Years of competition with Amazon were tough enough. But these days Barnes & Noble has bigger problems: it's facing off against Apple, whose iBooks virtual bookstore runs not just on the iPad but on most iPhones and iPod Touches as well. The bookseller’s Nook e-reader has earned some good reviews, but the stiff competition is one reason for the gloomy income statement the company released this week: Barnes & Noble lost $32 million in the quarter ending May 1, compared with a $2 million loss during the same period last year. Its net income for the full year was $36 million, down from nearly $76 million.
Despite the losses, Barnes & Noble tried to paint a rosy picture. It emphasized boosts in sales since last year, noting that the most recent quarter’s $1.3 billion in sales was a 19 percent improvement over the same period last year. But those sales came with significantly higher costs. Compared with the same quarter in 2009, the company spent $180 million more on sales and occupancy, $59 million more on interest, and $31 million more on administration. Barnes & Noble said it was investing in expanding its digital business. “The explosive growth of digital books has created the most compelling opportunity in Barnes & Noble’s history,” chairman Leonard Riggio said.
Maybe so, but investors were not impressed with the company’s potential to take advantage of that opportunity—its stock price dropped nearly 20 percent Tuesday after the earnings news. Investors may have been responding to the strategy that CEO William Lynch outlined Tuesday, emphasizing heavy investment in technology, sales, and marketing and accepting short-term losses. Lynch acknowledged that the moves will have a “significant impact” on the company’s 2011 bottom line.
The company emphasized how much its share of the digital-book market had grown since it released the Nook in November—a spike from 2 percent to 20 percent, it said. “In just a brief 12 months since we launched the Barnes and Noble ebookstore, our share of the digital market already exceeds our share of the retail book market,” Lynch said in the earnings statement.
But the company’s public statements have been short on details about how exactly it will continue to increase that market share. Meanwhile, it still has 775 costly brick-and-mortar stores (as of October 2009) to maintain nationwide. As a Standard & Poor's analyst told The Wall Street Journal, “closing stores would make sense,” especially if digital sales keep growing. Barnes & Noble is smart to throw resources at digital distribution, and its Nook certainly has Amazon’s attention. But its 12-month-old e-bookstore and 8-month-old Nook may have come too late to the game.