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Sell Barnes & Noble, Inc. Stock (BKS)

BKS has had a big run up this year, but print is a fading business

What do you do with a stock when you’ve got some gains in it? It’s an age-old question investors and traders happily wrestle with.

Barnes & Noble BKSBookseller Barnes & Noble, Inc. (BKS) is likely just such a stock for many who’ve bought it in the last year.

Investors who’ve held the stock for a year or even less may have as much as 50% gains if they bought BKS stock in a sweet spot, and traders who have played the dips and rises might have made out nearly as well or better.

BKS stock recently traded at just over $22, though it traded as low as $13.25 on Feb. 3. Value investors who bought wisely and held on can book solid gains. So, too, can chartists and technical analysts who no doubt closely followed the rises to $21 in March and $23 in June after the dips.

The February, May and October lows each were higher, as BKS spent a lot more time closer to its 52-week highs. So both investors and traders in BKS stock who bought well could have significant profits. What to do?

What Not to Do with BKS

Sometimes it helps to know what not to do.

This is not a stock to hold forever, or for 10 years or even multiple years at a time. Why not? Because BKS has a fragile business underlying it in a precarious industry.

Barnes & Noble has had declining sales in what can be argued is a declining industry. According to Nielsen’s Book scan, total industry sales of print books by volume, both hardcover and paperback, fell in 2013 by 2.5% compared to 2012.

It would take wild optimism to foresee a reversal of what is a powerful trend. All avenues of print publishing — newspapers, magazines and books, have been permanently changed.

On a personal note, we still love print books, book stores, even libraries. The argument here is that it would be better for the culture if both print and digital publishing flourished, but that argument has already been culturally decided in favor of digital.

Investors should take heed.

BKS Numbers

BKS recently reported earnings in November for the second quarter of its 2015 fiscal year. Earnings declined in the year-over-year quarter from 15 cents to 12 cents per share. Sales declined 2.7% in the same period by nearly $50 million.

Of its two main divisions which account for most of the revenue, retail sales slipped 3.5% while the college division showed a gain of 1.9%. Its Nook division had a 41.3% decline in sales, to $63.9 million. Nook sales made up only 3.8% of total company sales. Barnes & Noble’s outlook was for a continued total company sales decline near term.

Barnes & Noble BKS Nook TabletThe Nook Factor

There was a time when the Nook division, with its e-reader portal to unending digital content, was seen as a potent answer to juggernaut, Inc. (AMZN) if not a potential savior of Barnes & Noble. But in June, CEO Michael Huseby announced that the Nook division would be spun off.

Recently, Microsoft Corporation (MSFT) ended its partnership in the Nook with Barnes & Noble. After investing $300 million in the Nook division, Microsoft will take a cash and stock buyout of roughly $125 million from Barnes & Noble.

Still A Digital Play?

BKS stock supposedly would be worth more if the Nook division were spun off and sold. Yet this proposed divestment has already been pushed back a couple of quarters.

And what is the real worth of Nook as an asset? Again, look at the revenue. The history of this assumption, that a spin-off would be beneficial, is questionable.

The original assumption in creating the Nook, that it would cement the success of the digital approach for BKS stock and would eventually support the retail division, was flawed. The Nook division isn’t generating the revenue it once did.

Just last fiscal year, while it pulled in more than $500 million, was 35% less than the previous year. Some at Barnes & Noble only a few years ago had forecast $1 billion in revenue for the division.

Then there was speculation that Microsoft would buy all of Nook. Still others suggest Target Corporation (TGT) or Wal-Mart Stores, Inc. (WMT) might buy it.

Again, why? There’s no compelling financial reason for them to do so.

Sell BKS Stock

Barnes & Noble is a business with both declining sales near term and declining prospects longer term.

The notion that the Nook division is somehow going to deliver massive profits which will support the traditional retail arm of the company seems fanciful. Investors and traders who have significant profits should book those profits and sell the stock.

Much as we love books and wish Barnes & Noble well, we can’t summon up much love for BKS stock.

As of this writing, Greg Sushinsky was long MSFT, TGT, WMT.

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