Barnes & Noble presented the most detailed look yet at how the growth in digital-related sales has impacted its business in releasing results for the year and fourth quarter ended April 28. The company reported that sales in the newly broken-out Nook business unit rose 34.3% in the year, to $933 million, while the division posted an EBITDA loss of $266 million compared to $209 million in fiscal 2011. In the retail segment, which now includes trade stores plus BN.com, sales slipped 1.5%, to $4.85 billion, but EBITDA rose 22.4%, to $317 million. Overall, sales in the year rose to $7.13 billion and the net loss was trimmed to $68.9 million from $73.9 million.
In the Nook segment, which consists of the company’s digital business (including digital eaders, digital content and accessories), comparable sales increased 1% for the fourth quarter while increasing 45% for the full year. Device sales declined during the fourth quarter due to higher third-party channel partner returns, lower selling volume and lower average selling prices, B&N said, noting that it took back Nook Simple Touch inventory following the holiday sales shortfall. Digital content sales increased 65% for the fourth quarter and 119% for the full year on a comparable basis, growing comparable digital content sales to $483 million for the full year. Digital content sales are defined as digital books, digital newsstand, and the apps business.
Retail sales were $1.1 billion for the quarter and $4.9 billion for the full year, increasing 0.5% for the quarter while decreasing 1.5% for the fiscal year. Comparable bookstore sales increased 4.5% for the quarter and 1.4% for the full year, as compared to the prior year periods. Comparable bookstore sales benefited from the liquidation of Borders’ bookstores during fiscal 2012, increased sales of Nook products, and a strong title lineup including The Hunger Games and Fifty Shades of Grey trilogies, B&N said. Core comparable bookstore sales, which exclude sales of Nook products, increased 6.9% for the quarter and 0.7% for the full year. BN.com sales continued to decline for the quarter as well as the fiscal year.
The College segment, which includes results from the Barnes & Noble College bookstores, had revenues of $228 million for the quarter and $1.7 billion for the full year, increasing 5.7% for the quarter and decreasing 1.9% for the year, as compared to the prior year. Fourth quarter sales were positively impacted by the recognition of textbook rental sales deferred from the third quarter. However, full year sales were lower as compared to a year ago, due to a shift from selling new and used textbooks to lower priced textbook rentals, B&N said. Comparable College store sales decreased 2.2% for the quarter and 0.3% for the full year, as compared to the prior year periods. College comparable store sales reflect the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period.
In an update on the creation of Newco, its joint venture with Microsoft that will include the Nook and college segments, B&N said that it “continues to be actively engaged in the formation of Newco and is in the process of implementing the work necessary to complete the separation and close the Microsoft transaction.” In a conference call, CEO William Lynch said he expects the deal to close late in the fiscal year second quarter or early third quarter.
During the call Lynch said he expects B&N to soon announce expansion into a few international markets. And while B&N opened no new trade stores
Houghton Mifflin Harcourt Publishing Co., the publisher of authors from Mark Twain to J.R.R. Tolkien, sought bankruptcy protection to eliminate more than $3 billion in debt.
The company, based in Boston, listed $2.68 billion in assets and $3.53 billion in debt in Chapter 11 documents filed today in U.S. Bankruptcy Court in Manhattan. More than 20 affiliates also entered bankruptcy, including Broderbund LLC and Classroom Connect Inc.
“The global financial crisis over the past several years has negatively affected” Houghton Mifflin’s financial performance, in a business that “depends largely on state and local funding” for the schoolbook market, said William Bayers, company general counsel, in court papers.
He cited “recession-driven decreases” and “purchase deferrals” by the states and a “lack of anticipated federal stimulus support” for “substantial revenue decline.”
The filing comes as traditional print-book publishing faces growing competition from e-books. Sales of adult paperbacks and hardcover books fell 18 percent from 2010 to 2011, according to the Association of American Publishers. Borders Group Inc., the second-largest U.S. bookstore chain, filed for bankruptcy in February 2011.
Among Houghton Mifflin’s largest unsecured creditors listed in court papers were Chicago-based R.R. Donnelley & Sons Co. (RRD) (RRD) and New York-based Williams Lea Inc., owed more than $20 million each in trade debt.
Houghton said May 11 it received support from more than 70 percent of its lenders to restructure its debt. The company has about $2.85 billion of loans maturing in the next two years, according to data compiled by Bloomberg.
The company, with about $1.29 billion in sales last year, said it plans to borrow as much as $500 million through Citigroup Inc. (C) (C) to complete the bankruptcy process, court papers show.
Under the proposed recovery plan, Houghton’s long-term bank loan and bond debt would convert to all of the equity in the reorganized company, according to a May 11 statement. Existing shareholders would receive warrants for 5 percent of the new stock if they voted in favor of the plan.
Houghton provides educational products and services to about 60 million students in 120 countries, according to its website. The company also prints and distributes electronic books owned by one of Amazon.com Inc. (AMZN) (AMZN)’s publishing arms, under an agreement announced in January.
The accord allows Amazon, the world’s largest Internet retailer, to market books to people who don’t visit its site and provides Houghton with a new source of revenue as sales decline at brick-and-mortar bookstores.
Moody’s Investors Service in May cut Houghton’s corporate credit grade to Ca, the second-lowest rating and reserved for borrowers that “offer very poor financial security.” In March, Moody’s said the company’s capital structure was “unsustainable without a significant rebound in earnings.”
Houghton’s origins date to 1832, according to the company. Among its authors are Ralph Waldo Emerson and Jonathan Safran Foer, and the company’s titles include the “Curious George” and “Lord of the Rings” books.
The case is In re Houghton Mifflin Harcourt Publishing Co, 12-bk-12171, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Phil Milford in Wilmington, Delaware, at email@example.com; Dawn McCarty in Wilmington, Delaware, at firstname.lastname@example.org.
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The New York Times
By DAVID STREITFELD
TULSA, Okla. — Plenty of people are upset at Amazon these days, but it took a small publishing company whose best-known volume is a toilet-training tome to give the mighty Internet store the boot. The Educational Development Corporation, saying it was fed up with Amazon’s scorched-earth tactics, announced at the end of February that it would remove all its titles from the retailer’s virtual shelves. That eliminated at a stroke $1.5 million in annual sales, a move that could be a significant hit to the 46-year-old EDC’s bottom line.
“Amazon is squeezing everyone out of business,” said Randall White, EDC’s chief executive. “I don’t like that. They’re a predator. We’re better off without them.”
[Related: What Apple’s Ebook Fiasco Means for Amazon and the Book Business] It is an unequal contest. EDC has 77 employees, no-frill offices on an industrial strip here and a stock-market valuation of $18 million — hardly a threat to Amazon, a Wall Street darling worth $86 billion. But Mr. White’s bold move to take his 1,800 children’s books away from the greatest retailing success of the Internet era is more evidence of the extraordinary tumult within the book world over one simple question: who gets to decide how much a book costs?
The Justice Department last week sued five major publishers and Apple on price-fixing charges, simultaneously settling with three of the houses. The publishers say they were not illegally colluding but simply taking advantage of a new device platform — Apple’s iPad — to sell their e-books in a different way, where they controlled the prices.
The publishers wanted to stop Amazon from using what one of them called “the wretched $9.99 price point,” according to court papers. Selling e-books so cheaply, they feared, would solidify Amazon’s robust grip on the business while simultaneously building a low-price mind-set among consumers that could prove ruinous to other bookstores and the publishers themselves.
EDC does not produce e-books, but saw exactly this happening with its physical inventory. Amazon was buying EDC’s books from a distributor and discounting them to the bone, just as it does with everything it sells. This might have been a boon for readers, but it was creating trouble with other retailers who carry the company’s titles, as well as with EDC’s network of independent sales agents, who market its books from their homes.
“They were becoming showrooms for Amazon,” Mr. White said. “We were shooting ourselves in the foot.” Amazon is generally reluctant to explain its business practices and declined to comment for this article. But its executives say it is shaking up an antiquated business model by eliminating middlemen and passing the savings on to consumers. Publishers that try to cling to the past, they have said, will die.
The retailer’s growing list of critics, however, argue that Amazon has $48 billion in revenue but hardly any profit, proof that its approach is opportunistic and unsustainable. When traditional publishers, booksellers and wholesalers are destroyed, these opponents say, Amazon will be left with a monopoly that will be detrimental to the larger health of the culture.
In recent months, the dispute over Amazon’s strategy of selling books below cost has boiled over from several directions. During the holiday season, Amazon encouraged customers to use physical stores as showrooms before ordering more cheaply online, a move that infuriated bookstores in particular.
Publishers and distributors say that Amazon, never exactly shy in negotiating terms, has been more assertive in its quest for ever-better deals. In February, Amazon demanded better margins from the
Independent Publishers Group, a Chicago distributor of dozens of small imprints. IPG balked, so Amazon removed nearly 5,000 of the company’s e-books from its site. “Amazon wants the price of books to be very, very low — lower than the publishing community can support,” said Curt Matthews, IPG’s chief executive. “Making a book is still a craft industry.
Books need to be edited, to be publicized. Someone needs to say this is good and this is not. If there is not enough money to support that whole chain, the system will break down.” Publishers have often been ambivalent about Amazon. On the one hand, it offers an extraordinarily efficient method of distributing their wares. Readers anywhere can easily order the most obscure volume and have it delivered the next day. With e-books, access is even easier, but publishers’ vulnerability is compounded; Amazon controls not just the method of distribution but the actual device the text is consumed on.
“Last year was the best in our 37 years, mainly due to the way Amazon was pushing the books,” said Bryce Milligan of Wings Press in San Antonio, an IPG client. “Then Amazon cut us off because they couldn’t get a better deal. Now our e-books sales are down 50 percent.” If publishers and wholesalers feel threatened, writers are caught in the middle — both pawns and prize. Ted McClelland, a writer in Chicago, had two IPG e-books dropped by Amazon. He just got a royalty statement on one of them, “Horseplayers: Life at the Track.” Half of his modest income on the book came from Kindle sales on Amazon. [Related: Sergey Brin: I’m Worried About the Internet]
“I don’t know whether Amazon is being greedy or IPG is being cheap, but I’m caught in the middle,” Mr. McClelland said. “What matters to me is getting my books back on Kindle.”
Here in Tulsa, EDC operates out of offices on the eastern outskirts in a less-than-glamorous district of warehouses and auto supply shops. Like IPG, it is primarily a distributor, selling picture books developed in England by Usborne Books to toy stores and bookshops in the United States. Its publishing line, Kane Miller, produces the popular “Everyone Poops” book and its sequels.
EDC’s so-called consultants — a direct sales force of about 7,000 women — sell to friends and acquaintances as well as their local schools. For a while the party plan was successful. Sales more than doubled from 2000 to 2004. In recent years, though, the consultants have found it rough going. They would pass around a picture book like “The Noisy Body Book” or “Guess How Much I Miss You,” talking it up, and then the customer would order it online. Sales fell about 20 percent.
Frustrated consultants began quitting. What happened in February to Christy Reed, a sales consultant in Pleasanton, Tex., was becoming all too routine. Her school district decided to order 16 copies of a science encyclopedia and a science dictionary but then completed the deal on Amazon. “I worked so hard to sell those books,” Mrs. Reed said. “I had to talk to so many different people. Then I lost the sale to a couple of clicks on the computer.” She acknowledged that the district saved a few dollars but added: “I’m here, in the neighborhood. I went to school here. My kids went to school here. Yes, they got the books for less. But my earnings go back into our community. Amazon’s do not.”
After Mr. White, EDC’s chief, heard about that episode, his exasperation with Amazon peaked. Several times in the past, he had grappled with the retailer. He tried to get it to lower its discount on his books three years ago, but a tentative deal did not stick, he said. He was outraged that the company did not collect sales tax, which had the effect of making its books even cheaper.
Two months ago, he asked his biggest wholesaler, Baker & Taylor, to stop selling all EDC books to Amazon. When Baker & Taylor refused, Mr. White canceled its account. Baker & Taylor declined repeated requests to comment about EDC. Of EDC’s $26 million in annual revenue, Baker & Taylor was responsible for about 6 percent, most of which was because of Amazon. Mr. White, a trim 70, said that when he made the decision to bail out, his blood pressure soared. But he’s also reveling in the excitement, just a little. He commissioned a drawing of EDC in the role of David taking on the giant Amazon. “I’m Type A,” he said. “I don’t mind a fight.”
Somewhat to Mr. White’s surprise, EDC is doing better without Amazon, at least for the moment. (Some of its books are still available on Amazon from third-party sellers.) Sales in March rose, in part because of new accounts like a toy store in Round Rock, Tex., that placed an initial order for 61 books. And colleagues in the business have been congratulating the publisher, or at least expressing their admiration for Mr. White’s guts. “I tell them, ‘You never had the chance to make 7,000 women happy in one day,’ ” he said.
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