August 20, 2013, 5:02 PM

Online sales decline for Barnes & Noble in Q1 of the 2014 fiscal year

Digital content sales decreased 15.8% and sales via BN.com were also down.

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Barnes & Noble Inc.’s chairman Leonard Riggio says he has suspended his effort to buy the retailer’s retail segment, which includes stores and BarnesandNoble.com Inc. Riggio launched his effort to do so in February. The news came today with the multichannel bookseller’s announcement of its earnings for the first quarter of fiscal 2014, including a 15.8% decrease in digital content sales and falling revenue in stores and online. Total revenue decreased 8.5% to $1.330 billion in Q1 2014 from $1.454 billion in Q1 2013, the retailer says.

“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,” he said in an amended SEC filing submitted today. “Right now, our priority should be to serve the more than 10 million customers who own Nook devices, to concentrate on building our retail business and to accelerate the sale of Nook products in our stores and in the marketplace.”

Riggio did not provide any further details on his change in plans. Riggio bought Barnes & Noble in 1971, when it had a single store in New York, and has held top leadership roles with the retailer ever since.

“It strikes me like he’s recognized Nook can’t compete,” says Paula Rosenblum, a managing partner at research and advisory firm Retail Systems Research LLC.  If that’s the case, she says it would then be pointless to split the company so that one business provides hardware—the Nook segment which Barnes & Noble would keep—and  another that provides digital content for it—BarnesandNoble.com, which is part of the retail unit Riggio originally proposed to buy. “That doesn’t mean he won’t eventually take the whole thing private, but the two-part company is about as non-starter as it gets at this point.”

In June, following mounting losses in Nook sales for the fourth quarter, Barnes & Nobleannounced it would no longer make its own color tablets, the Nook HD and Nook HD+, on its own. It will, however, continue to make them with the help of outside manufacturers that will co-brand the devices, it said in June, without revealing which manufacturers it is working with. In Q4 2013 sales of Nook devices declined 34.1% , to $108 million from $164 million in Q4 2012. In a call with investors this morning, Barnes & Noble president Michael P. Huseby reiterated that Barnes & Noble is not giving up on tablets.  “The company intends to continue to design and develop innovative Nook black-and-white and color devices,” he said. “At least one new Nook device will be released for the coming holiday and further products are in development.”

For the first quarter of fiscal 2014, the Nook segment reported a 20.3% decrease in sales, to $153 million from $192 million in Q1 2013.

“As it turned out, we were overly optimistic the last two holiday seasons forecasting demand for our Nook devices, falling far short of our expectations,” Huseby said. “This reality prompted us to adjust our thinking.” The retailer has brought in new leadership for its Nook division and updated its strategy around the devices, he said. In addition to naming Huseby CEO of Nook Media LLC, a subsidiary for Nook digital content created last October, the retailer also appointed Kanuj Malhotra, formerly its vice president of corporate development, as the subsidiary’s chief financial officer. Both began their new roles last month.

“While [digital] content revenue has declined due to lower-than-expected device sales, our top priority in our operating strategy is to increase all categories of our content revenue,” Huseby said. Education is one area where Nook devices and digital content could grow, he added. Another is Nook Press, the retailer’s digital self-publishing platform, which has been adding thousands of titles to its catalog each week, he said.

Huseby added that the retailer is exploring other ways to turn around its finances as well, including the possible sales of some of its business units, which include Nook, retail and college—should offers arise. “We are obviously as a company open to any alternatives that are presented to us.”

Huseby replaced William Lynchas CEO of Barnes & Noble Inc. Lynch stepped down about six weeks ago.

For the first quarter of fiscal 2014 ended July 27, Barnes & Noble also reports:

  • A net loss of $87.0 million, compared with a net loss of $39.8 million in Q1 2013.
  • Digital content sales, which include e-books and apps for the retailer’s Nook tablet, were down 15.8% to $69.0 million from $81.9 million. However, excluding the effect of waning sales for “The Hunger Games” and “Fifty Shades of Grey” trilogies, which were hit titles in the last fiscal year, digital content sales were down 6.9%.
  • Online sales through BarnesandNoble.com were also down, though the retailer doesn’t break out those sales separately. Together with stores, the company’s retail segment had revenue of $1.01 billion, down 9.8% from $1.12 billion in Q1 2013, it says. Comparable-store sales were down 9.1% and some stores closed in Q1, it says.

“The most alarming trend is the decrease in online sales volume,” RSR’s Rosenblum says.  “When you factor out the singularities of the ‘Hunger Games’ and ‘Fifty Shades,’ the decline isn’t too terrible—but in an era where most companies are improving their e-commerce sales by double digits, it spells trouble.”

Ultimately, she says she suspects Amazon.com Inc. is “buying sales” from Barnes & Noble by undercutting its pricing, which she loosely confirmed in a few quick comparisons.

BarnesandNoble.com in No. 27 in the 2013 Internet Retailer Top 500 Guide; Amazon is No. 1.

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