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Barnes & Noble retreats from tablet wars as Nook sales plummet

People walk past a Barnes and Noble store in New York October 24, 2012. REUTERS/Brendan McDermid
People walk past a Barnes and Noble store in New York October 24, 2012. REUTERS/Brendan McDermid

By Phil Wahba

(Reuters) - Barnes & Noble Inc will stop manufacturing its own Nook tablets, marking the end of its expensive attempt to compete alone with deep-pocketed rivals Amazon.com Inc, Apple Inc and Google Inc in the tablet wars.

The top U.S. bookstore chain reported another quarter of dismal results on Tuesday, led by a 34 percent drop in sales of Nook devices and e-books business, and said it expects sales to continue to decline this fiscal year at its bookstores.

Shares were down 17.5 percent to $15.53 in afternoon trading.

Barnes & Noble will still make and design black-and-white readers like the Nook Simple Touch, which it says are more geared to serious readers, who are its customers, than to tablets.

But it is looking for a partner to make its Nooks, acknowledging that competition is too fierce to fight alone.

"We want to move away from taking on all that risk ourselves," Barnes & Noble Chief Executive William Lynch told investors on a call. "It was very capital intensive to build our own tablets."

In the fiscal year ended April 27, Barnes & Noble lost $475 million on the Nook business and it repeatedly had to slash prices on the Nook tablets and accept returns from retailers unable to sell the devices.

The retreat raised fresh questions about Barnes & Noble's ability to sell its Nook Media subsidiary, created in early 2012 and made up of Nook and its college bookstore chain. The bookseller's ability to look at strategic alternatives and its position in the e-books market were also matters of concern.

Barclays Capital analyst Alan Rifkin said in a research note the losses "reduce the likelihood" Barnes & Noble will find a buyer for its digital business.

Last year, Microsoft Corp took a 17.6 percent stake in Nook Media, and British publisher Pearson Plc bought 5 percent. Barnes & Noble owns the rest.

Barnes & Noble shares shot up in May on unconfirmed reports that Microsoft wanted to buy Nook.

Barnes & Noble, the largest U.S. bookstore chain, launched the first version of the Nook e-reader in 2009 to take on Amazon.com Inc's market-leading Kindle and secure a place in the fast growing e-books market.

E-books now account for about 20 percent of book sales, according to the Association of American Publishers. By Barnes & Noble's estimates, it has a 27 percent share of the U.S. e-books market.

BOOKSTORE CHAIN STRUGGLES

The picture was also bleak for Barnes & Noble's retail business, consisting of its 675 bookstores and accounting for two-thirds of sales.

Sales at stores open at least 15 months fell 8.8 percent last quarter and Barnes & Noble expects retail sales to be down by a high single digit percentage in its new fiscal year.

Earlier this year, Leonard Riggio, the company's chairman, founder and largest shareholder with a nearly 30 percent stake, said he wanted to buy Barnes & Noble's bookstore chain.

Lynch declined on the call to provide an update on the status of the talks.

The retailer plans to close as many as 20 stores this year.

Mitchell Klipper, who heads Barnes & Noble's retail business, told Reuters the results and forecasts would have no impact on the pace of store closings. He also said Barnes & Noble had no plans to invest in large renovations to the stores.

He also said there was no need to reduce the size of the stores.

"That is not even an option," Klipper said.

Barnes & Noble executives said that success last year of bestsellers like The Hunger Games and Fifty Shades of Grey played a large part in its forecast for a comparable sales decline.

Companywide, revenue was down 7.4 percent to $1.28 billion in the fourth quarter, below the $1.33 billion Wall Street analysts were looking for, according to Thomson Reuters I/B/E/S.

One bright spot was its college bookstore chain, where same-store sales rose 7.5 percent. Still, Barnes & Noble forecast a low-single digit percentage decline for fiscal 2014 after a full year decline last year.

The retailer reported a net loss of $118.6 million, or $2.11 per share, for the fiscal fourth quarter ended April 27, more than twice the loss of $56.9 million, or $1.06 per share, a year earlier.

(Reporting by Phil Wahba in New York; Editing by Gerald E. McCormick, Chris Reese and Kenneth Barry)

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