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Barnes & Noble Heads Back to the Drawing Board After NOOK Split

By  +Follow June 26, 2014 6:48AM
Tickers Mentioned:

Barnes & Noble stock, BKS, small-cap, small-cap companies, small-cap stocks, small-cap stars, NOOKBarnes & Noble, Inc.'s (BKS)  reported narrower losses for Q4 on Wednesday, but it was the book retailer’s decision to split its NOOK Media business from the Barnes & Noble Retail division into two separate companies. Shares of Barnes & Noble closed 5% higher on the day at $21.65, but popped as high as 10 percent at one point on the news. 

Barnes & Noble Finally Spins Off NOOK

Analysts believe it's the right time to spin off the NOOK department. According to the report, NOOK tablet sales decreased more than 22% to $87 million in Q4. NOOK's device and accessories sales also plunged 30% to $25 million in the quarter. E-book content revenue was $62 million in Q4, which was a 19% decline from the year-ago period. 

Released in 2009 following Amazon's (AMZN) Kindle 2 and Sony's (SNE) Sony Reader Touch, Barnes & Noble’s NOOK failed to gain traction and grow market share during its five years. The NOOK faced very stiff competition as the Kindle and Apple’s (AAPL) iPad dominated the market. 

Talks of possibly spinning off the NOOK business were shelved in 2013 as the company was willing to endure losses as a long-term strategy to gain market adoption. That is, until April 4 when Liberty Media slashed its stake due to disappointing sales of the NOOK.

The company said they hope to optimize shareholder value by this separation. However, Michael P. Huseby, CEO of Barnes & Noble, explained that the two separate entities will still pursue the same strategic opportunities as before. 

"We fully expect that our Retail and NOOK Media businesses will continue to have long-term, successful business relationships with each other after separation," Huseby said.

Huseby claimed that customers would not see any difference in their digital or store experiences. "It's a structural separation but it won't change the commercial ability of both companies to benefit from each other," he said.

The split is expected to be completed by the end of the first quarter of 2015. 

Barnes & Noble’s Improving Retail Business

In comparison, Barnes & Noble's prospects as a retail business looks a bit brighter without the anchor of the NOOK business.

For Q4, the company posted a net loss of $36.70 million, or $0.72 per share, as compared to a net loss of $114.80 million, or $2.04 per share, in the same period of last year. Sales for the quarter increased 3.5% to $1.32 billion from $1.28 billion a year ago.

Retail sales, including physical bookstores and online, edged up 0.8% to $956 million for the quarter, but fell 6% for the year to $4.3 billion. Same store sales also declined 4.1 percent for Q4 and 5.8% for the full year.

Barnes & Noble College sales continued to grow 18.2% to 298 million. Comparable store sales increased 2.6%. College sales were positively impacted by the back-to-school season’s increasing need for textbook.

For the 2015 fiscal year, the company expects retail and comparable bookstore sales as well as college comparable store sales to decline in the low-single digits.

What’s Next for Barnes & Noble?

With a $1.23 billion market capitalization, Barnes & Noble remains the biggest retail bookseller in the U.S., operating 663 stores in 50 states, occupying two-thirds of the country's retail bookstores. It college bookstore subsidiary also operates 696 college bookstores, serving more than 4.6 million students and faculty members across the country.

But while Barnes & Noble once saw the NOOK as the savior to its declining brick-and-mortar business, the move to finally ditch the money-losing segment for good is a painful admission for management. The hope now is that the company’s losses will continue to decrease as a result of addition by subtraction.

However, as Huseby stated, Barnes & Noble’s spinoff of the NOOK business does not mean the retailer is exiting the profitable digital book market. Ditching the NOOK would eliminate the high costs of research, design and manufacturing of the e-book reader device from Barnes & Noble’s balance sheet.

In addition, Barnes & Noble may also benefit from a more device-agnostic sales strategy for digital books.

On the brick-and-mortar front, the company will continue to expand its cash cow: college bookstores. Started as a university bookstore in New York, the division now operates 696 college bookstores across the country. The college bookstore segment currently accounts for about one quarter of the company’s total revenue.

In an interview with Reuters last month,the company’s head of college business Max Roberts said the company would increase the number to 1,000 stores over the next five years.

He added that the company would introduce more products and services in its college stores to help boost top line growth, which raises the question of whether the company will diversify the offerings of its other stores as well.


DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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