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Barnes & Noble shares tumble as it preps for Nook spinoff

Barnes & Noble (BKS), the brick-and-mortar book retailer that has struggled for years to emerge from the shadow of Amazon.com (AMZN), today began separating its Nook e-reader business into a separate company. The company also reported quarterly earnings that badly lagged Wall Street's expectations, which sent its shares plunging more than 12 percent.

New York-based Barnes & Noble and Microsoft (MSFT) have agreed to terminate their 2012 commercial agreement in which the software giant pledged to invest as much as $605 million in the retailer's Nook Media business. The bookseller also agreed to buy Microsoft's stake in Nook Media for about $120 million in cash and stock. According to a Barnes & Noble press release, the separation of Nook could occur by August 2015.

Microsoft's financial muscle, though, wasn't able to fend off fierce competition from Amazon's Kindle and Apple's (AAPL) iPad. The plummeting popularity of stand-alone e-readers didn't help either. Forrester Research estimates that 1.72 million e-readers will be sold in 2019, a 65 percent drop-off from the 4.92 million expected to be sold this year.

Not surprisingly, the latest quarterly results of the Nook business were dismal. Revenue plunged 41.3 percent to $64 million. Device and accessories sales were $18.7 million, a decrease of 63.7 percent on a year-over-year basis, while digital content revenue plummeted 21.2 percent to $45.2 million.

"... today's announcement on the restructuring of the Nook Media agreements will enable the Company to further rationalize the NOOK business and provide a clearer path for the potential separation of our Retail and NOOK Media businesses," said Barnes & Noble CEO Michael Huseby in a press release.

Shares of Barnes & Noble were down nearly 10 percent to $20.07 as of 11:49 a.m. ET , paring back earlier losses.

Investors have pressured to spin-off the money-losing Nook business for years and the retailer announced plans to do so in June. The rest of Barnes & Noble is continuing to struggle even as Huseby has tried to counter Amazon's market dominance by offering non-book products such as toys to lure shoppers into the chain's stores. The strategy has yet to pay off.

In the fiscal quarter ended Nov. 1, net income at Barnes & Noble fell $12.3 million, or 12 cents a share, compared with $13.2 million, or 15 cents, a year earlier. Revenue fell 2.7 percent to $1.7 billion as the decline in its retail business overshadowed the gains at its college bookstores. Wall Street analysts had expected profit of 31 cents on sales of $1.9 billion.

The company sees its troubles lingering into 2015. It expects 2015 comparable sales, a key retail metric measuring performance at stores opened at least a year, to decline in the low- to mid-single digits. The Nook loses when measured on an EBITDA (earnings before interest, taxes depreciation and amortization) basis are expected to decline in the fiscal year versus the prior year.

Chairman and founder Leonard Riggio has been trimming his holdings in the retailer over the past few months, though he still remains the company's largest shareholder. Riggio said that the sales were for tax planning purposes and said in April that he wouldn't sell any more stock for the rest of the year. John Malone's Liberty Media (LMCA) has also reduced its holdings in the retailer.

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