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B&N CEO Lynch: “We’re not going to continue doing what we’re doing”

In a contentious investor call Thursday morning, analysts questioned Barnes & Noble’s entire strategy following its poor third-quarter earnings report. With Nook revenues down, Barnes & Noble (s BKS) CEO William Lynch sought to assure investors that both Nook and physical B&N bookstores will survive — even as a committee evaluates B&N founder and chairman Len Riggio’s proposal to buy the chain’s 689 retail stores and take them private.

As today’s earnings report revealed, physical stores are doing better than the digital business, with comparable store sales down just 2.2 percent as Nook revenues plunged by 26 percent.

The conversation repeatedly became heated, with one analyst asking why Riggio continues to serve as the company’s chairman even as he tries to buy its stores. The analyst accused Barnes & Noble of “selling its working business to the chairman while keeping its shareholders beholden to the business that isn’t working.”

When Lynch noted that Riggio also owns shares in Nook Media and said he “isn’t trying to do anything that isn’t in the business of all shareholders,” the analyst pushed back — asking again why Barnes & Noble is “considering selling the business that is doing better to Riggio” while leaving shareholders with Nook Media, which has “no business model.”

At that point, B&N’s retail CEO Mitchell Klipper B&N general counsel Gene DeFelice snapped back, “The loaded question you’re posing really isn’t appropriate for us to discuss on this call.”

B&N retail CEO Mitchell Klipper isn’t normally a participant in the company’s earnings calls, but he was trotted out Thursday to assuage concerns about Barnes & Noble closing more physical stores over the next decade. Klipper had recently told the Wall Street Journal that the chain will have “450 to 500 stores” 10 years from now, compared to 689 today.

Klipper described the article as a “mischaracterization.” Ninety-five percent of our stores are profitable and we have no plans to close any of those…let’s make no mistake about it, folks.” He also spoke of “new store formats” and said B&N plans to open three to five new stores in fiscal year 2014.

“We’re not going to continue doing what we’re doing”

Barnes & Noble released two new Nook tablets last September. Lynch described those tablets as reading-focused and said that as the market shifted to multi-function tablets,” customers simply weren’t looking for B&N’s new products. “We did a lot of work with the consumer post-holiday to find out what happened,” he said. “What we’re seeing is, the larger technology brands have more resonance in that multi-function tablet market than we do. We obviously have to adjust and change … we’re not going to continue doing what we’re doing.” He said there are “announcements forthcoming.”

One analyst asked Lynch if there was anything the company would have done differently when it launched its new tablets. “You look at the numbers and there are absolutely things we could have done differently,” Lynch said. “I’m not going to go into what those are.” He said Barnes & Noble leads in “delivering reading experiences,” citing its apps’ high ratings in the iOS (s AAPL), Android (s GOOG) and Windows 8 (s MSFT) stores. But “as the market goes to more multi-function tablets, we have to look at how we offer functionality differently and that’s what we’re focused on now.”

“You poured a huge amount of money into a display that really seems not to matter a whole heck of a lot,” one analyst said.

More than once, Lynch mentioned Barnes & Noble’s strength in digital content as such sales were up by 6.8 percent for the quarter. When an analyst asked how B&N defines that content, Lynch explained it comes from “hundreds of thousands of publisher relationships. Our ability to resell their copyrighted content.” In other words, it is the ebooks, digital magazines and so on that Barnes & Noble sells, but that other retailers — like Amazon (s AMZN) and Apple (s AAPL) — sell as well.

“Umm … is that proprietary?” the analyst responded. “Can somebody [else] turn around and put it on iTunes tomorrow?”

“Each one of those contracts has its own nuance,” Lynch responded. “This isn’t flip the switch, get them done. We were the biggest customers for those publishers on the physical side. There is no flip-switching. It is a strategic asset that is valuable and hard to replicate. And expensive.”

This story was corrected at 1 p.m. to fix Mr. Klipper’s name. He is Mitchell, not Marshall.

7 Responses to “B&N CEO Lynch: “We’re not going to continue doing what we’re doing””

  1. Publishing a book on Barnes and Noble is a good deal more difficult than publishing on Amazon. When they make their access as easy and as direct as Amazon, along with a revenue link directly to a bank account and not through Paypal, then they will get more digital content.

    I simply gave up publishing on BN for three reasons. I don’t like Paypal’s over-control and blocking access to my funds, I can’t upload and make changes to my books directly to BN and less than five percent of my book revenue was coming from BN. They have a lot to fix if they want to be viable competition with Amazon.

  2. Wall street analysts are suppose to ask these questions when they get an earning report as dire as this. Of course, nothing useful ever comes out of these meetings, just a lot of hot air…still interesting though.

    What matters is what they do next and if Riggio does get what his wants. Taking B&N private could free them up from constant Wall Street scrutiny or they can simply run it down to the ground even faster. Whatever happens, there wont be a dull moment for B&N for the next 5-yrs, if they figure out how to stop throwing money into things they don’t understand.

    Nook devices generally has received good reviews but they still haven’t figure out why they can’t expand beyond their current customer base (cough, going international isn’t the answer either). That is a lot more troubling because these execs don’t have deep pockets to keep throwing money away for a learning experience.

  3. B and N does not need to do research to find out that its digital books are more expensive and it has lesser titles than Amazon. This is not rocket science. Solve that problem and people will give you a chance. Without that ….. Good luck

  4. Taylor S.

    Hi Laura,
    As always, great article on Barnes and Noble. In the finance, tech and publishing press, there seem to be only a few journalists who report rather than sensationalize the news and events surrounding BN.

    Just a minor item — Mr. Klipper’s name is Mitchell, not Marshall.

    I look forward to your ongoing coverage of BN as they continue to surprise their detractors and delight reading junkies such as myself.

    Taylor S.