Barnes & Noble Eyes ‘Minority’ of Borders Locations to Support Digital Sales

In the wake of Borders’ Chapter 11 filing last week, Barnes & Noble has suspended its dividend of 25 cents a share to pad its cash flow with $60 million and give the company “flexibility” to make quick investment decisions “as opportunities arise,” the company said in its fiscal Q3 2011 earnings webcast Tuesday. CEO William Lynch noted that Barnes & Noble had predicted “consolidation in the market” in brick-and-mortar stores and said the company doesn’t plan to shut stores besides the “nominal number” it previously announced. He said “a minority” of Borders’ 200 locations “appear attractive to us.”

Profit fell to $60.5 million for the quarter ended Jan. 29 from $80.4 million a year earlier, Barnes & Noble said. Sales rose 7 percent to $2.3 billion. Barnes & Noble shares fell 14.4 percent to $15.94 Tuesday.

Lynch said Nook sales were “very successful at holiday” and repeated that sales of paper books “are declining.” Quarterly retail growth resulted from Nook sales, attached accessories and expansion of the educational toys and games business, he said.

Barnes & Noble’s recent cash flow “has been in digital, so [brick-and-mortar] stores are not where the company sees the greatest return on investment opportunities,” Lynch said. The company will continue to focus investment in the digital area, “where we're seeing the business scale from a sales and profitability standpoint,” he said. Barnes & Noble gained an additional “three or four points” of share in the e-book and digital newsstand market Q3 and now has a quarter of the U.S. market for e-books -- larger than its share for physical books, Lynch said.

BN.com’s gross margin rose 50 percent quarter to quarter, indicating “the quickly scaling nature of the digital content business model,” Lynch said. The company sells “twice as many e-books as all formats of physical books combined” on BN.com, he said. The digital newsstand site, which started in Q3, has become the largest seller of Oprah magazine single issues and subscriptions, he said.

Despite the dividend suspension and Borders’ Chapter 11 filing, Lynch said, “we still have a very profitable store model.” Comparable store sales increased 7.3 percent for the quarter, higher than the 5-7 percent forecast. Lynch said the company sees its physical stores “as the biggest asset toward the growth of digital content.” Despite the “exciting growth of e-content,” physical books and magazines will continue to account for most of the market for the foreseeable future, he said. “It remains early in the development of the digital reading market."

Barnes & Noble’s physical stores “are critical to the success of our digital strategy,” said Chief Financial Officer Joseph Lombardi. “That’s where we're selling more of our devices -- in our retail stores with our employees selling the device.”