With sales in its Nook segment falling 26% in the third quarter ended January 31 and an EBITDA loss that increased to $190.4 million from $82.8 million, Barnes & Noble CEO William Lynch said the company is taking “significant actions to begin to right size our cost structure in the Nook segment” and will also take a large write down on Nook devices to try to sell existing inventory. Lynch also said that following the poor holiday season, B&N “is in the process of making adjustments to our strategy” although he said the Nook Media company remains committed “to its Tablet and e-reader business.” Sales also fell in B&N’s store categories, falling 10.3% at retail and 1.6% in college. In a bright spot, EBITDA in the retail store segment rose 7% to $212 million.
The 26% decline in Nook segment sales, to $316 million, was attributed primarily to lower sales of Nook devices, although sales of content rose a modest 6.8%. The company also recorded $21 million in returns and a $15 million promotional allowance. The deeper Nook EBITDA losses resulted primarily from the sales shortfall, inventory charges, and higher operating expenses. The company recorded $59 million of additional inventory charges during the third quarter. To accommodate a smaller business, B&N it is calibrating its [Nook] business model and has implemented a cost reduction program that the company projects will significantly reduce Nook’s expenses.”
In the retail segment, the 10.3% sales decline, to $1.5 bilion, was attributed to a 7.3% decline in comparable store sales, store closures and lower online sales. Core comparable store sales excluding Nook products, decreased 2.2% as sales of Nook products in at its retail stores declined during the quarter due to lower unit volume. Improved EBITDA resulted from a higher sales mix of higher margin core products and expense management.
The 1.6% decline in college segment sales, to $$517.2 million, was due to a comp store sale decline of 5.2% due in part to the extension of the back-to-school rush season; factoring in the two additional weeks in February that contributed to this year’s rush season, comparable store sales decreased 2.1% for the quarter. College EBITDA decreased $1.3 million during the quarter as compared to a year ago to $34 million. College’s product margins improved during the quarter on a higher mix of higher margin textbook rentals, while expenses increased due to new store growth and continued investments in digital education.
For the entire company, sales dropped 8.8%, to $2.22 billion in the quarter and the company had a net loss of $6.0 million compared to income of $52.0 million in the third quarter of fiscal 2012. For all of fiscal 2013, B&N said it expects comp sales at its retail stores to fall in the low-to mid-single digits, while Nook revenue will be about $2.5 billion (down from earlier expectations of $3 billion) and losses in the fourth quarter to be equal to losses in last year’s fourth period. College store comps are projected to fall in the low single digits.
"Won't Continue Doing What We Have Been Doing"
Although Lynch said more details of how it is changing its Nook business would be made over the next few months, he told analysts in a conference call that the company "won't continue doing what we have been doing." Besides cutting costs, B&N will look to form partnerships with other companies to leverage its ability to sell e-books through the Nook e-bookstore. He also said B&N will continue to develop reading apps. While he didn't say B&N would stop making new hardware, he conceded that multifunctional devices built by larger companies than B&N have greater consumer awareness. B&N is committed, however, to open up new Nook e-bookstores in 10 countries this summer.
Lynch said he believes B&N can grow its digital content business without hardware, though B&N will continue to sell its existing Nook devices into fiscal 2014 that begins May 1. In addition, Lynch said there remains lots of room for growth in digital education and that B&N would be making announcements in that field in the future.
Lynch said B&N's objective is for Nook Media to be EBITDA positive in a "reasonable period." The Nook segment is expected to have a EBITDA loss of $375 million in fiscal 2013.