Early in January, Barnes & Noble (NYSE:BKS) released its holiday numbers. One that stands out is the 13% decline in its Nook revenue for the nine-week period ended Dec. 29. Nook has long been the argument for why investors should own its seemingly undervalued stock.
But with this latest dent in Barnes & Noble’s armor, one can’t help but wonder whether it’s still a value play.
Nook revenue during the 2012 holidays was $311 million. Working backward based on a 13% decline in revenue, the 2011 number for this all-important nine-week period would have been $357 million. Unfortunately, Barnes & Noble doesn’t mention this figure in its 2011 holiday sales report. It does, however, mention that its consolidated Nook business increased 43% during the 2011 holiday period to $448 million on a comparable basis.
The $91 million gap from above could be the result of this particular line in its 2011 press release: “Nook’s comparable sales reflect the actual selling price of eBooks sold under the agency model rather than solely the commission received. Additionally, it includes all deferred eReader device revenues, and includes device sales to channel partners on a ‘sell-in’ basis net of estimated returns.”
It’s possible that Nook’s “deferred eReader device revenues” plus the difference between the selling price of an e-book and its commission represents the gap between what was reported in 2011 and what should have been the result based on its 2012 holiday report. The real figure for 2011 remains a mystery.
Is it any wonder that Barnes & Noble is in trouble when it can’t even present financial metrics in a transparent and consistent manner. I’m sure there’s a simple answer for the discrepancy, but it’s frustrating when you’re left comparing apples to oranges.
What I can say is that in the last three fiscal quarters — Q4 2012 to Q2 2013 — Nook’s revenues, on average, have decreased by 1.3% year-over-year. There’s no ambiguity about that number — it stinks!
Nevertheless, there appears to be no shortage of companies willing to saddle up to the digital business. In October, Microsoft (NASDAQ:MSFT) invested $300 million for 17% of Nook Media, which combines all the Nook business as well as Barnes & Noble’s college bookstore operations. In addition, Microsoft paid $180 million for revenue sharing on the Nook app for Windows 8 as well as $125 million for Nook Media to purchase digital content.
Then, at the end of December, Pearson (NYSE:PSO) announced that it was paying $90 million for a 5% interest in Nook Media, putting a hypothetical value of $1.8 billion on the business, more than double the enterprise value for the entire company. Nook might be facing stiff competition from both Amazon‘s (NASDAQ:AMZN) Kindle Fire and Apple‘s (NASDAQ:AAPL) iPad, but that’s not stopping investors like Microsoft and Pearson from placing a bet.
In January 2012, Canada’s Indigo Books & Music (PINK:IDGBF) sold Kobo, its 51%-owned e-reader subsidiary, to Japan e-commerce giant Rakuten (PINK:RKUNF) for $315 million. Kobo’s fiscal 2011 revenues were $90 million, and while I don’t have the 2012 results, I’d assume they were no higher than $95 million, which means Rakuten paid 3.3 times sales for a business that was losing about $20 million per year. Indigo made the move because Kobo was costing it significant cash, and Rakuten could do a better job leveraging the brand.
Nook’s revenues in fiscal 2012 were $533 million when you exclude sales to Barnes & Noble’s retail and college segments. At 3.3 times sales, we’re talking about a valuation very similar to the $1.8 billion derived from Pearson’s 5% investment. A sale of Nook would mean $1.4 billion for Barnes & Noble shareholders, or $23.72 per share.
It’s awfully enticing for John Malone, whose Liberty Media (NASDAQ:LMCA) paid $17 per share in 2011 for 17% of Nook’s parent. With Liberty Media’s recent spin-off of Starz (NASDAQ:STRZA) completed, it has additional financial resources available to increase its stake in B&N. I’d be surprised if Malone doesn’t eventually own a majority of its stock.
So, what does it all mean?
Although Nook’s e-reader business seems to be slipping, it has enough staying power to ensure its value as a business — despite significant losses — isn’t eroding much. Like Kobo, someone eventually will want to own the Nook business (possibly Liberty Media) outright and will make a play for it, either as a separately operated segment of Barnes & Noble or as a completely independent, public company.
Despite the overhang of B&N’s poorly performing retail division, people like Malone don’t stay in the game to lose money. At the moment he’s underwater to the tune of $48 million less the dividends received on his preferred shares. Eventually, he’ll want to rectify that in some way.
Poor holiday sales or not, Barnes & Noble remains a decent value play.
As of this writing, Will Ashworth didn’t not own any securities mentioned here.