While Barnes & Noble has created lots of buzz and headlines with its Nook e-reading devices, its future profitability lies in the sale of content. That was the message CEO William Lynch delivered to analysts last week in a conference call discussing first-quarter results. Improved gross margins were due to increased sales of higher-margin content, while competition forced B&N to lower the price of its e-reading devices by an average of 23% compared to a year ago, which contributed to a decline in device sales. Lynch said that while B&N needs to be “competitive” in the device space, “hardware is not where margins reside—they reside in digital content.” Digital content sales rose 46% in the first quarter, with sales of apps, magazines, and newspapers growing at a slightly faster pace than e-books, Lynch noted.

It was old-fashioned content that drove sales in B&N’s retail division as sales of physical books had an 8.3% comparable store gain in the quarter, led by sales of the Fifty Shades trilogy plus strong sales of juvenile books. Overall, retail comps were up 4.6%, but ex­cluding Nook sales comps were up 7.6%. The sales decline of devices in the quarter was due largely to manufacturing problems of the Nook with GlowLight, which resulted in the new device being out-of-stock at most stores for much of the quarter. Those problems have been corrected, Lynch said, and the device is now available at all of its retail partners. The lack of availability of GlowLight hurt digital content growth since B&N has its strongest sales of content within the first two months of a customer buying a device, Lynch said. In the first period, sales from existing customers and higher sales through third parties helped to offset softer sales from new customers.

The good performance of the bricks-and-mortar stores in the quarter led Lynch to declare that B&N’s retail stores will be a “great business” for the foreseeable future as the company continues to be the largest physical retailer where consumers can buy printed media. The company, which closed two stores in the quarter and will likely close 10–15 for the year, will open a “handful” of new stores as well, Lynch said. Despite the recent gains made by the retail segment and improved comp sales in the quarter, B&N’s forecast still calls for comp sales to fall by low to mid single digits for the full fiscal year.

Stores Boost BAM!

The addition of more than 40 Borders stores late last year boosted sales in the quarter ended July 28 by 14.9% at Books-A-Million; in its conference call, executives made clear that their plans rely heavily on selling an expanding mix of physical products, which, in addition to books, includes merchandise that ranges from yogurt to Legos. Although, in the words of chairman Clyde Anderson, BAM! sold Nooks “in a big way” in the quarter and the number of downloads increased, digital content still poses more of a threat than an opportunity for the retailer. President and CEO Terry Finley observed that while the rate of erosion of print sales to e-books slowed for the third straight quarter, digital content continues to put pressure on all formats, especially mass market paperbacks, where sales are down in all genres. As a response, Finley said BAM! will continue to look for new categories that will work well in its stores.

Barnes & Noble, First-Quarter Segment Results, 2012–2013 (in millions)

Segment 2012 2013 % Change
Sales $1,097.0 $1,119.0 2.0%
EBITDA 40.0 75.0 87.8
Sales $191.0 $192.0 .03
EBITDA (51.0) (57.0) -11.1
Sales $220.0 $221.0 0.1
EBITDA (12.0) (14.0) -15.0
Total $1,418.0 $1,454.0 2.5

Books-A-Million, Second-Quarter Results, 2011–2012 (in millions)

2011 2012 % Change
Sales $104.8 $120.4 14.9%
Net Loss 0.9 2.8NM