Can Barnes & Noble (BKS) Survive the Kindle, iPad and eReader Push?

by Burke Speaker | September 20, 2010 3:13 pm

While companies across the country are still fretting the economy’s woes, Barnes & Noble (NYSE: BKS[1]) is facing a tougher challenge. Not only is book retailer Barnes & Noble fighting for its immediate health via sales and earnings – but with the Kindle and digital publishing booming, it’s also fighting for its survival as e-books and e-readers come into their own.

The company is currently in an internal battle between billionaire Ronald W. Burkle and company chairman Leonard S. Riggio over its direction. And Barnes & Nole has begun seeking potential buyers for the entire 1,350-store chain, a move that will ultimately decide its fate. Of course, whoever the victor, the hope is the battle doesn’t leave the company even weaken than before.

The company’s market value has shrunk to less than $1 billion, as bookselling is being trounced by digital offerings and the Kindle from (NASDAQ: AMZN[2]),  the iBookstore and iPad from Apple Inc. (NASDAQ: AAPL[3]) and even discount electronic titles from that king of retail Walmart (NYSE: WMT[4]). Analysts and shareholders ponder its recent “underperform” status and fear the digital strategy is weak compared to industry rival. BKS stock has fallen -42% since April, at -17% year-to-date compared to a relatively flat Dow and S&P 500.

Even its business plan has some worried. Just last week, Chief Executive Officer William J. Lynch Jr. sent shareholders a letter detailing the company’s plans, which consisted of a less-than-aggressive approach to growth. Its first bullet point was, in effect, “wait till the competition dies.” Barnes & Noble currently owns 18% of the U.S book market – and expects that figure to grow to +25% in the three years. Why? Per the memo: “As the physical book market contracts over the next four years … we see many of these non-book retailers de-emphasizing the book category with greatly reduced shelf space and in some cases eliminating it all together. This will provide an opportunity for us.”

Of course, hopefully for the company, hardcover book sales don’t decline too much. While for its most recent quarter, Barnes & Noble showed a +21% increase in overall revenue, to $1.4 billion, it posted a $63 million net loss (or $1.12 per share) from weakening print book sales – and internal legal struggles for shareholder control.

Barnes & Noble originated in 1873 with Charles Barnes opened a bookstore with G. Clifford Noble in 1917 in New York City. Since then the company expanded and flourished, notably under Riggio – should he retain tight control of the company. Its current financials may help decide that.

Should sales flounder as much as it expects, the strategy also aims to increase its online and eReading capabilities, especially since eBook sales are expected to overtake regular book sales by next year.  Barnes & Noble was actually the first company to launch an eReading device, dubbed the “Rocketbook,” in early 2000. Perhaps coming a little too ahead of its time, it failed. Today, the company offers more than 1 million books on its new NOOK digital reading software, which also supports some 400 mobile devices.

Since re-launching our eBookstore more than a year ago, Barnes & Noble says it’s capturing 20% of the digital trade book market – higher than the 18% in the physical book market. In its last two quarters, eBook sales are fueling nearly all the company’s new growth, banking more than 50% year-over-year comparative revenue increases.

It’s good news for the bookseller – especially considering that Kindle and the iPad are a tidal wave of immense competition for the company. The stock market hit bottom in March 2009 but BKS stock hit its low point in July – in part showing the company has more to fear from its competition than the market.

Over the past three months, Amazon has seen sales of electronic books far outpace sales of hardcover books. Apple, too, is seeing its iPad sales through the roof – from 3.6 million unit forecast for the quarter to 5.7 million.

If the Nook stays behind the competition in eReaders, the Barnes & Noble eReader still plans to grow in its share of the $12 billion textbook market.  Acquiring Barnes & Noble College Booksellers – with 636 college bookstores in the U.S – hopes to capture more of the college cash.

The bottom line, though, is the future of books. If the company can’t find a way to be at least one of the best in digital book sales – and stay that way – then Barnes & Noble may slowly go the way of its hardcover sales.

As of this writing, Burke Speaker did not own a position in any of the stocks named here.

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