Barnes & Noble Slashes Forecast, May Spin Off Nook Business
January 6, 2012

Barnes & Noble Slashes Forecast, May Spin Off Nook Business

Barnes & Noble Inc. slashed its Nook sales forecast on Thursday, and surprised investors by saying it was considering spinning off its digital business in an attempt to regain profitability amid the growing popularity of digital books and magazines.

The bookseller said it now expects its Nook business, which accounts for nearly one-quarter of sales, would reach $1.5 billion for the fiscal year ending in July 2012, in part because of disappointing numbers for its $99 Nook Simple Touch e-reader.  The previous forecast was for sales of $1.8 billion.

The company now expects earnings before interest, tax, depreciation and amortization of $150 million to $180 million for the fiscal year, down from its forecast last month of between $210 million and $250 million.

The company also forecasts a loss of $1.40 to $1.10 per share for the fiscal year, much worse than Wall Street´s expectations of a loss of 63 cents per share.   The losses are due in part to the tens of millions of dollars it has put into the Nook device.

Shares of Barnes & Nobles´ stock plummeted as much as 31 percent on the news, before closing the day down 17 percent at $11.24.

The company now has a market value of about $676 million, or less than 1 percent of Amazon's.

Barnes & Noble has relied on e-readers, tablets and electronic books to offset declining sales at its retail stores, so the news of weaker-than-expected Nook sales sparked fears the company may be laboring to keep pace with Amazon´s Kindle.

In a statement, Barnes & Noble said it sought to "unlock" the value of its Nook business and take it into foreign markets.  The company has already started talks with potential international partners, including overseas publishers, retailers and tech firms.

The bookseller said it sold 70 percent more Nook devices this holiday season compared with last year, while its e-book sales doubled, something CEO William Lynch said investors had underappreciated.

"Our (market) share remains very strong," Lynch told Reuters.

"We certainly think this is not being properly valued.”

Liberty Media Corp. CEO Greg Maffei, who joined Barnes & Nobles´ board last year, suggested during a conference call on Wednesday that Nook would be better able to attract investors as a standalone business.

Liberty Media Corp is one of Barnes & Noble's largest investors.

Extracting value from Nook and Barnes & Noble could be achieved by finding "partners to help fund that game," Maffei said, referring to Barnes & Noble's digital business.

However, investors seemed spooked at the idea of a Barnes & Noble stock that would represent only its traditional retail business.

"They would be separating their one growth driver," Morningstar analyst Peter Wahlstrom told Reuters.

Indeed, Barnes & Noble without Nook would be nearly identical to its former rival Borders, which shut down in 2011.

However, Reuters cited a source familiar with Barnes & Noble as saying the bookseller would likely remain closely involved in developing and promoting the Nook, harnessing its links with publishers and its 700 retail stores -- essentially continuing to run the business.

Barnes & Noble put itself up for sale in 2010, but secured only one solid bid -- for $17 per share, or $1 billion.  That offer came last May from Liberty Media, which was drawn by Nook's growth.

Liberty ultimately decided to invest $204 million, rather than acquire the company outright, with much of that money earmarked for the Nook.


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