UPDATE 2-Barnes & Noble cost cuts reduce sting of sharp sales drop

Wed Nov 27, 2013 12:28am IST

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(Adds details from executives interviews, conference call)

By Phil Wahba

Nov 26 (Reuters) - Barnes & Noble Inc, the largest U.S. bookstore chain, on Tuesday reported a higher than expected quarterly profit as it cut store workers' hours scaled back its money losing Nook business, helping it offset sharp sales declines.

The bookseller reported an 8 percent drop in quarterly revenue to $1.73 billion, below analyst estimates, hurt primarily by its deteriorating digital books and Nook device business, and a drop in business at its college campus bookstores and at its namesake superstores.

Shares were down 6.5 percent to $15.37 in midday trading.

Barnes & Noble has been struggling for years with readers' shift to e-books. Its Nook devices, launched in 2009 to give the retailer a fighting chance against Amazon.com Inc, and initially a success, has cost it hundreds of millions of dollars.

Earlier this year, Barnes & Noble scaled back its Nook business, saying it would look for a partner to make Nook tablets in the future. The move helped Barnes & Noble pare its Nook loss for the quarter ended Oct. 26 to $45.3 million compared to $51.4 million a year earlier.

According to data from the Association American Publishers, sales of e-books rose 45 percent between 2011 and 2013, and now account for 20 percent of U.S. book sales.

Barnes & Noble estimates it has a 20 percent share of the U.S. e-books market, compared to about 27 percent in February.

Barnes & Noble reaffirmed its commitment to its Nook business, saying devices were essential for selling e-books and other content and building back that market share.

"We are in the device business to stay," said Michael Huseby, CEO of Nook Media, the company's digital division. The company is focusing its Nook development on features directed at book readers rather than consumers looking for an entertainment device.

FEWER STORES FEWER HOURS

Barnes & Noble re-iterated its forecast that retail sales should fall by a high single digit percentage in its current financial year that ends in April 2014. The company blamed the absence of a blockbuster like last year's 'Fifty Shades of Grey' trilogy for the sales shortfall in the second quarter.

Its retail business remains highly profitable, despite sluggish sales. Most of Barnes & Noble's workers are part-time, giving it flexibility to adjust workers' hours as needed, Mitch Klipper, head of the chain's retail business, told Reuters.

The company also continued to close stores and now operates 673 stores, compared to 689 a year ago. Most of Barnes & Noble's leases are up for renewal within only a few years, making it relatively easy for it to shrink its store base as needed. Barnes & Noble expects to continue to cut 15 to 20 stores a year, Klipper said.

The company posted a net profit of 15 cents a share, compared with a loss of 7 cents per share a year earlier. Analysts on average were expecting a loss of 3 cents per share on revenue of $1.77 billion, according to Thomson Reuters I/B/E/S.

Barnes & Noble's profit got help from the higher margins on book rentals at its College bookstore chain, helping it offset a 3.6 percent decline in comparable sales in that division. Its textbook rental revenue rose 63 percent during the quarter.

The retailer has seen turmoil in its top ranks this year. CEO William Lynch, the architect of Barnes & Noble's failed Nook strategy, quit and founder and Chairman Leonard Riggio suspended a bid to buy the chain's retail business. Earlier this year, it dropped a plan to split the company in two. (Additional reReporting by Aditi Shrivastava and Neha Alawadhi in Bangalore; Editing by Rodney Joyce and Andrew Hay)