Barnes & Noble Heads Back to the Future

Last week Barnes & Noble severed its ties with Microsoft, taking another step toward becoming, in the words of CEO Mike Huseby, a “client- and content-focused” company.

A little more than two years after Microsoft invested $300 million in B&N to form Nook Media, the retailer agreed to buy back the computer giant’s preferred stock for $125 million, in a combination of cash and stock. As part of the deal, Microsoft is relieved of its obligation to invest additional funds in Nook Media, and B&N is freed from having to make further investments in Nook’s international business—an area that generated less revenue than the two companies expected when the partnership was formed in 2012, according to Huseby. The CEO noted that ending its relationship with Microsoft allows B&N to be more flexible in its efforts to separate its retail stores from Nook Media, which is composed of Nook Digital and B&N’s college stores businesses.

Huseby said he hopes that B&N’s restructuring will be completed by next August, although he offered no guarantees. And while B&N executives have talked mostly about splitting off the company’s retail stores from Nook Media, during the conference call at which they discussed the agreement and B&N’s second-quarter results, there were hints about the possibility that only Nook Digital would be separated, leaving the college stores and retail businesses together.

Under the new agreement, for instance, Microsoft is entitled to receive about 22% of the proceeds of any sale of the Nook Digital business, which, Huseby stressed, includes the digital content and device businesses only. And B&N continues to invest heavily in its college business, Huseby said, developing technology, increasing head count, and supporting marketing efforts there, while working to slash spending and reduce costs on the Nook Digital side. In another sign that B&N might we willing to let Nook Digital go on its own, Huseby noted that B&N has held talks with outside companies that see “substantial value in Nook in the form of its content library, Nook Press, and the talent we have in Santa Clara [where Nook is headquartered].”

B&N’s financial report for its fiscal second quarter once again shows why the company favors its retail and college businesses over Nook. The digital division lost $37.6 million in the period, which ended November 1, although that loss was smaller than in the second quarter of 2013. Nook had $63.9 million in sales in the most recent quarter, down 41.3% over the same period last year, due to a 63.7% decline in device and accessory sales and a 21.2% drop in spending on digital content—a particularly worrisome trend for a company betting its future on content sales. Its retail and college operations both posted profits in the quarter, though earnings were down compared to last year.

In retail, revenue fell 3.6% year over year, to $888.2 million in the second quarter. B&N blamed the decline largely on fewer sales of Nook devices, which led to a 1.5% drop in comparable store sales. Excluding Nook, comp sales were up 0.5%.

Mitch Klipper, CEO of the B&N retail group, said the retailer’s core book business continued to improve in the quarter, and that sales were up in its juvenile and toys and games departments. He was optimistic about prospects for the holidays, pointing to a strong lineup of books, including about 500,000 signed copies of more than 100 first editions for sale throughout its stores.

B&N did not close any retail stores during the second quarter, entering the holiday season with 658 outlets. For the full fiscal year, B&N expects retail and college comparable store sales to decline in the low single digits.

Barnes & Noble, Segment Results, Second-Quarter Fiscal 2014-2015

(in millions)