Barnes & Noble: Drama Worthy of a Beach Paperback

by Brad Moon | August 21, 2013 11:49 am

I thought I had this Barnes & Noble (BKS[1]) thing all figured out.

There has been plenty of drama this year and some real head-scratchers, but as the pieces were played, it all more or less made sense[2]. Six months from now, I was expecting to see privately owned B&N retail stores with Microsoft (MSFT[3]) launching its own e-bookstore — after buying and rebranding B&N’s — to compete against Apple (AAPL[4]) and Google (GOOG[5]). Nook Color tablets would be running Android, but the only place you could buy one of the discontinued devices would be on eBay (EBAY[6]).

So much for that. Barnes & Noble just pulled a dramatic 180 as part of its latest earnings report[7]. The numbers were bad enough (at $87 million in the red, BKS doubled the loss it reported last quarter), but the reversal of strategy makes it seem as though B&N actually has no strategy at the moment. The combo was enough to hammer BKS to the tune of 16% on Tuesday.

What constitutes a reversal of strategy?

First, lets look at those Nook tablets.

At one time the Nook was best-selling tablet that wasn’t an iPad, but now the Nook Color and Nook HD began a downward spiral when Amazon (AMZN[8]) released its Kindle Fire line of tablets, followed by Google’s Nexus 7.

With the Nook division bleeding, reports surfaced in May that Microsoft was planning to go from an 18% stake in Nook Media to buying it altogether in a billion-dollar deal[9]. As part of that agreement, the money-losing Nook tablets would be jettisoned (after all, Microsoft had its own Surface tablets) and Microsoft would gain the established e-bookstore it wants to go head-to-head against Apple and Google. B&N announced it would stop producing the devices in-house and opened up its tablets to stock Android instead of the customized version that locked them into the B&N media ecosystem. Although Nook e-readers might live on, it was clear that the Nook tablet was toast.

On Tuesday, despite continued bleeding (Nook device sales were down 23.1% year-over-year), B&N announced: “The company intends to continue to design and develop cutting-edge NOOK black and white and color devices,” adding that at least one new Nook device can be expected for the holidays with more in development.

What about the plan for founder and CEO Leonard Riggio to buy the company’s retail bookstores[10], taking them private?

That’s been a big part of the B&N story this year, always in the background. From the earnings press release:

“The company said its Chairman, Leonard Riggio, has advised the Board of Directors that he has suspended his efforts to make an offer for the company’s Retail business.[11]”

We’re left with a foundering bookstore chain — the country’s largest — that’s hurting on all fronts. Retail sales were down nearly 10% year-over-year, Nook Media division revenues are down 20%, digital content sales are off 15.8%. The closest thing to a bright spot is its college bookstores which posted a 2.4% yearly revenue increase … but that was off 1.2% compared to the previous quarter, and in its guidance, B&N says it expects college bookstore sales to decline in the low single digits for the year.

So, a lot of drama, a lot of reversals, a lot of red ink and a lot of confusion.

Through a first half of the year that featured everything from a CEO being forced out[12] (largely because of those Nook problems) to flirting with a tech giant, tablet fire sales[13] and continued poor financial results, BKS still crept up from $14.50 at the beginning of the year to as high as $23 at one point. Most of that was based on speculation and optimism that Barnes & Noble had a coherent strategy for exiting the money-losing tablet business and an eager purchaser for its digital media business, and that a formal privatization bid for those retail outlets would push share prices up.

The current state of disarray and determination to continue moving forward with tablets clearly hasn’t impressed, nor should it. Unless you’re Apple — or maybe Samsung (SSNLF[14]) — tablets are a commodity business. Amazon and Google can sell them at cost because they drive sales of digital media through their online stores. When B&N opened its tablets up to buying content from competitors instead of locking them in to its own app and e-bookstores, it essentially gave up that captive revenue. So why keep developing and selling the devices?

In July, InvestorPlace Editor Jeff Reeves thought Barnes & Noble, profitless in five of the past 19 quarters and apparently ditching its money-losing tablet, was doomed[15]. What does it say when the company co-founder drops his retail privatization bid, the profitless quarters streak  extends to 20, and the tablets it has been unloading at a loss are back on the table?

BKS was trading in the $11 range just over a year ago — and that’s when there were reasons for some optimism. Considering it’s now in the mid-$14s, I’d say Tuesday’s losses were just the beginning.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

  1. BKS:
  2. it all more or less made sense:
  3. MSFT:
  4. AAPL:
  5. GOOG:
  6. EBAY:
  7. latest earnings report:
  8. AMZN:
  9. buying it altogether in a billion-dollar deal:
  10. buy the company’s retail bookstores:
  11. he has suspended his efforts to make an offer for the company’s Retail business.:
  12. CEO being forced out:
  13. tablet fire sales:
  14. SSNLF:
  15. was doomed:

Source URL:
Short URL: