FINANCE

Barnes & Noble surprises in Q4

BY Marianne Wilson

Ongoing cost reductions helped the nation's largest bookstore retailer narrow its loss in its fourth quarter even as its sales continued to slide.

Barnes & Noble posted a net loss of $13.4 million, or $0.19 per share, for the quarter, compared to a loss of $30.6 million, or $0.42 per share, in the prior year. For the quarter, the company's retail division generated an operating loss of $15.9 million, while Nook incurred an operating loss of $7.9 million, for a total operating loss of $23.8 million.

Total sales fell 6.3% to $821 million for the quarter, ended April 29. Same-store sales declined 6.3%. Online sales increased 2.9%.

For the full year, Barnes & Noble reported sales of $3.9 billion, down 6.5% over the previous year. Comparable store sales declined 6.3% for the year. Online sales increased 3.7%.

"While fiscal 2017 proved to be a challenging year for the company, we reduced costs by $137 million, enabling us to sustain our profitability level," said Demos Parneros, CEO, Barnes & Noble, Inc. "In fiscal 2018, we are focusing on ways to improve the business and reignite sales through an aggressive test and learn process and companywide simplification process that will take out costs."

Neil Saunders, managing director of GlobalData Retail, noted that helpful as Barnes & Noble's cost reductions, they do not hold the key to a sustainable future.

"Indeed, we would argue that they (cost reductions) are simply a necessity of a business that is still losing customers and their spend," Saunders said. To be successful, B&N must, at the very least, stabilize its top line."

Saunders added that Barnes & Noble should focus more on its online operation, and on making changes to its stores.

"In our view, B&N is simply not an online destination for many shoppers buying books and associated items — something that the company needs to correct," he said.

Barnes & Noble operated 633 stores at the end of the quarter. It ended the fiscal year with $64.9 million of debt under its $750 million credit facility. For fiscal year 2018, the company expects comparable bookstore sales to decline in the low single digits and full year consolidated EBITDA to be approximately $180 million.

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FINANCE

Analyst: Nook division is ’festering sore’ for Barnes & Noble

While the pace of decline at B&N has eased, the company remains firmly in decline with sales down across the board. The saving grace is that a firm grip on costs, which were slashed by $137 million over the year, allowed the group to reduce losses for the quarter, and to post a $22 million net profit for the full fiscal.

Helpful as they are, cost reductions do not hold the key to a sustainable future for B&N. Indeed, we would argue that they are simply a necessity of a business that is still losing customers and their spend. To be successful, B&N must, at the very least, stabilize its top line.

This challenge falls to new CEO Demos Parneros, who took up the role in April after serving as operations director for around half a year. In our view, this change in management could be a good thing for B&N, if it injects some fresh thinking into the business.

The start point for Parneros should be the Nook division. In our opinion, this has been a festering sore for too long and, despite severe cost cutting, it still made a loss of $7.9 million this quarter. We see very little future in this area: overall e-book growth is waning, and B&N's weak position in the segment means it will suffer more than most.

We have noted that B&N is moving the Nook section in some stores from its prominent front-of-shop location to a more obscure position near the customer service area. In our view, this is a sensible relocation and, perhaps, one that finally signals the beginning of the end of Nook.

Rather than toying around with Nook, B&N should focus more squarely on its online operation. This part of the business is in desperate need of attention, as is evidenced by the 2.9% growth rate for the quarter. This is an unsatisfactory outcome and shows that the small investments in digital made over the past year are not paying dividends. In our view, B&N is simply not an online destination for many shoppers buying books and associated items – something that the company needs to correct.

Away from online, changes also need to be made to stores. Parneros appears to believe in investing in shops and wants to keep most of the current fleet open. That said, we do not preclude a handful of closures, particularly since around 500 leases will come up for renewal over the next five years. From a financial standpoint, this affords the group the flexibility to re-engineer the business should circumstances require it.

New smaller formats, different configurations, and larger cafe spaces may all help on the store front. However, we are reserving judgment as to how effective these shifts may be. Essentially, we see many of the current changes as gentle transformations rather than bold initiatives to revive the fortunes of B&N.

The good news for B&N is that it has some breathing space thanks to its cost disciplines. It also has a solid base of loyal shoppers through its membership and loyalty scheme. These are insufficient to guarantee the long-term future of the firm, but they provide a solid foundation on which the company can build — if it chooses to do so.

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J.Crew clinched lenders’ consent to amend loan

BY Deena M. Amato-McCoy

J. Crew just bought itself some more time with its lenders.

Lenders holding approximately 88% of the outstanding principal amount of loans under J. Crew’s term loan agreement have approved a term amendment. The amendment, initially proposed in mid-June, was offering to exchange its $566.6 million of outstanding pay-in-kind notes due 2019. The notes were issued by Chinos Intermediate Holdings, an indirect parent to J.Crew.

“These transactions are strategically important to the overall effort in po-sitioning the company for long-term success,” the company said. “Ad-dressing the nearest-term maturity removes an overhang in a challenging market environment and provides the company a clear and more confi-dent path to execute its business plan.”

The decision comes on the heels of winning the support of more than 50% of its term loan holders to trim its $2 billion debt load and end intellectual property litigation. If J.Crew’s lenders failed to consent to the plan, the retailer would have found itself on the fast-track toward a potential bankruptcy, according to CNBC.

J.Crew continues to fight in hopes of turning its business around, despite the obstacles in its way. The company posted dismal first quarter earnings, which revealed its 11th consecutive quarter of same-store sales declines. Total sales fell 6.3% to $532 million in the quarter, ended April 29. Total same-store sales fell 9%.

In the wake of these declines, CEO and chairman Mickey Drexler announced he would be stepping down as chief executive after 14 years in the role. Drexler, who will remain as chairman, will be succeeded by West Elm CEO Jim Brett. Earlier in the year, the retailer announced that its longtime creative director and muse, Jenna Lyons, was leaving.

Despite the company’s challenges, Drexler expressed optimism about the chain's efforts to improve its business. “We have a clear vision and action plan in place to meet our customers' needs — wherever and however they choose to shop," he said.

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