Barnes & Noble Inc posted strong sales in both its Nook and printed books businesses over the holiday quarter, holding its own in its bruising fight with Amazon.com Inc's Kindle in the digital books market.
Sales at its Nook business, including e-books and the devices, rose 38 percent to $542 million during the holiday quarter, which ended January 28. And physical book sales at its 720 superstores rose 4.2 percent in the first holiday quarter since rival Borders Group shut down in September.
Barnes & Noble has been engaged in a fierce, closely watched battle with Amazon in the market for electronic readers.
Chief Executive William Lynch told analysts on a conference call on Tuesday that Barnes & Noble now had a 27 percent to 30 percent share of the U.S. digital books market, compared with a previous estimate of 27 percent.
But that growth has not come free. The largest U.S. bookstore chain, whose shares were up 1.6 percent in late morning trading, lowered the price on its Nook Color e-reader to $169 from $199.
The retailer also introduced a Nook tablet that will cost $199, or $50 less than the first version, which was launched in November. The new Nook tablet will have half the memory capacity of the earlier version but the same price and memory as Amazon's Kindle Fire tablet.
In Q3, we made sizable investments to fuel the growth of our Nook digital business, Lynch said on the call.
Those investments, including heavy advertising for the Nook devices and technology, have reduced the bookseller's profits.
Selling and administrative costs, including advertising, rose to 34.1 percent of online sales in the quarter, from 25.3 percent a year earlier.
Adding to the pinch, Barnes & Noble had already cut the price of the Color and other devices in November.
It's hard to maintain the same profitability if you keep lowering prices, Morningstar analyst Peter Wahlstrom said.
Wahlstrom said that the $50 cut on the tablet was deeper than what was needed for a device with less memory, reflecting how competitive the e-reader and tablet market is.
Overall sales during the holiday quarter rose 5 percent to $2.44 billion. Companywide sales at stores open at least 15 months rose 2.8 percent.
Barnes & Noble's interim finance chief, Allen Lindstrom, told Reuters the lift from Borders' liquidation would be higher in future years.
Sales and gross profit fell at Barnes & Noble's chain of college campus bookstores, the only part of the company's business to show a decrease. The college chain accounts for one-fifth of overall sales.
Barnes & Noble maintained its forecast of full-year company sales of $7 billion to $7.2 billion. The Nook business is expected to generate $1.5 billion in the fiscal year ending in April.
Last month, the bookseller cut its full-year sales and profit forecasts because of Nook costs and said it may split off its digital books and e-reader business.
It also said at the time that sales of its touchscreen Nook had been disappointing.
Barnes & Noble reported net income of $52 million, or 71 cents per share, for the quarter, compared with $60.6 million, or $1 per share, a year earlier.
Excluding items, Barnes & Noble earned 99 cents per share, while analysts were expecting 92 cents, according to Thomson Reuters I/B/E/S.
Shares were down 20 cents, or 1.5 percent, at $12.91 in late morning trading.
(Reporting By Phil Wahba in New York; Editing by Dave Zimmerman, Derek Caney and Steve Orlofsky)