Barnes & Noble could be a very different company one year from now. Following a report in Wednesday’s Wall Street Journal that B&N is looking to sell Sterling Publishing (a process that a source told PW “is moving along”), the company disclosed Thursday morning that it is considering spinning off its Nook business into its own company. The disclosure came as part of B&N’s holiday sales report that showed large increases in sales of Nook devices, but also revealed that EBITDA, hurt by lower than expected sales of the Nook Simple Touch and increased investment in Nook products, will be less than forecast only a month ago.
During the nine-week holiday period ending December 31, Nook unit sales, including Nook Simple Touch, Nook Color and the new Nook Tablet increased 70% over the same period last year, but while the Nook Tablet exceeded expectations, sales of Nook Touch lagged expectations. During the same nine-week period digital content—e-books, digital newsstand, and apps-- rose 113% on a comparable basis.
For the entire year, B&N expects the Nook business to generate about $1.5 billion and William Lynch, B&N CEO said that given the strong growth of Nook and the encouraging forecast, the company is “evaluating its reporting segments. The evaluation is expected to be complete by the end of this fiscal year, which may result in reporting Nook as a separate operating segment. Lynch continued, “in order to capitalize on the rapid growth of the Nook digital business and its favorable leadership position in the expanding market for digital content, the Company has decided to pursue strategic exploratory work to separate the Nook business.
The new Nook group would be comprised of four revenue streams: devices; digital content, including e-books, subscriptions, apps, textbooks; accessories; and warranties and extended service plans. While e-books and other digital content sales would be made through BN.com, those sales would become part of the Nook business. B&N said it was not a certainty that it would go ahead with the spin off.
While sales of devices has surged, continued investment in development has cut into profits. Those investments, coupled with the poorer than expected performance of Nook Touch, led B&N to reduce its earnings forecast for the full fiscal year from a range between $210 million and $250 million to $150 million and $180 million. The company noted that it has invested the increased revenue it earned at its stores in the Nook business and that it is in “discussions with strategic partners including publishers, retailers, and technology companies in international markets that may lead to expansion of the Nook business abroad.”
Getting back to holiday sales, B&N said that in its trade retail segment, sales increased 2.5% over the prior year period to $1.2 billion. Comparable store sales increased 3.4% and retail core comparable store sales, defined as the sales of non-digital merchandise, increased 4.5% over last year. Book sales were strong overall, B&N said, fueled by strength across multiple categories with the juvenile category particularly strong. In addition, there was significant crossover between physical and digital book sales, including big movie books like The Help (Penguin), The Girl with the Dragon Tattoo (Knopf) and War Horse (Scholastic) among the holiday hits. Physical book sales on a comparable basis increased by 4% at Barnes & Noble stores, exhibiting growth for the first time in five years. It expects to see extra sales of between $200 million and $230 million for the full year.
At BN.com sales increased 43% over the prior year period to $327 million, with comparable sales increasing 52%. This increase was driven by continued growth of the Nook business, offset by a decline in online physical product sales. The consolidated Nook business across all of the B&N’s segments, including sales of digital content, device hardware and related accessories, increased 43% during the holiday period to $448 million, on a comparable sales basis. A substantial portion of the 70% year-over-year Nook unit increase was driven by sell-through at third-party retailers which the company said “is indicative of the increasing awareness of the Nook brand and demand for the product from customers new to Barnes & Noble. “