Fork in the Road for a Bookseller

Chuck Burton/Associated Press

Customers at a Nook kiosk in a Barnes & Noble store. The company said that it would no longer manufacture color tablets.

William Lynch was brimming with the enthusiasm of a start-up entrepreneur. It was January 2012, and Mr. Lynch, Barnes & Noble’s chief executive, was showing off the company’s shiny Palo Alto, Calif., offices, a 300-person outpost that was the center of its e-reader operations.

William Lynch had been enthusiastic about the Nook.

He and other executives proudly displayed their new devices, talked about plans to expand and promised that the bookstore chain could go head-to-head with the giants of Silicon Valley.

“We’re a technology company, believe it or not,” Mr. Lynch said.

But only 16 months later, Barnes & Noble’s digital plans are crumbling. Last month, a disastrous earnings report coincided with the company’s announcement that it would no longer manufacture color tablets. And on Monday, Barnes & Noble announced that Mr. Lynch, the young, tech-savvy architect of the company’s digital strategy, had abruptly resigned. A new chief executive was not named.

That leaves the nation’s only major bookstore chain without a clear path forward, reviving fears among publishers, authors and agents â€" who are deeply dependent on a viable Barnes & Noble â€" about its future.

Barnes & Noble executives have acknowledged one fact: the digital business that was to be the centerpiece of its growth strategy must be retooled.

After introducing its first black-and-white e-reader in 2009, called the Nook, Barnes & Noble joined the tablet race, a move that industry experts have pointed to as a source of the company’s current troubles. Barnes & Noble’s inexpensive color tablets aimed for a niche in the market below the iPad. But while the company grabbed close to 25 percent of the e-book market, its digital division was getting pummeled by larger competitors, and bleeding money.

“Barnes & Noble was in a Catch-22. They had to do something in digital and Nook was their best shot at it,” said Peter Wahlstrom, a retail analyst with Morningstar Equity Research. “William Lynch had a good vision, but he was overwhelmed and fighting with one hand behind his back.”

Mr. Lynch’s departure, which was effective immediately, leaves Leonard Riggio, the chairman of Barnes & Noble, with a much more visible and powerful role within the company. Mr. Riggio, who built the company into a national force, is known to cherish the physical bookstores. His increased influence, analysts said, could shift the company’s focus more toward the retail side of the business.

Mr. Riggio, the public face of Barnes & Noble for decades, declined a request for an interview on Tuesday. But in meetings and memos in the last two days, Barnes & Noble employees have been assured that despite the recent tumult, their fundamental mission remains the same.

“As you know, we reported year-end results two weeks ago, and Barnes & Noble Retail and Barnes & Noble College delivered very solid performances and remain profitable businesses,” Mr. Riggio wrote in an e-mail to employees after the resignation of Mr. Lynch was announced. “While the losses were significant in the Nook business, I feel certain we will get the business back on track.”

For the fiscal fourth quarter, the Nook unit showed a $177 million loss in earnings before interest, taxes, depreciation and amortization, or Ebitda, more than doubling the loss from the period a year earlier. Sales fell 34 percent, to $108 million.

“We’re trying to figure out the right strategy, but it can’t happen overnight,” said one executive, who spoke on condition of anonymity because he was not authorized to talk publicly. “E-books are still expanding, and we still have a piece of that market. We just have to find other ways to grow our digital business.”

Analysts said the resignation of Mr. Lynch could increase the likelihood of a formal split of the company. In April 2012, the Nook was spun off as a separate business from Barnes & Noble’s nearly 700 retail stores. Microsoft, which paid hundreds of millions of dollars for 17.6 percent of the Nook division, has expressed interest in buying the entire division, but it is unclear if a deal will be reached.

“The question is, can they truly take the Nook and sell it to someone who’s interested?” said Jack W. Perry, a publishing consultant. “I don’t know if the Nook name has the value to it. But with the customers Barnes & Noble has, there’s still value there.”

In February, Mr. Riggio indicated that he wanted to buy the retail stores and take them private, but he has not publicly acted on those plans since.

On Monday, the company said it was reviewing its strategic plan and would provide an update “when appropriate.”

Michael Norris, a senior analyst with Simba Information, said Barnes & Noble was “in a period of serious and meaningful transition.”

“I think that they need to really ask themselves what kind of business they want to be in,” Mr. Norris said. “And they need to figure out how they expect to make money from both the bookstore business and the e-reader business.”

John Tinker, an analyst for the Maxim Group, said the retail stores were still an attractive property, something that had been obscured by missteps from the digital division. Mr. Lynch, who came to Barnes & Noble with a background in technology and e-commerce rather than book-selling, spent most of his time focused on the digital side of the company. Mr. Riggio has expressed support of the Nook business to employees, but has always devoted his energies to old-fashioned retail book-selling.

“The huge losses and the huge noise on the Nook side are masking a very interesting business on the retail side,” Mr. Tinker said. “If there’s one thing that Riggio is good at, it’s running stores.”

A version of this article appeared in print on July 10, 2013, on page B1 of the New York edition with the headline: Fork in the Road for a Bookseller .