Barnes & Noble Inc. cut its Nook sales forecast and shocked investors by saying it may spin off its digital business, sending its shares plunging nearly 20 per cent.
The No. 1 U.S. bookstore chain had been banking on the Nook and e-books for growth, so news on Thursday that holiday sales of the basic touchscreen e-reader were disappointing raised investors' fears that Barnes & Noble was struggling to keep up with Amazon.com Inc's market-leading Kindle.
Even if Barnes & Noble does split off its Nook business, the consequences are not likely to be noticeable to every-day customers.
A source familiar with the company's plans said the retailer would remain intimately involved in developing and promoting the Nook, tapping its links with publishers and fleet of 700 stores, many of which have new Nook boutiques.
The retailer has poured tens of millions of dollars into the Nook – the first version hit the market in 2009, two years after Kindle – and Barnes & Noble gave a profit forecast well short of Wall Street expectations.
Barnes & Noble also lowered the sales forecast for the fiscal year ending in July 2012 for the Nook business, which now accounts for nearly one-quarter of sales, to $1.5-billion from $1.8-billion, in part because of disappointing numbers for its $99 Nook Simple Touch e-reader.
"Demand for NOOK products appears to be decelerating faster than original expectations," Barclays Capital analyst Alan Rifkin said in a research note.
Still, the bookseller said it sold 70 per cent more Nook devices this holiday season, while e-book sales doubled, and chief executive William Lynch told Reuters that investors have not given the company enough credit for that growth, one reason for considering a spin-off.
"Our (market) share remains very strong," Lynch said. "We certainly think this is not being properly valued."
Barnes & Noble put itself up for sale in 2010 but attracted only one firm offer – a bid for $17 per share, or $1-billion, last May from John Malone's Liberty Media Corp, attracted by Nook's growth.
Liberty ultimately decided to invest $204-million rather than buy the company outright. Liberty has preferred shares it can convert into a 16.6 per cent stake in Barnes & Noble at a strike price of $17. Liberty Media's CEO Gregory Maffei and another Liberty executive sit on Barnes & Noble's board.
Barnes & Noble shares plummeted 19.2 per cent, or $2.61, to $10.94 in afternoon trading. That gave the chain a market value of about $655-million, or less than 1 per cent of Amazon's.
PRICE WAR
The war with Amazon is ferocious. Amazon last week said it sold 1 million Kindle devices per week in December, including the Fire tablet and a touchscreen device.
Other Nook devices fared better than the Simple Touch, including its Nook Tablet. Forrester Research estimates that Amazon sold about 5 million Kindle Fire tablets during the holidays, compared with sales of some 1.5 million Nooks.
The company is second only to Amazon in the e-books market and claims to have as much as 27 per cent of that market.
But when Barnes & Noble introduced the Nook tablet in November, it also cut the prices on other versions of the device, including the Simple Touch, in response to aggressive pricing by Amazon, which is known for uncutting rivals on price.
Unlike Amazon, Barnes & Noble's other businesses do not generate enough money to subsidize its e-reader segment. Last month, Barnes & Noble posted an unexpected quarterly loss and last year, it suspended its dividend to finance the Nook.
Despite the liquidation in September of its one-time archrival, Borders Group, and rising Nook sales, Barnes & Noble now expects sales of $7-billion to $7.2-billion this fiscal year, down from its initial forecast of $7.4-billion, suggesting an accelerating decline in book sales.
Still, Barnes & Noble expects Borders' disappearance to boost sales $210-million to $250-million.
Morningstar analyst Peter Wahlstrom said the company could be banking on being "the last one standing" among large bookstore chains.
Indeed, sales at Barnes & Noble stores open at least 15 months, excluding Nook and e-books, rose 4.5 per cent during the holidays, an improvement over recent quarters.
Barnes & Noble now expects earnings before interest, tax, depreciation and amortization of $150-million to $180-million for the fiscal year ending in July, down from its forecast last month of $210-million to $250-million.
The retailer forecast a loss of $1.40 to $1.10 per share in the fiscal year, much worse than the average Wall Street forecast of a loss of 63 cents.
In addition to its bookstores, Barnes & Noble operates a chain of textbook stores on college campuses.