Barnes & Noble may split off Nook, cuts forecast

Thu Jan 5, 2012 6:33pm EST

The new Nook Tablet is seen during a demonstration at the Union Square Barnes & Noble in New York, November 7, 2011. REUTERS/Shannon Stapleton

The new Nook Tablet is seen during a demonstration at the Union Square Barnes & Noble in New York, November 7, 2011.

Credit: Reuters/Shannon Stapleton

(Reuters) - Barnes & Noble Inc cut its Nook sales forecast and shocked investors by saying it may spin off its fast-growing digital business, sending its shares plunging 17 percent.

The No. 1 U.S. bookstore chain has relied on readers, tablets and electronic books to offset shriveling sales at its brick-and-mortar stores, so news of weaker-than-expected Nook sales stoked fears the company is struggling to keep up with Amazon.com Inc's market-leading Kindle.

On Thursday, Barnes & Noble also projected a steeper net loss for the fiscal year than Wall Street had been expecting as it keeps shelling out on the Nook.

The retailer has poured tens of millions of dollars into the e-reader device. The first version hit the market in 2009, two years after the Kindle.

Barnes & Noble said in a statement it wanted to "unlock" the value of the Nook business and bring it to foreign markets. The company has opened discussions with potential partners such as publishers, retailers and technology companies outside the United States, it added.

One retail banker who declined to be identified said the Nook business was a faster-growing technology asset trapped within a slower retail stock, and theorized that Barnes & Noble simply wanted to spin off the Nook business to give it a chance to trade at a higher valuation.

The bookseller said it sold 70 percent more Nook devices this holiday season, while e-book sales doubled. Chief Executive William Lynch told Reuters that investors have not given the company enough credit for that growth.

"Our (market) share remains very strong," Lynch said. "We certainly think this is not being properly valued.

The chief executive of Liberty Media Corp, one of Barnes & Noble's largest investors, hinted at a conference earlier in the week that Nook would have an easier time attracting investment as a stand alone business.

Liberty Media CEO Greg Maffei, who joined Barnes & Noble's board last year, said on Wednesday that extracting value from Nook and Barnes & Noble could come by finding "partners to help fund that game," referring to Barnes & Noble's digital business.

But investors were frightened of the prospect of a Barnes & Noble stock that would reflect only its traditional retail business.

"They would be separating their one growth driver," said Morningstar analyst Peter Wahlstrom. Barnes & Noble without Nook would be too similar to its former rival Borders, which went out of business in 2011.

But a source familiar with the company's thinking said the retailer would remain intimately involved in developing and promoting the Nook, tapping its links with publishers and fleet of 700 stores, and essentially continue to run the business.

So even if Barnes & Noble does split off its Nook business, everyday customers will scarcely notice.

Barnes & Noble put itself up for sale in 2010 but attracted only one firm offer - a bid for $17 per share, or $1 billion, last May from Liberty Media, which was drawn by Nook's growth.

Liberty ultimately decided to invest $204 million rather than buy the company outright, with much of that money earmarked for the Nook.

Liberty has preferred shares it can convert into a 16.6 percent stake in Barnes & Noble at a strike price of $17.

Barnes & Noble shares closed the day down 17 percent at $11.24, after falling as low as 31 percent. The chain now has a market value of about $676 million, or less than 1 percent of Amazon's.

PRICE WAR

Barnes & Noble lowered the sales forecast for the fiscal year ending in July 2012 for the Nook business, which accounts for nearly one-quarter of sales, to $1.5 billion from $1.8 billion, in part because of disappointing numbers for its $99 Nook Simple Touch e-reader.

"Demand for Nook products appears to be decelerating faster than original expectations," Barclays Capital analyst Alan Rifkin said in a research note.

The war with Amazon is ferocious. Amazon last week said it sold 1 million Kindle devices per week in December, including the Fire tablet and a touchscreen device.

Other Nook devices fared better than the Simple Touch, including its Nook Tablet. Forrester Research estimates that Amazon sold about 5 million Kindle Fire tablets during the holidays, compared with sales of some 1.5 million Nooks.

The company is second only to Amazon in the e-books market and claims to have as much as 27 percent of that market.

But when Barnes & Noble introduced the Nook tablet in November, it also cut the prices on other versions of the device, including the Simple Touch, in response to aggressive pricing by Amazon, which is known for uncutting rivals on price.

Unlike Amazon, Barnes & Noble's other businesses do not generate enough money to subsidize its e-reader segment. Last month, Barnes & Noble posted an unexpected quarterly loss and last year, it suspended its dividend to finance the Nook.

Despite the liquidation in September of its one-time archrival, Borders Group, and rising Nook sales, Barnes & Noble now expects sales of $7 billion to $7.2 billion this fiscal year, down from its initial forecast of $7.4 billion, suggesting an accelerating decline in book sales.

Still, Barnes & Noble expects Borders' disappearance to boost sales $210 million to $250 million.

Indeed, sales at Barnes & Noble stores open at least 15 months, excluding Nook and e-books, rose 4.5 percent during the holidays, an improvement over recent quarters.

Barnes & Noble now expects earnings before interest, tax, depreciation and amortization of $150 million to $180 million for the fiscal year ending in July, down from its forecast last month of $210 million to $250 million.

The retailer forecast a loss of $1.40 to $1.10 per share in the fiscal year, much worse than the average Wall Street forecast of a loss of 63 cents.

In addition to its bookstores, Barnes & Noble operates a chain of textbook stores on college campuses.

(Reporting by Phil Wahba in New York and Brad Dorfman in Chicago; Additional reporting by Jessica Hall; Editing by John Wallace, Maureen Bavdek and Richard Chang)

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Comments (6)
aburt wrote:
As an ebook publisher of backlist work from best-selling and award winning authors (ReAnimus Press) I see that the Nook store is consistently a less attractive platform than Amazon: B&N pays a lower royalty rate than Amazon (when, to attract clients, it should pay more since it’s the second fiddle challenger), B&N takes longer to process new titles, loses sales (I’ve had whole days of sales vanish from reports, only restored when I complain), has a much less attractive sales page for books — not to mention has Google ads on it, of which I get no share, so my books are generating ad sales for B&N at the expense of selling my books (once a customer clicks a google ad they leave the site), and on and on. As a result, sales are drastically less on B&N than on Amazon (well under 10% as much as Amazon). All that taken together means publishers concentrate their efforts on Amazon, thus B&N has less depth, thus is less attractive to readers… a sort of downward feedback loop, or death spiral. I love competition and dearly wish B&N were competitive with Amazon, but their strategy and implementation are pushing it the other way. I hope they can turn it around before it’s too late for them.

Jan 05, 2012 10:23am EST  --  Report as abuse
socratesfoot wrote:
Get away from hardware B&N and focus on software. Stop marketing in competition with Amazon’s gimped tablets and instead turn every Android device into a Nook instead. In the end, Amazon will have to do the same. Why by a gimped tablet when Android tablets open and able to run both systems are the same price.

Jan 05, 2012 12:45pm EST  --  Report as abuse
waynefreeman wrote:
If B&N do this, they’re doomed. They need to do what aburt suggests. They need to get competitive while they still have some cash.

What socratesfoot suggests has merit, too, but I don’t think they should get out of the hardware business entirely. The nook is a nice little device, a good reader.

Jan 05, 2012 4:11pm EST  --  Report as abuse
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