Barnes & Noble Vows to ‘Continue to Innovate’ Promotionally

Amid the widely publicized success of Kindle Fire during the holiday selling season, Barnes & Noble “maintained or slightly gained share” in the e-book space during its fiscal third quarter ended Jan. 28, said BN CEO William Lynch on the company’s earnings call Tuesday. Citing data from the industry and “some of the largest U.S. publishers,” Lynch said BN’s e-book market share is now in the 27-30 percent range, “a substantially higher share than BN has ever maintained in the physical book market."

The share gain came on an increase in advertising spending and broader distribution, BN said. Lynch also referred to Nook digital boutiques in BN stores, which the company expanded going into the holiday season. “We invested significantly” in updated showrooms in September and October, an investment that’s largely complete, Lynch said. Higher spends on advertising will be considered on a case-by-case basis, he said.

BN.com EBITDA losses increased from $50 million to $94 million for the quarter, largely due to investments in the Nook business, including advertising costs and personnel, the company said. Lynch said advertising drove sales of devices during November and December, but the higher margin portion of the business -- content -- typically occurs during January and February. In the lead up to the holidays, “You're incurring significant acquisition and rollout costs for the digital shops and the rollout of new channel partners,” he said, “and your income stream is really being realized in the following months."

BN hopes to gain more share with its own $199 tablet, which it announced Tuesday. The $199 8GB version of its Nook Tablet joins the $249 16GB Nook Tablet, the Nook Color, dropped to $169, and the $99 E Ink-based Simple Touch reader. It’s been widely reported that Amazon lost money on its first tablet at the expense of amassing market share. Lynch wouldn’t provide specifics about how component costs weighed into the pricing model for the new 8GB Tablet. “We feel good about our component sourcing, the supply chain, our manufacturing capabilities … and we've optimized costs against this new tablet,” he said. At $249, the existing 16GB version is “gross-margin positive for us,” he said, “and we feel good about this product as well."

The company “will continue to innovate” in areas where it can add value,” Lynch said, hinting that other announcements are on deck. Lynch wouldn’t comment specifically whether BN is looking at a larger screen product to compete with other tablets on the market but said, “We've always sold a lot of media products in entertainment,” referring to stores’ DVD business, and added, “There are opportunities in other form factors.” Outside of the Christmas season, the Mother’s Day-Dads & Grads period is the biggest sales period for the company, “and you're going to see a lot of innovation from us going into that period,” he said.

A proliferation of readers and wider distribution have resulted in average selling prices falling “dramatically,” Lynch said. BN opened “a load” of third-party retail channel partners compared with last year and “broadened distribution significantly” to meet demand, he said. Regarding profitability of BN stores versus third-party sellers, which included most recently Target and a higher number of Walmart stores, Lynch said BN has to pay a commission on third-party retail sales and “some of the ancillary revenue streams” including accessories and warranties “aren’t as lucrative through third parties.” BN incurs its own costs such as payroll that affect margin so “if you net all that out” margin differences “aren’t as significant as you might imagine,” he said.

Regarding the payoff from acquisition costs for Nook customers, Lynch said, “their spend is significantly higher” at BN when they buy a Nook, with content, warranties and add-ons tacked on. Nook customers also continue to buy physical books, he said. Regarding non-book content acquisition, Lynch said Netflix is the second or third most downloaded app in the Nook app store, behind “Angry Birds.” Within the apps segment, entertainment, games, and kids’ content have done well, he said.

Total BN sales grew 5 percent from Q3 2011 to $2.4 billion, the company said. Net income dropped to $52 million compared with $60.5 million for Q3 2011. Retail sales edged up 2 percent to $1.49 billion, and comparable store sales were up 2.8 percent across categories. Retail core comp store sales -- excluding sales of devices, accessories and warranties -- advanced 4.2 percent over last year, presumably as a result of Borders’ liquidation. Borders closed its last stores in September, and BN purchased the Borders customer list in the fall as part of the former chain’s bankruptcy settlement.

Lindstrom said BN is still on track for fiscal 2012 Nook revenue of $1.5 billion. BN shares ended the day down 4.4 percent to $12.54.