Time Is Running Out for This Bookseller

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"I would be most content if my children grew up to be the kind of people who think decorating consists mostly of building enough bookshelves."  - Anna Quindlen

Whenever I pick up a new book, I find myself involuntarily riffling its pages with my thumb to enjoy the resulting burst of air, bringing with it that distinctive "book smell" - the scent of aging paper and ink with which most of us are all-too-familiar. Sadly, with the advent of massively-popular electronic book readers, bookshelves are increasingly becoming obsolete.

It's with grudging acceptance, then, I express this sentiment: Barnes & Noble's (NYSE: BKS) days are numbered, at least in its current form as a stubborn brick-and-mortar bookseller. 

Considering shares of BKS closed down nearly 10% last Thursday after the company announced its ninth quarterly loss in the last eleven quarters, it would seem the market agrees with me.  Interestingly, by losing "only" $0.04 per share, Barnes & Noble actually beat analyst estimates which called for a loss of $0.06 per share.  Consolidated revenue also decreased slightly from the year-ago period to $1.9 billion due to flat same-store sales, store closures, and lower BN.com sales.

On a positive note, while the Retail and College segments continued to struggle, revenue for the Nook tablet segment actually increased 6% compared to the year-ago period while electronic book purchases increased 38%.  Expenses related to Nook product development and international expansion, however, increased 10%, causing the segment's EBITDA losses to rise 1% year-over-year to $51.4 million.  While the company wouldn't provide specific sales numbers, Barnes & Noble was quick to note Nook unit sales doubled over last week's holiday weekend, helped by strong sales through its retail channels at Target and Wal-Mart.  While these losses will continue through 2013, they should lessen as fresh Nook customers fill their devices with new electronic goods.

Barnes & Noble has also found a friend in Microsoft (NASDAQ: MSFT), which earlier this year announced an initial strategic $300 million investment in the Nook segment in exchange for a 17.6% stake of a new subsidiary called Nook Media, LLC.  According to the original agreement, the partnership also includes an additional $180 million in guaranteed revenue-sharing payments over three years and $125 million over five years to help finance international expansion.

With friends like Microsoft, Target, and Walmart, why should Barnes & Noble worry?  Unfortunately for Nook Media, its primary competitor lies in the ruthlessly efficient Amazon.com (NASDAQ: AMZN), which vies for consumers' e-reader affections with its wildly-popular Kindle line of products.

Like Barnes & Noble, however, Amazon is coming off its own difficult quarter, posting its first quarterly loss in five years thanks largely in part to infrastructure investments and an impairment charge for its investment in daily deal site LivingSocial.  Nonetheless, shares of AMZN are still trading near 52-week highs as investors remain convinced its short-term pain will be their long-term gain.

Unlike Barnes and Noble, though, Amazon isn't distracted by running a declining brick-and-mortar business and has the deep pockets to continue selling its Kindle devices at rock bottom prices while it waits to realize the high-margin electronic benefits down the road.  With the ability to swing deals like this year's Black Friday Kindle Fire sale, you can bet Amazon won't easily give up its current 60% share of the e-book market. 

While Barnes & Noble was right to recognize the deterioration of its core in-store book sales, I fear its foray into electronic books may be too little, too late.  Even with the help of Microsoft, Target, and Wal-Mart, shareholders of BKS are in for a painfully-wild ride until the company can prove it has what it takes to compete against a smarter, faster, stronger opponent in Amazon.com.


symie5 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Microsoft. Motley Fool newsletter services recommend Amazon.com and Microsoft. 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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