Barnes & Noble's third-quarter results for the period ended January 29 shows the dilemma faced by companies making the transition from print to digital. In the case of B&N, while its fastest growth is tied to the sale of e-books and Nook digital readers, its most profitable business remains its bookstores. "Bookstores remain a profitable model," CEO William Lynch told analysts in a conference call last week. While sales through Barnes & jumped 52.4% in the quarter, the losses at the online bookstore increased; sales through the trade bookstores rose a much more modest 4.6%, but while profits declined, the retail stores still generated $177.6 million of EBITDA (earnings before interest, taxes, depreciation, and amortization) in the quarter. The retail stores also had a much higher gross margin in the period, 32.2%, compared to 9.5% for had negative EBITDA of $147.4 million in the first nine months of fiscal 2011, but Lynch said's rapid growth in e-book sales and of its share of the market will allow it to become profitable quicker than originally planned and that losses in fiscal 2012 will be "minimized greatly." And even as represented significantly more of B&N's total revenue than one year ago (13.7% vs. 3.6%), CFO Joe Lombardi noted that bookstores remain a critical part of B&N's digital strategy since they are the largest sales channel for Nook e-readers and accessories. Plus, according to Lynch, B&N still expects that physical books "will remain the majority of the market for the foreseeable future." Still, the company is working to move beyond book sales, evidenced by ramping up sales of educational toys and games, while making the stores the best place to discover and buy content.

B&N doesn't expect to close more than the 10 to 15 stores it has already announced and could move into a couple of outlets that will be abandoned by Borders. B&N's strategy toward the Borders bankruptcy appears to still be evolving. Of the 200 Borders's outlets to be closed, B&N competed in 75% of those markets; while it could take a small hit in the current quarter as close-out sales drive up Borders's business, the company expects to benefit in the long run. But whether that gain will come by simply taking over business that had gone to Borders or by opening in new locations is still to be determined. B&N's decision to suspend its dividend will add $60 million to B&N's capital funds, giving it the flexibility to take advantage of new opportunities; while those will most likely be in the digital arena, B&N did not rule out making some strategic moves in the physical side of the business.

Barnes & Noble Third-Quarter Segment Results (in millions)


Segment 2010 2011 % Change
Trade stores $1,399.1 $1,464.5 4.6%
College stores 565.9 541.3 -4.3
B& 209.5 319.4 52.4
Total 2,174.5 2,325.2 6.9


Segment 2010 2011 % Change
Trade stores $186.1 $177.6 -4.6%
College stores 49.2 43.0 -12.6
B& (31.5) (50.5) NM
Total 203.8 170.1 -16.5