Barnes & Noble mulls spinning off Nook unit

on Friday, January 6, 2012

Barnes & Noble mulls spinning off Nook unit In an effort to increase profitability, Barnes & Noble said this week it would consider spinning off its Nook e-reader division.

Barnes & Noble is struggling to compete amid competition from digital booksellers such as Amazon. Fearing it could suffer the same fate as Borders, which closed all of its stores after filing for bankruptcy in 2011, Barnes & Noble chief executive William Lynch said on Thursday that though Nook sales jumped last year, the company is mulling a number of options as it considers future business cost reduction programs.

Barnes & Noble released the Nook only two years ago, and since has attained a relatively large slice of the e-book market. Still, while the Nook is one of the most popular e-readers and comprises approximately 30 percent of the segment, it is far behind Amazon's dominant Kindle e-reader. What's more, Apple's iPad has also quickly gained market share in the few years since it was released, placing additional pressure on Barnes & Noble.

For all its success with the Nook, Barnes & Noble has openly noted that the device is not yet profitable. Analysts contend the company likely invests between $200 and $250 million annually on the Nook's software and hardware. Shareholders have grown increasingly anxious about Barnes & Noble's long-term strategy with the device, especially as fears swirl that the company could go under.

However, analysts note that Barnes & Noble is better positioned for growth than Borders was, and the company has successfully overhauled spend management and indirect spend, in an effort to drive profitability. Moreover, it is continuing to revamp supply chain management as it endeavors to keep inventories relatively low, a component of its cost reduction initiatives.

The New York Times reports Barnes & Noble is still struggling to develop a streamlined purchasing services program. The company conceded that sales of its black-and-white Nook devices did not meet expectations, attributing the weak growth to its purchasing too many of the e-readers. Analysts asserted that by working with procurement consultants, Barnes & Noble could prevent such an occurrence in the future.

Nevertheless, Nook sales were particularly strong in the last few months of 2011, according to the company. In the nine-week period ending on December 31, sales of all the various iterations of the Nook jumped 70 percent compared to the same period in 2010. Digital content sales also surged, rising 113 percent. Barnes & Noble forecasts 2012 digital content sales to rise to $450 million.

Amazon, however, is the undisputed leader in digital sales, and shareholders are placing added pressure on Barnes & Noble to develop a strategy that will make the Nook profitable. Forrester Research senior analyst Sarah Rotman Epps asserted that the device is poised for growth, but that it is unclear whether Barnes & Noble has the money – or the patience of shareholders – to tap into it.

"The Nook business has been a growth business for Barnes & Noble," she said. "But there's no doubt that continued growth and international expansion will take sustained investment that Barnes & Noble shareholders will not have the patience for."

Lynch largely corroborated such an assertion, noting that Barnes & Noble is exploring a number of different scenarios in which it could expedite growth within the division. He said the company is looking toward international markets, and that it had not ruled out spinning off the Nook.

"We see substantial value in what we've built with our Nook business in only two years, and we believe it's the right time to investigate our options to unlock that value," Lynch said in a statement.


 

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