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B&N Nook Hardware Sales Down, eBook Market Share Down

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 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.

Coming soon to a crackerjack box near you

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.


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flyingtoastr February 28, 2013 um 10:47 am

The reason Kobo and Amazon are showing such drastic content sale increases are the exact reason BN isn’t. The US content market is saturated – it’s not going to grow at a huge rate from here on out for anyone.

But both Kobo and Amazon expanded internationally to a large degree in the last year. Those are markets where they had no sales in the previous year, so even making a few million from them is a huge jump. And it adds up at very little cost to the company.

It’s pretty imperative that BN gets into international markets. They’re comparative cash cows: all the R&D for the devices and market is done, it’s just pure bank once you have it set up.

Mike Cane February 28, 2013 um 11:43 am

According to the webcast, the international expansion is being done on Microsoft’s dime. Which makes me wonder if they didn’t have that dime, would they have been able to expand outside the U.S. at all?

fjtorres February 28, 2013 um 2:33 pm

Uh, no.
They didn’t before MS went digging between the sofa cushions.

flyingtoastr February 28, 2013 um 3:26 pm

Maybe. BN does have a very good revolving credit facility, so they potentially might have been able to do so. But it would have spanked the bottom line even harder and saddled them with a lot of debt that they don’t have to deal with now.

Also, Microsoft’s investment in NOOK Media is small enough to be a rounding error on their balance sheets. While the world is "owned" by Apple and Android according to the internet, don’t count out just how much money Ballmer has to throw around.

fjtorres February 28, 2013 um 4:26 pm

Oh, Microsoft is passe, according to the internet. Never mind that they have $50 billion cash on hand *after* paying decent dividends. Or raking $17 Billion a year in net, in a *bad* year.
They can afford to waste $300M on Nook-type investments. 🙂

fjtorres February 28, 2013 um 4:18 pm

Lots of faux-analyst fodder in there…
Juicy stuff.

$21 Million in channel returns? That’s 2ooK STRs or 1ooK Nook Tablets. Let’s compromise and go 50/50 for a return of 100K STRs and 50K NTs. How many channel partners were carrying that stuff? 10,000, each returning 10 STRs? 5,000 returning 20 each?
We’ve heard from the Kobo indie partners that their sales run into single digits so it doesn’t look like B&M presence moves much reader hardware.
In fact, looking at WalMart: they started out with Sony and Kobo, ditched them for Kindle because of poor sales, and then ditched them for Nook because "Amazon competes with them". Hmmm…

Anyway, juicier number: $316M revenue, *net* losses $190M. Best case scenario, assuming excess inventory is the sole cause of the $190M loss–so the rest of the operation is breakeven–we get about $2 million excess Nook STRs worth of trouble. Or a million Nook Tablets. Now, since Nook Color only sold 340,000 over its first year, I doubt they really would’ve ordered way over a million NTs to be built so I’m going to keep blaming STR for the losses. Let’s say 1.6 Million STRs and 200K NTs headed for ebay or a landfill. (And yes, I’m assuming Nook Glo returns and excess inventory at near zero. They seem to have sold well for most of the year, afer all.)

The thing is, all those numbers are for the holiday quarter and I doubt the Nook HD and HD+ were in those returns and excess inventory. So next quarter could get messy, judging by the promo on the HD+.

Now, another way to slice and dice those losses is to say they *don’t* have any excess inventory to liquidate, except for the returns, and that the rest of the losses, $479M, were the result of generating $316M in revenue. Which is to say, it costs Nook $1.50 to earn $1.

I’m not sure anybody can be *that* bad selling digital content, even factoring in hardware subsidies, so I prefer to believe their main problem is inventory management. Because then they have a chance to survive. If they *don’t* have warehouses full of unsold Nooks then things are really bleak because it means they’re selling hardware that *doesn’t* sell ebooks and selling subsidized razors that don’t sell blades is no business at all. Inventory issues, it has to be inventory issues. Or somebody is embezzling and on a plane to Rio right now. 🙁

Hmm, assuming zero hardware sales, the $316M revenue would be the result of selling about 50 million ebooks. If we say the average nook owner buys one book per month that works out to 16Million unique cumulative customers spread among hardware and app customers. It would give Nook something north of 40% ebook market share. (Not anywhere realistic but it sets a theoretical limit.)

Conversely, setting their ebook revenue to zero and assuming an average device price of $100 (yes, I know it’s low) means total sales of a maximum of 3 million devices for the quarter. (Another limit.)

The reality lies somewhere in the middle; something like 2 million devices averaging $120-140 each and ebook sales of anywhere between $50-75 million for the quarter. (That suggests a customer base of 5-7 million, BTW. Troubling.)

We have a report pegging US ebook sales in 2012 at $1.3 Billion and we know the business is strongly seasonal. Neglecting seasonality, that Nook ebook sales estimate works out to 15-23% market share. And that feels about right, no?

(Problem is, it means each dollar of ebook sales requires about $4 of hardware cost and a loss of over $2. Unless they have terrible hardware inventory problems.)

The higher number puts Nook at $300M a year in ebook sales if they totally ditch hardware. That’s about twice Kobo’s numbers? Factor in the college book stores and Nook media might now be worth about half of the valuation the MS deal gave it last summer. Tops.

Yup. I think they are in deep.

Those are just WAGs… now we wait and see what the guys that do it for a living come up with.

Nate Hoffelder February 28, 2013 um 5:17 pm

That’s a good point about the stock. B&N has something like half a million units taking up space in the warehouse. that’s gotta sting..

fjtorres February 28, 2013 um 5:51 pm

Oddly enough, Amazon is helping there:

Doug February 28, 2013 um 7:19 pm

Re: "I doubt the Nook HD and HD+ were in those returns and excess inventory."

On the contrary, that’s exactly where the problem was. B&N CEO William Lynch, opening the investor conference call today: "Q3 revenue and earnings shortfall across the company was almost entirely a function of our missing sales targets for our 2 new NOOK tablet devices. Despite generating very strong reviews and the highest preorder volume we received on any NOOK launch to date, sales of those products didn’t materialize at the rate we expected through holiday…"

And during the Q&A portion, Lynch said, "what we’re seeing is that the bigger brands, larger technology brands have more resonance in that multifunction tablet market than we do."

fjtorres February 28, 2013 um 8:01 pm

So, their brand new state of the art tablets introduced in november were being returned in december?
To the tune of $21 million?!!
If that’s their story…
…they *really* need to get out of hardware.

Nate Hoffelder February 28, 2013 um 8:47 pm

It would not surprise me to learn that most of the unsold stock is the new stuff. What, did you really think B&N would ship that many of the previous year’s model instead of the current device?

fjtorres February 28, 2013 um 11:31 pm

Not ship, but rather receive the last of the old stuff as the new stuff filtered in.
Back in Nov-december there were still tons of NTs and STRs in the various retail sites around me. I still see STRs at retail.
Kmart was pimping them in january…

It made sense that as the new tablets filtered in the old would get returned. That’s why I was WAG off STRs and NTs.

But if its the new that’s been bounced back then it’s pretty much curtains for their tablets. If they couldn’t sell when they were new and shiny, the cheapest of the high-res Androids, they’re not going to do any better when they’re no longer new and shiny nor the cheapest of the high res androids.
(Sooner or later Archos is going to have to actually ship their stuff. 😉 )

Ben March 1, 2013 um 12:09 am

Whether it’s an inventory issue or lack of brand vs tech companies…they need to get out of tablets. They dont have the deep pockets to create hardware, provide content and offer good quality apps, all at the same time.

Losing money year after year is no way to save a business in a division that is not their core business…even though, they like to fancy themselves this is going to save them. Understand why people still like to go to stores and shop, reduce store sizes instead and re-focus on customer service. So instead of closing stores, divide big stores into smaller ones.

There are so many things they could do to save themselves but they don’t. It’s like watching the auto industry pissing money away and the difference here is no one will ever come save B&N if they continue on this path of self-destruct. Publishers need B&N…anyone that thinks they can simply sell every book online is a wishful thinker.

fjtorres March 1, 2013 um 6:47 am

Not all publishers are equal, though.
The big publishers don’t need B&N, which is something their management still doesn’t get.
They really are alone in the middle.
Big publishing makes the bulk of its money off bestsellers they carpetbomb the universe with so losing 700 out of the tens or thousands of retail sites no longer worries them. The Borders implosion made it clear they are not dependent on the big storefronts.
More, they are starting to get significant returns from their backlists in ebook form and, as Nate has pointed out, they are starting to wise up about online.
B&N is *not* indispensable. Not to the big publishers.
And since B&N is not particularly friendly to the small guys…
Well, they’re alone in the middle.
It’s not just Nook that needs a chane in attitudes and strategies.

Paul March 1, 2013 um 9:04 am

They need to spend more money doing their web site up to make it more attractive to buy books there rather than amazon. The user interface could be improved quite a bit.

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