B&N_outside

Barnes & Noble’s Union Square location.

By Danni Santana

Long known for its physical books and author talks, Barnes & Noble has now placed much of its fate as a company on educational toys & games.

In September, newly appointed Chief Executive Officer Ronald Boire identified non-book items as the key to Barnes & Noble’s success. Recent growth in the toys & games sector has validated his strategy.

The problem is B&N’s non-book sales aren’t growing fast enough to offset continuing losses from its Nook E-reader. As the company fights for survival, it is now relying on its biggest asset to sell merchandise, boost sales and compete with rival Amazon, its physical store presence.

Barnes & Noble has scaled back on planned store closures as a result, recognizing toys could be the bookseller’s last opportunity to overcome the Nook’s blow on its bottom line.

“Lots of books in one store used to be a magnet for customers. It isn’t anymore. So they’re cutting down on the footprint of books and putting it elsewhere,” said Mike Shatzkin, a book-publishing consultant and CEO of The Idea Logical Company. “B&N used its stores well when it first introduced the Nook, but it is a tool they have marketed ineffectively since.”

On Dec. 4, the company reported fiscal 2016 second-quarter earnings that fell well below analyst’s estimates. The retailer disclosed revenue of $895 million for the period ending Oct. 31, down 5 percent from the year before. It also suffered a net loss of $27 million, or 36 cents a share, following a $12 million profit in the quarter inBKSStock 2014.

Losses are attributed to the Nook, a string of store closings and the re-launch of BN.com in September, which has been subject to glitches, according to company filings. Analysts predicted a loss of 31 cents per share on revenue of $918 million.

Wall Street reacted accordingly. Barnes & Noble’s share price plummeted 17 percent on Dec. 5 and is currently trading at a year low $8.52. Its stock is down 45 percent for the year compared with the S&P 500, down 2 percent. Amazon, the closest thing to a rival Barnes & Noble has left, has seen its stock price more than double in 2015.

Toys are the lone bright spot

Toys & games, the small yet integral part to Barnes & Noble’s plans, were the lone bright spot of the book retailer’s quarterly earnings. Toy sales increased nearly 15 percent year-over-year, limiting retail sales decline in the quarter to 3.1 percent. The rise follows an 18 percent climb in toys sales last quarter.

Toys

Retro toys on display at Barnes & Noble’s Union Square location.

“While these are smaller pieces of our overall business, it’s clear we are a destination for these products and we see prospects for further growth,” Boire said in an earnings call with analysts on Dec. 4, adding that adult coloring books are one of the fastest growing book categories as well.

Despite weak earnings, Barnes & Noble points to comparable store sales–up 1.1 percent this quarter– through Black Friday as reason for optimism ahead of the upcoming holiday season.

The company announced its list of must have toys for the holidays including: a Smart Toy Bear and TK1 Telescope & Astronomy Kit for children and an app enabled BB-8 robot, from the popular Star Wars saga, for its older customers.

“We expanded our toy section a few years ago but are constantly tweaking it. Trends arise as we switch to what customers want,” said one Barnes & Noble store manager on Manhattan’s Upper West Side in November. “A lot of our customers love games. We have both collectables for adults and toys for kids.”

In efforts to lure shoppers beyond the holiday season, Barnes & Noble says it will only close 10 stores in fiscal 2016 instead of the 13 it had previously planned. The company currently operates 647 stores nationwide.

Coincidently, Amazon opened its first bookstore in Seattle last month. The 5,500-square-foot location offers as many as 6,000 book titles and uses barcodes instead of price tags, allowing customers to confirm in-store prices match those found online.

Tanking Nook sales

As Amazon tries to establish a physical store presence, Barnes & Noble struggles to crawl out from under its failed Nook business. The Nook represented Barnes & Noble’s previous attempt to fight off the online retailer, but was misguided from the start, according to analysts.

Sales of the Nook dropped 32 percent to $43.5 million last quarter, adding to a 22 percent decline in online sales. Gabelli & Company, an institutional research firm, projects sales of the Nook will subside to just $80 million by 2019 after generating $935 million in 2012.

Analysts attribute the Nook’s failure to its subpar performance compared to other e-readers on the market, including Amazon’s Kindle Fire. Barnes & Noble has recently outsourced production of the Nook to Samsung, which has cut manufacturing costs.

“The NOOK segment has been a loss-making unit for the company,” said Joe Cornell, analyst at Spin-Off Research, in a research note. “We expect the Nook’s struggles to continue going forward given Amazon’s dominant position in the e-reader market and intensifying competition from mobile and tablets.”

Barnes & Noble’s growing online struggles however are fixable, Shatzkin said. But better integration of its stores and online marketplace is needed.

“Protecting its in-store business inhibited B&N’s thinking about expanding its online presence,” he said. “From the beginning, they should have been promoting a bookseller who had large stores and a great online system.”

There’s still books

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Barnes & Noble’s coloring book section.

Barnes & Noble’s focus may be on toys but books aren’t exactly on the back burner. Analysts note the retailer is looking to capitalize on its ability to meet demand from customers who want products quickly, not 3-5 business days later. That demand includes physical books, especially coloring books.

“Barnes & Noble is benefitting from being ‘last man standing’ as non-book retailers, such as Wal-Mart reduce their presence in the book category,” said John Tinker, an analyst at Gabelli & Company, in a research note.

The book retailer stands to benefit from a sudden shift in consumer preference to print books, which should drive customers back to brick-and-mortar bookstores, said Tinker. Barnes & Noble currently has an 18 percent share of the print book market. Amazon has the largest share at 30 percent, while Target has 20 percent, according to Gabelli & Company.

“The book business is a healthy business and has the prospects to grow,” Boire told MarketWatch, in an interview. “That is not the perspective that the industry had four or five years ago. Back then, digital books were taking a bite out of the physical books business.”