June 25, 2013, 12:37 PM

Barnes & Noble gives up on making tablets

The retailer will sell cobranded tablets others make, and stick with the Nook e-book reader.

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Bleeding cash from its digital content unit, Barnes & Noble Inc. said today that it will stop making its own color tablets, the Nook HD and the Nook HD+, that compete with Apple Inc.’s iPad and Android devices using software from Google Inc. It will continue to sell the tablets, but they will be co-branded with outside manufacturing companies that Barnes & Noble will work with to build them, CEO William Lynch says. The retail chain will continue to make and sell its black-and-white Nook electronic book reader.

The strategic shift came as Barnes & Noble Inc. reported sharp revenue decreases in its most recent financial quarter and fiscal year, due in part to falling sales in its Nook segment, which includes the bookseller’s digital content, physical tablets and their accessories.

Barnes & Noble is No. 27 in the Internet Retailer Top 500 Guide.

For fiscal 2013, which ended April 27, revenue decreased 4.1%, to $6.84 billion from $7.13 billion in fiscal 2012, the retailer says. Nook sales in fiscal 2013 were down 16.8%, to $776 million from $933 million last year. That $157 million decline in the Nook unit accounted for 54% of the company’s revenue decline.

Revenue in the fourth quarter fell 7.2%, to $1.28 billion from $1.38 billion in the same period last year, the retailer says. The Nook segment in Q4 booked a 34.1% decrease in sales, to $108 million from $164 million in Q4 2012, representing about 56% of the retail chain’s overall revenue decline.

To address those mounting losses, Barnes & Noble is changing its tablets strategy, Lynch told investment analysts in a call this morning. Barnes & Noble is in discussions about manufacturing deals now, he said, declining to provide further details.

In addition to being a large capital expense, chief financial officer Michael Huseby said competition has heated up in recent years among suppliers of sub-8-inch tablets—the size of all Barnes & Noble tablets. But the company knows it can sell a lot of them, he said. The manufacturing changes do not apply to the retailer’s black-and- white e-reader devices, which Huseby said are not tablets; those devices  account for the majority of Barnes & Noble’s digital content sales, he said.

“We are taking big steps to reduce the losses in the Nook segment, as we move to a partner-centric model in tablets and reduce overhead costs,” Lynch says. “We plan to continue to innovate in the single-purpose black-and-white e-reader category, and the underpinning of our strategy remains the same today as it has since we first entered the digital market, which is to offer customers any digital book, magazine or newspaper, on any device.”

In October, Microsoft Corp. invested $300 million in Nook digital content, which led to the formation of a new Barnes & Noble subsidiary, Nook Media LLC. Since then, the subsidiary has been financing itself, Barnes & Noble says. In January, educational products company Pearson invested approximately $89.5 million in exchange for about 5% equity ownership of the Nook subsidiary, the retailer says; Barnes & Noble now owns about 78.2% of Nook Media LLC and Microsoft owns about 16.8%, it says. The subsidiary encompasses device sales, content sales, third-party device sales and the retailer’s college segment, a spokeswoman says. Barnes & Noble does not break out Nook Media LLC as a separate division in its earnings reports, she says.

Barnes & Noble also reports today that:

  • Retail sales, which include sales made on BarnesandNoble.com, were down 9.7% in Q4 2013, to $948 million from $1.05 billion in Q4 2012.
  • For the fiscal year 2013, retail sales were down 5.7%, to $4.57 billion from $4.85 billion in fiscal 2012.
  • College bookstore sales were up 10.5% in Q4, to $252 million from $228 million in Q4 2012.
  • For the fiscal year 2013, college sales were up 1.1%, to $1.76 billion from $1.74 billion.  and a 10.7% revenue increase in Q4.

Lynch told investors this morning that the retail division and the college division, which includes retail stores on college campuses, will help boost revenue as the company cuts its losses in the Nook unit.

This year the retailer will close five retail stores and open 15 to20 new ones, Huseby said. In February, Barnes & Noble founder and chairman Leonard Riggio announced plans to make an offer to buy the retail business, excluding Nook Media LLC.

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