BN.com Y/Y quarterly losses widen on increased sales

[Doug_Pardee Distinguished Bibliophile]

Barnes & Noble's quarterly 8K filing for May, June, and July shows that the BN.com arm (online book sales, NOOK, and e-books) had a 37% increase in sales over the same period in the previous year, but its EBITDA losses widened by 25%.

A significantly improved gross margin (up from 3.7% a year ago to 21.0% this year) helped, but sales and administrative expenses almost doubled over the year.

BN.com figures for fiscal 1Q2012 (US$ million, rounded):

Sales	198
Gross Profit	42
Sales & Administrative Expenses	100
EBITDA Loss	58

Quarterly EBITDA losses at BN.com have been increasing over the past two years (US$ millions) — the first NOOK model was introduced in 4Q2010:

2Q2010	13.7
3Q2010	31.5
4Q2010	29.5
1Q2011	46.7
2Q2011	50.2
3Q2011	50.5
4Q2011	57.2
1Q2011	58.3

In the official press release, B&N CEO William Lynch indicated that B&N expects this trend to reverse within this fiscal year: "in fiscal 2012, we expect to see leverage as our digital sales growth is projected to exceed the growth of investment spend."

The entire Barnes & Noble operation, including bookstores and college bookstores, lost $57MM. So absent BN.com's losses, B&N would've been just above break-even this past quarter.

[Doug_Pardee Distinguished Bibliophile]

It's becoming a well-worn refrain...

Barnes & Noble's quarterly 8K filing for August, September, and October shows that the BN.com arm (online book sales, NOOK, and e-books) had a 17% increase in sales over the same period in the previous year, but its EBITDA losses widened by 17%. The B&N press release says that the widening losses were "driven by planned product markdowns on the recently announced NOOK price adjustments, as well as higher advertising production costs."

Gross margin slipped from the previous quarter, down from 21% to 15%, but was still up significantly from the 6.3% of the prior year. Sales and administrative expenses were cut from last quarter's high of $100MM to $90MM, but are still almost half again the previous year's expenses of $62MM.

BN.com figures for fiscal 2Q2012 (US$ million, rounded):

Sales	206
Gross Profit	31
Sales & Administrative Expenses	90
EBITDA Loss	59

Quarterly EBITDA losses at BN.com have been increasing over the past two years (US$ millions) — the first NOOK model was introduced in 4Q2010:

2Q2010	13.7
3Q2010	31.5
4Q2010	29.5
1Q2011	46.7
2Q2011	50.2
3Q2011	50.5
4Q2011	57.2
1Q2011	58.3
2Q2011	58.9

Whereas last quarter CEO William Lynch projected a turn-around in the fortunes of BN.com by the end of this fiscal year, this quarter shows a different strategy: "[the company] plans to invest more heavily in customer acquisition activities to fuel NOOK digital growth. These investments primarily include promotional activity and advertising for NOOK products, as well as technology costs related to developing other opportunities." [DP: I wouldn't be surprised if this change of strategy was related to the $204MM investment by Liberty Media.]

The entire Barnes & Noble operation, including bookstores and college bookstores, lost less than $7MM for the quarter, which is chicken-feed on total sales of almost $2B. So absent BN.com's losses, B&N would've had a profit of over $52MM this past quarter.

[Nom-de-Nook]

Growing pains hurt but they won't kill you.

Only time will tell if this is growing pains or something more serious (like an inability to effectively execute a digital strategy)

[Doug_Pardee Distinguished Bibliophile]

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Nom-de-Nook wrote:

Growing pains hurt but they won't kill you.

Only time will tell if this is growing pains or something more serious (like an inability to effectively execute a digital strategy)

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Unfortunately, time has already told. B&N has not found a way to make BN.com profitable, or even to reduce its losses. BN.com started selling books online shortly after Amazon did. Amazon got rich doing it, BN.com lost money. Last quarter B&N said that they were going to be reducing the losses at BN.com, but this quarter the losses aren't reduced, they're the worst ever. Now B&N has decided to stop worrying about the losses and go full-speed with the Digital Initiative.

The Digital Initiative is a good one, IMO, but B&N must do some serious house-cleaning at BN.com. These bozos redesign the web site every few months, for no reason at all, and break it every single time. They come up with abortive concepts like MyNook. They've lost who knows how many million of dollars in sales through the inability to sell books and e-books at Christmastime. They release firmware updates that break some NOOK features, and most of the time they just leave the features broken. A year ago they broke Customer Service, and it's still broken.

And the biggest sin: BN.com manages to lose money at a high rate — currently spending $1.29 to make $1.00 in sales. Excuses about "we're spending money on developing the next NOOK models" or "Amazon is putting pricing pressure on us" are totally lame. Those things are always going to be happening. BN.com needs to learn to be profitable in a world in which they're always developing new NOOK models and Amazon is always keeping the heat on.

There's no reason that BN.com shouldn't already be profitable, especially with the Agency Model assuring that they get a 30% gross margin on most of the e-books they sell. Instead, the more BN.com sells, the more money they lose. Every quarter: the more they sell, the more money they lose. So far, the bookstores have been propping them up, but with declining sales in bookstores and increasing losses at BN.com, that's not a long-term solution. In that long term, there are only four ways out of that mess:

1. Fix BN.com.
2. Quit selling so much at BN.com.
3. Find something more profitable than bookstores to underwrite BN.com's losses.
4. Run out of money.

I suggest that choice #1 is the best solution.

[ProfReader]

I can't understand why they keep redesigning their website over and over instead of concentrating on making it just work properly. The continued incompetence almost seems deleberate.

[gstone]

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Doug_Pardee wrote:

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Nom-de-Nook wrote:

Growing pains hurt but they won't kill you.

Only time will tell if this is growing pains or something more serious (like an inability to effectively execute a digital strategy)

---

..... BN.com started selling books online shortly after Amazon did. Amazon got rich doing it, BN.com lost money. ...... 

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"In the begining" Amazon's pricing for the Kindle was so high it didn't matter if they sold any ebooks. I seriously doubt Amazon got rich by selling ebooks and or kindles.

Amazon went online in 1995 but didn't report a profit until the 4th quarter of 2005.

Profit and Loss is an accounting concept that doesn't necessarily have anything to do with how well a company is doing at any point in time. If a company makes a substantial investment that is to be depreciated it may be a long time before that company reports a profit on paper. 

[AlanNJ Inspired Bibliophile]

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ProfReader wrote:

I can't understand why they keep redesigning their website over and over instead of concentrating on making it just work properly. The continued incompetence almost seems deleberate.

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I still go to Amazon to look for books I've purchased at B&N in order to get Amazon recommendations.  B&N recommendations seem to be based on Free Friday books that I've downloaded just because they are free.  That is quite honestly absurd.

If I didn't like the Simple Touch so much I would consider just getting a Kindle Touch (which I don't think I'd like as much as the ST) and being done with it.  

[Doug_Pardee Distinguished Bibliophile]

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gstone wrote:

Profit and Loss is an accounting concept that doesn't necessarily have anything to do with how well a company is doing at any point in time. If a company makes a substantial investment that is to be depreciated it may be a long time before that company reports a profit on paper. 

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I highly recommend that anyone who is interested go look at the B&N 8-K filing. It's a public record, available for free. Make up your own mind; I'm not saying you have to agree with my interpretation.

The numbers I'm looking at are EBITDA cash flow — that's all that B&N provides for BN.com, which is more than Amazon provides for Amazon Digital Services — so the depreciated investments don't come into play.

Here are some BN.com-related quotes and extracts from the 2Q2012 8-K:

BN.com sales increased 17% over the prior year, from $177 million to $206 million. Comparable sales increased 38%, on top of a 59% increase a year ago. This increase was driven by continued growth of digital content sales and purchases of award winning NOOK™ devices. BN.com comparable sales reflect the actual selling price for eBooks sold under the agency model rather than solely the commission received.

 ...

BN.com EBITDA losses increased from $50.2 million to $58.9 million, driven by planned product markdowns on the recently announced NOOK price adjustments, as well as higher advertising production costs

 ...

The consolidated NOOK business across all of the company’s segments, including sales of digital content, device hardware and related accessories, increased 85% in the second quarter to $220 million, on a comparable sales basis.

  ...

The company expects full year EBITDA to be at the lower end of the previously issued range of $210 million to $250 million. Although the company has seen and continues to expect increases in retail earnings from plan, it plans to invest more heavily in customer acquisition activities to fuel NOOK digital growth. These investments primarily include promotional activity and advertising for NOOK products, as well as technology costs related to developing other opportunities.

 ...

 [For the 13 weeks ended October 29, 2011; in thousands of dollars]

BN.com Sales	205,922
BN.com Gross Profit	31,007
BN.com Selling and Administrative Expenses	89,896
BN.com EBITDA	(58,889)

BN.com Percentage of sales:

Gross Margin	15.1 %
Selling and Administrative Expenses	43.7 %

Here's an historical look at BN.com Gross Margin and Selling and Administrative expenses versus Sales, as reported by B&N:

Qtr	Gross Margin	S&A : Sales
3Q2010	7.5 %	22.6 %
4Q2010	9.1 %	30.1 %
1Q2011	3.7 %	36.0 %
2Q2011	6.4 %	34.8 %
3Q2011	9.5 %	25.3 %
4Q2011	13.2 %	39.5 %
1Q2012	21.0 %	50.4 %
2Q2012	15.1 %	43.7 %

BN.com's shown a significant improvement in gross margin, but the Sales and Administrative expenses continue to run at about 3x the gross margin. Getting a positive cash flow with S&A expenses running 40-50% is pretty much impossible.

[KingAl]

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AlanNJ wrote:

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ProfReader wrote:

I can't understand why they keep redesigning their website over and over instead of concentrating on making it just work properly. The continued incompetence almost seems deleberate.

---

I still go to Amazon to look for books I've purchased at B&N in order to get Amazon recommendations.  B&N recommendations seem to be based on Free Friday books that I've downloaded just because they are free.  That is quite honestly absurd.

If I didn't like the Simple Touch so much I would consider just getting a Kindle Touch (which I don't think I'd like as much as the ST) and being done with it. 

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Freebies also influence your recommendations at Amazon, so you probably wouldn't be any better off.

[AlanNJ Inspired Bibliophile]

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KingAl wrote:

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AlanNJ wrote:

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ProfReader wrote:

I can't understand why they keep redesigning their website over and over instead of concentrating on making it just work properly. The continued incompetence almost seems deleberate.

---

I still go to Amazon to look for books I've purchased at B&N in order to get Amazon recommendations.  B&N recommendations seem to be based on Free Friday books that I've downloaded just because they are free.  That is quite honestly absurd.

If I didn't like the Simple Touch so much I would consider just getting a Kindle Touch (which I don't think I'd like as much as the ST) and being done with it. 

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Freebies also influence your recommendations at Amazon, so you probably wouldn't be any better off.

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Do they?  I have no idea since I don't have a Kindle.  Of course, all I have to do is look at something on Amazon and I get a list of more of that item the next time I log on.  It's tedious.

[KingAl]

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AlanNJ wrote:

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Do they?  I have no idea since I don't have a Kindle.  Of course, all I have to do is look at something on Amazon and I get a list of more of that item the next time I log on.  It's tedious.

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That's why I hate it when a book I click on turns out to be a genre I have no interest in (e.g. romance.) I have to look at a bunch of of other books to get Amazon to stop recommending romance books.

[RHWright]

At least on Amazon you can adjust the recommendations, including telling it to ignore certain titles when making them. I don't know if this feature is unique enough that B&N doing something similar would violate somebody's patent, but I really wish they would (if they could).

[Doug_Pardee Distinguished Bibliophile]

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KingAl wrote:

That's why I hate it when a book I click on turns out to be a genre I have no interest in (e.g. romance.) I have to look at a bunch of of other books to get Amazon to stop recommending romance books.

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You can control that, to a fair extent. If you don't want it at all, go to "Your Browsing History" and click "Turn off your browsing history", which takes you to the real "turn off browsing history" button. For individual items, click the appropriate "delete this item" link. Or if you want to delete them all but start over with a new browsing history, there's a "Delete all items" button.

[keriflur]

I don't see the value of the recommendation engine regardless of whether it's Amazon's or B&N's.  If I want a recommendation I go to real people who have a passion for the subject, I don't take the advice of an autobot.

[AlanNJ Inspired Bibliophile]

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keriflur wrote:

I don't see the value of the recommendation engine regardless of whether it's Amazon's or B&N's.  If I want a recommendation I go to real people who have a passion for the subject, I don't take the advice of an autobot.

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Hmmm.... Maybe the people you're asking got their recommendations from an autobot...

[Nom-de-Nook]

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AlanNJ wrote:

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keriflur wrote:

I don't see the value of the recommendation engine regardless of whether it's Amazon's or B&N's.  If I want a recommendation I go to real people who have a passion for the subject, I don't take the advice of an autobot.

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Hmmm.... Maybe the people you're asking got their recommendations from an autobot...

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I might take the recommendation of an autobot but never a decepticon.

[keriflur]

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AlanNJ wrote:

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keriflur wrote:

I don't see the value of the recommendation engine regardless of whether it's Amazon's or B&N's.  If I want a recommendation I go to real people who have a passion for the subject, I don't take the advice of an autobot.

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Hmmm.... Maybe the people you're asking got their recommendations from an autobot...

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Nope - I get my book recommendations from book bloggers and authors who've actually read the books. 

Now if there was an autobot that was reading and forming intelligent opinions on the books, and could articulate those well, then I'd take its opinion.

[Doug_Pardee Distinguished Bibliophile]

It's getting worse...

Barnes & Noble's quarterly 8K filing for November, December, and January (fiscal 3Q2012) shows that the BN.com arm (online book sales, NOOK, and e-books) had a 32% increase in sales over the same period in the previous year, but its EBITDA losses widened by over 85%(!). The B&N press release says that the widening losses were "driven by planned product markdowns on the recently announced NOOK price adjustments, as well as higher advertising production costs."

Gross margin once again slipped from the previous quarter, down from 15% to 11%, but was still up from the 9.5% of the prior year. Sales and administrative expenses took a huge jump to $143MM from last quarter's $90MM, and are more than half again the previous year's expenses of $81MM.

BN.com figures for fiscal 3Q2012 (US$ million, rounded):

Sales	420
Gross Profit	50
Sales & Administrative Expenses	143
EBITDA Loss	94

Quarterly EBITDA losses at BN.com have been increasing over the past two years (US$ millions) — the first NOOK model was introduced in 4Q2010:

2Q2010	13.7
3Q2010	31.5
4Q2010	29.5
1Q2011	46.7
2Q2011	50.2
3Q2011	50.5
4Q2011	57.2
1Q2012	58.3
2Q2012	58.9
3Q2012	93.7

When the 1Q2012 figures were released, CEO William Lynch projected a turn-around in the fortunes of BN.com by the end of this fiscal year, but when the 2Q2012 figures were released, Lynch committed to spending more on NOOK growth.

The entire Barnes & Noble operation, including bookstores and college bookstores, showed a profit of $52MM for the quarter on total sales of $2.4B. So absent BN.com's losses, B&N would've had almost three times the profit they reported this past quarter.

For the first time, B&N is reporting some consolidated NOOK business figures. They are a bit confusing because some of the numbers are comparables in dollars and some are units.

• Overall NOOK business, comparable: $542MM, up 38% Y/Y
• NOOK devices, units: up 64% Y/Y
• Digital content, comparable $: up 85% Y/Y

As with Amazon's reporting, there's just enough info missing to keep from piecing it together.

The press release also notes, "according to some of the largest U.S. publishers, we maintained or slightly gained share in the eBook market during the third quarter."