The Nook, launched in 2009 to compete with Amazon.com Inc's market-leading Kindle, has been the cornerstone of Barnes & Noble's strategy to counter the shift by many book readers to digital books. Early growth attracted a big investment last year from Microsoft Corp.
And last week, British education and media publisher Pearson Plc said it would take a 5 percent stake in Barnes & Noble's Nook Media unit, which also includes its college bookstore chain, giving it a $1.8 billion value, about double the company's value as a whole.
But questions swirled about whether it is worth that much, after the retailer said that the Nook segment's revenue fell 12.6 percent from a year earlier during the nine weeks ended December 29, hurt by lower unit sales and prices.
Sales of digital content like e-books and magazines rose 13.1 percent during the holidays, a much slower pace than the 38 percent gain last quarter and 113 percent in the 2011 holiday season, suggesting Barnes & Noble is having trouble holding on to its 25-30 percent share of the U.S. e-books market.
"We are way beyond the point where you should see content sales accelerate," Morningstar analyst Peter Wahlstrom told Reuters. "That hasn't materialized and that's concerning."
The numbers were all the more disappointing given that in late November, Barnes & Noble had told investors Nook device sales doubled over the Black Friday weekend, which follows Thanksgiving and kicks off the holiday season in earnest.
That suggests the rest of season was a debacle, analysts said, and Chief Executive William Lynch said in a statement that Barnes & Noble is "examining the root cause" of the shortfall and will adjust its strategy.
"The investment question for Barnes & Noble in 2013 is the Nook's staying power as a legitimate tablet device," Credit Suisse analyst Gary Balter wrote in the note, predicting the retailer will face stiffer competition this year from the likes of Apple Inc and Google Inc, since tablets now have improved functions that make them more appealing to book readers.
The drop in Nook sales came despite the launch of two well-reviewed high-definition Nook tablets in October and promotions at large chains like Wal-Mart Stores Inc and Target Corp, both of which stopped selling Kindles last year.
Despite the holiday results, Barnes & Noble still expects Nook Media sales of $3 billion this fiscal year, keeping a forecast it gave in October.
That steady forecast helped lift shares 2.6 percent to $14.88 in morning trading.
The company will report full quarterly results in late February.
The results follow a warning from Barnes & Noble in a filing last week that holiday sales would come in below its expectations. The warning erased most of the gains in its share price that followed the news of Pearson's investment.
Fewer visitors in stores
Compounding Barnes & Noble's troubles, fewer shoppers came into its bookstores during the Christmas period.
Barnes & Noble, which had enjoyed a sales bump after onetime rival Borders Group liquidated in 2011, reported a 10.9 percent decrease in sales at its bookstores and on its website over the holiday period.
Sales at stores open at least 15 months fell 3.1 percent, excluding Nook products, despite the benefit of some store closings Barnes & Noble operates 689 bookstores, 14 fewer than a year ago.
"The Borders tailwind is over," Morningstar's Wahlstrom said.
© Thomson Reuters 2012