Investors were expecting a bad earnings report from Barnes & Noble on Tuesday morning, and they definitely got it: Barnes & Noble’s Nook business lost a lot of money, dragging down the entire company’s results. In response, Barnes & Noble said it will stop manufacturing Nook tablets in-house, though it will keep developing its e-ink readers.
The company’s revenues were down 7.4 percent compared to this time last year, to $1.3 billion, in the fourth quarter of fiscal year 2013, with a net loss of $118.6 million, or $2.11 per share. For the full fiscal year, revenues were down 4.1 percent to $6.8 billion, with net losses of $154.8 million, or $2.97 per share, compared to $65.6 million the previous year. Shares were down 10 percent before the market opened.
Nook sales and digital content sales fall, despite slashed prices
Nook lost a ton of money: Nook revenues were down 34 percent to $108 million for the quarter, compared to $168 million this time last year. For the full year, Nook revenues declined by 16.8 percent to $776 million, compared to $933 million the previous year. “Device sales declined during the fourth quarter due to lower selling volume,” the company said. “Digital content sales increased 16.2 percent for the full year, however, they decreased 8.9 percent for the fourth quarter due in part to the device sales shortfall as well as the comparison to the The Hunger Games and Fifty Shades of Grey trilogies a year ago.”
In an attempt to stanch the bleeding, B&N said it will create “a partnership model for manufacturing” those tablets, while continuing to develop e-ink readers in-house. “The company’s tablet line will be co-branded with yet to be announced third party manufacturers of consumer electronics products,” the company said. (Gotta point out that B&N slashing the Nook line was one of my predictions for 2013.)
Barnes & Noble recently slashed prices on those tablets, and the money it spent doing so contributed to its losses: “Nook EBITDA losses were $177 million for the fourth quarter, which include an additional $133 million of inventory charges as the company adopted more aggressive promotional strategies given the shift in strategic direction. Nook EBITDA losses were $475 million for the full year, primarily driven by cumulative Nookinventory related charges of $222 million.”
Barnes & Noble says it will keep selling Nook tablets through the holiday season, will keep building its digital content catalog and will keep focusing on e-readers. “We plan to continue to innovate in the single purpose black-and-white e-reader category,” CEO William Lynch said in a statement, “and the underpinning of our strategy remains the same today as it has since we first entered the digital market, which is to offer customers any digital book, magazine or newspaper, on any device.”
In an investor call following the earnings report, Lynch said that “the majority of the content sales come from non-tablets” and that e-readers have “been our primary customer acquisition vehicle for content.” (Yet Barnes & Noble keeps building out its multimedia content.)
In the call, Lynch didn’t share any more details on how third-party relationships for tablets will work. “We want to move away from taking on all that risk ourselves,” he said, adding that the “sub-8-inch” tablet market “got extremely competitive and it was very capital-intensive to build our own tablets.” Barnes & Noble is in discussions about manufacturing with “a lot of parties” and further details will come eventually.
Retail sales: Also not so hot. College does better
If Nook hadn’t done so badly, the poorly performing retail segment — which consists of both bricks-and-mortar stores and BN.com — would be getting more attention this morning: Retail revenues fell 10 percent for the quarter, to $948 million, and fell 5.9 percent for the year, to $4.6 billion. Even here, Nook played a role: “Fourth quarter comparable bookstore sales decreased as a result of lower NOOK unit volume and a stronger title lineup in the prior year.” One bright spot: for the fiscal year, retail EBITDA was up 16 percent to $374 million, “as the sales decline was mitigated by a higher sales mix of higher margin core products and lower expenses.”
Barnes & Noble founder Leonard Riggio, who is also the company’s largest shareholder, offered in February to buy the chain’s retail stores and BN.com and take them private. B&N formed a strategic committee to evaluate that offer but hasn’t released a timeline for answers, and refused to provide any further comment in the investor call.
The college segment — which Microsoft has a stake in, along with the Nook business — did better: Revenues were $252 million for the quarter, up 10.7 percent, and $1.8 billion for the year, up 1.1 percent. College EBITDA was up to $3.8 million, but “full year EBITDA declined 3.9% to $111.5 million, primarily resulting from increased investments in digital education. College’s full-year product margins improved on a higher mix of higher margin textbook rentals, while expenses increased due to new store growth and continued investments in digital education.
Finally, the quarter brought a TechCrunch report that Microsoft, which already has a stake in B&N’s Nook and college businesses, is interested in buying those businesses outright for $1 billion. After today’s news about its performance, it’s unlikely Microsoft would want to shell out that much cash, though there are still some compelling reasons for it to buy the Nook digital content business. Barnes & Noble provided no information about this on the investor call.
This post was updated several times on Tuesday morning.