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

Barnes & Noble store

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 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, Android and Windows 8 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 and Apple — 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.

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