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If Neither E-Books or Paper Can Save Barnes & Noble, What Can?

Barnes & Noble (BKS) announced a bigger-than-expected loss -- $59 million -- for last quarter and a net loss of $74 million on its "record" $7 billion in sales for fiscal 2011. According to the company, the reason for the fourth quarter plummet was competition from bankruptcy liquidation sales by Borders (BGPIQ) and investment in digital technology.

Does that mean that e-books and e-readers are supposed to be the salvation of the book retailer? Because as you look through B&N's financials, you might wonder whether they -- or anything else -- can be.

E-books come on strong ...
Most of the book industry has come to the conclusion that e-books are the only way forward in the long term. In the earnings call this morning, CEO William Lynch said that e-books now outsell all categories of print books combined 3-to-1 at Barnes & Noble.

That's astounding, but also disturbing. Look at this table from the B&N 8-K filing, which had more financial details than what was included with the earnings press release (click to enlarge):


Not all revenue in the retail division comes from selling books. There are the cafes, gift items, notions -- and the now all-important Nook e-readers. And not all revenue in the Barnes & Noble.com division comes from e-books. The company still sells paper books through the site.

The company credits digital books and the Nook for its 65 percent year-over-year sales growth. However, all of the e-book sales happen online, and the online division's revenue was only about a fifth of retail sales, even though digital books now outsell paper three to one. It raises the question of what business Barnes & Noble can actually be in. Sounds like it was more the Nook with minor assistance from digital books that pushed the numbers.

... and wheezing
If it's the Nook that is really driving growth, the company is in deep doo-doo. Human readers turned book purchases into B&N's annuity. E-books are much cheaper than paper -- the gross margin for 2010 on B&N.com sales was 8.8 percent, versus 30.6 percent for the stores. At the same time, SG&A (overhead costs) represented 32.6 percent of the online division's revenue, versus 24.9 percent of the retail stores. (Or 14.8 percent for the company's college bookstore division.)

How can Barnes & Noble see revenue growth going forward? Will people buy new e-readers regularly, like smartphone users who upgrade every two years when contracts are up? Doesn't seem so likely, does it? The numbers suggest a much bleaker future than might seem on the surface. It would explain why B&N's market cap is only $1.14 billion, and why Liberty Media offered only $1 billion buy-out for a company whose annual revenue nears $7 billion.

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Image: Wikimedia Commons, public domain.
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