Breakout

Barnes & Noble: The Final Chapter?

Jeff Macke
Breakout

The last nationwide book retailer may be writing its final chapter. Barnes & Noble's (BKS) latest quarterly sales results show a lack of foot traffic in the stores and an absence of management focus on retail that foreshadows a disappointing end for the company's 675 stores and perhaps its entire existence.

This morning the company reported a 7.4% drop in revenues and a $122 million loss for the fourth-quarter of its fiscal year. For the full year Barnes & Noble earned a mere $10 million, compared to $177 million in 2012.

B&N's disastrous focus on making Nook e-Readers is weighing heavily on the chain's operations. A 17% drop in Nook revenues and stunning $475 million loss for the device division in 2013 are hobbling the company's ability to keep its stores afloat in an increasingly tough environment for bricks and mortar stores.

Brian Sozzi, CEO and chief equities analyst at Belus Capital Advisors, thinks the odds are stacked against Barnes & Noble. "I have no confidence in this company surviving," Sozzi says in the attached video. In large part that has to do with the company cannibalizing itself with branded tablets and e-reader applications. "The more they continue to pump this Nook app across platforms the stores become increasingly irrelevant."

The world will remember little about the Nook business disappearing. The physical stores are a different matter. The chain had declining revenues in 2013 but actually increased earnings by 16% by selling higher margin goods.

Plenty of people including, Leonard Riggio the 71-year-old chairman and founder of Barnes & Noble, think the stores would make a good freestanding business in their own right. In February Riggio suggested he would attempt to cleave the stores from the digital branch of the company. Riggio hasn't made his bid yet but analysts value the chain at anywhere from $500 million to $1 billion.

Sozzi thinks Riggio could make the stores a lucrative business in their own right but only if he dramatically reduces the store count. Mom and Pop bookstores stay open because of select product offerings, great service and less square footage. "Barnes & Noble has these giant, hulking stores and you don't need that in this digital age," he states.

Shares of BKS are down more than 15% in early trading as the company struggles to convey its strategy to skeptical analysts and investors. Management is clearly focused on salvaging Nook operations rather than trying to make a go of it with the stores.

Barnes & Noble has a market capitalization of less than $1 billion. If a greater fool could be found to buy the Nook side of the operation, buying the entire chain and splitting it up would likely be profitable for Riggio or any other entity with the ability to run physical stores.

As of now the company's management has shown no interest in splitting up the company. For both investors and traditionalists who long for the days when hanging out in a bookstore was a nice way to spend a few hours, the best thing that could happen is a speedy close to the dark story of the Nook.

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