Stay Away From This Retailer

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New York-based book retailer Barnes & Noble (NYSE: BKS) engages in selling magazines, DVDs, newspapers, gifts, music, and games. As of January 26, 2013, the company had 1355 stores across United States, including 678 college bookstores.

Recently, Barnes & Noble released its earnings for the third quarter of 2013. It wasn't able to meet earnings estimates, and posted a net loss of more than $6 million. Now, the big question is what's in store for the company in the future? 

Quarterly earnings

In 3Q'13, Barnes $ Noble reported a net loss of $6.1 million, or $0.18 per share compared to earnings of $52 million, or $0.71 a share in the same quarter last year. Revenue didn’t meet estimates and dipped 10.3% to $2.23 billion. The major reason behind this lackluster performance was a sharp dip in the company’s sales related to Nook and e-books.

The company recorded a $190.4 million loss on its Nook business. In the case of digital content, sales grew 7%. Sales at stores open at least 15 months (excluding Nook products) declined 2.2%. As far as college bookstores were concerned, same-store sales dipped 5.2%. 

Going forward

In the fourth quarter of 2013, analysts expect Barnes & Noble to report a loss of $0.83 per share on revenue of $1.39 billion. For the full year, analysts estimate a net loss of $1.05 a share. For 2014, analysts’ estimates stand at $0.89 loss per share on revenues of $7.03 billion.

Valuation

Barnes & Noble’s negative profit margin of 0.62% depicts the fact that the company isn’t generating any income on its sales. An operating margin of (0.28)% doesn’t help either. Moreover, analysts don’t expect Barnes & Noble to start earning a profit in the near future. A negative EPS estimate for 2013 and 2014 is a testimony to this. A mean recommendation of 2.7 on the sell side clearly shows that it’s way behind its competitors such as Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG). Therefore, it doesn’t seem to be an attractive buy.

Competitors

Nook’s biggest competitor in the tablet/e-book market is Amazon’s Kindle. With a 45% share in the e-book market, Amazon currently leads it. Amazon has been keen on selling its Kindle tablets at cost, as the long-term plan is to sell more e-books, music, video games and apps through Kindle. Given the fact that Amazon has recently been really successful in selling its digital content via Kindle, the strategy appears to be working for the company.

As far as earnings are concerned, analysts expect Amazon to keep on growing its profits in the coming years. A mean recommendation of 2 shows that the Amazon is one of the top buys in the retail sector.

Just like Kindle, Google’s Nexus has done really well over the past few months. During the holiday season in Japan, Nexus 7 became the best selling tablet by overtaking Apple’s iPad mini. Nexus 7 enjoys a healthy share of 44.4% in the Japanese market, as opposed to the iPad mini’s 40.1%. Nexus' low price relative to the iPad mini was the main reason behind this success. Google is trading at a forward P/E of 15.09, and has a strong PEG of 1.28. It has a mean recommendation of 2, making it one of the best buys in the market.

Conclusion

As Nook faces severe competition from products such as the Kindle, the Nexus and the iPad mini, the future doesn’t look that bright for the retailer. Barnes & Noble’s rivals not only offer a vast range of content and apps for readers on their tablets, but have also improved a lot on their e-reading functions. As a result, customers are moving away from the Nook.

Lesser Nooks sold means lesser digital content sold in the long run, which in turn would amplify the company’s losses. Further, the company’s declining sales at its college bookstores give a clear signal that people are steadily moving towards e-books. As far as the e-book market is concerned, Barnes & Noble stands nowhere in comparison to the market leader--Amazon. This reiterates the fact that the company’s future looks bleak. In short, I don’t recommend buying Barnes & Noble.


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Google. The Motley Fool owns shares of Amazon.com and Google. 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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