Barnes & Noble: The Future May Be Digital, but Bricks-and-Mortar Is Hot

At first glance, Barnes & Noble's (BKS) CEO switch Thursday morning was unexpected news. After all, Steve Riggio had been with the company for 35 years, rising to the top of the food chain in 2002. He's also the younger brother of Chairman Leonard Riggio, who bought the company in 1971 and transformed a small series of outlets into arguably the largest bookseller in the world, with a sizable share of the American book market. The older Riggio even went on record as saying he and his brother have "always been worried about the continuity of our enterprise."

But a number of interlinked factors make the appointment of William Lynch -- an e-commerce veteran who had never worked in the book biz until joining B&N a year ago as CEO of the company's online side -- not shocking but inevitable. And only some of those factors have to do with keeping ahead of the digital curve.

Bullish on Online Growth

Lynch joined B&N in February 2009 from the Home Shopping Network, where he had headed up HSN.com. Before then, his resume included other dot-coms and tech companies like IAC and Palm. B&N went online in 1995 -- a year after Amazon (AMZN) -- and had established a fairly healthy cyber-presence through virtual book clubs, marketing portals and a stand-alone literary book review (which I contribute to). But Lynch's hiring clearly signaled bigger plans -- to take direct aim at the Seattle-based Amazon's phenomenally successful Kindle.

Although Leonard Riggio singled out its nook e-reader in Thursday's conference call to discuss Lynch's appointment as "our single bestselling product," the nook has had to overcome some big bumps since its December launch. Shipping delays, lawsuits, firmware issues and long, long waits before it hit store shelves built a negative buzz. But those early hurdles seem to have been cleared, and nook buzz is trending positive.An estimated $10 million to $20 million worth of the devices sold last holiday season, a time when BN.com reported $134 million in sales, a 17% jump from the previous year.

B&N's e-reader is only part of the company's digital story. Last year B&N acquired e-bookstore Fictionwise and developed e-reading software for a multitude of devices, from the iPhone (AAPL) to the BlackBerry (RIMM) to the iPad, timed to the device's early April availability.

The Old-School Way Won't Go Away

Clearly, when a market sector is growing as fast as B&N's digital side, the company must fuel that fire. Concentrating on the positive also tempers the bad news -- and B&N has had plenty to worry about. Last holiday season, as online sales zoomed up, same-store book sales dropped 5.4%, and overall sales dropped in similar fashion to just over $1.1 billion. The company isn't expecting a turnaround for the third quarter, either, lowering its guidance from $1.30–$1.50 a share to $1.20–$1.40 a share.

And the days of opening megastores in every neighborhood are over. Chairman Riggio doesn't expect to close stores in the future, he said during Thursday's call, and plans to merely "stay at the level we're at and see what happens over the next couple of years."

The company is banking on exponential growth in e-book sales, and Lynch is putting much of its resources into that sector. But abandoning storefronts would be foolish: Bricks-and-mortar, paradoxically, remains the company's secret weapon against tech-oriented peers like Amazon, Apple and Google (GOOG). The chain is counting on its brawn to determine, even in a diminishing book market, which books publishers pay to have placed at the front of the stores. That lets B&N do something Amazon never has -- turn a book into a bestseller.

Even if e-books cut into print sales, B&N likely figures it has both bases covered. Say a customer walks into a B&N store, browses the New Fiction table near the front, and picks up a book -- an e-copy could be downloaded instantly to his nook. (Or his Kindle or his iPad, of course. But neither Amazon nor Apple allows for a print-to-digital experience under one roof.)

Two Fronts, One Future

Streamlining B&N's traditions in a digital world while still turning publishers' books into bestsellers will be the job of Mitchell Klipper, who moves from COO to the new position of retail stores group CEO. And as long as tradition gets integrated with digital, and overall sales look a lot more like what's coming from the online side, that might be enough to convince stockholders that they need a beefed-up Ron Burkle presence like a hole in the head.

But if online growth stalls, or bricks-and-mortar sales continue to decline -- or if Amazon finally learns how to co-opt B&N's big bestseller alchemy through its dominant digital-book market force -- then the bright future imagined by the Riggios will dim -- and set up quite the proxy fight at the annual stakeholders' meeting this fall.