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Barnes & Noble - Does The Book Retailer Have a Future in Electronics
Barnes & Noble (BKS) has been fighting to gain traction in the marketplaces in which it operates, and has not been having much success. Recent performances have done little to draw attention to the book seller’s stock, and B&N’s founder Leonard Riggio recently suspended his efforts to buy the Retail business. Finally, while the company continues to aggressively market its NOOK tablets and e-readers, we doubt the offerings’ ability to excite consumers and drive long-term growth.
In the company’s first quarter, revenues were $1.330 billion. The top line figure was down about 9% from the year-earlier tally, and there was very little for investors to get excited about. Losses continued to mount, as the book seller reported a quarterly share deficit of $0.86. This was $0.06 worse than our estimate and $0.03 better than the consensus target. This marked the sixth consecutive quarter in which the company reported a loss, and B&N will likely post a fourth straight full-year deficit in fiscal 2013 (ends around April 30, 2014).
Retail sales slumped 10%, to $1.008 billion, a decrease that was attributable to a comparable-store revenue slide of 9%, store closures, and lower online sales. The Retail top-line also suffered from decreasing volume of NOOK tablets as well as a lack of big-name draws, like The Hunger Games and Fifty Shades of Grey. Operating profits here slipped by $12 million, or 15%, as a result of the abovementioned top-line weakness.
The NOOK segment, which consists of the company’s digital business (including devices, accessories, and digital content), reported sales of $153 million in the fiscal first quarter, a decrease of 20%. Device and accessories revenues tumbled 23%, owing to much lower volume, while digital content sales fell 16%. Management again blamed a lack of alluring titles for the segment’s top-line woes, but we continue to caution that the company’s device offerings lag behind the tablets and e-readers offered by competitors like Apple (AAPL) and Amazon (AMZN) in terms of functionality, price, etc. The NOOK group’s EBITDA losses remained unchanged on a year-over-year basis, as the deficit held steady at $55 million. Lower sales and narrower gross margins were offset by cost cutting.
Finally, the College segment booked revenues of $226 million in the period, a time that did not include a back-to-school season, which was up 3%. New store openings and higher textbook prices were the growth catalysts, as same-store sales were down 1%. The EBITDA deficit widened from $14 million last year to $19 million this year, due to expenses related to opening new stores and increases in investments in digital education among other things.
No Longer an Acquisition Candidate
Prior to the earnings release, BKS stock had been getting a lot of attention from investors due to a potential buyout. The chairman and founder of Barnes & Noble, Leonard Riggio, had expressed interest in purchasing the company’s Retail business, but he recently suspended his efforts. The prospects of the deal had likely been supporting the stock price for some time, as BKS piqued the interest of speculators and hedge funds. Now that the likelihood of a deal emerging has all but disappeared (Mr. Riggio did state he reserved the right to pursue an offer down the road, but we deem this an unlikely outcome), the speculators have headed for the exits and BKS shares have fallen sharply.
Looking for a Growth Driver
When announcing that he was suspending his efforts to buy B&N’s Retail business, Mr. Riggio said that the company needed to focus on the business at hand, which included serving existing customers that own NOOK devices, building the Retail business, and generating more tablets and e-readers sales. Management echoed this sentiment, and analysts on Wall Street have been saying this for years. However, the reality is, making these changes and generating demand is much easier said than done, and we think Barnes & Noble is letting opportunity pass it by.
The company recently announced that it is releasing a new NOOK e-reader for the holidays. The GlowLight e-reader will be priced at $119, the same as Amazon’s Kindle Paperwhite e-reader. The offering is lighter than its main competitor and is free of advertising, which management hopes will draw in consumers. However, the announcement comes as research firm IDC says the market for dedicated e-readers is declining, as people in the market are opting for tablets instead. Tablets can do much more, including video, email, social media, and games, and this added functionality seems to outweigh the few downsides, such as shorter battery life and increased glare. The problem is NOOK tablets have not sold well of late, and the company is hesitating to make any moves in the marketplace.
The performance of NOOK tablets has suffered due to intense competition with Apple’s iPad, Amazon’s Kindle Fire, and others. B&N recently fell off IDC’s top-five list of market share holders in the tablet space, but only held a slim 2% slice in the fourth quarter of fiscal 2012 the last time it was on the list. Management claims that B&N is not giving up on tablets, but will instead focus on a new e-reader this year while it continues to sell last year’s tablet model and review its tablet strategy. We think this move is unwise, as consumers seem to have little loyalty in the space and are constantly searching for new and improved devices. We surmise that B&N’s share of the tablet market will evaporate in the next six to 12 months, while management creates a new plan of attack. B&N should continue to do well in the dwindling e-reader space, but given Amazon’s lower cost base and greater reach, we think the company is fighting an uphill battle.
The two businesses left are the traditional Retail segment and the College division. Retail is Barnes & Noble’s only profitable venture, and we think Mr. Riggio had the right idea in pursuing this unit. With some more fine tuning (closing underperforming stores), geographic expansion, and partnerships (such as offering Starbucks (SBUX) coffee at most locations), we think Retail could be solidly profitable. The College group also holds lots of promise. If the company could find a way to penetrate university campuses and partner with more institutions of higher learning, the segment should be able to climb into the black thanks to the high margins associated with textbooks. We think management would be wise to get back to the Barnes & Noble’s roots and leave the e-readers and tablets to Apples, Amazons, Microsoft (MSFT-Free Microsoft Stock Report), and Google (GOOG).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.