Even in the digital age, Barnes & Noble can’t avoid the headache of returns. Although the company posted lots of positive results for the year-end and fourth quarter of fiscal 2012, the number most analysts seem to focus on was Nook segment sales for the fourth quarter, which fell 10.5%, to $164 million. CEO William Lynch explained that the decline was due to heavy returns of Nook Simple Touch in the quarter and the decision to delay the launch of Nook GlowLight to May to ensure it met B&N’s quality standards.

For the full year, sales in the Nook segment, which B&N broke out for the first time, rose 34.3%, to $933 million. Revenue includes sales of all Nook digital readers, accessories, plus digital content. With prices for devices coming down, Lynch said the company expects digital content sales to be the main revenue driver in the years ahead. In fiscal 2012, B&N sold $483 million worth of e-books and other digital items, an increase of 199%, but it actually earned less than that since it only records a commission on e-books sold under the agency model. Lynch acknowledged to analysts that e-book sales growth has slowed a bit, but B&N estimated that it still has between a 25% to 30% share of the e-book market. Growth this year should be enhanced by international expansion, with an announcement of its first overseas operation expected soon along with new digital content to be offered through the Nook.

B&N’s retail trade bookstores performed well in the year, helped by the closure of Borders. Comp sales for the year were up 1.4% and rose 4.5% for the fourth quarter. Excluding Nook sales, comps were up 6.9% in the final quarter and 0.7% for the full year. An increase in customer traffic helped to offset the decline in sales from BN.com, which is now part of retail for reporting purposes. BN.com sales reflect only sales of print books and other physical products, with all digital sales recorded in the Nook segment.

During fiscal 2012, B&N closed 14 outlets and said that it will close 15 this year, but open five stores, its first new stores in over a year. Although during the conference call executives said the stores would represent a new format, B&N CFO Michael P. Huseby later told PW the change will be “evolutionary, not revolutionary.” B&N will be taking the best practices from its existing stores and applying them to the new outlets, Huseby said. While the stores will be tailored to each neighborhood, in general the outlets will have extensive Nook boutiques, expanded educational toys and games sections, plus a wider juvenile selection. The first stores are set to open November 7 in Fredericksburg, Va. (24,000 sq. ft.), and in Portland, Ore. (26,000 sq. ft.); both will have about 200,000 titles.

Looking ahead, Lynch said the deal with Microsoft should be completed by the end of the second fiscal quarter or early in the third period. When the agreement is completed, the Nook and college segments will become part of the B&N-Microsoft joint venture currently called Newco. From a financial performance standpoint, Lynch said the key to profitability will be to scale B&N’s digital content sales while maintaining (and improving) its 30% gross margin. Comp sales at the retail trade stores are expected to decline in the low to mid-single digits this year, as more buying moves to e-books and the stronger than expected lift from the closing of Borders will not be repeated.

Barnes & Noble Results by Segment, Fiscal 2011–2012 (in millions)

Segment 2011 2012 % Change
Sales $4,927.0 $4,853.0 -1.5%
EBITDA 259.0 317.0 22.4
Sales $695.0 $933.0 34.3
EBITDA (209.0) (262.0) 25.1
Sales $1,779.0 $1,744.0 -1.9
EBITDA 113.0 116.0 2.2
Intercompany sales (402.0) (401.0) -
Total $6,999.0 $7,129.0 1.9
Net loss 73.9 68.9 -