nook content sales didn't even grow as fast as the rest of the ebook market, which according to the AAP was around 46% for the first 10 months of last year.
B&N is losing ebook market share in the US, and it is far from likely that they will be capable of expanding internationally any time in the near future. Barring some radical changes on the part of B&N, the Nook is done. Put a fork in them.