3 Reasons This Retailer Won’t Make It Through Next Year
Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems like everyone and anyone is making a tablet PC these days. But the young tablet market can’t support so many competitors, each vying for a sliver more of market share than the next. Inevitably, when it comes to new product sales, disappointment will set in for laggard companies with stale products. Barnes & Noble (NYSE: BKS) is a prime example of a stubborn tablet producer that is letting a failing product run its business right out of business.
A broken tablet
The first reason Barnes & Noble won’t live past 2014 is its Nook tablet. Sometimes the hardest thing to do is admit a failure and move on. Barnes & Noble can’t. By continually lagging the market in functionality, battery life, and connectivity, the Nook tablet never performed well for the bookseller. But 2013 took those problems to another level.
A company official stated that the latest figures revealed Nook’s losses to be “much higher” than expected. As second-quarter tablet sales numbers fell 34% short of expectations, B&N’s loss on the division increased 130%, ballooning to $177 million compared to a $77 million loss the year before. The company, never able attract a large enough customer base, is now paying the costly toll.
A punishing market
Barnes and Noble is also failing miserably because of the market it is attempting to conquer. At the dinner party that is tablet PCs, Apple (NASDAQ: AAPL) sits at the head table. It's no secret that Apple is enjoying incredible success with its iPad, averaging a 43% profit margin for the last year on its low-end (yes, low-end) 16 GB model. No doubt that type of seemingly impenetrable margin is just another reason why Apple boasted over $10.00 per share in earnings for the second quarter of 2013.
Those earnings are likely to continue. Apple’s iPad sales revenue increased 22% two quarters ago and 40% last quarter, sequentially. Such staggering figures hint that more trouble is coming for the rest of the market.
Tablet Market Share by Company
Coming in at about one-third of Apple’s market share is second-place Samsung (NASDAQOTH: SSNLF), which uses Google’s Android as its operating system. Samsung is catching Apple not only with its smartphones, but also enjoying a year-over-year tablet market share increase from 16% to 22%. By offering consumers phones loaded with features not found with Apple’s iPhones, such as larger screen size and multitasking capabilities, Samsung is finding ways to be competitive in a tough market.
Of course, with its $199 Nexus tablet, Google is no pushover, either. Moreover, the Android software is activated on almost 190 million devices worldwide, bringing the tech giant $2.5 billion dollars of yearly revenue from just the Android division.
But when you don’t have the sales or market share that Apple or Samsung enjoy, it's hard to make even a slim profit margin. Barnes & Noble finds its tablet, the Nook, in this category with just 2% market share. It’s a sliver so small that the company can’t make a dime off tablet sales.
Not just the Nook
If Barnes and Noble’s woes were just related to the Nook and the market, the company might have a fighting chance. It doesn't. B&N is also struggling to stay relevant (read: profitable) in its core business of bookselling.
Studies show that Barnes & Noble’s market share slipped another 2% in 2012, to a record low of just 16%. And things don’t appear any better in 2013. Earnings targets gravely missed in the second quarter, sending the share price down 17% in one day. The company's sales figures tat came in about 10% lower than last quarter’s, at a staggering loss of $2.54 per share.
In addition to its slipping book sales, Barnes & Noble’s leadership seems to be giving up. Barnes & Noble’s CEO William Lynch resigned on July 8 amid the bookseller’s many troubles. Lynch hinted that failure to meet strategic objectives caused his exit. If he’s willing to give up on the company, maybe investors should be moved to do the same.
Am I being a bit too pessimistic about Barnes & Noble? Maybe so, maybe not.
As of April 2013, B&N had $160 million in the bank and $77 million in debt. New debt issuance aside, when you consider the fact that B&N is chewing up $714 million per month in expenses, and operating at a loss, the picture looks quite bleak.
In fact, for a (very) rough estimate of the company's life expectancy, divide Barnes & Noble's net cash by its monthly net losses. The answer of four months of cash left reveals that a major problem. Obviously, this metric doesn’t capture the timing of cash charges, nor account for non-cash depreciation charges. But the metric gives a back-of-the-envelope idea of Barnes & Noble’s poor health.
I believe that Barnes & Noble is just starting its descent. Its share price plummeted more than 20% since the last earnings release on June 25. Believe me, I’d much rather be writing about a great opportunity to buy shares on the cheap. But, alas, here I am writing about why not to buy these dreadful shares on the cheap.
Do you agree or disagree? Please share your opinion in the comments!
This article was written by Ian Finney and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!