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Analysis: Departure of Barnes & Noble CEO may put focus on retail

Customers enter a Barnes and Noble store in New York June 25, 2013. REUTERS/Brendan McDermid
Customers enter a Barnes and Noble store in New York June 25, 2013. REUTERS/Brendan McDermid

By Phil Wahba and Atossa Araxia Abrahamian

NEW YORK (Reuters) - The sudden resignation on Monday of Barnes & Noble Inc's chief executive could indicate the struggling bookseller is closer to breaking up and returning to basics: bookstores.

William Lynch, who became CEO in 2010 to take on Amazon.com Inc in the e-books wars, quit on Monday just two weeks after the company reported a 34 percent drop in revenue in its Nook business, a venture he spearheaded that has cost Barnes & Noble hundreds of millions of dollars. His departure was somewhat of a surprise to investors because he signed a two-year contract renewal in March.

The company is not looking for a replacement for Lynch and instead named finance chief Michael Huseby to be the CEO of its Nook Media division, which it created in 2012 as a potential spin off. The CEO of Barnes & Noble Retail, Mitch Klipper, and Huseby will both report to Leonard Riggio, who built the chain and owns 30 percent of its shares.

"With no plans to hire a CEO in the near term and Len Riggio once again in control, this management restructuring could bring the company closer to a more formal break up," Janney Capital Markets analyst David Strasser wrote in a note to clients.

Barnes & Nobel did not respond to a request for comment.

The management shakeup puts Riggio, who said in February he wanted to buy the company's 680 bookstores, in the driver's seat. It also deepens the separation between its main book store business and its digital business, which the company had long touted as complementary.

The company has struggled for years with the gradual shift to e-books, which is what led to its venture into e-readers in 2009. Last month, it said it would stop producing Nook tablets on its own, but will continue to make black-and-white e-readers.

At first, the Nook was a success, helping Barnes & Noble garner as much as 27 percent of the U.S. e-books market. But as tablets' reading functions improved, Barnes & Noble found itself competing against very popular devices such as Amazon's Kindle Fire and Apple Inc's iPad.

The Nook's initial popularity attracted investments from Microsoft Corp and Pearson Plc , which valued it at between $1.7 billion and $1.8 billion. But the unit's fortunes have changed. Nook lost $475 million last year.

Microsoft and Pearson did not return requests for comment about their plans for their Nook stakes.

Barnes & Noble reported two catastrophic quarters in a row, including a dismal holiday season, prompting many on Wall Street to say Nook's decline would pressure Barnes & Noble to get a deal done.

Barnes & Noble shares closed up 5.4 percent at $18.61, giving the company a market value of about $1.1 billion.

RETAIL STILL VIABLE

The growing preference among readers for e-books has been painful for Barnes & Noble. Sales at stores open at least 15 month fell 3.4 percent in the fiscal year ended April 28, making clear the sales bump from the 2011 liquidation of rival Borders Inc was over.

At the same time, the retail chain is profitable. Barnes & Noble's gross profit margin in its retail business was 31 percent of sales last year, up from 30 percent a year earlier. Barnes & Noble's stores generate two thirds of company sales.

The chain's profits have gotten a big boost from its educational toys and games selection, which it has expanded since 2011. Its cafes also are popular.

Barnes & Noble is still planning to close about 15 stores a year, Klipper told Reuters two weeks ago. He estimated that 95 percent of the stores are profitable. If the company needed to close more, it could do so relatively painlessly. Some 442 leases are up for renewal within the next three years.

The company is likely to find an ally in the publishing industry, which is wary of Amazon having almost no competition.

"From a publishing point of view everyone is urging them to keep going and keep helping," said Lorraine Shanley, co-founder of Market Partners International, a consulting firm that advises publishers. "Barnes & Noble were always the behemoths that everyone was ranting about and now they're the David in the David and Goliath story."

(Reporting by Phil Wahba and Atossa Araxia Abrahamian in New York; Editing by Jilian Mincer and Andre Grenon)

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