Let's play Follow the Money!

Barnes & Noble released quarterly and annual earnings yesterday, and I think that they are worth going over as people ponder both the company's future and the future of book sales. (Some background if you don't know much about corporate finance: Companies report their finances every three months (which is a quarter) and every year. The fiscal year, however, can be any 12-month period and may not end December 31. In the case of B&N, their fiscal year ended April 30.)

B&N as a whole lost $59.4 million for the quarter, significantly worse than the $32 million it lost during the same quarter last year. This is mainly because the company is putting a lot of money into e-books. Just like with people, there are two ways for a company to make money: Spend less, or earn more. B&N is spending way more on e-books in hopes that eventually it will earn enough on them to make a profit.

Is that working? Well, sales rose 4% overall, so maybe that doesn't look too promising.

Look at the company's individual units, though, and it's easy to see who the laggard is: Sales at bookstores fell 2.9% for the quarter. That was in part because of all the going-out-of-business sales at Borders, but even for the year bookstore sales grew only 0.7%, and B&N attributes that small growth to the fact that they are selling more non-book items at their bookstores.

While B&N still gets most of its revenues ($943 million for the quarter) from stores, not shockingly The Wall Street Journal reports that B&N is now planning to stop signing 10-year retail leases for bookstores, since it wants to be able to shut those suckers down at a moment's notice. Also, they report that B&N had many chances to buy Borders, and passed, because who wants more bookstores these days?

But look at the Web business, and--whoo-whee!--the growth picture is very different. BN.com had sales of $217 million for the quarter, 54% higher than the previous year. For the year, BN.com sales are 50% higher than the year before. And where's all that Web business coming from? E-books! E-books now outsell paper books on BN.com by 3-to-1! What with the Nook and its Web store, B&N now controls 26% to 27% of the e-book market--a market it entered only two years ago.

So, yeah, bookstores still represent the majority of Barnes & Noble's sales. But for how long? The growth trajectory is all on the side of e-books, and it looks very, very nice. Of course, it's possible that B&N still won't make it--after all, entering this market isn't cheap, and B&N still has those bookstores to worry about. But if they can get 50% growth in revenues every year without continually spending 50% more (which I would think is doable--it should cost less to update the Nook than to create the Nook, for example), they will eventually make money again.