Barnes & Noble's Nook Division Loses Money, But Pledges a New Device is Coming

Barnes & Noble Reports Fiscal 2014 Third Quarter Financial Results

Consolidated EBITDA of $173 million

Core Comparable Bookstore Sales Trend Improves

NOOK® Losses Narrow on Cost Reductions, Device Strategy Shift and Comparisons to Prior Year Charges

Third quarter consolidated revenues decreased 10.3%, to $2.0 billion, as compared to the prior year.  Third quarter consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) increased from $59 million a year ago to $173 million.  Prior year results were adversely impacted by $74 million of NOOK inventory-related charges.  The remaining year-over-year EBITDA increase was primarily attributable to lower NOOK expenses.

“During the third quarter, the company significantly improved its balance sheet and bottom line, while making real progress on our strategic priorities,” said Michael P. Huseby, Chief Executive Officer of Barnes & Noble, Inc.  “Retail’s core comparable store sales benefited from a strong title line-up, strong execution and an effective advertising campaign.  College entered into the spring back-to-school rush and saw continued growth in its higher margin textbook rental business.  This resulted in a slight EBITDA increase for College, even after funding and developing our digital educational applications. We expect the soft launch of our higher education digital product before the end of this fiscal year.  NOOK losses narrowed significantly as we achieved our objective of selling through much of our pre-holiday device inventory, while managing promotions to optimize sales.”

Third Quarter 2014 Results from Operations
Segment results for the fiscal 2014 and fiscal 2013 third quarters are as follows:

Retail
The Retail segment, which consists of Barnes & Noble bookstores and BN.com, had revenues of $1.4 billion for the quarter, decreasing 6.3% over the prior year.  The sales decrease was attributable to a comparable store sales decline of 4.9% for the quarter, store closures and lower online sales.  Comparable store sales declined primarily due to lower sales of NOOK products.  “Core” comparable bookstore sales, which exclude sales of NOOK products, decreased 0.5% for the quarter, an improvement as compared to the first half of the fiscal year.

Retail generated EBITDA of $200 million in the quarter, decreasing 7.5% as compared to a year ago.  The sales decline was partially mitigated by a higher mix of higher margin core products and continued expense management.

College
The College segment had revenues of $486 million, decreasing 6.0% as compared to a year ago.  Comparable College store sales decreased 4.0% for the quarter, impacted by a higher mix of lower priced used textbook rentals and lower textbook volume, partially offset by higher general merchandise sales.  The spring back-to-school rush season extended past the close of the Company’s fiscal third quarter.  Factoring in the two additional weeks in February that contributed to this year’s rush season, comparable store sales decreased 3.1% for the quarter.  Comparable College store sales reflect the retail selling price of new or used textbooks when rented.

College EBITDA increased 3.9% as compared to a year ago to $35 million despite the sales decline, as higher margins outpaced additional investments in digital product development.

NOOK
The NOOK segment (including digital content, devices and accessories) had revenues of $157 million for the quarter, decreasing 50.4% from a year ago.  Device and accessories sales were $100 million for the quarter, a decrease of 58.2% from a year ago, due to lower unit selling volume and lower average selling prices.  Digital content sales were $57 million for the quarter, a decline of 26.5% compared to a year ago, due primarily to lower device unit sales.

The Company did not introduce any new tablet products this past holiday season, contributing to the third quarter sales decline.  Instead, the Company executed its plan to sell through most of its existing device inventory, while also building additional tablet devices to meet holiday and post-holiday demand, using previously acquired parts and components.

NOOK EBITDA losses decreased $129 million, or 67.5%, as compared to a year ago to $62 million.  As noted earlier, prior year results were adversely impacted by $74 million of inventory-related charges.  The remainder of the EBITDA loss reduction was primarily due to a decline in NOOK expenses of $52 million for the quarter on lower advertising and targeted cost rationalization.

As part of the Company’s ongoing efforts to rationalize the NOOK business and position it for future success and value creation, staffing levels in certain areas of the organization have changed, leading to certain job eliminations after the quarter ended.  These ongoing efforts may involve additional actions.

“We have taken steps to reduce costs and device exposure, while focusing our efforts to reverse the content sales decline,” continued Michael P. Huseby.  “We remain committed to delivering world-class reading experiences to our customers through our reading centric e-Ink and color reading devices.  The Company is actively engaged in discussions with several world-class hardware partners related to device development as well as content packaging and distribution.   As a result, we plan to launch a new NOOK color device in early fiscal 2015.”

Consolidated Results
Consolidated third quarter net earnings were $63.2 million, or $0.86 per share, compared to a net loss of $3.7 million, or a loss of $0.14 per share, in the prior year.

During the quarter, the Company recorded an additional valuation allowance against certain deferred tax assets as a result of decisions made regarding the Company’s future device strategy in international markets.  The impact of this item on third quarter net income was $44 million.

The Company ended the quarter with $490 million in cash, $276 million higher than last year, with no borrowings drawn under its $1 billion credit facility.  As the Company executed its plan to sell through its device inventory, it converted inventory to cash, which contributed to the Company’s improved liquidity position.

Guidance
The company reaffirms its previously issued full-year guidance, in which it expects Retail comparable store sales to decline in the high single digits, Core Retail comparable bookstore sales to decline in the low- to mid-single digits and College comparable store sales to decline in the low single digits.