Barnes & Noble Inc. (BKS:US)’s move to shelve a breakup plan for now steps up pressure on the biggest U.S. bookstore chain to stem losses at its e-book division and hatch a new plan for coping with the shift toward digital publications.
“They are stuck,” said Michael Souers, an analyst for Standard & Poor’s in New York. While the company could become profitable by shedding the Nook business, e-books will continue to take market share from printed books.
Founder Leonard Riggio, 72, who is also the chain’s chairman and largest shareholder, said yesterday in a filing that he dropped the plan he floated in February to buy Barnes & Noble’s website and almost 680 stores. The shares plunged (BKS:US), erasing their gain for the year, as the company also reported a fiscal first-quarter loss (BKS:US) that was bigger than analysts estimated.
Sales at the Nook unit, once the centerpiece of a plan for navigating from printed to digital books, declined 20 percent in a third straight drop. Rather than banking on a breakup, Barnes & Noble now will focus on better integrating its retail, college and Nook units, President Michael Huseby said in an interview. The company may revisit breakup prospects in the future, he said.
The stock fell (BKS:US) 0.8 percent to $14.49 at the close in New York. The shares have slid 4 percent this year, compared with a 15 percent increase for the Standard & Poor’s 500 Index.
A further decline in the price eventually may bring back Riggio or convince a private-equity fund to make a bid, said Souers, who rates (BKS:US) the company’s shares a hold.
Barnes & Noble created Nook Media, a subsidiary made up of its Nook digital reading and college bookstore divisions, last year with the goal of spinning it off. The impetus for that was the company said investors weren’t properly valuing the Nook’s success. That thesis collapsed during the holidays when new devices flopped, forcing writedowns and eventually led to the July departure of Chief Executive Officer William Lynch, who oversaw Nook.
Huseby declined to provide details about the company’s revised plan other than promoting products across channels and sharing costs. He’s the company’s highest-ranking executive since Lynch’s departure.
The Nook division’s costs in the quarter ended July 27 produced a loss before interest, taxes, depreciation and amortization of $55 million, following a deficit of $57 million by the same measure in the previous year.
Since starting Nook in 2009, Barnes & Noble has been taking the profits from its stores and spending on building a digital unit to compete on content and devices with Amazon.com Inc. (AMZN:US) The division has also sought outside investors.
Microsoft Corp. and Pearson Plc (PSON) invested in the Nook Media unit last year. Pearson’s 5 percent stake in December, which came after Microsoft announced about an 18 percent purchase in April, valued the subsidiary at $1.79 billion. The market valuation for all of Barnes & Noble was just $872 million at yesterday’s close.
Their investments came after Liberty Media Corp. (LMCA:US) took a stake in the entire company in August 2011. Liberty initially made a cash offer of $17 a share, or about $1 billion, in May and then three months later spent $204 million buying preferred shares that can be converted into a 17 percent stake.
Microsoft, Liberty Media
Microsoft and Liberty Media need to figure out their strategies, said John Tinker, an analyst with Maxim Group in New York, who recommends buying (BKS:US) the shares.
After Nook tablets missed with consumers during the holidays, Lynch said the company would look for a major hardware manufacturing partner to help produce those devices to reduce costs and the risk of making them on its own.
Yesterday the company reversed that decision. Huseby said that Barnes & Noble would continue to design and develop “color devices” along with its black-and-white e-readers under the Nook brand and that it won’t be outsourcing production.
“If we want to be in the content business, we need to be in the device business, and we believe our people can develop devices better than anyone else,” Huseby said on a call with analysts to discuss the quarterly results.
While Nook tablets were well reviewed, the company didn’t sell as many as it expected. Lynch had chalked that up to other devices having more functionality, and in May, Barnes & Noble reached an agreement with Google Inc. to install several of its applications on Nooks.
Barnes & Noble has rejected that notion too, as Huseby said it will no longer try compete head-to-head with the likes of Amazon and Apple Inc. (AAPL:US) It will instead make devices geared to its core customers of readers and learners. He even declined to use the word “tablet” in describing Nook’s next color devices because the term is too closely associated with Apple’s iPad.
“To use the word tablet is to put us into a league that we aren’t willing to go into at this point,” Huseby said. “Our focus is on providing the best reading experience. We’re not trying to be all things to all people.”
The chain will release one new device for the holiday shopping season, after unveiling two tablets last year. As for concerns over the losses Nook continues to incur, Huseby said those would be reduced by being better at forecasting demand after missing by so much during the holidays.
The net loss in the quarter was $87 million, or $1.56 a share, compared with a loss of $39.8 million, or 76 cents, a year earlier, the New York-based company said in a statement. The loss excluding some items was 86 cents. Analysts projected a loss of 67 cents, the average of six estimates.
Sales declined 8.5 percent to $1.33 billion. Analysts projected $1.32 billion. Revenue at the chain’s 674 stores sank 10 percent.
The results were reported just minutes after Riggio filed an update to his 13-D filing.
“While I reserve the right to pursue an offer in the future, I believe it is in the company’s best interests to focus on the business at hand,” Riggio said in the filing with the U.S. Securities and Exchange Commission.
Riggio’s decision “is not surprising given that the Nook business has collapsed,” said Tinker, the Maxim Group analyst. “The issue here is you have a lot of deal investors in the stock and there is obviously no deal today. I emphasize ‘today,’” Tinker said yesterday.
The company didn’t name a successor to Lynch and declined to comment on whether it was looking for a new CEO. After Lynch left the company, Huseby was promoted from chief financial officer to president of the company and CEO of Nook Media. He reports to Riggio.
Riggio, who still owns about 30 percent of the bookseller’s stock, founded the company in 1965 with a college bookstore in Manhattan. Six years later, he bought the Barnes & Noble name and its flagship store, beginning a spree of acquisitions, including Doubleday Bookshops. The chain started focusing on superstores, instead of mall sites, in the 1990s.
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