Barnes & Noble Says NOOKcolor Selling Through at Double Its Projections

Financial returns on the Nook e-reader and digital content platform “may be greater than we originally thought in our one- to three-year models,” Barnes & Noble CEO William Lynch said Tuesday in the company’s fiscal Q2 earnings webcast. The company predicts an annualized run-rate of $400 million for digital content when the fiscal year ends in April, Lynch said, noting that “selling digital content through the Nook bookstore is the fastest growing business we've ever launched at BN.”

So far for this holiday sales season, the newly launched NOOKcolor readers are selling through at twice initial projections, according to Lynch. During the three-day post-Thanksgiving weekend, the company saw a comparable store sales increase of 17.2 percent at stores and 105.7 percent online, it said. Lynch said all three Nooks represent the “best selling e-reading brand at Best Buy” and the number one e-reader at Wal-Mart, which is getting the color model this week.

According to Chief Financial Officer Joseph Lombardi, comparable sales at BN.com were up 75 percent for the third quarter, driven by sales increases in core products, digital content and Nooks. Comparable store sales are expected to bump up 5-7 percent for Q3 and be in the range of flat to 3 percent up for the year, he said, driven by sales of Nook readers and accessories and by increases in children’s products and other non-book merchandise. The company reported a net loss of $12 million for the quarter ended Oct. 30 on sales of $1.9 billion.

Lombardi said sales growth continues to “explode” in the company’s Internet and digital businesses, and comparable sales at BN.com were up 59 percent in Q2, the third straight quarter of revenue increases in excess of 50 percent since the Nook went on sale last December. Lower overall margins for the quarter resulted from a move to everyday low pricing on paper books and the fact that last year’s results didn’t include lower margin Nooks. He forecast improved margins in the second fiscal half resulting from cost reductions to be realized on the original Nook 3G and Wi-Fi Nook, higher margins on the color version and expected growth and higher margin e-content sales resulting from “strong forecasts of holiday e-reader sales.” Company executives wouldn’t break out the sales mix of digital content versus hardware.

Barnes & Noble has a strong vested interest in the future of digital books. Lynch said: “It’s clear that the market for physical books is flattening and will shrink in the future as digital content scales quickly.” He expects the number of bookstores to shrivel but maintains that Barnes & Noble will benefit due to its “best of breed” model and relationships with publishing partners. A large part of store success is due to Nook Boutique areas it has opened in stores to demo and support Nook readers, Lynch said, and the company also expects children’s toys and games to represent a significant part of the sales mix going forward. Commenting on the “transformative time in the book business,” he said, “we expect to emerge in a favorable position.”

Lynch said the success of Nook has reinforced the “high education, high-income” Barnes & Noble customer and has given the company the resolve to investigate other opportunities. “For the first time we've shown we can sell $300 electronics in our stores, in volume,” he said. “This excites us and has us examining other electronic expansion opportunities.”