Why Barnes & Noble Might Want to Stay in the Bookstore Business

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Nook sales took a nosedive last quarter, reminding Barnes & Noble executives that their luddite brick-and-mortar business still holds value. Ironically, the most stable route forward for the company right now seems to be sticking with physical rather than digital retail. 

The last of the big bookstore chains released their third quarter earnings report on Thursday and the numbers weren't great across the board, with sales in their retail segment dipping about 10 percent. But the numbers were much worse for their Nook segment, declining by a steep 26 percent due to underwhelming sales of their e-reader units. Barnes & Noble had been banking on the Nook, too. Their CEO made that plain when he told a reporter last year that he doesn't "read physical books that much anymore" thanks to the Nook. His statement came before it was clear that the Nook was losing the tablet wars. While the Nook hasn't been a complete failure according to Forrester Research analyst James McQuivey, who spoke with The New York Times' Leslie Kaufman about today's earnings report, it hasn't kept up with a tablet market that "has actually blown way past the Nook’s performance." And other observers are saying Barnes & Noble should take this as their cue to get out of the device business, leaving that to the big boys like Apple and Samsung. E-publishing blogger Baldur Bjarnason captured this argument well, writing

Tablet and phone churn is much too high and you are constantly competing with groups like Apple and Samsung. Those two do the whole devices thing for a living and are very good at it, much much better than any book retailer is ever going to be.

We've become conditioned to hearing about how the Nook will help keep Barnes & Noble's hemorrhaging physical stores afloat, but the present reality seems to be just the opposite — now it's the Nook that's dragging the company's more stable brick & mortar operation down. Total sales increases and decreases only take a snapshot of a business' health. A better indicator of profitability is EBITDA, which measures earnings before interest, taxes, and other factors. As you can see in the graph below, even though B&N's retail side slipped on earnings, their EBITDA rose by 7.3 percent. In the previous quarter, their retail-side EBITDA shot up by over 100 percent. The Nook segment, on the other hand, fell by almost 130 percent this quarter: 

Those numbers help us understand why the man who helped expand the Barnes & Noble chain in the '80s and '90s, Leonard Riggio, has been considering buying the company's retail operations himself. He knows that, at least for this particular company at this particular juncture, physical retail is a better bet than e-reading. However, Barnes & Nobles executives know they can't simply retreat to physical retail and abandon pushing into a digital future. In today's investor call, CEO William Lynch said that he plans to keep both the digital and physical side of Barnes & Noble strong. Lynch says the company is planning to "reposition" its digital storefront, and that a committee is reviewing Riggio's bid to purchase the retail chain. "We obviously have to adjust and change," Lynch says. "We’re not going to continue doing what we’re doing." 

By the company's own admission, Barnes & Noble's retail sales dipped this past quarter mostly due to store closings. That doesn't bode well for their strategy, recently outlined by retail CEO Mitchell Klipper, of closing up to one third of their stores over the next decade. Tomorrow, a Barnes & Noble store in Washington, D.C. is set to close. Rumor has it that the location will be replaced by an H&M. 

This article is from the archive of our partner The Wire.