Barnes & Noble's Nook sales plunge 26% despite digital media gains

February 28, 2013 | By Jason Ankeny

Barnes & Noble swung to steep quarterly losses stemming from declines in Nook tablet and e-reader sales during the holiday season.

Barnes & Noble reported fiscal third-quarter losses of $6.1 million, plummeting from net earnings of $52 million a year ago. The bookseller's Nook Media unit, which includes hardware as well as e-book and mobile app sales, slumped 25.9 percent year-over-year to $316 million, with EBITDA losses totaling $190 million compared to $83 million a year ago. Barnes & Noble blamed the losses on falling Nook device sales, inventory charges and higher operating expenses, but noted digital content sales increased 6.8 percent compared to year-ago totals.

"In terms of the Nook Media business, we've taken significant actions to begin to right size our cost structure in the Nook segment, while also taking a large markdown on Nook devices in order to enhance our ability to achieve our estimated sales plans in subsequent quarters," said Barnes & Noble CEO William Lynch. "Coming off the holiday shortfall, we're in the process of making some adjustments to our strategy as we continue to pursue the exciting growth opportunities ahead for us in the consumer and digital education content markets."

Lynch said Barnes & Noble remains committed to the Nook Media business despite its recent struggles. Earlier this week, The New York Times reported the company plans to move away from engineering and building Nook e-readers and tablets in favor of licensing its digital content to other device manufacturers. "They are not completely getting out of the hardware business, but they are going to lean a lot more on the comprehensive digital catalog of content," a source familiar with Barnes & Noble's strategy said.

"To be clear, we have no plans to discontinue our award-winning line of Nook products," a Barnes & Noble spokesperson said in response to the NYT report.

Barnes & Noble kicked off its Nook e-reader line in 2009, and in late 2011 introduced the Android-based Nook Tablet, touting a wealth of e-books, mobile applications and HD video content in its bid to rival Amazon's (NASDAQ:AMZN) Kindle Fire as well as Apple's (NASDAQ:AAPL) market-leading iPad. In May 2012, Microsoft (NASDAQ:MSFT) invested $300 million in Nook Media, and late last year, British textbook publisher Pearson acquired a 5 percent stake in the unit for nearly $90 million.

But despite exploding consumer interest in tablet devices, Nook sales have suffered. "Even though the Nook compares well with many of its competitors' tablets, Barnes & Noble's distribution channel and marketing of its products is nowhere near like those of [Apple, Google (NASDAQ:GOOG) and Amazon]," Yankee Group Senior Analyst Boris Metodiev said earlier this month. "One problem for Barnes & Noble is that most people think of the company only as a book retailer--having good e-readers seems reasonable; manufacturing good tablets seems a bit of a stretch. And the e-reader market will continue to be suffocated by the plethora of 7-inch cheap tablets. Another thing that doesn't help the popularity of the Nook is that it runs on Android's Gingerbread OS (version 2.3) which makes it quite outdated and unattractive for the consumer, compared to most other popular Android tablets running on Ice Cream Sandwich (version 4.0) or Jelly Bean (version 4.2)."

In related news, Barnes & Noble said a strategic committee of three independent directors is reviewing a proposal from chairman and largest shareholder Leonard Riggio to buy out its consumer bookstore chain. Such a deal would split the consumer bookstore division from Barnes & Noble's Nook and college bookstore units.

For more:
- read this release
- read this Wall Street Journal article (sub. req.)