Barnes and Noble Business Analysis

...

B&N College

B&N College is one of the largest contract operators of bookstores on college and university campuses across the United States. As of April 27, 2013, B&N College operated 686 stores nationwide. B&N College’s customer base, which is mainly comprised of students and faculty, can purchase various items from their campus stores, including textbooks and course-related materials, emblematic apparel and gifts, trade books, computer products, NOOK® products and related accessories, school and dorm supplies, convenience and café items, and more recently, textbook rentals. B&N College provides extensive textbook rental options to its customers and has expanded its electronic textbooks and other course materials through a proprietary digital platform (NOOK Study™). A significant number of textbooks are now available in multiple formats: new, used, rental and digital (rental and ownership), resulting in improved choice and substantial student savings.

B&N College operates 651 traditional college bookstores and 35 academic superstores, which are generally larger in size, offer cafés and provide a sense of community that engages the surrounding campus and local communities in college activities and culture. The traditional bookstores range in size from 500 to 48,000 square feet. The academic superstores range in size from 8,000 to 75,000 square feet.

B&N College generally operates its stores pursuant to multi-year management service agreements under which a school designates B&N College to operate the official school bookstore on campus and B&N College provides the school with regular payments that represent a percentage of store sales and, in some cases, include a minimum fixed guarantee. B&N College’s business strategy is to maintain long-term relationships with colleges and universities by providing high-quality service to college administrators, faculty and students.

NOOK

The underlying strategy of the NOOK business is to offer customers any digital book, newspaper or magazine any time on any device. The Company remains committed to delivering to customers the best digital bookstore experience, while reducing its existing cost structure. As part of this commitment, the Company intends to continue to offer the best black-and-white and color eReaders on the market, backed by quality customer service and technology\ support for those devices.

Over the past several years, the Company has introduced leading devices in the tablet and eReader categories. In April 2012, the Company introduced NOOK Simple Touch™ with GlowLight™, the world’s first E Ink device with patent-pending lighting technology that lets you read in the dark. In September 2012, the Company introduced NOOK® HD, the lightest and highest-resolution 7-Inch HD tablet, and NOOK® HD+, one of the lightest full HD tablets.

Customers can use Barnes & Noble’s eReading software to access and read books from their personal Barnes & Noble digital library on devices including Windows 8 PCs and tablets, iPad™, iPhone®, Android™ smartphones and tablets, PC and Mac®. The Company also offers NOOK Newsstand™, which provides an extensive selection of digital newspapers and magazines, available in both subscription and single copy format, NOOK Kids™, a collection of digital picture and chapter books for children, NOOK Study™, an innovative study platform and software solution for higher education, and NOOK Video™, which offers an extensive and diverse digital collection of standard and high-definition movies and TV shows available for streaming and download.

The Company will continue to sell its existing device inventory through reduced and promotional pricing. At the same time, it will leverage all Barnes & Noble retail, digital and partnership assets, as well as existing NOOK customer relationships. The Company sells digital content in the U.K. directly through its NOOK devices and its nook.co.uk website. The Company plans to continue to expand into additional international markets and believes that its partnership with Microsoft will help foster that expansion. Under its partnership agreements with Microsoft, the Company previously disclosed that it expected to be in 10 international markets by June 30, 2013. While substantial progress has been made towards meeting the target expansion requirement, the Company now expects expansion into these 10 markets to be accomplished by the end of 2013.

In terms of its device strategy, the Company intends to reduce its existing cost structure. Further, the Company’s business plans are being adjusted to reduce its investment in sourcing, assembling and manufacturing the Company’s own NOOK® tablets and to explore outsourcing or co-sourcing such functions. This revised strategy is intended to capitalize on the Company’s design capabilities in partnering with third parties to source co-branded tablets with NOOK® content.

Financial Overview

The Company’s financial performance has been significantly impacted in recent years by a number of factors, including the economic downturn, increased online competition and the expanding digital market. However, the Company has benefited from reduced physical bookstore competition in the marketplace, as well as the successful execution of new merchandising strategies.

The Company derives the majority of its sales and net income from its B&N Retail and B&N College stores. B&N Retail comparable store sales benefited as one of B&N Retail’s largest competitors in the sale of physical books, Borders Group, Inc. (Borders), completed liquidating all of its stores under Chapter 11 of the Bankruptcy Code in early fiscal 2012.

The Company’s sales decreased $290.2 million, or 4.1%, during fiscal 2013 to $6.84 billion from $7.13 billion during fiscal 2012. The following table summarizes the Company’s sales for the 52 weeks ended April 27, 2013 and April 28, 2012:

[pic 1]

B&N Retail sales for the 52 weeks ended April 27, 2013 decreased $284.7 million, or 5.9%, to $4.57 billion from $4.85 billion during the same period one year ago, and accounted for 66.8% of total Company sales. The decrease was primarily attributable to a 3.4% decrease in comparable store sales which decreased sales by $138.4 million, lower online sales which declined by $83.5 million, and closed store sales which decreased sales by $68.0 million.

B&N College sales increased $19.6 million, or 1.1%, to $1.76 billion during the 52 weeks ended April 27, 2013 from $1.74 billion during the 52