Barnes & Noble Inc (BKS.N) said the quarterly loss in its Nook division increased as the bookseller increased spending on its e-readers and tablets to keep pace with larger rivals Amazon.com Inc (AMZN.O) and Apple Inc (AAPL.O).
Shares slid 9.6 percent to $14.51 in mid-day trade.
The top U.S. bookstore chain also said on Thursday that sales growth in its core bookselling business slowed in the quarter and declined over the Thanksgiving weekend, as the benefits from last year's liquidation of rival Borders Group waned.
In one bit of sunlight, the company reported that quarterly sales of its high-margin digital books and periodicals soared.
Nook segment revenue rose 6 percent for the three months ended October 27, largely on the strength of a 38 percent jump in sales of digital books, newspapers and applications.
But the company, which operates 689 stores, sold fewer Nook units at its owns stores.
The Nook business has been a driver of revenue since it was first introduced in 2009 as readers buy more digital books but product development and marketing costs to keep the devices competitive with Amazon's Kindle have made it an expensive project.
Chief Executive William Lynch told investors on a conference call that he stuck by his forecast that the Nook segment's loss would narrow this fiscal year.
Halfway through the fiscal year, the loss has increased 6.1 percent to $108.1 million as the company invested in developing the devices and prepared for its first international expansion to Britain.
The new Nook HD and Nook HD+ tablets were launched after its fiscal second quarter ended October 27, and are taking on the Amazon Kindle devices and Apple's new mini iPad.
Barnes & Noble said Nook device sales over the four-day Thanksgiving weekend - one of the busiest times of the year for U.S. retailers - doubled from last year, helped by promotions by Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N).
Both stopped selling Kindles this year. Amazon reported similar growth for its devices.
"Barnes & Noble is holding on to market share at the expense of profit," said Morningstar analyst Peter Wahlstrom. The investments to keep pace with rivals will make it hard for the Nook unit to turn a profit, he said.
Lynch said Barnes & Noble has hung on to its 25-30 percent share of the U.S. e-books market.
Nook accounts for 8.5 percent of total revenue. In August, early in the quarter, Barnes & Noble lowered prices on several Nook devices.
In another worrisome sign longer term, Wahlstrom noted that same-store sales for books fell over the holiday weekend.
Overall revenue in the quarter slipped 0.4 percent to $1.88 billion, while retail sales, still its biggest segment by far, fell 2.9 percent to $996 million, hurt by flat same-store sales and a drop in sales on its website.
Revenue at its college bookstore chain, which generates much of the cash needed to fund Nook, edged up 0.4 percent to $773 million while same-store sales fell. Barnes & Noble expects growth in this business to come in part from landing new accounts.
On a net basis, Barnes & Noble reported quarterly income of $2.2 million versus a loss of $6.6 million a year ago.
Factoring in preferred stock dividends and accretion of dividends on preferred stock, it posted a net loss of 4 cents a share, compared with a loss of 17 cents a year earlier. On that basis, analysts expected a loss of 6 cents, according to Thomson Reuters I/B/E/S.
(Reporting by Martinne Geller and Phil Wahba in New York; Editing by Maureen Bavdek and Leslie Gevirtz)