B&N Confronts Changing Market, Bad Environment

The book business is “holding up” in an extremely difficult macro economic environment, but that doesn't mean the industry hasn't changed, Barnes & Noble CFO Joseph Lombardi told analysts in a presentation made at Goldman Sachs's global retailing conference last week. The 13.9% increase posted by Barnes & Noble.com in the second quarter is proof that people still buy books—it's where they buy books that is changing, Lombardi said. “The Internet is where the growth is,” Lombardi said, adding that B&N expects its online division to continue to benefit from that trend.

He said the boom in online retailing has led the retailer to reduce the number of books its stores carry in certain categories as those sales move to the Web, estimating, for example, that the size of B&N's computer book section is about half what it was eight years ago. Sales of atlases and dictionaries have largely moved online, and other reference titles and business books also sell better over the Web. The children's book category is one segment that still does best in traditional stores, Lombardi said. As music sales continue their double-digit decline, B&N is experimenting with different products to replace CDs.

Faced with what other B&N executives are calling the “worst retail environment in 30 years,” Lombardi said B&N is concentrating on tight management of its business, including improving the efficiency of its supply chain and managing the payroll of its stores. While Lombardi said B&N continues to look for ways to trim store costs, the reality is that stores need help to get ready for the holiday season. While he said B&N has done a good job managing earnings—it still expects earnings per share for the full year to be in the $1.70 to $1.90 range—he said that for margins to “move forward” the company needs to register comp-store gains. The forecast for the third quarter, however, is for comp sales to decline in the low single digits. B&N also can't count on opening lots of new stores to give sales a lift. The credit crunch has led to a decrease in the number of mall developments, and B&N will open between 20 to 25 stores next year, down from the 30 to 35 outlets it expects to open this year. Lombardi was vague about B&N's plans to sell digital products, saying only that the retailer is looking at its options.