DISCUSSION

Barnes & Noble Considering Options for Nook

January 11, 2012Written by Tom Ryan

Barnes & Noble said last Thursday that it was weighing spinning off its Nook business. The move would enable B&N to focus more closely on its aging bookstore business and e-commerce operations while capitalizing on the value created in its successful e-book venture. B&N would also escape the significant costs still required to build the Nook brand.

Indeed, Nook investments have fed a string of quarterly losses over the last two years. The nation's largest bookstore chain also warned last week that it would lose twice as much money this fiscal year ending in April as previously projected, due primarily to a shortfall in the expected sales of Nook Simple Touch, as well as additional investments to grow the Nook business.

Nevertheless, the star this holiday was the Nook, as sales of the e-reader, led by the Nook Tablet, surged 70 percent in the nine weeks ending Dec. 31 vs. the year-ago period driven by third-party distribution beyond B&N.

"We see substantial value in what we've built with our Nook business in only two years, and we believe it's the right time to investigate our options to unlock that value," said William Lynch, Chief Executive Officer of B&N, in a statement.

Online physical product sales declined in the nine-week holiday period, although another bright spot was that physical book sales on a comp basis increased by four percent at B&N stores — the first time in five years — benefiting from the closing of Borders, an increased emphasis on toys, and strength in juvenile titles.

The Nook may be sold entirely or in parts, with B&N maintaining a majority ownership stake.

The potential spinoff led to a heap of scrutiny in the business world. On the positive side, a new investor (Google or Microsoft were widely cited as the lead candidates) could more greatly support the investments required to expand Nook, especially with overseas opportunities just being tapped. While B&N is not cash-strapped, its primary competitors for the Nook — Kindle and iPad — are backed by outrageously capitalized companies.

For B&N stockholders, a spinoff could unearth capital gains with management believing the overall business is significantly undervalued.

On the downside, B&N may lose the favorable treatment publishers have given to the Kindle competitor. Amid positive reviews, Nook has grabbed about a quarter of the U.S. e-book market. "Nook boutiques" have also been established inside stores and any loss of control could impair any leverage gained between the e-reader and book selling side of the business. Said Peter Wahlstrom, a senior analyst with Morningstar Equity Research, to The New York Times, "It is so ingrained with the physical bookselling experience."

Discussion Thread0