Would Barnes & Noble be Better off Without the NOOK?
Chad 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 gotten a lot of press about how the company is being killed by Amazon.com (NASDAQ: AMZN). What's interesting is many people look at the company's lineup of NOOK tablets as the crown jewel of Barnes & Noble. Microsoft (NASDAQ: MSFT) even believed in this lineup enough to invest $300 million in a venture with Barnes & Noble to pair up the NOOK segment and the college bookstore segment. From what I can see, it might not be exciting, but Barnes & Noble bookstores could be a better business than the new Microsoft venture. I know that sounds crazy, but hear me out.
In Barnes & Noble's most recent earnings release, we got a breakdown of how NOOK is doing, how the college division is doing, and how the traditional bookstores are operating. Consolidated sales increased just .4% in the fourth quarter, and EBITDA showed a loss of $11.1 million. In huge bold print, the company trumpeted NOOK comparable sales increase for the year of 45%, while comparable digital content sales for the year were up 119%. The interesting thing is, if you dig further into the earnings release, NOOK sales in just the fourth quarter were actually down 10.5% and EBITDA from this division was down 64.3%. The company also said that, “device sales declined during the fourth quarter due to channel returns, lower selling volume, and lower average selling prices.” If this is the crown jewel of Barnes & Noble, this gem is tarnished.
The other part of the Microsoft partnership is the college division, which did noticeably better than NOOK. College sales were up 5.7% in the fourth quarter, and EBITDA was actually up 101.6%. The only bad news from the college division was, comparable sales were down 2.2% for the quarter. All I can say is, Microsoft fans, this is what your $300 million bought, a business in NOOK that looks like it lost all of its momentum from the first few quarters, and a college bookstore business.
So what about the more traditional Barnes & Noble bookstores? This is actually two businesses, and I wish that Barnes & Noble would break out their online sales. BN.com seems to be a drag on the company's results. The most telling comment from the company about BN.com was [sales] “continue to decline for the quarter as well as for the fiscal year.” While BN.com is a problem, a big surprise was how well the traditional bookstores did. In the fourth quarter, bookstore sales were up 4.5%, and if you exclude NOOK, comparable sales were actually up an even more impressive 6.9%. While overall retail sales were up just .5%, EBITDA was up 82.9%. To be blunt, if Barnes & Noble is going to find firm footing again, the bookstores seem to be the place to look. Of course, one of the big criticisms of Barnes & Noble is in their financials.
There is no question that Barnes & Noble has gotten itself into quite a pickle when it comes to their balance sheet. With over $324 million in long-term debt, and just $54 million in cash, the company needs to make some decisions. One positive I noticed was that gross margin actually improved year-over-year from about 27% to nearly 29%. To those who say that Amazon is the more efficient competitor, consider for a minute that Amazon's gross margin in the same quarter was 27.42%. That's right, Barnes & Noble actually maintained a higher gross margin than Amazon during the same timeframe. The difference between the two companies is obvious when you look at SG&A spending. During the most recent quarter, Amazon spent 82% of their gross profits on SG&A. Barnes & Noble has improved in this category, going from 106% to 102.7% in the last year, but SG&A spending is still too high. So what can Barnes & Noble do from here?
First, the company needs to let Microsoft prop up NOOK. If Microsoft believes in the NOOK, let them pay to keep it moving forward. Where the traditional bookstores are concerned, it's very simple. The company must cut SG&A in whatever way it can. This probably means the company needs to look to sell and close some under-performing stores. Barnes & Noble also should seriously consider their staffing needs. No one likes to hear that job cuts might be needed, but the company must find a way to cut expenses and staffing eats up a huge part of total expenses. Additionally, the company needs to overhaul BN.com. A good idea would be to create a tie-up with another large retailer to combine sites. I could see a company like Target (NYSE: TGT) being interested in folding BN.com into Target.com. Let's face it, books, magazines and music are not Target's forte'. To fold BN.com into Target.com would seem to give both companies a better chance of competing against Amazon.com. In the online space, bigger is clearly better. A revenue sharing agreement would make the most sense. Barnes & Noble could agree to share revenues, in exchange for an investment from Target to shore up the balance sheet. This would seem like a win-win situation for both companies. This would also allow Target to compete more effectively with Amazon when it comes to books, magazines, and music. Barnes & Noble would get a helping hand for both BN.com and an investment to improve the company's balance sheet. Can you believe it? Barnes & Noble's bookstores might actually be the strongest part of their business?
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