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Barnes & Noble Takes Unexpected Sales Hit

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Nov 27- Dec 4, 2011 Edition Barnes & Noble Takes Unexpected Sales Hit

Barnes & Noble Inc. on December 1 reported an unexpected decline of 0.6% in sales for the second quarter compared to the prior year. Total sales fell from $1.90 billion to $1.89 billion and retail store sales decreased 1% from $931 million to $918 million with comparable sales decreasing 0.6%. The company’s heavy investment in its Nook e-reader, to stay completive with Amazon’s Kindle, led to the unexpected quarterly loss, sending stock prices down as much as 24 percent on December 1, the day the report was issued.

Expensive promotion for the Nook put downward pressure on the company, which says it will continue its aggressive investment strategy. The company expects full year EBITDA to be at the lower end of the previously issued range of $210 million to $250 million. Although the company has seen and continues to expect increases in retail earnings, it plans to invest more heavily in customer acquisition activities to fuel NOOK digital growth. These investments primarily include promotional activity and advertising for NOOK products, as well as technology costs related to developing other opportunities.

Barnes & Noble College (“College”) sales also declined, falling 4% from $797 million to $768 million, due to a shift from selling new and used textbooks to lower priced, higher margin textbook rentals. Comparable store sales increased 0.4%. College comparable store sales reflect the retail selling price of a new or used textbook when rented, rather than solely the rental fee received and amortized over the rental period.

BN.com sales increased 17% over the prior year, from $177 million to $206 million. Comparable sales increased 38%, on top of a 59% increase a year ago. This increase was driven by continued growth of digital content sales and purchases of award winning NOOK(TM) devices. BN.com comparable sales reflect the actual selling price for eBooks sold under the agency model rather than solely the commission received.

SECOND QUARTER EARNINGS

Earnings before interest, taxes, depreciation and amortization (EBITDA) grew 21% over the prior year, from $46 million to $56 million.

Retail EBITDA grew from $1.3 million to $21.0 million, benefiting from higher product margins this year. In addition, the prior year included $10 million of litigation and proxy contest costs. College EBITDA declined slightly from $95.3 million to $93.9 million. BN.com EBITDA losses increased from $50.2 million to $58.9 million, driven by planned product markdowns on the recently announced NOOK price adjustments, as well as higher advertising production costs.

Total company net loss was $6.6 million for the quarter, or $0.17 per share, as compared to a net loss of $12.6 million last year, or $0.22 per share. Included in the current quarter is a $0.06 loss per share related to the company’s preferred stock dividend, in accordance with ASC 260, Earnings per Share. The dividend is deducted from earnings available to common shareholders in the earnings per share calculation and does not impact the company’s results of operations.

BARNES & NOBLE LAUNCHES NOOK Tablet(TM)

On November 7, 2011, Barnes & Noble launched NOOK Tablet, the company’s fastest and lightest tablet with the best in entertainment. msnbc.com cited the product as a “terrific tablet,” The Associated Press called it “really impressive” and Forrester Research Inc. called it a “wow product”. In the first few weeks of launch, NOOK Tablet has become the fastest selling NOOK product in the company’s history.

Concurrent with the launch of NOOK Tablet, the company also announced enhancements and new low prices for NOOK Color(TM) and NOOK Simple Touch(TM), retailing at $199 and $99, respectively.

The newly updated NOOK Simple Touch continues to earn high praise from leading tech review outlets. CNET, PCMag and Laptop Magazine rank it among their top-rated touch eReaders with all three naming it “Editor’s Choice” and this week, PC World rated NOOK Simple Touch the #1 eReader (11/29/11).

The consolidated NOOK business across all of the company’s segments, including sales of digital content, device hardware and related accessories, increased 85% in the second quarter to $220 million, on a comparable sales basis.

“The launch of NOOK Tablet, combined with the product enhancements to NOOK Color and $99 NOOK Simple Touch, represents the highest-quality portfolio of digital reading products on the market at incredible values,” said William Lynch, chief executive officer of Barnes & Noble, Inc. “We expect to sell millions of devices during our third quarter, adding to the millions of current NOOK customers. This growing base of customers buying digital content from Barnes & Noble will continue to position us as one of the fastest growing companies in this exploding digital content market, and we project this will generate significant returns on our investments for years to come.”

Over the three-day holiday weekend, comparable store sales increased 10.9% at Barnes & Noble stores, on top of 17% comparable store growth last year. “Based on early sales and traffic results in stores we are encouraged by our prospects for this upcoming holiday,” added William Lynch.

Barnes & Noble, Inc. will report holiday sales on or about January 5, 2012.

ABOUT BARNES & NOBLE, INC.

Barnes & Noble, Inc. BKS -0.44% , the world’s largest bookseller and a Fortune 500 company, operates 703 bookstores in 50 states. Barnes & Noble College Booksellers, LLC, a wholly-owned subsidiary of Barnes & Noble, also operates 637 college bookstores serving over 4.6 million students and faculty members at colleges and universities across the United States. Barnes & Noble conducts its online business through BN.com ( www.bn.com ), one of the Web’s largest e-commerce sites, which also features more than two million titles in its NOOK Bookstore(TM) ( www.bn.com/ebooks ). Through Barnes & Noble’s NOOK(TM) eReading product offering, customers can buy and read digital books and content on the widest range of platforms, including NOOK devices, partner company products, and the most popular mobile and computing devices using free NOOK software.