The Nook of Doom Gnaws at Barnes & Noble

When the Nook e-reader was announced, Barnes & Noble touted its strategy of using its network of stores to drive sales. At the time, we pointed out the flaw in that plan: the more successful B&N became at shifting sales to the electronic device, the more it would undermine the company’s margins. Unlike Amazon, which is built upon a very different business model, Barnes & Noble is locked into a capital intensive bricks-and-mortar retail business.

Yesterday, B&N reported earnings. It made the headline a prediction that e-book sales would soon account for $1 billion worth of its business. That was the good news. Everything else was the bad news.

Total sales for the fourth quarter were $1.3 billion, a 19% increase from the thirteen weeks ended May 2, 2009. Barnes & Noble.com sales increased 51% to $141 million for the quarter, as compared to the period one year ago.

BN.com’s sales would include both the Nook device and e-books sold to Nook owners. That would seem to validate Barnes & Noble’s new e-strategy in the face of continuing declines in store turnover:

Barnes & Noble store sales decreased 3% to $962 million, with comparable store sales decreasing 3.1% for the quarter, in-line with guidance of a comparable store sales decline between 2% and 4%.

Looking forward, BN.com expects a huge jump in sales of 75%, but those revenues are governed by the agency model. So the company will make less direct revenue on that billion while it continues to invest $235 to $275 million in expanding its electronic business.

By its own expectations, BN won’t make any money in 2011. Whether it can come out the other side and become profitable again over the longer term probably has more to do with its ability to manage the closing of stores as much as the opening of a new electronic business.