Digital Business Continues to Grow for Barnes & Noble Despite Falloff in Physical Store Sales

Despite a 3 percent drop in Barnes & Noble brick-and-mortar store sales for fiscal Q1 2012, CEO William Lynch said in the company’s earnings call that the consolidation of the physical bookstore market has begun “in a meaningful way” and the company forecasts a 2-3 percent sales uptick for the fiscal year ending April 28. The turnaround is a direct result of increased store traffic from Borders’ liquidation of 200 stores, Lynch said, and Barnes & Noble’s expectation is to become the “bookstore of choice for those displaced customers.” With less competition, the company is forecasting this holiday season to deliver the most traffic Barnes & Noble stores have seen in 5 years, Lynch said. For Q1 2012, Barnes & Noble’s physical book business slipped 3 percent to $1 billion, with comparable store sales shaved by 1.6 percent for the quarter.

Barnes & Noble’s Nook digital segment -- including Nook content, hardware and related accessories -- continues to be a “rapidly growing business,” delivering $280 million revenue for Q2, he said. The company continues to plan to fuel growth in the “massive digital opportunity before us,” Lynch said. Gross margins from bn.com were 21 percent, up from 3.7 percent a year ago, he said. Toys and games were up 66 percent in the quarter and are expected to be a “sizable part” of the bottom line going forward, he said.

Attach rates are “slightly above plan,” Lynch said, saying Nook owners spend more at Barnes & Noble in total than they did prior to purchasing the reader. On the iPad and other devices, Lynch said ebook penetration has increased but he wouldn’t break out numbers. “The notion that customers will own just one device isn’t accurate,” and that’s borne out in purchase activity on iOS and Android devices, he said. Still, most Nook store downloads are purchased through bn.com, he said.

Regarding Liberty Media’s investment in the company, Chief Financial Officer Joseph Lombardi said Barnes & Noble will continue to invest in the growing digital business along with physical stores. Because of the appreciable amount of hardware sold through Barnes & Noble physical stores, the company sees those outlets as integral to its digital strategy, Lombardi said. Whether Barnes & Noble might re-evaluate its store strategy in response to economic conditions, Lombardi said, “We're always looking at whether we want to keep stores open as we renew.” He referred to a “tremendous amount of lease flexibility,” including 100 stores a year over a 4-year-period that are up for renewal. The company exits stores that aren’t profitable, averaging 15 closures a year, he said.

Asked about changes in the pricing structure of ebooks going forward, Lynch cited two trends that have stratified the market. The first, the company’s PubIt platform of self-published books, is seeing “explosive” growth and represents the fastest growing segment of the business, he said. Barnes & Noble takes an undisclosed cut of all self-published books, which are typically priced under $2.99, he said. Front-list trade books, on the other hand, range from $9.99 to $19.99, although the higher prices are being “tested,” he said. “We see that pricing holding,” Lynch said, saying PubIt is expected to grow at a faster rate.

Apps sales for Nook Color have exceeded company forecasts by 200 percent, Lynch said. Run rate is in the tens of millions, he said, with the company taking a 30 percent cut of each app sale. Hundreds of new apps are being added each month and the company plans to have thousands of apps shortly, he said. The belief that people would read books on smartphones hasn’t materialized, Lynch said. He also said many tablets “aren’t optimized for reading” in weight, size or screen type. Although Barnes & Noble reports an increase in reading ebooks on tablets, it’s “not at the same rate as dedicated reading devices,” he said.

In response to a question about rumors Amazon will introduce a new tablet this fall, Lynch referred to the Simple Reader and the company’s mission to “keep innovating.” He wouldn’t provide a timetable but said “you'll be seeing new devices launching from us.” There are numerous ways to monetize the platform, he said, including apps and digital newsstand sales. Advertising and special offers are another model, but he wouldn’t elaborate other than to say, “We're chasing them.”

Meanwhile, Barnes & Noble announced Wednesday that P.C. Richard & Son has begun selling Nook devices and accessories at its 65 stores in New York City, Long Island, New Jersey, Connecticut and Pennsylvania.