Where Barnes & Noble, Inc. (BKS) Went Wrong

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Barnes & Noble, Inc. (NYSE:BKS) invested heavily in its Nook e-reader business, a move that may have been short-sighted and incomplete. After a disappointing holiday season for the company when Nook sales failed to meet expectations, Barnes and Noble reported late Wednesday that Nook EBITDA for its fiscal year will be greater than in fiscal 2012 losses of $262 million.

Where did Barnes and Noble go wrong? And why hasn’t the company kept up with its competition from devices like Apple Inc. (NASDAQ:AAPL)‘s iPad and Amazon.com, Inc. (NASDAQ:AMZN)‘s Kindle, or from the sales of media from these outlets?

Barnes & Noble, Inc. (NYSE:BKS)Based on current forecasts, Barnes and Noble expects the fiscal year 2013 Nook segment EBITDA loss to be greater than it was in fiscal 2012 and Nook Media revenues to be less than $3 billion. The company had anticipated that Nook sales would be about the same as the year previous.

The Nook segment, which consists of the company’s digital business (including e-readers, digital content and accessories), saw revenues of $160 million for the second quarter, increasing 6% as compared to a year ago.  Digital content sales (which include e-books, digital newsstand, and apps) increased 38% for the second quarter over the prior year.

The Barnes and Noble Retail segment, which is primarily physical books sold both in-stores and online, had revenues of $996 million for the second quarter, decreasing approximately 3% over the prior year due to flat comparable store sales, store closures and lower BN.com sales.

In comparison, for the most recent quarter, Apple net sales of the iPad were $10.7 billion. Net sales for iTunes, software and services (which include books, movies, and music) were $3.7 billion in the first quarter of 2013, an increase of $667 million or 22% compared to the first quarter of 2012. What Apple nets in one quarter off content alone, is more than Barnes and Noble makes in the full year for both the e-reader and content sales.

Amazon CEO Jeff Bezos declared that after 5 years of e-book selling, eBooks was a multi-billion dollar category and growing fast. eBooks were up 70% overall in 2012. Amazon doesn’t share actual e-book numbers, or Kindle sales figures, but North American media (which includes e-books, music, and videos) revenues were $2.9 billion for the fourth quarter of 2012 (up 13%) and $9.19 billion for the year (up 15%). International media revenues were $3.6 billion for the quarter and $10.75 billion for the year.  In contrast, Amazon’s physical book sales experienced the lowest December growth rate in 17 years, up by only 5%, according to a statement made by Bezos.

It is hard to compare the three companies on just media, e-book, or tablet sales, when they each report them differently. But what we can see is that Barnes and Noble, lags significantly behind. Barnes and Noble wraps up the revenue from the Nook and digital content into one number, and that number for just one quarter, is still less than half of what the other two companies reported in for just media sales. And Barnes and Noble, in spite of the brick and mortar opportunities, saw a decrease in physical book sales, while Amazon saw growth, albeit low growth.

Where Did it All Go Wrong?

Barnes and Noble was once an American powerhouse. It was once of the most popular places to buy books and music. How did a store that called itself one of the original “big box” stores, fall so far as to rank lowest in book sales out of the booksellers? Where did the company go wrong?

One area the company has not kept up in is music sales. Both Amazon and Apple are thought of as go-to places to download the latest music, and older music as well. Both companies allow for single song downloads as well. Barnes and Noble sells CDs both online and in-store, but does not sell downloads, or single song tracks, on its website.

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