|Username||Post: The Daily Activist Stock for 01/04/2010 is Barnes & Noble|
01-04-10 12:33 AM - Post#4130
Filed with the SEC from Dec 17 to Dec 23:
Barnes & Noble (BKS)
Aletheia Research & Management disclosed that it holds 6,211,760 shares (10.82%), for which it paid a little more than $137 million, or $22.06 per share. Aletheia said it has no plans or proposals related to the book retailer.
Barnes & Noble, Inc. (Barnes & Noble or the Company), the nation’s largest bookseller 1 , as of January 31, 2009 operated 778 bookstores and a website. Of the 778 bookstores, 726 operate primarily under the Barnes & Noble Booksellers trade name (35 of which were opened during the 52 weeks ended January 31, 2009 (fiscal 2008)) and 52 operate primarily under the B. Dalton Bookseller trade name. Barnes & Noble conducts the online part of its business through barnesandnoble.com llc (Barnes & Noble.com). Through Sterling Publishing Co., Inc. (Sterling or Sterling Publishing), the Company is a leading general trade book publisher. Additionally, as of January 31, 2009, the Company owned an approximate 74% interest in Calendar Club, an operator of seasonal kiosks. The Company subsequently sold its interest in Calendar Club in February 2009. The Company employed approximately 37,000 full- and part-time employees as of January 31, 2009.
The Company’s principal business is the sale of trade books (generally hardcover and paperback consumer titles, excluding educational textbooks and specialized religious titles), mass market paperbacks (such as mystery, romance, science fiction and other popular fiction), children’s books, bargain books, magazines, gift, café products and services, music and movies direct to customers. These collectively account for substantially all of the Company’s sales. During fiscal 2008, the Company’s share of the consumer book market was approximately 16.2%. Bestsellers (the “top ten” highest selling hardcover fiction and hardcover non-fiction) typically represent between 3% and 5% of Barnes & Noble sales.
The Company’s fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of January. Fiscal 2008 ended January 31, 2009 and was comprised of 52 weeks. The fiscal year ended February 2, 2008 (fiscal 2007) was comprised of 52 weeks.
The Company was incorporated in Delaware in 1986.
Barnes & Noble is the nation’s largest operator of bookstores 1 with 726 Barnes & Noble stores located in all 50 states and the District of Columbia as of January 31, 2009. With over 40 years of bookselling experience, management has a strong sense of customers’ changing needs and the Company leads book retailing with a “community store” concept. Barnes & Noble’s typical store offers a comprehensive title base, a café, a children’s section, a music/DVD department, a magazine section and a calendar of ongoing events, including author appearances and children’s activities, which make each Barnes & Noble store an active part of its community.
Barnes & Noble stores range in size from 10,000 to 60,000 square feet depending upon market size, with an overall average store size of 26,000 square feet. In fiscal 2008, the Company added 0.5 million square feet to the Barnes & Noble store base, bringing the total square footage to 18.7 million square feet, a 3% increase over fiscal 2007. The Company plans to open approximately 15 Barnes & Noble stores in the fiscal year ending January 30, 2010 (fiscal 2009), which are expected to average 34,000 square feet in size. The weighted-average age per square foot of the Company’s 726 Barnes & Noble stores was 9.03 years as of January 31, 2009 and is expected to increase to approximately 9.68 years by January 30, 2010.
Based upon sales reported in trade publications and public filings.
At the end of fiscal 2008, the Company operated 52 B. Dalton bookstores. Most of the B. Dalton stores range in size from 2,000 to 6,000 square feet. B. Dalton generally discounts between 15% and 30% off publishers’ suggested retail prices for hardcover bestsellers. B. Dalton also offers the Barnes & Noble Member Program which gives members additional discounts and other benefits.
The Company is continuing its controlled descent in the number of its B. Dalton stores in response to declining sales attributable primarily to superstore competition. Part of the Company’s strategy has been to close underperforming stores, which has resulted in the closing of 915 B. Dalton bookstores (33 in fiscal 2008) since 1989.
The Company believes that the key elements contributing to the success of the Barnes & Noble stores are:
Proximity to Customers. The Company’s strategy is to increase its share of the consumer book market, as well as to increase the size of the market. Since it began its bookstore roll-out, the Company has employed a market clustering strategy. As of January 31, 2009, Barnes & Noble had stores in 163 of the total 210 DMA (Designated Market Area) markets. In 66 of the 163 markets, the Company has only one Barnes & Noble store. The Company believes its bookstores’ proximity to their customers strengthens its market position and increases the value of its brand. Most Barnes & Noble stores are located in high-traffic areas with convenient access to major commercial thoroughfares and ample parking. Most stores offer extended shopping hours seven days a week.
Dominant Title Selection. Each Barnes & Noble store features an authoritative selection of books, ranging from 60,000 to 200,000 titles. The comprehensive title selection is diverse and reflects local interests. In addition, Barnes & Noble emphasizes books published by small and independent publishers and university presses. Bestsellers typically represent between 3% and 5% of Barnes & Noble store sales. Complementing this extensive on-site selection, all Barnes & Noble stores provide customers with access to the millions of books available to online shoppers at Barnes & Noble.com while offering an option to have the book sent to the store or shipped directly to the customer. The Company believes that its tremendous selection, including many otherwise hard-to-find titles, builds customer loyalty.
Store Design and Ambiance . Many of the Barnes & Noble stores create a comfortable atmosphere with ample public space, a café offering, among other things, sandwiches and bakery items, and public restrooms. The cafés, for which the Starbucks Corporation is the sole provider of coffee products, foster the image of the stores as a community meeting place. In addition, the Company continues to develop and introduce new product line extensions, such as proprietary gifts, and Barnes & Noble @ School, providing education tools for teachers, librarians and parents. These offerings and services have helped to make many of the stores neighborhood institutions.
Music/DVD Departments. Many of the Barnes & Noble stores have music/DVD departments, which range in size from 1,300 to 6,000 square feet. The music/DVD departments typically stock over 30,000 titles. The Company’s DVD selection is focused on foreign films, documentaries and episodic TV shows. In 2008, the Company introduced an extensive selection of BluRay discs. The music selection is tailored to the tastes of the Company’s core customers,
focused on classical music, opera, jazz, blues and pop rock. The music department features RedDotNet, an advanced listening station technology. RedDotNet enables customers to listen to any compact disc in the store, sampling up to 200,000 music titles using scanner technology. RedDotNet is connected to the Company’s online electronic music catalog.
Discount Pricing. Barnes & Noble stores employ an aggressive nationwide discount pricing strategy. The current pricing is 30% off publishers’ suggested retail prices for hardcover bestsellers and 20% off select feature titles in departments such as children’s books and computer books. The Barnes & Noble Member Program offers members greater discounts. For an annual fee of $25, members receive discounts of 40% off publishers’ suggested retail prices on hardcover bestsellers, 20% off adult hardcovers, and 10% off on almost all other merchandise. These discounts are available to members for purchases made at Barnes & Noble stores, B. Dalton bookstores and on Barnes & Noble.com. In addition, members receive exclusive offers and promotions via direct mail and email.
Marketing and Community Relations. Barnes & Noble stores are generally launched with a major grand opening campaign involving extensive print and radio advertising, direct-mail marketing and community events. Each store plans its own community-based calendar of events, including author appearances, children’s storytelling hours, poetry readings and discussion groups. The Company believes its community focus encourages customer loyalty, word-of-mouth publicity and media coverage. The Company also supports communities through efforts on behalf of local non-profit organizations that focus on literacy, the arts or K-12 education.
Merchandising and Marketing
The Company’s merchandising strategy for its Barnes & Noble stores is to be the authoritative community bookstore carrying a dominant selection of titles in all subjects, including an extensive selection of titles from small independent publishers and university presses. Each Barnes & Noble store features an extensive selection of books from 60,000 to 200,000 unique titles, of which approximately 50,000 titles are common to all stores. The balance is crafted to reflect the lifestyles and interests of each store’s customers. Before a store opens, the Company’s buyers study the community and customize the title selection with offerings from the store’s local publishers and authors. After the store opens, each Barnes & Noble store manager is responsible for adjusting the buyers’ selection to the interests, lifestyles and demands of the store’s local customers. BookMaster, the Company’s proprietary inventory management database, has more than seven million titles. It includes over 2.4 million active titles and provides each store with comprehensive title selections. By enhancing the Company’s existing merchandise replenishment systems, BookMaster allows the Company to achieve high in-stock positions and productivity at the store level through efficiencies in receiving, cashiering and returns processing. The Company also leverages its system investments through utilization of Barnes & Noble.com’s proprietary order management system, which enables customers to place orders at stores for any of the over one million titles in stock throughout the Company’s supply chain.
The Company has a multi-channel marketing strategy that deploys various merchandising programs and promotional activities to drive traffic to both its stores and website. At the center of this program is Barnes & Noble.com, which receives over 365 million visits annually, ranking it among the top 15 multi-channel retailer websites in terms of traffic, as measured by Comscore Media Metrix. As a result of this reach, the Company believes that the website provides significant advertising power which would be valued in the tens of millions of
dollars if such advertising were placed with third-party websites with comparable reach. In this way, Barnes & Noble.com serves as both the Company’s direct-to-home delivery service and as an important broadcast channel and advertising medium for the Barnes & Noble brand. For example, the online store locator at Barnes & Noble.com receives millions of customer visits each year providing store hours, directions, information about author events and other in-store activities.
The Company’s multi-channel marketing strategy enables it to have consistent cross-channel promotions which are primarily communicated via email. In addition, Barnes & Noble.com is an important component in the Barnes & Noble Member Program.
Another example of a multi-channel initiative is the Barnes & Noble MasterCard, an affinity credit card issued by Barclays Bank Delaware. Holders of the Barnes & Noble MasterCard receive an additional 5% rebate for all purchases made in Barnes & Noble stores, B. Dalton bookstores or at Barnes & Noble.com. In addition, points are accumulated for purchases made elsewhere, and may be redeemed for Barnes & Noble gift cards which can be used for purchases in either channel. The Company firmly believes that its website is a key factor behind its industry-leading comparable store sales.
Store Locations and Properties
The Company’s experienced real estate personnel select sites for new Barnes & Noble stores after an extensive review of demographic data and other information relating to market potential, bookstore visibility and access, available parking, surrounding businesses, compatible nearby tenants, competition and the location of other Barnes & Noble stores. Most stores are located in high-visibility areas adjacent to main traffic corridors in strip shopping centers or freestanding buildings and regional shopping malls.
The Company’s subsidiary Sterling Publishing is a leading publisher of non-fiction trade titles, with more than 5,000 books in print. Founded in 1949, Sterling publishes a wide range of non-fiction and illustrated books, consisting primarily of subjects such as crafts, food and wine, mind/ body/spirit, photography, puzzles and games, current affairs and children’s books. Sterling also publishes books for a number of brands, including many of the Hearst magazines such as Good Housekeeping and Cosmopolitan, Hasbro, The American Museum of Natural History, and AARP.
Sterling’s mission is to publish high-quality books that educate, entertain, and enrich the lives of its readers. Among its best-selling titles are Paul McKenna’s I Can Make You Thin , the Windows on the World Complete Wine Course from renowned wine expert Kevin Zraly, Peter Yarrow and Lenny Lipton’s Puff, the Magic Dragon , Charles Darwin’s On the Origin of the Species: The Illustrated Edition ( Edited by David Quammen), and Cosmopolitan’s The Cosmo Kama Sutra.
The latest addition to Sterling’s line is Ecosystem - a comprehensive assortment of hard- and flexi- cover journals. The products are 100% made in the USA from 100% recycled paper.
The Company has seasoned management teams for its stores, including those for real estate, merchandising and store operations. Field management includes regional directors and district managers supervising multiple store locations.
Each Barnes & Noble store generally employs a store manager, two assistant store managers, a café manager and approximately 50 full- and part-time booksellers. Many Barnes & Noble stores also employ a full-time community relations manager. The large employee base provides the Company with experienced booksellers to fill positions in the Company’s new Barnes & Noble stores. The Company anticipates that a significant percentage of the personnel required to manage its new stores will continue to come from within its existing operations.
Field management for all of the Company’s bookstores, including regional directors, district managers and store managers, participate in an incentive program tied to store productivity. The Company believes that the compensation of its field management is competitive with that offered by other specialty retailers of comparable size.
Barnes & Noble has in-store training programs providing specific information needed for success at each level, beginning with the entry-level positions of bookseller. Store managers participate in annual merchandising conferences, and district managers participate in semi-annual training and merchandising conferences. Store managers are generally responsible for training other booksellers and employees in accordance with detailed procedures and guidelines prescribed by the Company utilizing a blended learning approach, including on-the job training, e-learning, facilitator-led training and training aids available at each bookstore.
Barnes & Noble’s buyers negotiate terms, discounts and cooperative advertising allowances with publishers and other suppliers for all of the Company’s bookstores. The Company’s distribution centers enable it to maximize available discounts and enhance its ability to create marketing programs with many of its vendors. The Company has buyers who specialize in customizing inventory for bookselling in stores and online. Store inventories are further customized by store managers, who may respond to local demand by purchasing a limited amount of fast-selling titles through a nationwide wholesaling network, including the Company’s distribution centers.
The Company purchases books on a regular basis from over 1,700 publishers and approximately 64 wholesalers or distributors. Purchases from the top five suppliers (including publishers, wholesalers and distributors) accounted for approximately 49% of the Company’s book purchases during fiscal 2008, and no single supplier accounted for more than 14% of the Company’s purchases during this period. Consistent with industry practice, a substantial majority of the Company’s book purchases are returnable for full credit, a practice which substantially reduces the Company’s risk of inventory obsolescence.
Publishers control the distribution of titles by virtue of copyright protection, which limits availability on most titles to a single publisher. Since the retail, or list, prices of titles, as well as the retailers’ cost price, are also generally determined by publishers, the Company has limited options concerning availability, cost and profitability of its book inventory. However, these limitations are mitigated by the substantial number of titles available, the Company’s ability to maximize available discounts and its well-established relationships with publishers, which are enhanced by the Company’s significant purchasing volume.
Publishers periodically offer their excess inventory in the form of remainder books to book retailers and wholesalers through an auction process which generally favors booksellers such as the Company, who are able to buy substantial quantities. These books are generally purchased in large quantities at favorable prices and are then sold to consumers at significant discounts off publishers’ list prices.
The Company has invested significant capital in its systems and technology by building new platforms, implementing new software applications and building and maintaining efficient distribution centers. This investment has enabled the Company to source an increasingly larger percentage of its inventory through its own distribution centers, resulting in increased direct buying from publishers rather than wholesalers. Greater volume through the Company’s own distribution centers lowers distribution costs per unit, increases inventory turns, and improves product margins. This has also led to improved just-in-time deliveries to stores and the ability to offer “Fast&Free Delivery” through its website and for in-store orders placed by customers for home delivery.
As of January 31, 2009, the Company had approximately 2.0 million square feet of distribution center capacity. The Company has a 1,145,000 square foot distribution center in Monroe Township, New Jersey, which ships merchandise to stores throughout the country and to online customers. The Company also has a 600,000 square foot distribution center in Reno, Nevada, which is used to facilitate distribution to stores and online customers in the western United States. The Company also has 230,198 square feet of distribution center capacity for facilitating Sterling Publishing third-party sales.
In fiscal 2007, the Company closed its facility located in Memphis, Tennessee, as well as a small facility in New Jersey.
Management Information and Control Systems
The Company has focused a majority of its information resources on strategically positioning and implementing systems to support store operations, online technology requirements, merchandising, distribution, marketing and finance.
BookMaster, the Company’s proprietary bookstore inventory management system, integrates point-of-sale features that utilize a proprietary data-warehouse based replenishment system. BookMaster enhances communications and real-time access to the Company’s network of bookstores, distribution centers and wholesalers. In addition, the implementation of just-in-time replenishment has provided for more rapid replenishment of books to all of the Company’s bookstores, resulting in higher in-stock positions and better productivity at the bookstore level through efficiencies in receiving, cashiering and returns processing.
The Company believes that it has built a leading interactive e-commerce platform, and plans to continue to invest in technologies that will enable it to offer its customers the most convenient and user-friendly online shopping experience. Barnes & Noble.com has licensed existing commercial technology when available and has focused its internal development efforts on those proprietary systems necessary to provide the highest level of service to its customers. The overall mix of technologies and applications allows the Company to support a distributed, scalable and secure e-commerce environment.
The Company uses Intel-based server technology in a fully redundant configuration to power its website, which is hosted in two locations. At these locations, the Company maintains computers that store its web pages in electronic form and transmits them to requesting users. Such storage and transmittal is called hosting. The Company utilizes two hosting locations. One
location is hosted internally by the Company and the other is maintained by a third-party hosting vendor. Either site has sufficient capacity to support the volume of traffic directed toward the Company’s website during peak periods. Both hosting locations are configured with excess Internet telecommunications capacity to ensure quick response time and three separate Internet service providers are used. By maintaining redundant host locations, the Company has significantly reduced its exposure to downtime and service outages. Additionally, the Company believes its technology investments are scalable.
The Company continues to implement systems to improve efficiencies in back office processing in the human resources, finance and merchandising areas. An offsite business recovery capability has been developed and implemented to help assure uninterrupted systems support.
The book business is highly competitive in every channel in which Barnes & Noble competes. The Company competes with large bookstores including Borders Group, Inc. (Borders) and Books-A-Million and smaller format bookstores such as Waldenbooks. The Company faces competition with many e-commerce businesses, notably Amazon.com. The Company also faces competition from mass merchandisers, such as Wal-Mart and Costco, some of which may have greater financial and other resources than the Company. The Company’s bookstores also compete with specialty retail stores that offer books in particular subject areas, independent store operators, variety discounters, drug stores, warehouse clubs, mail-order clubs and other retailers offering books and music. In addition, the Company also faces competition from the expanding market for electronic books and digital distribution of book content.
The music and movie businesses are also highly competitive and the Company faces competition from mass merchants, discounters and electronic distribution. The store experience is geared towards the Company’s customer’s base, including a strong BluRay presence as well as a tailored, returnable product assortment.
Trademarks and Servicemarks
B. Dalton Bookseller, Sterling Publishing, Lark Books, Quamut and SparkNotes are some Company-owned servicemarks registered with the United States Patent and Trademark Office. The Company licenses the “Barnes & Noble” name under a royalty-free license agreement dated February 11, 1987, as amended, from Barnes & Noble College Booksellers, Inc. (B&N College), a company owned by Leonard Riggio and his wife. Barnes & Noble.com licenses the “Barnes & Noble” name under a royalty-free license agreement, dated October 31, 1998, as amended, between Barnes & Noble.com and B&N College (the License Agreement). Pursuant to the License Agreement, Barnes & Noble.com has been granted an exclusive license to use the “Barnes & Noble” name and trademark in perpetuity for the purpose of selling books over the Internet (excluding sales of college textbooks). Under a separate agreement dated as of January 31, 2001 (the Textbook License Agreement), between Barnes & Noble.com, B&N College and Textbooks.com, Inc. (Textbooks.com), a corporation owned by Leonard Riggio, Barnes & Noble.com was granted the right to sell college textbooks over the Internet using the “Barnes & Noble” name. Pursuant to the Textbook License Agreement, Barnes & Noble.com pays Textbooks.com a royalty on revenues (net of product returns, applicable sales tax and excluding shipping and handling) realized by Barnes & Noble.com from the sale of books designated as textbooks. The current term of the Textbook License Agreement is through January 31, 2010 and it renews annually for additional one-year periods unless terminated 12 months prior to the end of any given term.
68 1986 Founder and Chairman of the Board
54 1993 Vice Chairman and Chief Executive Officer
George Campbell Jr.
63 2008 Director
Michael J. Del Giudice
66 1999 Director
William Dillard, II
64 1993 Director
Patricia L. Higgins
59 2006 Director
Irene R. Miller
56 1995 Director
Margaret T. Monaco
61 1995 Director
Lawrence S. Zilavy
58 2006 Director
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Liquidity and Capital Resources
The primary sources of the Company’s cash are net cash flows from operating activities, funds available under its senior credit facility and short-term vendor financing.
The Company’s cash and cash equivalents were $95.7 million as of October 31, 2009, compared with $16.1 million as of November 1, 2008.
Merchandise inventories increased $228.0 million, or 15.2%, to $1.731 billion as of October 31, 2009, compared with $1.503 billion as of November 1, 2008. Excluding B&N College inventories of $323.5 million, merchandise inventories decreased $95.5 million, or 6.4% compared to the same period one year ago.
The Company’s investing activities consist principally of capital expenditures for new store construction, the maintenance of existing stores and system enhancements for the retail stores and the Company’s website and digital initiatives. Capital expenditures totaled $47.4 million and $118.1 million during the 26 weeks ended October 31, 2009 and November 1, 2008, respectively. This decrease was primarily the result of five new Barnes & Noble store openings during the 26 weeks ended October 31, 2009 compared to 19 openings during the 26 weeks ended November 1, 2008. Furthermore, during the 26 weeks ended November 1, 2008, the Company purchased its distribution facility and related equipment located in South Brunswick, New Jersey for approximately $21.0 million.
On September 30, 2009, the Company completed the acquisition (the Acquisition) of B&N College from Leonard Riggio and Louise Riggio (the Sellers) pursuant to a Stock Purchase Agreement dated as of August 7, 2009 among the Company and the Sellers (the Purchase Agreement). Mr. Riggio is the Chairman of the Company’s Board of Directors and a significant stockholder.
The purchase price paid to the Sellers under the Purchase Agreement was $596 million, consisting of $346 million in cash and $250 million in aggregate principal amount of the Seller Notes described in Note 2 to the Consolidated Financial Statements contained herein. However, pursuant to the terms of the Purchase Agreement, the cash paid to the Sellers was reduced by approximately $82 million in cash bonuses paid by B&N College to 192 members of its management team and employees, not including Leonard Riggio.
On September 30, 2009, the Company entered into a credit agreement (the Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, under which the lenders committed to provide up to $1,000,000 in commitments under a four-year asset-backed revolving credit facility (the Credit Facility) and which is secured by eligible inventory and accounts receivable and related assets. Borrowings under the Credit Agreement are limited to a specified percentage of eligible inventories and accounts receivable and accrue interest, at the election of the Company, at Base Rate or LIBO Rate, plus, in each case, an Applicable Margin (each term as defined in the Credit Agreement). In addition, the Company has the option to request the increase in commitments under the Credit Agreement by up to $300,000 subject to certain restrictions.
The Credit Agreement includes a fixed charge coverage ratio requirement which would be triggered if Availability (as defined in the Credit Agreement) were to fall below (a) the greater of (i) 15% of the Loan Cap (as defined in the Credit Agreement) or (ii) $110,000. In addition the Credit Facility contains covenants that limit, among other things, the Company’s ability to incur indebtedness, create liens, make investments, make restricted payments, merge or acquire assets, and contains default provisions that are typical for this type of financing, among other things.
The Credit Facility replaces the Company’s prior $850,000 credit agreement which had a maturity date of July 31, 2011, as well as B&N College’s $400,000 credit agreement which had a maturity date of November 13, 2011. The remaining unamortized deferred costs of $807 relating to the Company’s prior credit facility was deferred and will be amortized over the four-year term of the Credit Facility.
The Company had $325 million of outstanding debt as of October 31, 2009, compared to $126.5 million in borrowings as of November 1, 2008. This increase in debt is related to the Acquisition.
Based upon the Company’s current operating levels, management believes cash and cash equivalents on hand, net cash flows from operating activities and the capacity under the Credit Facility will be sufficient to meet the Company’s normal working capital and debt service requirements for at least the next twelve months.
The Company paid quarterly cash dividends of $0.25 per share on June 30, 2009 to stockholders of record at the close of business on June 9, 2009, and on September 30, 2009 to stockholders of record at the close of business on September 9, 2009. On November 24, 2009, the Company announced that its Board of Directors had
authorized a quarterly cash dividend of $0.25 per share for stockholders of record at the close of business on December 10, 2009, payable on December 31, 2009.
The Company’s business (excluding B&N College), like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the third quarter, which includes the holiday selling season. The B&N College business is also seasonal, with the major portion of sales and operating profit realized during the second and third quarters, when college students generally purchase textbooks for the upcoming semesters.
Results of Operations
13 weeks ended October 31, 2009 compared with the 13 weeks ended November 1, 2008
During the 13 weeks ended October 31, 2009, the Company’s sales increased $47.6 million, or 4.3%, to $1.161 billion from $1.113 billion during the 13 weeks ended November 1, 2008. This increase was primarily attributable to the inclusion of B&N College sales of $65.3 million generated since the date of Acquisition, as well as a $10.3 million increase in sales at Barnes & Noble.com. These increases were offset by a $21.4 million decrease in sales at Barnes & Noble stores and a $3.6 million decrease in sales at B. Dalton stores.
Barnes & Noble store sales for the 13 weeks ended October 31, 2009 decreased $21.4 million, or 2.2%, to $949.8 million from $971.2 million during the same period a year ago, and accounted for 81.8% of total Company sales. The 2.2% decrease in Barnes & Noble store sales was primarily attributable to a 3.2% or $29.0 million decrease in comparable store sales, and to closed stores that decreased sales by $20.8 million, offset by new Barnes & Noble store sales of $28.3 million.
B. Dalton sales decreased $3.6 million, or 26.7%, to $9.9 million during the 13 weeks ended October 31, 2009 from $13.5 million during the 13 weeks ended November 1, 2008. This decrease was primarily attributable to the closing of 21 stores over the last 12 months.
Barnes & Noble.com sales increased $10.3 million, or 9.4%, to $120.5 million during the 13 weeks ended October 31, 2009 from $110.2 million during the 13 weeks ended November 1, 2008. This increase to sales was due to increased traffic to the website as well as eBook sales, which commenced with the acquisition of Fictionwise in March 2009.
During the 13 weeks ended October 31, 2009, the Company opened four Barnes & Noble stores and closed three, bringing its total number of Barnes & Noble stores to 725 with 18.8 million square feet. Since the date of Acquisition, the Company added six B&N College stores and closed two, ending the period with 636 B&N College stores under contracts. At October 31, 2009, the Company operated 50 B. Dalton stores with 0.2 million square feet. As of October 31, 2009, the Company operated 1,411 stores in the fifty states and the District of Columbia.
Cost of Sales and Occupancy
During the 13 weeks ended October 31, 2009, cost of sales and occupancy increased $41.5 million, or 5.3%, to $818.7 million from $777.2 million during the 13 weeks ended November 1, 2008. Cost of sales and occupancy
increased as a percentage of sales to 70.5% from 69.8% the same period one year ago. Excluding B&N College cost of sales and occupancy of $50.6 million, cost of sales and occupancy increased slightly as a percentage of sales to 70.1% from 69.8% the same period one year ago. This increase was primarily attributable to the deleveraging of fixed occupancy costs on the negative comparable store sales, as well as changes in product mix.
Selling and Administrative Expenses
Selling and administrative expenses increased $10.7 million, or 3.4%, to $324.1 million during the 13 weeks ended October 31, 2009 from $313.4 million during the 13 weeks ended November 1, 2008. Selling and administrative expenses decreased as a percentage of sales to 27.9% from 28.2% during the same period one year ago. Included in selling and administrative expenses for the 13 weeks ended November 1, 2008 were an $11.6 million impairment charge for property and equipment and a $3.0 million charge related to a management resignation. Excluding these charges, selling and administrative expenses increased as a percentage of sales to 27.9% from 26.8% during the same period last fiscal year. This increase was primarily due to $8.0 million of Acquisition-related expenses and the deleveraging of fixed expenses with the negative comparable store sales.
Depreciation and Amortization
During the 13 weeks ended October 31, 2009, depreciation and amortization increased $5.0 million, or 11.2%, to $49.2 million from $44.2 million during the same period one year ago. This increase was primarily due to the inclusion of $3.9 million of B&N College depreciation and amortization, as well as additional capital expenditures for existing store maintenance, new store openings and technology investments.
Pre-opening expenses decreased $2.0 million, or 61.2%, to $1.3 million during the 13 weeks ended October 31, 2009 from $3.3 million for the 13 weeks ended November 1, 2008. This decrease was primarily the result of the lower volume of Barnes & Noble new store openings.
The Company’s consolidated operating loss increased $7.6 million, or 30.5%, to $32.4 million during the 13 weeks ended October 31, 2009 from $24.8 million during the 13 weeks ended November 1, 2008. This increase was primarily due to the inclusion of B&N College’s operating loss of $10.2 million, as well as the matters discussed above.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees increased $2.6 million, or 200.9%, to $3.9 million during the 13 weeks ended October 31, 2009 from $1.3 million during the 13 weeks ended November 1, 2008. This increase in interest expense was primarily due to the interest expense related to the Acquisition.
Income tax benefit during the 13 weeks ended October 31, 2009 was $12.4 million compared with $10.4 million during the 13 weeks ended November 1, 2008. The Company’s effective tax rate was 34.17% for the 13 weeks
ended October 31, 2009 due to the estimated non-deductible portion of the Acquisition-related fees. The Company’s effective tax rate was 39.93% for the 13 weeks ended November 1, 2008.
Loss from Discontinued Operations
On February 25, 2009, the Company sold its interest in Calendar Club to Calendar Club and its chief executive officer for $7.0 million, which was comprised of $1.0 million in cash and $6.0 million in notes. Calendar Club is no longer a subsidiary of the Company and the results of Calendar Club have been classified as discontinued operations in all periods presented. Accordingly, the Company reported a $2.5 million loss from discontinued operations for the 13 weeks ended November 1, 2008.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests decreased to $0.03 million during the 13 weeks ended October 31, 2009 from $0.25 million during the 13 weeks ended November 1, 2008, and relates to the 50% outside interest in Begin Smart LLC.
Net Loss Attributable to Barnes & Noble, Inc.
As a result of the factors discussed above, the Company reported a consolidated net loss attributable to Barnes & Noble, Inc. of $24.0 million or ($0.43) per diluted share during the 13 weeks ended October 31, 2009, compared with a consolidated net loss attributable to Barnes & Noble, Inc. of $18.4 million or ($0.34) per diluted share during the 13 weeks ended November 1, 2008.
Results of Operations
26 weeks ended October 31, 2009 compared with the 26 weeks ended November 1, 2008
During the 26 weeks ended October 31, 2009, the Company’s sales decreased $17.7 million, or 0.8%, to $2.317 billion from $2.334 billion during the 26 weeks ended November 1, 2008. This decrease was primarily attributable to a $79.5 million decrease in sales at Barnes & Noble stores, and a $9.2 million decrease in sales at B. Dalton stores, offset by the inclusion of B&N College sales of $65.3 million and an $11.8 million increase in sales at Barnes & Noble.com.
Barnes & Noble store sales for the 26 weeks ended October 31, 2009 decreased $79.5 million, or 3.9%, to $1.982 billion from $2.061 billion during the same period a year ago, and accounted for 85.5% of total Company sales. This decrease was primarily attributable to a 5.1% decrease in comparable store sales which decreased sales by $99.2 million and by closed stores that decreased sales by $42.2 million, offset by new Barnes & Noble stores that contributed to an increase in sales of $62.1 million.
B. Dalton sales decreased $9.2 million, or 30.9%, to $20.5 million during the 26 weeks ended October 31, 2009 from $29.7 million during the 26 weeks ended November 1, 2008. This decrease was primarily attributable to the closing of 21 stores over the last 12 months.
Barnes & Noble.com sales increased $11.8 million, or 5.6%, to $222.5 million during the 26 weeks ended October 31, 2009 from $210.7 million during the 26 weeks ended November 1, 2008. This increase to sales was due to
increased traffic to the website as well as eBook sales, which commenced with the acquisition of Fictionwise in March 2009.
During the 26 weeks ended October 31, 2009, the Company opened five Barnes & Noble stores and closed six, bringing its total number of Barnes & Noble stores to 725 with 18.8 million square feet. Since the date of Acquisition, the Company added six B&N College stores and closed two, ending the period with 636 B&N College stores under contracts. The Company closed one B. Dalton store, ending the period with 50 B. Dalton stores with 0.2 million square feet. As of October 31, 2009, the Company operated 1,411 stores in the fifty states and the District of Columbia.
Cost of Sales and Occupancy
During the 26 weeks ended October 31, 2009, cost of sales and occupancy decreased $5.3 million, or 0.3%, to $1.619 billion from $1.624 billion during the 26 weeks ended November 1, 2008. Cost of sales and occupancy increased slightly as a percentage of sales to 69.9% from 69.6% the same period one year ago. Excluding B&N College cost of sales and occupancy of $50.6 million, cost of sales and occupancy remained flat as a percentage of sales of 69.6% during the 26 weeks ended October 31, 2009 and November 1, 2008. This was accomplished primarily due to lower distribution expenses, particularly in freight and payroll, as well as favorable product mix, offset by the deleveraging of fixed occupancy costs on the negative comparable store sales.
Selling and Administrative Expenses
Selling and administrative expenses decreased $0.4 million, or 0.1%, to $612.8 million during the 26 weeks ended October 31, 2009 from $613.2 million during the 26 weeks ended November 1, 2008. Selling and administrative expenses increased slightly as a percentage of sales to 26.5% from 26.3% during the same period one year ago. Excluding B&N College selling and administrative expenses of $20.9 million, selling and administrative expenses remained flat as a percentage of sales of 26.3% during the 26 weeks ended October 31, 2009 and November 1, 2008. This was accomplished primarily due to planned cost reductions. Included in selling and administrative expenses for the 26 weeks ended November 1, 2008 were an $11.6 million impairment charge for property and equipment and a $3.0 million charge related to a management resignation. Included in selling and administrative expenses for the 26 weeks ended October 31, 2009 were a $6.7 million benefit related to an insurance settlement, offset by $10.0 million of Acquisition-related costs. Excluding these charges, selling and administrative expenses increased as a percentage of sales to 26.4% from 25.6% during the same period last fiscal year. This increase was primarily due to deleveraging of fixed expenses with the negative comparable store sales.
Depreciation and Amortization
During the 26 weeks ended October 31, 2009, depreciation and amortization increased $7.3 million, or 8.5%, to $94.0 million from $86.7 million during the same period last year. This increase was primarily due the inclusion of $3.9 million of B&N College depreciation and amortization, as well as the depreciation on the additional capital expenditures for existing store maintenance, technology investments and new store openings.
Pre-opening expenses decreased $3.5 million, or 54.0%, to $3.0 million during the 26 weeks ended October 31, 2009 from $6.5 million for the 26 weeks ended November 1, 2008. This decrease in pre-opening expenses was primarily the result of the lower volume of new Barnes & Noble store openings.
Operating Profit (Loss)
The Company’s consolidated operating loss increased $15.9 million to $11.8 million during the 26 weeks ended October 31, 2009 from an operating profit of $4.1 million during the 26 weeks ended November 1, 2008. This increase was primarily due to the inclusion of B&N College’s operating loss of $10.2 million, as well as the matters discussed above.
Interest Expense, Net and Amortization of Deferred Financing Fees
Net interest expense and amortization of deferred financing fees increased $1.9 million, or 77.2%, to $4.2 million during the 26 weeks ended October 31, 2009 from $2.4 million during the 26 weeks ended November 1, 2008. This increase in interest expense was primarily due to the interest expense related to the Acquisition.
Income tax benefit during the 26 weeks ended October 31, 2009 was $4.3 million compared with income tax expense of $0.7 million during the 26 weeks ended November 1, 2008. The Company’s effective tax rate was 26.94% for the 26 weeks ended October 31, 2009 due to the estimated non-deductible portion of the Acquisition-related fees. The Company’s effective tax rate was 42.29% for the 26 weeks ended November 1, 2008.
Loss from Discontinued Operations
On February 25, 2009, the Company sold its interest in Calendar Club to Calendar Club and its chief executive officer for $7.0 million, which was comprised of $1.0 million in cash and $6.0 million in notes. Calendar Club is no longer a subsidiary of the Company and the results of Calendar Club have been classified as discontinued operations in all periods presented. Accordingly, the Company reported a $3.8 million loss from discontinued operations for the 26 weeks ended November 1, 2008.
Net (Income) Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests during the 26 weeks ended October 31, 2009 was $0.004 million compared with net income attributable to noncontrolling interests of $0.18 million during the 26 weeks ended November 1, 2008, and relates to the 50% outside interest in Begin Smart LLC.
Net Loss Attributable to Barnes & Noble, Inc.
As a result of the factors discussed above, the Company reported a consolidated net loss attributable to Barnes & Noble, Inc. of $11.7 million or ($0.21) per diluted share during the 26 weeks ended October 31, 2009, compared with a consolidated net loss attributable to Barnes & Noble, Inc. of $3.0 million or ($0.05) per diluted share during the 26 weeks ended November 1, 2008.
Critical Accounting Policies
SEC Financial Reporting Release No. 60 requests all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Management of the Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Merchandise Inventories. Merchandise inventories are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under both the first-in, first-out (FIFO) basis and the last-in, first-out (LIFO) basis. The Company uses the retail inventory method for 98% of the Company’s merchandise inventories. As of October 31, 2009, November 1, 2008 and May 2, 2009, 82%, 100% and 100%, respectively, of the Company’s inventory on the retail inventory method was valued under the FIFO basis. B&N College’s textbook and trade book inventories are valued using the LIFO method, where the related reserve was not material to the recorded amount of the Company’s inventories or results of operations.
Market is determined based on the estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on the Company’s history of liquidating non-returnable inventory.
The Company also estimates and accrues shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.
Other Long-Lived Assets. The Company’s other long-lived assets include property and equipment and amortizable intangibles. At October 31, 2009, the Company had $852.3 million of property and equipment, net of accumulated depreciation, and $273.0 million of amortizable intangible assets, net of amortization, accounting for approximately 27.4% of the Company’s total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Accounting Standards Codification (ASC) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10). The Company evaluates long-lived assets for impairment at the individual Barnes & Noble store level, except for B&N College long-lived assets, which are evaluated for impairment at the university contract combined store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value.
Goodwill and Unamortizable Intangible Assets. At October 31, 2009, the Company had $524.1 million of goodwill and $314.9 million of unamortizable intangible assets (those with an indefinite useful life), accounting for approximately 20.4% of the Company’s total assets. ASC 350-30, Goodwill and Other Intangible Assets , requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by ASC 350-30. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company has noted no subsequent indicators of
impairment. The Company tests unamortizable intangible assets by comparing the fair value and the carrying value of such assets. Changes in market conditions, among other factors, could have a material impact on these estimates.
Gift Cards. The Company sells gift cards which can be used in its stores or on Barnes & Noble.com. The Company does not charge administrative or dormancy fees on gift cards, and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Over time, some portion of the gift cards issued is not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the Company’s historical redemption patterns. The Company records this amount in income on a straight-line basis over a 12-month period beginning in the 13th month after the month the gift card was originally sold. If actual redemption patterns vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. The Company also sells online gift certificates for use solely on Barnes & Noble.com, which are treated the same way as gift cards.
Income Taxes. Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, tax issues arise where the ultimate outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various tax authorities. Consequently, changes in the Company’s estimates for contingent tax liabilities may materially impact the Company’s results of operations or financial position.
Disclosure Regarding Forward-Looking Statements
This report may contain certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act)) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including, among others, the general economic environment and consumer spending patterns, decreased consumer demand for the Company’s products, low growth or declining sales and net income due to various factors, possible disruptions in the Company’s computer or telephone systems, possible risks associated with data privacy, information security and intellectual property, possible work stoppages or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, higher-than-anticipated store closing or relocation costs, higher interest rates, the performance of the Company’s online, digital and other initiatives, the performance and successful integration of acquired businesses, the success of the Company’s strategic investments, unanticipated increases in merchandise or occupancy costs, unanticipated adverse litigation results or effects, the results or effects of any governmental review of the Company’s stock option practices, product shortages, and other factors which may be outside of the Company’s control, including those factors discussed in detail in Item 1A, “Risk Factors,” in this Form 10-Q and in the Company’s other filings made hereafter from time to time with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Form 10-Q.
Joseph J. Lombardi
Good morning and welcome to Barnes & Noble's fiscal 2010 second quarter earnings conference call. Joining us today are Steve Riggio, Mitchell Klipper, William Lynch, and other members of the senior management team.
Before I begin, I would like to remind you that this call is covered by the Safe Harbor disclosure contained in our press release and public documents and is the property of Barnes & Noble. It is not for rebroadcast or use by any other party without the prior written consent of Barnes & Noble.
This morning before the market opened we released our results for the second quarter ended October 31, 2009. Included in our financials are Barnes & Noble College bookseller results, which I will be referring to as college, from September 30, 2009, the date of acquisition, to October 31st.
Consolidated sales totalled $1.161 billion for the quarter. Sales at Barnes & Noble stores were $950 million for the quarter, a decline of 2% from last year. Comparable store sales declined 3.2%, slightly lower than guidance of a 1% to 3% decrease. The company previously announced a comparable store sales decline of 4.1% for the nine-week period ended October 3rd. Sales trends improved in October as the company cycled against easier comparisons due to the prior year economic downturn.
Retail traffic continues to be the main driver in our comparable store sales performance, whereas our average ticket declined slightly.
Sales at Barnesandnoble.com were $120 million for the quarter, a 9% increase over last year due to higher traffic as well as e-book sales.
College's comparable store sales from the data of acquisition declined slightly, 0.2%, better than our forecast of a down 1% to 3%. College added $65 million to the top line since the date of acquisition.
Gross margin decreased by 70 basis points compared to the prior year. 40 basis points of the 70 basis points decline was due to the inclusion of College's results. You may recall from our October 8th conference call, College has a lower gross margin than the consumer bookstore business. The remainder of the gross margin decrease was primarily attributable to occupancy deleverage against the comparable store sales decline and product mix.
Selling and administrative expenses as a percentage of sales decreased 30 basis points this quarter or 50 basis points excluding college. Last year's expenses included an $11.6 million pretax impairment charge and a $3 million pretax severance charge. This year's expenses included an $8 million pretax one-time transaction expenses associated with the College acquisition. Excluding college and these items, selling and administrative expenses on an absolute dollar basis were $2 million lower than last year due to cost reductions as well as timing of certain expenses expected to be incurred later this year.
Depreciation and amortization increased by $5 million, due to primarily the inclusion of college's depreciation and amortization of intangibles related to purchase price accounting.
Pre-opening expenses were $2 million lower this quarter due to fewer store openings. Four stores opened this quarter compared to nine a year ago. Interest expense increased $2.6 million over last year due to higher interest costs associated with the college acquisition. The company's second quarter tax rate was 34.2%, due to the estimated non-deductible portion of the acquisition related fees. The company reported a net loss of $24 million, or $0.43 per share for the quarter, compared to guidance of a loss of $0.45 to $0.55 per share. Despite sales coming in slightly lower than expected, earnings per share exceeded the range due primarily to the timing of expenses expected to be offset later in the year.
At quarter end, the balance sheet now incorporates College's numbers. Inventories are up $228 million from a year ago; however, excluding College, inventories are down $95 million, or 6% versus a year ago. The company had $325 million of borrowings at quarter end, or $229 million net of cash on hand. Last year at this time, the company had net borrowings of $110 million. The increase is primarily due once again to the acquisition of College offset by lower short-term borrowing needs for the operations of the business.
During the quarter, the company completed its acquisition of College. In accordance with accounting rules, the purchase price has been primarily allocated to asset and liabilities based on their estimated fair value at the acquisition date. The value ascribed to intangible assets was approximately $500 million, which includes $255 million of amortizable intangible assets for the existing college and university relationships and $245 million non-amortizable assets for the trade name. Non-cash amortization for the school relationships is expected to be expensed over a period of 25 years. The company also recorded a deferred tax liability of $209 million related to the difference between the book basis and the tax basis of the net assets acquired. In addition, the company stepped up the value of certain other assets and liabilities resulting in a net increase to good will of $266 million.
Also reflected on the balance sheet is other non-current assets now include $37 million of deferred financing fees incurred in securing the new credit facility. This amount will be amortized to interest expense over the remaining four year life of the facility.
Capital expenditures for the fiscal year ended April, 2010 are forecasted at $150 million, which includes $125 million for Barnes & Noble and $25 million for College since the date of acquisition. We currently forecast $100 million of free cash flow for the full fiscal year, slightly reduced for the earnings guidance that happened today, the reduction to EBITDA guidance, but we intend to make that up with improvements in working capital, so we are sticking to the original $100 million. And we believe we will have approximately $359 million in year-end debt.
With the company's new credit facility, we have ample capacity.
Now I would like to comment on third quarter and full year outlook. For the third quarter, the company expects Barnes & Noble comparable store sales to decrease between 1% and 3%. This sales guidance is reflective of the slight improvement in sales trends from the second quarter. The company continues to expect full year comparable store sales to decline between 2% and 4%.
College's comparable store sales are expected to be in a range between flat to 2% up for the third quarter and to be in a range from negative 1% to positive 1% from the date of acquisition to the end of fiscal 2010.
Third quarter earnings per share are expected to be in the range of $1.30 to $1.50. As noted in this morning's earnings release, due to the overwhelming demand for Nook, the company is ramping up its production schedule and increasing investments in its digital initiatives. This includes adding people, increasing technology spend, and expanding in-store marketing support. As a result of the increased investment in the company's long-term digital strategy, combined with the anticipated continued general retail traffic softness during the holiday season, the company is lowering its full year earnings per share forecast for fiscal 2010 to be in the range of $0.33 to $0.63.
Please remember that this guidance includes the fees resulting from the College acquisition, which on an annual basis is $0.14 per share, and excludes College's earnings in the beginning of fiscal 2010 through the acquisition date.
At this point, I would like to turn the discussion over to our CEO, Steve Riggio.
Good morning. It is clear to us that the retail book selling marketplace is consolidating and that the quality and flexibility of our real estate portfolio holds us in good stead. While our comparable store sales continue to be under pressure due to a decrease in traffic in shopping centers across America, we still continue to gain market share in the brick and mortar book selling business. We believe this is due to the outstanding service our booksellers have long provided day in and day out, the quality of our store locations, the continued growth of our member program, and to continued enhancements in our well-developed multi-channel strategy.
Customers know they can get any book anytime, anywhere from Barnes & Noble, whether they choose to shop in our stores or online. For example, our new pick-me-up service -- with our new pick-me-up service, customers can use our website to reserve any book that is in stock on our stores and to pick it up within our stores within 60 minutes. That's been a major success for us.
And I do want to comment a bit about the retail business in terms of competition among mass merchants. Much has been written recently about the price wars among mass merchants and discounters selling the very, very top end of the best-selling spectrum. We have commented on this before and we will say it again -- we believe this concern is over-blown because the impact of this competition has been absorbed for the past decade. The book-selling has been for a long time a long-tail business. Bestsellers represent less than 5% of our sales and among these very top bestsellers, less than 1% of our sales.
Our e-commerce business is doing great. We believe we've got lots of room to grow and we are very, very pleased to see sales accelerating there with a 9% growth in the second quarter. We believe in good part that's due to our fast and free shipping commitment. We deliver customer orders within three days at no extra charge and we think the growth is in part due to the traction that that has gained among more and more customers.
With the launch of the e-bookstore this year, we took our promise of any book, anywhere, anytime to a new level, enabling customers to download e-books in second to more platforms than any other online bookseller. And our iPhone app quickly became the most downloaded app in the iTunes store. The big news, of course, is the overwhelming response to Nook, our e-book reader. Pre-orders for Nook, they far, far exceeded our expectations and as Joe noted, in order to meet this overwhelming demand and to continue to serve this fast growing market, we are ramping up our production schedule and increasing our investments in the necessary people and technology to establish a strong market position.
As we've said from the beginning, however, our digital strategy is much more about selling e-books. The bookstore business is a long-tail business. The e-commerce business is a longer tail still, and the e-content digital business is still a longer tail business. We will soon be selling a much, much wider range of content, digital content than what we offer in physical format, either through our stores or online. It in a way represents a product extension for Barnes & Noble. We will be selling new and archived newspapers, blogs, magazines, periodicals and journals. We do not offer this content today in subscription form. We will offer it in subscription form, a la carte form, digital plus physical -- all sorts of new ways to deliver content. And our strategy has been to make all this content available to readers wherever they are, from a Nook device, PC, a Mac, a smart-phone, as well as from a coming wave of new devices with ever more amazing capabilities. And we believe that this is the first inning and that it will be a multi-billion opportunity for Barnes & Noble. As important, there are formidable barriers to entry for new players who want to jump in. Among those barriers are content aggregation on a massive scale -- content formatting for multiple devices and platforms, digital rights management technology, synchronization of all this content so a user can get it anywhere, anytime. We believe this will result, these barriers to entry are going to result in a less fragmented marketplace for digital content than the current marketplace for physical content.
Remember, books are sold in thousands and thousands and thousands of outlets in America and more than 50% of the books sold are outside of bookstores. We believe that digital content will be much, much less fragmented than that and we've established a strong position in order to gain a sizable market share as this market develops. Thank you.
Joseph J. Lombardi
And now we'd like to turn the call over to questions. Operator, we'll take questions now.