So, how does this sound to you? Getting ready for a bid, I would say...
> "I don't believe I've ever said the nooks aren't selling at a loss."
You've said multiple times that you believed the cost of the Nook was significantly lower than the selling price.
> "In fact, that's EXACTLY what I've been saying."
When did you ever say that?
> "So the portion of the inventory that is not nook-related can be converted into cash."
No, the inventory can't be converted into cash (unless they sell it). Account payables exceeds inventory. Inventory returned simply reduces the account payables balance.
> "The biggest medium-term risk factor is that people won't buy enough digital content to justify selling the nook at a loss and at least partially make up for stagnant-to-lost physical book sales."
I think that's the short, medium, and long term risk. Even if BKS losses were increasing, I wouldn't be as pessimistic as long as gross profit dollars was increasing. If BKS can't translate increased R&D and marketing expenses into sales that increase gross profit, then there's no hope. And thus far, we've been seeing gross profit dollars declining at double digit rates.
I don't believe I've ever said the nooks aren't selling at a loss. In fact, that's EXACTLY what I've been saying.
I just don't agree with the contention that this is necessarily a bad long-term strategy, or that BKS can't afford it in the short term.
BKS has a long-standing requirement with publishers that books MUST be 100% refundable by the publisher- shipping paid both ways.
So the portion of the inventory that is not nook-related can be converted into cash. The biggest risk factor, balance sheet wise, was that they wouldn't be able to move the nooks. We now know they did.
The biggest medium-term risk factor is that people won't buy enough digital content to justify selling the nook at a loss and at least partially make up for stagnant-to-lost physical book sales. I think they will, but I'll be watching the projection for next quarter to make that judgement. People who received nooks for Christmas wouldn't have started buying until after they opened them.
All of the deductions from inventory end up in COGS. The main deduction from inventory is when the inventory is sold. Other reasons might be because inventory gets lost or damaged or stolen. Or the inventory can be written down if the value is permanently impaired due to obsolescence.
And in BKS's case, they also include rent in COGS. But that's really sides the point.
You've basically been struggling with the fact that Nook (at least the monochrome versions) have been with almost certainly been sold at negative gross margin.
It is possible that BKS is purchasing Nook's for less than the price they are selling it at and still be reporting negative gross margins on the Nook. The reasons could be all of the ones listed above. Another significant factor is customer returns. Each time a customer returns a Nook after trying it out, BKS is basically taking back a damaged unit that needs to be refurbished and sold for a much lower price. I've seen refurbished Nooks sold at $99/$129 versus $149/$199 new. Add in the cost of refurbishing and profit margin for the third-party selling the refurbished Nook, you can imagine BKS gets only a fraction of what they paid for the Nook.
But all of these inventory costs are ongoing parts of the business. You can't just say because BKS is buying the Nook for $180 (for instance) and selling it at $199 that it's profitable. COGS is reflecting all of the inventory costs that went into producing the sales that they are reporting.
I'm really looking forward to BKS's next earnings report. We already have an idea of how things look on the sales side. But that tells us almost nothing about the health of BKS. Given what I've seen from past earnings reports, I'm expecting gross profit, operating profit to show that they are on an unsustainable trajectory.
I'm an engineer, not an accountant, so I'm more than willing to admit I may not know everything about this.
But according to this site:
Inventory write-downs can be part of COGS, or they can be recorded separately on the income statement. BKS has not recorded a separate line item on the income statement- so inventory write-downs would need to be included in COGS.
My phrasing may have come across a little odd. I'm not trying to say that write-downs occur automatically every time a quarter ends. Just that, because of the nature of the nook product, Barnes and Noble must sell a nook within a couple of quarters of producing it or take a write down due to inventory obsolescence (coming up for nook 3g) and/or price cuts (b/c of the lower of cost-or-market principal, a write down can be triggered by either retail price cutting or production cost decreases). Defective units, damaged units, returned units, and nooks that never sell and get marked down all lower the margins on those that do. My point is that the $50 mark-up reported by tear-down analysts is probably fairly accurate, but it is not the same as the margin.
> "Let's clear up the Nook "margins" vs. markup a little, b/c it keeps coming up and I think it's confusing to everyone, long and short."
I don't think anyone is more confused than you so you're obviously not going to be clearing up anything.
> "they are taking the entire price paid for each manufacturing run of the nook and recording it as "inventory"
> "Then, pretty much that entire expense has to be written off in the next quarter as "cost of goods sold", whether or not every nook is actually sold"
Wrong. Cost of goods sold is referring to the cost of good sold (hence the name) - not cost of goods bought (which is what you're assuming).
COGS is related to sales. When BKS sells a nook for $249, they record the cost of that unit as COGS. If Nook inventory is not sold, it says on the balance sheet as inventory. You don't write it off unless the inventory is damaged or otherwise impaired.
Could be, but that's presumptuous. Other reasons could be; Dividend payment, Another B&N loan, or just that GameStop has not been doing very well at all lately and he's vacating his position.
I'm not sure I follow what you mean by dividend payment.
One thing to note about a Riggio buyout- he already owns 37% of the shares outstanding. So the buyout price of the rest of the CSO at the current prices would be only $606 million. Adding in the 500m debt the company already owes him- his personal buyout price becomes just $106 million+ premium. Half of which is now burning a hole in his pocket.
Incidentally, the price at which Riggio's combined current stake and debt ownership could theoretically allow him to acquire the company for free is just under $14/share. I see that price (rather than 0) as the long-term, worst-case scenario floor for the stock price, because BKS' altman-Z score as a private company would be viewed more favorably than their altman-Z score as a public company.