Opinion: What’s Really Going on at Barnes & Noble

By Thad McIlroy, The Future of Publishing, @ThadMcIlroy

Thad McIlroy is an electronic publishing consultant based in Vancouver. His career has spanned book distribution, journalism and consulting. He has authored or edited a dozen books on electronic publishing and written about 200 articles on the topic. In addition, he has written for Digital Book World about Barnes & Noble and another article from him on the company will be published here next week. His writings can also be found at TheFutureofPublishing.com.

Yesterday morning, Barnes & Noble dropped a bombshell. In a press release reporting on the holiday season, Barnes & Noble CEO William Lynch revealed that the company’s overall sales and profits are not looking as strong as expected.

Lynch had good news to report as well, but that didn’t matter, as Wall Street gets angry when companies revise sales projections downward. Barnes & Noble shares lost over 30% of their value at one point yesterday before closing down 17% for the day. (They’ve lost three-quarters of their value in the last five years.)

More confusing yet, a rumor had leaked on Wednesday that Barnes & Noble is selling its Sterling publishing group. It felt like the beginning of the end.

Is Barnes & Noble going down the tubes? Could it be that terrible? If you read the headlines yesterday you would’ve sold your shares by noon. Publishers were probably checking how their accounts receivable stood. Authors started imagining life without bookstores.

Let’s have a look at what’s really going on at Barnes & Noble. A good place to start is my article published on Tuesday this week. It reveals seven advantages Barnes & Noble holds – among them good management, great investors and lots of opportunity in e-books, e-readers and tablets. Next week I’ll be examining the company’s disadvantages in the same detail. What’s happened in the mean time?

Barnes & Noble’s William Lynch provided little public comment beyond what’s contained in the press release. Let’s look at the details.

The press release is a short story in two parts: the good news and bad news.

The good news is that Barnes & Noble’s Nook is a big success. The hardware is selling well and so is the content that runs on it. Nook sales are up 70% from the same period last year while sales of content – defined as digital books, magazines and apps – grew by 113% over Christmas. Sales of the monochrome Nook Simple Touch were disappointing, but tablet sales “exceeded expectations.” Lynch said also that the company now expects that content sales will total $450 million in its current fiscal year, ending April 30, 2012.

The bad news is financial. If you’re not a shareholder of the company, it’s no big deal, little has changed. The company is going to lose a bit more money this year than it did last. Retail sales aren’t landing as large as hoped for. And the company is still losing a lot of money online, mostly because selling and marketing Nooks is expensive. Still, the loss is less than 1% of sales; Borders’s loss was 13.3% of sales in its last fiscal year.

For more insight into Barnes & Noble, hear a senior executive at Barnes & Noble speak at Digital Book World, January 23-25 in New York City.

 

The Story Behind the Story

What publishing professionals need to get a handle on instead is the underlying financial health of the company. Here it is in four bullet points:

— Barnes & Noble makes very little money online

— Barnes & Noble makes no money on the Nook

— Barnes & Noble makes very little money from its bookstores

— Barnes & Noble makes a whole bunch of money from its college bookstores. Without the college bookstores we probably wouldn’t have a Barnes & Noble to kick around right now.

On the one hand William Lynch and everyone associated with Barnes & Noble would like us to focus on the tremendous success of the Nook and the burgeoning content sales for the devices. On the other hand he would prefer us not to pay too much attention to how hard it is to make a dollar selling hardware in a hideously competitive market. And with Amazon as a competitor, it’s tough all around to make any money selling stuff online.

Still, sales of the Nook are growing by leaps and bounds. And so Barnes & Noble would like investors to pay much more attention to its fast-growing digital business, and ignore its core business – trade bookstores, that are quietly closing and are now all-but-impossible to make a profit on.

This leads to an even more challenging spin. William Lynch is the first to admit that Barnes & Noble’s big play against Amazon in selling e-readers and tablets is its bookstore network: feet on the street to sell content in the cloud. As I reported Tuesday, Lynch calls it Barnes & Noble’s “biggest competitive advantage.” The devices are similar and pricing is competitive. It’s the one thing, the only thing, which Amazon cannot compete with at this point.

Barnes & Noble would be thrilled to separate the Nook business and create a separate public share offering. One analyst projected “conservatively” that the Nook business alone would be instantly more valuable than all of Barnes & Noble today, weighed down as it is by bricks-and-mortar.

A comparison is readily available. In November Indigo Books & Music, Canada’s largest bookstore chain (the equivalent of Barnes & Noble in Canada), sold off its e-reader business, Kobo, to Rakuten, the Amazon of Japan. The calculations are complex because Kobo’s ownership was shared between several companies, but the sale, for roughly $315 million, was called a “windfall” and a “vindication” for Indigo, which will net $140 million. Indigo CEO Heather Reisman said this sale represented a 300 per cent return on its investment in the startup.

Indigo’s market value (as of yesterday) is just $50 million more than the sale proceeds, so it’s tough to call it a triumph. (The big jackpot was claimed by the outside investors who bought 42% of Kobo Inc. for $11 million at the end of 2009. They hit payday: a 12 times return in two years.) If this is Barnes & Noble’s financial model, the prospects are grim.

The problem with selling your e-reader business is that you don’t have one anymore – you’ve lopped off the most appealing growth opportunity left to a declining industry.

 

Bringing it all together

Where does that leave things?

Did the market over-react yesterday to Barnes & Noble’s news? Yes, as it always does. (The shares closed up 20% from their low point yesterday, and they’re up another 3% this morning.)

Over 13 million shares traded hands yesterday, 15 times the daily average for BKS shares and easily the largest trading day ever for Barnes & Noble. We’ll probably be hearing shortly from the biggest buyer(s).

The sale of Sterling Publishing is a distraction in this story, just as it’s a distraction for Barnes & Noble. Unlike Amazon’s high-profile publishing effort, Sterling is a stolid and solid backlist non-fiction publisher. It makes sense to convert it to cash and lose the distraction.

Can Barnes & Noble compete against Amazon with the Nook? Yes, as evidenced by yesterday’s announcement.

Can Barnes & Noble compete against Amazon profitably? That looks like it’s going to be very, very tough.

Write to Thad McIlroy

For more insight into Barnes & Noble, hear a senior executive at Barnes & Noble speak at Digital Book World, January 23-25 in New York City.

3 thoughts on “Opinion: What’s Really Going on at Barnes & Noble

      1. evelyn

        There are currently 19 B&N stores in Ohio. You may be confusing B&N with Borders, a seperate company that recently went out of business.

        Reply

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