Barnes & Noble reported third quarter earnings Tuesday and, consistent with their holiday sales update, business increased at the retail stores. At $1.494 billion, store sales were up 2 overall; same-store sales rose 2.8 percent, and the company said “retail core” comparable sales, excluding devices, accessories and warranties, rose 4.2 percent compared to a year ago. (Those increases are all slightly smaller than the growth reported for the nine-week holiday period on its own) BN.com sales rose 32 percent to $420 million, on the rising Nook business but with “a decline in online physical product sales”; college sales slid, “due to a shift from selling new and used textbooks to lower priced textbook rentals.” Total sales for the quarter of $2.439 million were up 5 percent from a year ago.
Net income declined, however, down 14% to $52 million. But rather than blaming lower than projected Nook Touch sales as the company did when reducing expectations in early January, today they say income “was approximately flat” if you “exclude the impact of the textbook rental deferral.” Earnings per share were 71 cents, reduced bcause of the dilutive effect of Liberty Media’s dividend-paying deferred shares. BN says if Liberty didn’t hold those shares, earnings would have been 99 cents a share. Though the results were below analysts’ expectations, investors viewed the news as positive on balance and shares rose modestly in morning trading.
CEO William Lynch says in the release that “our traffic and sales in stores were the highest we’ve seen in five years.” He reports that “physical book sales at our stores increased more than 4 percent over last year, and our merchandising changes in our juvenile business and our toys & games department experienced double-digit revenue growth.” The Nook business continues to grow “and according to some of the largest US publishers, we maintained or slightly gained share in the eBook market during the third quarter.”
The overall Nook business grew 38 percent to $542 million, and Nook device sales rose 64 percent. Digital content sales was up 85 percent on a comparable basis. (When reporting the Nook business on its own, the company reports the full consumer price of agency ebooks rather than just the commission, though in their official income statement they only book the commissions.)
In the conference call with analysts, executives underscored the success of the BN stores. Mitchell Klipper said “the landlords love us now more than ever” and “are just not letting us leave.” He said most of their leases are being renewed and “the rents are coming down” at 95 of every 100 stores. He expects that trend “to continue for the next two or three years.”
CEO William Lynch tried hard to imply that they might be able to stop losing money building the Nook business some time soon, even though the major competitors continue to spend heavily. He noted they had “invested significantly” on the expanded in-store Nook boutiques but said that spending is “substantially complete” and pointed out that Nook personnel for now had been “essentially flat.” Advertising was clearly a big line item during the holidays–and that “spend really drives a lot of demand at the third-party” sellers of Nook–but they will view those expenses on a “case-by-case basis.”
Taking a cue from Amazon, BN started talking about the lifetime value of a Nook customer. Lynch promised they would “look at each of those big expenses buckets…to intelligently scale the business” going forward. He also revealed that in digital, “the fastest-growing part of our content portfolio is apps” and in answering to an analyst’s question, Lynch said the 16GB Nook Tablet is “gross margin positive” for the company. (He took a dig at “prognostications” that Amazon was seeing at 15 percent to 25 percent return rate on Kindle Fires and said “ours are below that.”
The company was silent on a number of fronts in this announcement: Not just Nook Touch sales, but there was also no mention of their notion they floated last month of separating the Nook business, and they still have not acknowledged the forthcoming sale of Sterling, set to close at the end of February the last we heard. (The did say on the conference call they expect to report Nook financial results separately “by the end of the fiscal year.”)