Web expert William Lynch runs out of breathing room at Barnes & Noble

July 10, 2013 03:48 PM

In a June 25 Barnes & Noble Inc. conference call with stock analysts, then-CEO William Lynch explained in detail how the struggling retail chain would continue striving to please customers of its Nook Media digital media division—while also slashing Nook operating expenses that had ballooned into a $475 million loss for the fiscal year ended April 27 and nearly wiped out the company’s earnings.

But for Lynch—who rose triumphantly to the CEO spot three years ago from his perch as head of, No. 27 in the 2013 Internet Retailer Top 500 Guide becoming the first e-commerce executive to lead a major retail chain—the plans outlined to the analysts turned out to be too little, too late. In a surprise move, the company announced yesterday that Lynch had resigned as both CEO and board director, effective immediately, and had been replaced by two executives who will share responsibilities for running the company and report to executive chairman Leonard Riggio.

For Lynch, the end came after an extended struggle with Riggio over how much to invest in the Nook business, which e-commerce veteran Lynch saw as key to the company’s growth, says analyst David Stasser, who follows Barnes & Noble at Janney Capital Markets, the investment research division of financial services firm Janney Montgomery Scott LLC. “There had been a big difference of opinion between Mr. Riggio and Mr. Lynch on what the proper spending levels were for this division,” Stasser says in a report issued yesterday. “The increased tension with Mr. Riggio was becoming more apparent as losses mounted, spending remained more robust than Mr. Riggio wanted it to be, and results were weak.”

Nonetheless, in announcing Lynch’s resignation yesterday, Riggio also thanked him for “helping to transform Barnes & Noble into a leading digital content provider” and for overseeing the development of the company’s Nook e-readers and tablets.

“He saw the shift to digital coming in the industry, and worked to capitalize on it,” Stasser says.

Lynch played up that record in the recent conference call. “We get extremely high ratings from our millions of customers using the Nook digital bookstore service, both on our Nook devices or those using our Nook third-party reading apps,” Lynch told the analysts. “Our commitment to digital customers hasn't changed, and existing and new Nook customers can expect further improvements in the catalog of e-books, periodicals and education content and a best-in-class reading experience from us going forward.”

He added that $222 million of the Nook loss in EBITDA (or earnings before interest, taxes, depreciation and amortization expenses, a measure analysts use to measure a company’s ongoing financial health) was related to a one-time write-down of Nook e-reading device inventory, and that the company had launched a cost-cutting plan late last year that resulted in a 34% drop in Nook-related expenses. As the retailer proceeds with its plan to outsource production of e-readers, he added, “we will substantially shrink the losses in the Nook business.”

But Lynch also faced multiple, formidable challenges that were tough to overcome, Stasser and others say, including weakening market demand for digital books, competition from Amazon and other retailers for both digital and paper books, and the costs of running large book stores often stocked with items like CDs and DVDs no longer in big demand by consumers.

“Put simply, the book superstore business is dead,” says Paula Rosenblum, a former retail company executive who is a managing partner at research and advisory firm Retail Systems Research LLC. She and others say that even stronger sales of digital books and e-readers aren’t enough to support most retail chains.

Candace Corlett, president of retail research and consulting firm WSL Strategic Retail, contends that the problems facing Barnes & Noble were already too much for Lynch to address with a more digitally focused strategy when he joined the company in 2010. “Lynch was doomed from the start,” she says. “Barnes & Noble is saddled with large, beautiful stores in high-rent districts that are great for coffee and a browse, but not for buying books. Inventory is thin, limiting Barnes & Noble stores’ advantage over online orders.” The retailer’s poor sales of e-readers compared with sales of Apple Inc. and Android devices hasn’t helped store performance, she adds.

Corlett and other experts also contend that Barnes & Noble has been unable to match rival’s deep discount book pricing strategy and ability to connect with online book buyers.

Amazon, No. 1 in the Top 500, reported a 12.2% year-over-year increase in worldwide media sales in 2012, to $19.94 billion from $17.77 billion. Among all retailers in the Top 500, combined sales in the books/music/video category rose 1.7% last year, to $43.23 billion from $42.52 billion in 2011.

By comparison, Barnes & Noble, which didn’t break out online sales last year, reported a 5.9% drop in total combined sales for its Barnes & Noble store and online sales, to $4.568 billion in 2012 from $4.853 in 2011, and a 16.8% decrease in Nook segment sales (including devices and digital content) to $776 million from $933 million. The retailer’s college division’s combined bookstore and e-commerce sales rose 1.1% to $1.763 billion in 2012 from $1.744 billion in 2011.

Barnes & Noble “is in a tough spot—their core product line has been digitized and their key competitor operates with a break-even business model,” says Sucharita Mulpuru, vice president and principal analyst for e-business and channel strategies at Forrester Research Inc. “How can anyone compete when your competitors are losing money selling the same thing you do?”

Adds Corlett, “Amazon online has so far out-paced Barnes & Noble with connectivity to shoppers, that it’s hard to see B&N ever catching up in any channel, no matter who is CEO.”

Lynch, however, left the company expressing more optimism. “There is a great executive team and board in place at Barnes & Noble, and I look forward to the many innovations the company will be bringing to its millions of physical and digital media customers in the future,” he said in a press release announcing his resignation yesterday. Neither he nor the company explained more about such innovations.

The future operating format run by Lynch’s successors, however, remains to be seen. Lynch has been replaced as a single CEO by a team of top executives, under chairman Riggio, running the Nook Media division, the Barnes & Noble retail store chain, and the company’s college book stores and digital education products. With the board of directors continuing to consider a proposal by Riggio to buy out the retail chain, this week’s restructuring of top management “could bring the company closer to a more formal break-up,” Stasser says.

The company said yesterday it was “in the process of reviewing its current strategic plan and will provide an update when appropriate.”




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