The Barnes & Noble Saga Continues

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Barnes & Noble (NYSE: BKS) has been a comedy, a thriller, a drama, and a horror. A lack of direction and fierce competition have been the biggest problems. We’ll take a simple and logical look at the company’s future potential.

Consumer trends

Today’s consumer wants value and convenience, not excess. This leads us directly to Target (NYSE: TGT) and Wal-Mart (NYSE: WMT). Though many people don’t realize these are considerable threats to Barnes & Noble’s physical bookstores, give it time.

If you have ventured into a Target recently, then you probably noticed an intriguing book section. What you might not have noticed is that you can only find popular titles -- titles that sell. If more readers who prefers physical books to reading tablets became aware of this, they would likely take advantage of what Target has to offer. 

Wal-Mart’s book section isn’t as impressive as Target’s appearance-wise, but it makes up for the lack of appeal with its location, which is right near the registers at the front of the store. Wal-Mart’s book section is also small, but the company likes to grow in a physical sense, so there’s no telling what the future might hold.

While Target and Wal-Mart aren't large current threats to Barnes & Noble, that has the potential to change in the future. 

If you want even better prices on your books, then you can visit a dollar store. The selection will be limited, but most people just want something to read in order to take their mind off their everyday problems. Believe it or not, you can find some quality titles at dollar stores, even hardcovers that once sold for $29.95. And, yes, you will only pay $1 for each of them -- in most cases.

A wise shopper will look at this as a great opportunity to purchase many books for $1, realizing that at least one of them is likely to be enjoyed. Why take a chance on one book when you can buy a basket of books for half the price?

Then there’s Amazon.com (NASDAQ: AMZN), the destroyer of other businesses’ hopes and aspirations. Amazon has a lot more online traffic than Barnes & Noble, and many books on Amazon are sold at discounted prices. That said, Amazon currently trades at 87 times forward earnings while sporting a weak profit margin of -0.14%. While growth has consistently impressed, Amazon remains a high-risk investment.

Wal-Mart and Target are both trading at 13 times forward earnings, and they both impress with profit margins of 3.6% and 3.8%, respectively. Furthermore, Wal-Mart yields 2.6% and Target yields 2.5%, whereas Barnes & Noble and Amazon don't offer any yield. Wal-Mart and Target are likely to be the safest options of all aforementioned companies going forward. 

When the company you’re investing in is battling against the likes of Wal-Mart, Target, and Amazon, the nightmares you suffer from at night are justifiable. 

Cutting costs

Barnes & Noble recently announced that it will discontinue its Nook color touchscreen tablets, but stick with its traditional e-readers. The Nook couldn’t compete with Amazon’s Kindle. This didn’t have to do with quality, but lack of an advertising budget for Barnes & Noble. When the Nook first became available, there was a lot of excitement surrounding it, but Barnes & Noble never followed through, seeming to rely on popular titles to carry its momentum. Those popular titles faded, and the Nook faded with them.

Many investors would like for Barnes & Noble to to cut all hardware investments, sell all large physical retail stores, and reduce its workforce in order to move back toward profitability.    

Conclusion

Barnes & Noble is fighting an uphill battle, and it’s a muddy and slippery hill, but there is still potential. If the company can drastically cut costs, then profits will improve. This, in turn, would lead to stock price appreciation. However, nobody knows how aggressive Barnes & Noble will be when it comes to cutting costs, making this a high-risk investment. 

The long-term picture doesn't look good for Barnes & Noble unless it completely alters its business model. One idea often thrown out is much smaller stores with a cafe-like setting. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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!

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