Barnes & Noble (BKS, Financial) reported third quarter consolidated revenues of $1.96 billion for fiscal 2015, down 2% from the year-ago quarter’s revenue of $1.99 billion, sending the company’s shares down 9% to $22.25 during the day’s trading following the results. The bookstore chain attributed the decline to higher than expected taxes and weakness in the Nook and retail segments. The company incurred 55% more in income taxes during the quarter as it bought back the stakes in its Nook Media LLC from former partners Pearson Education and Microsoft (MSFT, Financial).
NOOK Division Drags Down Revenues
Despite the fall in revenues, Barnes & Noble logged net income of $72.2 million for the quarter ended Jan 31, up from the $63.2 million from the prior-year quarter, owing to the company’s cost-rationalization measures. The company’s third quarter consolidated pre-tax earnings grew 14% to $197 million compared to the year-ago period. EPS for the third quarter stood at $0.93 per diluted share, falling short of the consensus estimate figure of $1.23 per share.
Segment-wise, Barnes & Noble saw a 1.0% dip to $1.4 billion in revenues from its Retail division that includes the company’s bookstores and online store BN.com, owing to decline in sales of NOOK products as well as store closures. The company’s “core” comparable-store sales that exclude NOOK products witnessed a 1.7% growth on the back of higher sales in book as well as non-book segments such as Educational Toys & Games and Gifts. The Retail division generated pre-tax earnings of $199 million during the quarter, indicating flat growth compared to the year-ago figure.
Barnes & Noble’ College division reported 7.2% growth in revenues to $521 million for Q3 2015 as the company added new stores and benefited from a shift in the fiscal calendar from Jan 25th to Jan 31, which provided an additional week of sales for the spring back-to-school season. Top line sales at the division also benefited from new school acquisitions and better- than-expected trends in comparable sales. However, the division posted a $7 million decline in pre-tax earnings to $28 million with continued investments to support the digital education platform and business growth offsetting growth in revenue. The company also saw a drop in margins owing to higher deferrals to textbook rentals.
The company’s NOOK division saw a massive drop of 50.6% in revenues to $78 million compared to the year-ago quarter, with sales of device and accessories declining 62.8% to $37 million. Also, sales of digital content also declined 29.3% to $41 million during the quarter. However, the NOOK division saw a decrease in pre-tax losses from $61.8 million in the year-ago quarter to $29 million as margins improved on reduced occupancy costs and better product mix. The division also benefited from reduced expenditure as a result of enduring cost-rationalization efforts.
Downbeat Outlook for Fiscal 2015
Barnes & Noble also announced its outlook for the full fiscal 2015. While the company expects the downward trend in Retail comparable-store sales to continue, Retail ‘Core’ comparable-store sales are projected to remain flat. Owing to better-than-expected comparable-store sales at the College division, revenues from the segment are projected to be flat for FY2015. Further, Barnes & Noble also projected a decline in pre-tax earnings in the NOOK division for the full fiscal year compared to the previous fiscal.
The company also plans to separate and list its College business by August 2015, a step that is expected to enable the segment to pursue opportunities in the growing market for educational services. However, repealing its earlier plans to combine its College and NOOK businesses into a separate single entity, Barnes and Noble announced that it would continue to keep the NOOK and Retail operations together.
Barnes & Noble, currently the largest bookstore chain in the US, competes with digital giants such as Amazon.com Inc. (AMZN, Financial) and Apple Inc. (APPL, Financial) as well as book retailers like Books-a-Million Inc. (BAMM, Financial).
Final Thoughts
Barnes & Noble is currently grappling with revenue losses at its NOOK digital media business, a trend that is expected to continue into the fourth quarter and affect the full fiscal results for 2015. Consequently, experts foresee flat revenue growth for the full fiscal 2015, while the company could cut losses marginally compared to the previous fiscal. The trend could reverse in the long-term based on the manner in which the College division spin-off affects the company’s overall business. The Barnes & Noble stock currently carries a ‘hold’ guidance for the short to mid-term.
