Barnes & Noble Vows Commitment to ‘Value'-Priced Nook Readers

Comments made on Barnes & Noble’s June earnings call suggesting the company was looking to explore options to offload its Nook color business were misinterpreted in the market, said Michael Huseby, Barnes & Noble president and CEO of Nook Media. Many people interpreted comments “incorrectly” and concluded “that we were getting out of the device business,” he said on the company’s fiscal 2014 Q1 earnings call Tuesday. “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 in time for the holiday season and more are in the pipeline, Huseby said. He didn’t say whether the device would be color.

"The problem is not the devices,” Huseby said in the Q-and-A on the shortfall in the Nook business, which one analyst pegged at between $1 billion-$1.5 billion since Nook’s inception. The e-readers that Nook hardware and software developers produced over the past four years “are great devices,” and the problem in the Nook business was management decisions based on bloated demand forecasts based on “what was thought to be good information,” he said.

A “wholesale outsourcing of our color device business is neither appropriate nor smart for the company,” Huseby said. “If we want to be in the content business, we need to be in the device business, no matter how they're produced,” he said, “and we think our people can produce great devices better than anyone else.” The company wants future Nook devices to be “innovative” but delivered on a more “targeted and controlled basis,” he said. Eventually the company will move to a strategy of “lower cost units at higher volumes to drive more content” sales, he said.

Huseby reaffirmed the June message that the company was “shifting to a partnership model” on production of color devices, saying it partners now on displays and chips. He sees opportunities to expand existing relationships with large players “to de-risk the business plan.”

Barnes & Noble is still burning off Nook inventory from “overly optimistic” sales forecasts for the past few years, with device sales “falling far short of our expectations,” Huseby said. The company took a “very significant” write-down of inventory in fiscal 2013 and is “selling it now in fiscal 2014, he said. The company’s intent is for Nook to be “self-sufficient” and not use Barnes & Noble’s retail unit to fund its needs, he said.

Nook Media has made a commitment to compete “differently, adjust thinking and compete more effectively,” Huseby said. The company plans to continue with its Simple Touch, Simple Touch with GlowLight, Nook HD and Nook HD+ “at the best values” in the market, he said. It wasn’t clear whether the company would continue with those models once inventories have been depleted. Monday’s price cut on the GlowLight reader to $99 was part of offering e-readers “at the best value” available today, he said. By selling lower priced Nooks, the company will be able to drive higher volume on content purchases, he said. Nook Media will look to “aggressively” drive revenue growth, he said. Content activation levels need to “better leverage” the 10 million Nook devices in the market, he said.

Before the earnings call Tuesday, Barnes & Noble Founder and Executive Chairman Leonard Riggio, who had announced plans to buy the company’s retail stores, filed an SC 13D/A with the SEC suspending his efforts to buy the retail business. In the filing, Riggio reserved the “right to pursue an offer in the future,” but in the “best interests” of the company chose to “focus on the business at hand.” Riggio’s decision comes a little more than a month after CEO William Lynch resigned, reportedly over a clash with Riggio over spending for the struggling Nook Media unit (CED July 10 p1).

In a move to expand content, Nook Media launched Monday a suite of Nook video apps for iOS, Android and Roku devices, and those join an app that will automatically appear in Nook users’ digital lockers, Huseby said. The company continues to work with Microsoft to find ways to improve and leverage that partnership, he said, including updating the website and investing in e-commerce capabilities, he said.

Nook Media has six million reading apps installed on third-party devices, Huseby said. Attachment rate both for Nook owners and those with third-party Nook apps is an average of three to four e-books per month, leaving a “tremendous opportunity” for Nook owners who aren’t active, he said. A bright spot Huseby cited was Nook Press, the company’s self-publishing arm that’s adding “thousands of titles each week,” he said. Title count and sales were up 50 percent in fiscal 2013, he said.

Janney Capital Markets gave Barnes & Noble a “neutral” rating Tuesday, saying Nook “continues to be a drag” on the rest of the company. But the stock is most likely to be affected by Riggio’s decision not to purchase the retail segment, said analyst David Strasser. Riggio’s decision is “likely to weigh on the shares near term,” but as the company gets “closer to resolution around the Nook segment, the stock could start to look attractive again,” he said.

For the quarter ended July 27, the Nook segment had revenue of $153 million, a 20 percent drop from the year-ago quarter. Sales of devices and accessories in the Nook segment fell 23 percent to $84 million for the quarter, while digital content brought revenue of $69 million, a 15.8 percent drop. Huseby cited the popularity of trilogies The Hunger Games and Fifty Shades of Grey in the stronger fiscal Q1 2013 quarter. Barnes & Noble’s consolidated fiscal Q1 2014 loss widened to $87 million, compared with a loss of $39.8 million in the year-ago quarter. Shares closed 12 percent lower Tuesday at $14.63.