Barnes & Noble 3rd Quarter Financial Results

Barnes and Noble reported their 3rd quarter numbers today and they were widely discussed and classified as disappointing.  The following is from their press release today:

Third quarter consolidated revenues were $2.2 billion, a decrease of 8.8% as compared to the prior year.  Third quarter consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) were $55 million, as compared to $150 million a year ago. Third quarter consolidated net losses were $6.1 million, as compared to net earnings of $52 million a year ago.  Third quarter results were adversely impacted by NOOK inventory charges and promotional allowances discussed below in the NOOK section.  Third quarter net losses were $0.18 per share, which includes the impact of the dividend on redeemable preferred shares, as compared to net earnings of $0.71 per share a year ago.

On January 23, 2013, the company announced the completion of its strategic partnership with Pearson, which invested $89.5 million in NOOK Media LLC for preferred membership interests representing a 5% equity stake.  Following the closing of the transaction, Barnes & Noble now owns approximately 78.2% of the NOOK Media subsidiary and Microsoft, which also holds preferred membership interests, owns approximately 16.8%.

The company ended the third quarter with cash of $214 million and no borrowings under its $1 billion Revolving Credit facility, as compared to a net debt position of $74 million a year ago.

RetailThe Retail segment, which consists of the Barnes & Noble bookstores and BN.com businesses, had revenues of $1.5 billion for the quarter, decreasing 10.3% over the prior year.  This decrease was attributable to a 7.3% decline in comparable store sales, store closures and lower online sales.  Core comparable store sales, which exclude sales of NOOK products, decreased 2.2% as compared to the prior year.  Sales of NOOK products in the Retail segment declined during the quarter due to lower unit volume.

Despite the sales decline, Retail EBITDA increased 7.3%, from $198 million to $212 million during the third quarter, resulting from a higher sales mix of higher margin core products and expense management.

CollegeThe College segment, which consists of the Barnes & Noble College bookstores business, had revenues of $517 million, decreasing 1.6% as compared to a year ago.  Comparable College store sales decreased 5.2% for the third quarter as compared to the prior year period, as the back-to-school rush season extended past the close of the company’s third fiscal quarter.  Factoring in the two additional weeks in February that contributed to this year’s rush season, comparable store sales decreased 2.1% for the quarter.  College comparable store sales reflect the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period.

College EBITDA decreased $1.3 million during the quarter as compared to a year ago to $34 million.  College’s product margins improved during the quarter on a higher mix of higher margin textbook rentals, while expenses increased due to new store growth and continued investments in digital education.

NOOKThe NOOK segment, which consists of the company's digital business (including devices, digital content and accessories), had revenues of $316 million for the quarter.  This represents a decline of 26% as compared to the same period a year ago, primarily as a result of lower device unit volume.  In addition, the company recorded $21 million of incremental channel partner returns given the holiday sales shortfall, as well as $15 million of promotional allowances to optimize future sales opportunities.  Digital content sales increased 6.8% for the third quarter over the prior year. 

NOOK EBITDA losses were $190 million for the third quarter, as compared to $83 million a year ago, primarily resulting from the previously noted sales shortfall, inventory charges, and higher operating expenses.  The company recorded $59 million of additional inventory charges during the third quarter, as the holiday sales shortfall resulted in higher than anticipated levels of finished and unfinished goods.  Operating expenses increased over the prior year on higher advertising costs.

In response to the device sales shortfall over the holiday season, NOOK is calibrating its business model and has implemented a cost reduction program that the company projects will significantly reduce NOOK’s expenses.

“In terms of the NOOK Media business, we’ve taken significant actions to begin to right size our cost structure in the NOOK segment, while also taking a large markdown on NOOK devices in order to enhance our ability to achieve our estimated sales plans in subsequent quarters,” said William Lynch, Chief Executive Officer of Barnes & Noble.  “NOOK Media has been financing itself since October of 2012 due to the strong investment partners we've been able to attract in Microsoft and Pearson.  Coming off the holiday shortfall, we're in the process of making some adjustments to our strategy as we continue to pursue the exciting growth opportunities ahead for us in the consumer and digital education content markets.”  Mr. Lynch also said that going forward NOOK Media still remains committed to its Tablet and e-Reader business.  And, he reiterated that NOOK and Barnes & Noble bookstores will continue to have a close relationship.  “Without question, our bookstores have made a significant contribution to NOOK’s success over the past three years.  And, in turn, our award-winning line of NOOK products have proven to be a strong driver of traffic to our stores.”