Nook's flop casts doubt on Barnes & Noble plans

Barnes & Noble (BKS) received a present and a lump of coal from Santa during the holiday season. The good news: Physical book sales have improved. Bad news? The company's Nook business of electronic devices and digital content tanked harder than an Abrams in a conventional ground war.

That would be bad enough, but the company had planned to split into two parts: one centered on the Nook and a second to manage that old-school paper-bound book business. But glamour and hope met reality, and now the company may have to conceive of a new strategic future.

The retail portion of the business, including stores and e-commerce, was up 0.2 percent year-over-year. That may seem like a pittance, but given that so many were writing off the traditional book and retail business, it's a veritable TV-movie Christmas miracle, particularly when Barnes & Noble has been closing stores, losing at least some portion of their sales. Not only have physical book sales "stabilized," but income from educational toys, games and gifts has grown.

For such a relatively great result, the markets showed caution as Barnes & Noble shares were up about 0.5 percent in Friday afternoon trading. The performance of the Nook products gave every excuse for the muted response.

The combination of digital devices, content and accessories brought in only $56 million, down more than 55 percent from the previous year. To put it into perspective, same-store sales, an important comparative measure in retail performance, was up 1.7 percent for the company's "core" stores -- not counting Nook products. But total comparable sales, including Nook products, were down by 0.6 percent.

Barnes & Noble had great hopes for the Nook as recently as June 2014, when it announced its intention to split into two separate public companies. That type of strategy used to open up possibilities for a hot new business area and relegate older parts to a separate mature organization that could still, for now, bring in money, although not much in terms of growth. At the time, the stock jumped 8 percent.

But by December, the company and Microsoft (MSFT), which had a two-year-old partnership agreement on the digital and college businesses, ended their deal.

Barnes & Noble had planned to spin off the Nook business by August 2015. But with that large a drop in sales, it's questionable whether investors would be interested in shares.

The company isn't alone. Amazon (AMZN) has found that entering the device business is much more difficult and expensive than it seems. The e-commerce giant has been logging barrels of red ink, particularly with such market failures as its smartphone.