As print book have sales declined, retail has shrank and readers have avoided the Nook, Barnes & Noble’s revenues have steadily — albeit slowly — declined. Despite this, the company plans to refocus on its retail business. (* indicates holiday quarter.)

Barnes & Noble’s holiday ad campaign this year shows people of all ages smiling as they flip through — and unwrap and giggle over — old-fashioned print books. One little girl reads Dr. Seuss’s “Horton Hears a Who!” as Sigourney Weaver tells viewers that “a book is a gift like no other.”

By contrast, only one woman in the ad — who doesn’t even face the camera — peeks at one of the retailer’s Nook e-readers.

The campaign marks a turn for the largest bookseller in the U.S., which in recent years has emphasized the digital reader in its holiday spots.

“With this commercial, we’re returning really to our roots as booksellers,” said Barnes & Noble Creative Director Glenn Kaplan in an interview.

And it’s more than just a new advertising focus. Amid overwhelming losses at Nook, the company announced in June that it intended to spin-off the segment. The company is effectively giving up its digital business to double down on retail. The move raises questions about how exactly a company can survive a retreat from digital in 2014.

A decade ago, that wasn’t a concern, of course. The Internet and Great Recession hadn’t yet overturned retail models. Barnes & Noble was a behemoth. Even today, when Amazon has destroyed Border’s and left Barnes & Noble as the vulnerable last player in book-only sales, Barnes & Noble retail does consistent (if modest) business. Its college campus stores have proven lucrative, and its stock has risen nearly 60 percent from a year ago.

But the Nook threatens all that: That segment accounted for less than 10 percent of Barnes & Noble’s total sales in all of the last four fiscal quarters. Yet in the company’s June annual report, Nook suffered an operating loss of more than $260 million, mostly because of unsold devices. That wiped out the retail segment’s operating profit of $228 million, and it’s why the company feels it has no choice but to go all in on brick-and-mortar retail — even as print books are in decline.

Barnes & Noble’s stock outperformed Amazon and the S&P 500 in 2014, but over the long-term, both have showed much more growth.

A Digital Business, Unrewarded

Barnes & Noble’s latest digital offering — a pair of co-branded tablets that Samsung produced — struck many as a surrender.

“This is Barnes & Noble trying to save face as it pulls out of its very public attempt to become a player in the tablet space,” said James McQuivey, a media analyst at Forrester Research. “They can’t afford to keep investing in hardware.”

Barnes & Noble started offering the well reviewed Nook back in 2009. They sold nicely, at first. In the past few years, as Barnes & Noble competed against Amazon’s book sales and Apple’s tablets, however, Nook has suffered.

Consumers have just seemed resistant to it. At the retailer’s flagship store in New York’s Union Square on the Sunday after Black Friday, the Nook counter was almost empty. The display Nooks didn’t seem to have any books loaded on them so would-be shoppers could not have investigated the reading experience.

One woman who bought a Nook said she was only buying it for her grandchildren “to play with” because it had been discounted to $129, from $179, and came with $200 credit at the Nook store. The company, in other words, was essentially paying customers to take buy the product, yet they still didn’t bother.

Hear From Three Nook Users

By 2012, that shrugging — and the losses it created — had become so problematic that CEO William Lynch had to resign. His successor, Michael Huseby, has been aggressive in making cuts at Nook. On just one day in November, for instance, the company let go of three vice presidents at Nook, including a member of the founding team, according to Publishers Weekly.

His affection for the retail core of Barnes & Noble may be justified: It had eked out operating profit in its retail stores for nine straight quarters until its most recent report, and analysts expect the company to report of $0.16 per share in the next year, up from a loss of $0.64 per share last year.

“They can keep a cash-flow-positive business alive,” said Mike Shatzkin, CEO of the Idea Logical Company, a consultancy for publishers.

Wall Street, at least, seems to agree. The stock is up nearly 60 percent since Huseby was officially named CEO on Jan. 8. By contrast, the S&P has risen only 13 percent in that time, while Amazon’s stock has fallen almost 25 percent as shareholders rebel against the lack of earnings.

Barnes & Noble’s stock has risen this year on the promise that new management would shed losses in the Nook division, but the stock has essentially returned to the same values over the past five years as investors see diminishing long-term potential in the company.

The Last Ditch?

The problem is that the Nook segment is still huge drag on the bottom line.

Analysts, for instance, had predicted a nearly 100 percent increase in earnings for the last quarter on the assumption that the losses at Nook were truly under control. Instead, earning fell to $12 million, from $13 million a year earlier. Nook, meanwhile, lost nearly $48 million by itself in the same quarter.

In most recent quarters, losses and Nook have overwhelmed profits in the core business. (* indicates holiday quarter.)

That puts pressure on the company to spin-off Nook as a public company as soon as possible — or sell it privately. But that will leave Barnes & Noble as a company that sells old-fashioned books even as readers turn to digital.

In the last year, 28 percent of adults read an e-book, way up from 17 percent just two years ago, according to the American Association of Publishers. Print-book reading dropped two percentage points. It is still dominant in the market, with 69 percent of adults reading in that format, but analysts say the trend is very bad news for Barnes & Noble.

“A public company has to have to growth,” said Thad McIlroy, principal at the Future of Publishing consultancy. That’s bad news for anyone getting out of the digital-reading business, he said. “The digital business is the only part of the book business that’s growing.”

Barnes & Noble, analysts pointed out, may face difficulties no matter what strategy it pursues: It has failed with its e-reader and is getting out. But retail sales have declined in seven of the last eight quarters, and analysts expect the company’s sales to fall nearly 5 percent to 6 billion in the coming year.

Retail sales have been shrinking at Barnes & Noble as readers embrace e-books and move away from print. (* indicates holiday quarter.)

The ideal would have been if the retail stores and devices could have reinforced each other, says Mike Shatzkin of the Idea Logical Company. But it just didn’t happen.

“They were able to make some really dramatic gains,” he said, “but having used up the advantage that the stores gave them, they don’t really have any advantages anymore.”