Barnes & Noble’s Tablet Exit Might Accelerate Breakup

Photographer: David Paul Morris/Bloomberg

Barnes & Noble Inc. has been trying to navigate readers’ shift away from paper books with its Nook brand of tablets and e-readers. Close

Barnes & Noble Inc. has been trying to navigate readers’ shift away from paper books... Read More

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Photographer: David Paul Morris/Bloomberg

Barnes & Noble Inc. has been trying to navigate readers’ shift away from paper books with its Nook brand of tablets and e-readers.

Barnes & Noble Inc. (BKS)’s decision to stop competing in the tablet business potentially will accelerate a break-up of the largest U.S. bookstore chain.

With its Nook Media digital unit racking up more losses in its fiscal fourth quarter -- sending the shares down the most in almost two years yesterday -- the company said that to cut costs and limit inventory risk it will stop making tablets and partner with electronics manufacturers.

Since Barnes & Noble got into the tablet business in 2010, analysts questioned how it would maintain its initial success because the amount of investment to churn out devices to compete against the likes of Amazon.com Inc. and Apple Inc. would be difficult for a company of its size and acumen. This decision removes those hurdles, which could help make the Nook more viable on its own or as an acquisition target.

“It’s a positive because anything they can do to cut back on that cash burn is a good thing,” said Michael Souers, an analyst for Standard & Poor’s in New York. “That definitely has to be seen as a good thing and could potentially help find a buyer for Nook Media.”

That in turn could allow founder Leonard Riggio, the company’s largest shareholder, to go ahead with his February proposal to buy the chain’s retail arm.

Photographer: Paul Taggart/Bloomberg

A pedestrian passes in front of a Barnes & Noble Inc. store in New York. Total sales, which include the company's retail, college and Nook units, dropped 7.4 percent to $1.28 billion. Close

A pedestrian passes in front of a Barnes & Noble Inc. store in New York. Total sales,... Read More

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Photographer: Paul Taggart/Bloomberg

A pedestrian passes in front of a Barnes & Noble Inc. store in New York. Total sales, which include the company's retail, college and Nook units, dropped 7.4 percent to $1.28 billion.

The New York-based company has been exploring ways to increase its value for more than two years as management has said that investors weren’t properly assessing its accomplishments with the Nook. The company started the digital content and mobile device division in 2009 to help navigate readers’ shift away from paper books.

Possible Spinoff

Last year, the company created a subsidiary that included the Nook and college bookstore divisions and dubbed it Nook Media with an eye toward spinning it off into its own company. Microsoft Corp. (MSFT) and Pearson Plc (PSON) invested in the unit last year. That came after Liberty Media Corp. (LMCA) bought a stake in the entire company in 2011.

Then in February, Riggio said he planned to offer to buy the bookstore chain’s retail assets, which included its more than 680 stores and website. That would leave Nook Media as a public company. It had a combined loss before interest, taxes, depreciation and amortization of $364 million in fiscal 2013 on revenue of $2.54 billion.

“It would be much easier to separate the businesses if Nook was doing better,” said Souers, who recommends holding Barnes & Noble shares.

Nook’s results looked much better last year when the idea of a spinoff took shape. While it was still losing money, revenue continued to grow.

Holiday Sales

That changed during this holiday shopping season as its lineup of new devices failed to connect with consumers. Sales at the Nook unit declined for the first time and the company had to write off excess inventory. That continued last quarter, leading to the decision to exit the tablet business.

“We’ve been very focused here for the last three years on devices, and we realize we have to shift our focus to distributing the content more aggressively,” through other platforms, Chief Financial Officer Michael Huseby said in an interview.

Barnes & Noble will keep making the black-and-white e-readers, on which it sells the majority of its e-books. It expects to generate more sales of digital content through its Nook application on other devices and sell more digital textbooks through the college unit, Huseby said.

Nook Color

The retailer started off well in the tablet business in 2010 when it released Nook Color. The seven-inch tablet quickly gained a foothold as one of the few inexpensive alternatives to Apple’s iPad.

About a year after the Nook Color debut, Amazon’s Kindle Fire arrived with a similar price and began grabbing customers. The competition only increased last year with Apple and Google Inc. offering seven-inch tablets.

Barnes & Noble responded by releasing its own 9-inch device, Nook HD+, for the holidays with the hope that a price 27 percent lower than an iPad would lure consumers. It didn’t work, and the lack of demand prompted the company to write down inventory and led to a surprise loss during what is usually its most profitable quarter. Such writeoffs totaled $222 million in fiscal 2013, including $133 million last quarter.

“We want to move away from taking on all that risk ourselves,” Chief Executive Officer William Lynch said on a call with analysts to discuss fourth-quarter results. “As we’ve seen, the tablet market --especially in sub-8 inch -- got extremely competitive and it was very capital expensive to build our own tablets.”

Funding Nook

The company expects Nook Media to keep funding itself with the reduction in costs from ceasing tablet production, selling current Nook inventory that has already been paid for and cash from Microsoft which agreed to make payments totaling $305 million over five years.

Barnes & Noble will sell its remaining inventory of Nook tablets through this holiday shopping season and then transition to the partnership model. The company declined to provide details on the plan beyond saying it is in talks with multinational technology firms.

The Nook division was part of a companywide net loss in the fiscal fourth quarter ended April 30 of $118.6 million, or $2.11 a share, from $56.9 million, or $1.06, a year earlier, Barnes & Noble said in a statement. Analysts projected 90 cents, the average of five estimates.

The shares rose 1.5 percent to $15.84 at 9:33 a.m. in New York after declining 17 percent yesterday for the biggest loss since Aug. 19, 2011.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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