Is It Time for This Big Box Store to Change Management?

Barnes & Noble CEO Michael Huseby has only served in his post since January 2014.

By most accounts, he has done an okay job stabilizing the retail business, growing its college segment, and transitioning the book-seller into new segments like toys and gifts. On the surface, Huseby has succeeded -- Barnes & Noble is healthier than when he took over.

In reality, however, Huseby has only improved results in the segments of the company that have a limited shelf life. The world of books -- where the majority of revenue still comes from -- is moving rapidly to digital delivery and online sales. Barnes & Noble has seen its CEO do nothing to grab a larger share of these markets, now dominated byAmazon.

Huseby and his management team have shown that they can manage expenses, eke out efficiencies, and get the most out of a dying business. That is commendable, and they deserve a gold watch and a hearty "thank you" on the way out the door. What they have not proven is that they can lead the massive transformation Barnes & Noble needs to survive in a digital world.

How bad is the digital business?By the time Huseby took over, it may have been impossible for anyone to turn around the Nook business. Digital e-reader sales have fallen steadily for years, which essentially puts an end date on the company. Amazon has pretty much consolidated the entire e-reader business, and Huseby has done nothing to change that.

The Nook unit, which includes digital content, devices, and accessories, had revenues of $78 million for the most recentquarter, a 50.6% decrease from a year ago. Device and accessory sales were $37 million for the quarter, a 62.8% year-over-year decrease, while digital content sales were $41 million for the quarter, a 29.3% decline. Both categories suffered due to declining unit sales volumes.

If you do not sell any devices, you will not sell any digital books, and if you do not sell any digital books, your business will fade away as the slow march to e-books continues.

Barnes & Noble still devotes floor space to the Nook, but few people are buying. Source: Author

A slow deathDespite the repeated failures of its leadership to update the business, the slowing pace of the digital conversion means there is still time left.

"Recent sales data indicate that the meteoric rise of the digital book, and a consequent fall in purchases of traditional books, may have subsided," wrote San Jose State University researcher M. Julee Tanner in the 2014 paper "Digital v. Print: Reading Comprehension and the Future of the Book." According to Tanner, "It seems likely that, at least in the short term, digital book sales will settle somewhere between 10% and 20% of the total market."

The important words here are "short term," as digital books will continue to supplant print. That means Barnes & Noble either needs a strategy where it somehow gains meaningful traction for its e-readers, or it needs to radically transform its business.

Adding toys was a nice fractional move, but toys -- even the higher-end, semi-educational ones Barnes & Noble is selling -- are also highly vulnerable to online competition. It should also be noted that the company has devoted a lot of space to Lego, which is a big seller but a low-margin product (30% to 35%) compared to books (50% to 60%).

A failure by his own descriptionRecommending Huseby be replaced is difficult, because under a lesser leader, Barnes & Noble may have already joined the ranks of Radio Shack, Circuit City, and Borders in the shopping center in the sky. But while Huseby has proved a stabilizing force, he has not shown any ability to make radical changes.

He has even failed when measured against his own words from the press release when he was appointed:

It is hard to call Barnes & Noble a leader in the sale of digital media. It is also hard to see where Huseby has unlocked any value on a long-term basis. Barnes & Noble is the same business with a slightly diversified product line and a failing digital strategy.

As a CEO, Huseby is a great manager. He kept Barnes & Noble afloat, but now it is time for him to hand the company to a gambler, a visionary who can make the bold moves that will not just make the death march slower but also find a new model for the business going forward.

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Daniel Kline has no position in any stocks mentioned. He wrote part of this article in a Barnes & Noble. The Motley Fool recommends The Motley Fool owns shares of and Barnes & Noble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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