Barnes & Noble, Microsoft Terminate Nook Partnership -- 2nd Update

By Chelsey Dulaney 

Barnes & Noble Inc. said it has terminated its commercial agreement for its Nook e-reader with Microsoft Corp., a move it said provides a clearer path toward the potential split of its business.

The bookstore retailer bought out Microsoft's preferred interest in Nook for about $120 million in cash and stock, freeing Microsoft from further investments in the business.

Barnes & Noble, struggling to adapt as book buyers migrated to online retailers like Amazon.com Inc., said Thursday that it expects the planned split of its Nook Media unit from its retail stores to occur by the end of August, behind its initial projection for a March separation.

Microsoft invested in Nook in 2012, pledging more than $600 million to help prop up Barnes & Noble's digital-reading business. In return, Barnes & Noble committed to creating e-reading apps for new computers, phone and tablets powered by Microsoft's Windows software.

But since the deal was struck, circumstances for both companies have changed. Barnes & Noble slowed work on its e-reading devices and tablets as its sales slumped and laid off much of the workforce devoted to its Nook devices. Microsoft, which has its own Windows tablets and smartphones, shifted its consumer-device strategy following sales hiccups.

The companies also scaled back their partnership earlier this year, allowing Barnes & Noble to stop developing the Nook e-reading app for devices powered by Microsoft software.

The planned split of the retailer, along with sharply narrower Nook losses and other promising signs, has driven up the retailer's shares up 49% this year through Wednesday's close. Shares, however, dropped about 8% premarket.

The company had sought to carve out its own niche in the tablet and e-reader space, but the device failed to catch on, posting a series of losses. Barnes & Noble said in September that it was in discussions with partners in Nook Media, Microsoft and Pearson PLC, as well as other possible partners about financing for the unit, which houses both the Nook digital business and the company's college stores.

For its second quarter ended Nov. 1, the Nook segment's revenue fell 41% to $63.9 million, while digital content sales fell 21% to $45.2 million.

Sales at the company's retail unit fell 3.6% in the quarter, due partly to store closures.

Barnes & Noble has also sought to inject excitement into its stores to combat the tepid store traffic that has plagued much of the retail industry. The retailer has gotten more creative with how it organizes its titles, added new displays and toys, and introduced big-ticket gifts like a $100 Crosley turntable ahead of the crucial holiday shopping season.

Revenue from its college unit ticked up 1.9%, buoyed in part by the back-to-school rush season.

Overall, Barnes & Noble reported a profit of $12.3 million, or 12 cents a share, down from $13.2 million, or 15 cents a share, a year ago. Revenue fell 2.7% to $1.69 billion.

Analysts polled by Thomson Reuters had projected per-share earnings of 31 cents and revenue of $1.69 billion.

Write to Chelsey Dulaney at [e-mail]

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