Digital Strategy Puts B&N Ahead of Borders
A comparison of the quarterly financial reports released today by leading U.S. book retailers Barnes & Noble and Borders shows that Barnes & Noble’s digital strategy appears to be paying dividends. Highlights from each chain’s quarterly performance and general analysis follow.
B&N Buoyed by Internet, College Bookstores
Barnes & Noble, Inc. reported a positive impact from its yearlong focus on online retailing and its August 2009 purchase of privately-held Barnes & Noble College Booksellers, Inc. During its Q2 fiscal 2010 (ended October 31, 2009), Barnes & Noble reported total sales of $1.16 billion, a 4% increase from $1.1 billion during the same 13-week period in 2008 (Barnes & Noble shifted its fiscal year calendar following the College Booksellers purchase).
Aiding this increase were a 9% jump in online sales, which rose from roughly $110 million to $120 million, as well as $65 million in sales from the college division. Not all was rosy, as Barnes & Noble also reported a $23.95 million net loss, a 30% increase from its $18.42 million net loss a year prior. In addition, comparable store sales fell 3.2% and Barnes & Noble store sales declined 2%, from roughly $970 million to $950 million.
Barnes & Noble’s quarterly comparable store sales performance slightly exceeded the 1-3% decline it forecast last month. However, as evidenced by the aforementioned e-commerce sales rise, Barnes & Noble has been actively expanding its digital strategy this year. Most significantly, Barnes & Noble is taking orders for its new wireless e-reader called Nook.
Nook, based on the 1.5 version of the Android open-source development platform, allows customers 3G wireless access to AT&T’s mobile broadband network and Barnes & Noble in-store WiFi at no additional cost. In addition, Nook features a color touchscreen with EInk display, digital book lending and bookmarking capabilities, and transfer of documents between Nook and other digital devices.
According to Barnes & Noble, Nook’s wireless capabilities enables fast, seamless download of e-books and other digital publications.
Other notable activities in this area have included acquiring e-book retailer Fictionwise, opening a new dedicated online kids’ store, launching a new blog that promotes interaction between customers and store employees, and opening a new e-bookstore with an updated proprietary Palm OS-based eReader e-book device.
During Q3 fiscal 2010, Barnes & Noble expects comparable store sales to decline 1-3%, with a full-year decline of 2-4%. In addition, due to the need to increase Nook production costs to meet its higher-than-expected demand and expectations of challenged holiday customer traffic, Barnes & Noble has lowered its full-year earnings per share forecast from a range of $0.59 to $0.89 to a range of $0.33 to $0.63.
As of October 31, 2009, Barnes & Noble operated 725 Barnes & Noble stores, 636 Barnes & Noble College Bookstores and 50 B. Dalton stores. During the second quarter, four Barnes & Noble stores were opened and three were closed.
Borders Continues Quarterly Struggles
Borders was less successful in its Q3 fiscal 2009 (also ended October 31, 2009) than Barnes & Noble was during its Q2 fiscal 2010. Total consolidated sales fell 12.7%, from $682.1 million to $595.5 million. Comparable store sales fell 12.1% at Borders stores and 7.2% at stores of its Waldenbooks subsidiary. Declines in multimedia sales accounted for 3.6 percentage points of the comparable store sales decline at Borders stores. This likely led to a quarterly $99.1 million reduction in inventory, of which $70.4 million represented multimedia inventory. Net loss was $39 million, a 69.8% reduction from a $136.4 million net loss a year earlier.
Borders has made some efforts to reach out to customers online via a blog aimed at science fiction fans, as well as through dedicated Facebook and Twitter social networking pages. However, Borders has also aggressively pursued the young reader demographic this year, running a summer 2009 reading promotion aimed at kids 12 and younger and expanding its in-store assortment of educational toys and games.
Shortly after the close of the quarter, Borders announced it will close 200 Waldenbooks stores in January 2010, eliminating about 1,500 positions, many of them part-time. Borders shuttered 112 Waldenbooks locations in fiscal 2008 and closed an average of 66 Waldenbooks stores a year between fiscal 2001 and 2007. Borders says the closings will reduce the number of stores with operating losses, reduce overall rent expense and lease-adjusted leverage, and generate cash flow through sales and working capital reductions.
Borders operates about 1,000 stores worldwide, most under the Borders and Waldenbooks banners.
General Analysis
Both Barnes & Noble and Borders are looking to online customer interactions and sales to niche audiences to boost their fiscal performance, but Barnes & Noble is currently doing a better job of it. While Barnes & Noble has hardly solved all its financial problems, impressive online sales growth and extra sales revenue from its new college bookstore subsidiary show that the retailer is at least on the right track. In addition, considering the early positive response to the new Nook device, Borders may want to consider updating the e-book partnership it has run with Sony since 2007.
Borders is focusing a lot of its growth efforts on readers ages 12 and under, while Barnes & Noble is focusing more on young readers in their teens and early 20s through its college bookstore purchase and foray into advanced handheld devices. So far, the slightly older youth demographic seems to be a superior growth market for the book retail vertical.