Sales at Barnes & Noble Inc.'s brick-and-mortar bookstores declined faster than expected in its latest fiscal quarter, stepping up pressure on the chain as it faces a proxy battle and a costly move to digital delivery.  Access thousands of business sources not available on the free web.  The bookseller posted a net loss of $62.5 million, or $1.12 a share, for the first quarter ended July 31, compared with a profit of $12.3 million, or 21 cents a share, a year earlier.  The news Tuesday came as the company is fighting two much richer rivals, Amazon.com Inc. and Apple Inc., in the fast-growing electronic-book marketplace. Barnes & Noble said it had made significant digital inroads in just a year, claiming north of 17% of the e-book market.  Overall quarterly sales, including those of the company's 633-unit college textbook chain, rose 21% from a year earlier to $1.4 billion.  But the retailer, the largest U.S. bookstore chain by revenue, posted a 0.9% decline in comparable sales at its namesake physical stores in the quarter. In June, the company projected that these same-store sales—a key retail indicator—would be in a range from flat to up 3%.  "Our physical trade-book business continues to be under some pressure," Chief Executive William Lynch said in a conference call, adding that the New York company would continue to dedicate a large part of its financial resources to a digital future.  Under the gun from declining sales of physical books and a campaign against its board launched by activist investor Ronald Burkle, Barnes & Noble put itself up for sale earlier this month. Mr. Burkle has since launched a proxy battle aimed at winning three board seats. The battle's cost is expected to weigh further on earnings this year, Barnes & Noble warned.  Leonard Riggio, the bookseller's chairman and largest investor, has bet big on converting Barnes & Noble into a digital player. The company has spent heavily on promoting its e-book reader, the Nook, and e-book sales in its stores.  But it faces fierce competition from Amazon.com's Kindle, Apple's iPad and new tablet devices expected to hit the market this year.  Mr. Lynch, the retailer's former digital chief who was appointed CEO in March, said in the conference call that the company sees "only three to four big players in the e-book market over time" because of the cost and difficulty of converting books to a digital format, which he compared to "hand to hand combat." Mr. Lynch also said that estimates that e-book sales will hit $500 million in the U.S. this year are "low."  Barnes & Noble said it is on track to spend $140 million on its digital strategy this year, but didn't break out profitability for its digital sales.  Barnes & Noble has spent heavily on promoting its e-book reader. Above, a man looks over the Nook.  Its recent court battle with Mr. Burkle took a $9.5 million bite out of pretax earnings. A judge ruled in favor of Barnes & Noble earlier this month in a suit challenging its decision to impose a "poison pill" that restricted Mr. Burkle's ability to increase his stake in the company.  Those legal costs, plus anticipated legal expenses from the proxy battle, prompted the company to lower its full-year earnings guidance by 25 cents a share, to a net loss in the range of 25 cents to 65 cents.  In another move Tuesday, Barnes & Noble said Mr. Riggio has decided against voting 990,740 shares in the coming proxy battle. Mr. Burkle challenged the legality of voting the shares, which Mr. Riggio recently acquired after exercising options at a strike price of $16.96, or $16.8 million.  Barnes & Noble said Mr. Riggio won't vote those shares to avoid the costs of additional litigation.  Write to Jeffrey A. Trachtenberg at jeffrey.trachtenberg@wsj.com
Barnes & Noble reported a significant loss as mounting costs of its digital strategy and legal expenses from a court battle compounded weak store traffic.