Friday, March 25, 2011

Barnes & Noble Bankruptcy Index: B&N is so cheap and yet no one wants to buy it!

I know - we're one day late, but we've got some interesting updates - this week our B&N bankruptcy index is showing bankruptcy is getting closer as no buyer is insight and B&N stock continues to fall down. Just a short reminder - As Borders filed for bankruptcy, we look at Barnes & Noble, the nation's largest book chain to see if they will follow Borders and also go into bankruptcy and if so, when exactly.

To do it more analytically we launched few weeks ago a new B&N Bankruptcy Index, which is based on 10 parameters, which receive a grade between 1-10 (1 - worst grade, 10 - best grade). Hence we receive a 0-100 point index scale, which we divide into several ranges as follows:

90-100: B&N is in an excellent shape. Couldn't be better!
80-89: B&N is doing great. Bankruptcy is no longer a real threat.
70-79: B&N could do better and has to be cautious of bankruptcy.
60-69: B&N doesn't look too good and bankruptcy is becoming a more realistic threat.

50-59: Bankruptcy is a clear and present danger.
49 and less: Red alert! Bankruptcy is just around the corner and is likely to happen within a short time frame.

We will check the
B&N Bankruptcy Index every Thursday, updating each one of the parameters included in the index and will analyze the trend. You can follow the weekly changes in the index from the day it was launched on the Barnes and Noble Bankruptcy Index page on our website.

So here's our update for this week (in brackets is last week's grade):

1. Confidence of the stock market in B&N

This parameter will look at the performan
ce of the B&N stock (symbol: BKS) in the last week. The performance of B&N's stock is an indication of the confidence the market has in the ability of B&N to maintain a viable business.

So let's look at last week's figures:

3/16: $9.71
3/23: $9.10
Change: -6.3%

As you can see, B&N's stock continued to fall down last week with a decrease of 6.3% in the stock's price. Just for comparison, the S&P500 Index went up during this period in 3.2% and Amazon also gained 0.4%. Just to give you a broader perspective - B&N shares have plunged 51% since Feb. 18, the last trading day before the company eliminated its $1 annual dividend.

The reason the stock keeps going down is probably connected to the fact that as Bloomberg reported Barnes & Noble said to be likely to end search without buyer, no matter how cheap the price is - "even with Barnes & Noble Inc. (BKS) selling for 60 cents on the dollar, the cheapest retailer in America still isn’t cheap enough to entice private-equity buyers looking for cash."

According to Bloomberg it looks like the only buyer left may be Leonard Riggio, founder and chairman of Barnes & Noble, himself as private-equity firms back away after the bankruptcy of Borders Group. I'm sure this piece of information is far from reassuring the markets.

Couple more figures from Bloomberg to take into account:

Barnes & Noble is now the only U.S. retailer valued at a discount to its net assets. The company sells for 0.6 times its book value, or assets minus liabilities, which is less than 94 other U.S. retailers with market values of more than $500 million, according to data compiled by Bloomberg.

The bookstore chain also commands less per dollar of revenue than any of its competitors, with its shares trading at 0.08 times sales in the past 12 months, the data show.

This week's grade for this parameter is going down by half a point to: 4.5 (5)

2. What analysts say on B&N

“There’s not much to like,” said Brian Sozzi, Wall Street Strategies’ retail analyst. “One thing I’ve learned in retail is once the model starts to go against you it’s tough to pull yourself out. Assets on their books are losing value so quickly. Other than Riggio, I don’t know who else would want it.”

“Barnes & Noble needs to do immediately what Borders waited too long to do,” said Jim McTevia, of Bingham Farms, Michigan-based McTevia & Associates, a turnaround consultant. It needs to start closing stores and “taking steps now to restructure this company before it’s forced into a Chapter 11” bankruptcy, he said.

The valuation discounts are “synonymous with companies that are really struggling,” said Michael Souers, an analyst for Standard & Poor’s in New York. “From a valuation perspective, it does look attractive but there’s concern about longer-term trends and little momentum in the near term.”

Even with Barnes & Noble trading at a level suggesting shareholders have more to gain from firing its managers and liquidating the company, private equity firms are wary of putting money into Barnes & Noble because it doesn’t generate enough cash to support a leveraged buyout and lacks property to sell off, according to Oscar Gruss & Son Inc.’s Bill Kavaler.

“It’s not generating cash, the future is too uncertain, the ability to lever the company is constrained,” said Kavaler, a special situations analyst at Oscar Gruss in New York. “It’s not a private-equity thing.”

He added that “This shouldn’t be a public company and it shouldn’t be a private equity company. It should be a private, family-held company. When it works they make a lot of money, and when it doesn’t work it doesn’t cost anybody outside of the family anything.”

Due to the relatively negative sentiment this week, this week's grade is going down by half a point: 6 (6.5)

3. New strategy to regain sales in the brick and mortar stores
Just like Borders, B&N still doesn't have yet a clear and comprehensive strategy that will transform their brick and mortar stores from a liability back to an asset. This week's grade stays the same: 4 (4)

4. What B&N is saying about itself
“Borders has had a number of strategic decisions along the way that were very different than Barnes & Noble,” Barnes & Noble’s Chief Financial Officer Joseph Lombardi said in an interview yesterday. “In June of last year we stood up in front of the investment community and said this was our plan we were going to execute. We are well on our way and positioning ourselves beautifully to participate in the e-book market.”

Well, I'm happy to hear that at least the CFO is optimistic..This week's grade for this parameter stays the same: 6 (6)

5. Steps B&N is taking
Nothing much here this week except the fact they're still looking for a buyer and can't really find one. This week's grade stays the same: 6 (6)

6. Competitors
This parameter will mainly look into Borders and how its problems affect B&N.
This week's grade stays the same: 5 (5)

7. Financial strength

Two weeks ago Barnes & Noble published the results for the third quarter. This week we learned from Bloomberg that Barnes & Noble ran a deficit from operations, after deducting capital spending, of $166 million in the past 12 months, one of only two mid-sized U.S. retailers with a shortfall in free cash flow, data compiled by Bloomberg show.

This week's grade stays the same: 7 (7)

8. Strength of the digital business

No updates here, except this interesting update on Wall Street Journal:

Microsoft Corp. sued Barnes & Noble Inc. and the manufacturers of Barnes & Noble's Nook electronic book device, escalating a series of patent battles over gadgets based on Google Inc.'s Android operating system.

The Redmond, Wash., company, in complaints filed Monday in federal court in Seattle and with the International Trade Commission, alleged that Barnes & Noble, Foxconn International Holdings Ltd. and Inventec Corp. all violate five Microsoft software patents with Nook, an electronic-book reader sold by Barnes & Noble in it stores.

Other than a that we found only a reminder of the some ebook sales figures from Bloomberg Businessweek:

The Kindle has 67 percent of the e-reader market in the U.S., followed by the Nook at 22 percent, according to a February report from Goldman Sachs Group Inc. Amazon also generates 58 percent of e-book sales, followed by Barnes & Noble’s 27 percent and Apple at 9 percent.

Bloomberg also mentioned that "some potential bidders balked at a purchase because of how long it may take Barnes & Noble to generate more digital sales, said two of the people, who asked not to be identified because negotiations aren’t public."

This week's grade stays the same: 8 (8)

9. Sense of urgency
It looks like B&N still think they have time and are not worried at all, or at least not worried enough to begin doing something with their brick and mortar stores (again, we don't believe more toys in the stores and extra room for the Nook is a winning strategy). If we can learn something from the Borders' case, it's how fast things go bad when your reach a certain tipping point of financial distress or distrust of your stakeholders (consumers or publishers for example). This week's grade stays the same: 5.5 (5.5)

10. General feeling

This parameter will be an indication of our impression of all the materials read and analyzed for this index. Our feeling this week is that things are not looking too good for B&N with the falling stock, no buyer at sight and no strategy for the brick and mortar stores.
This week's grade stays the same: 5.5 (5.5)

This week's Barnes & Noble Bankruptcy Index: 57.5 points (58.5)

As you can see, this week's index is set at 57.5 points, which means B&N is getting deeper into the 50-59 zone: Bankruptcy is a clear and present danger. It's still not the red zone but it means that bankruptcy is getting closer and is becoming a real threat to B&N. See you next Thursday.

To view the weekly changes in the index visit Barnes and Noble Bankruptcy Index on our website.

You can find more resources on the future of bookstores on our website at

Raz @ Eco-Libris

Eco-Libris: Working to green the book industry!


atomicliving said...

Do you think Riggio is intentionally hoping (or somehow affecting) the lowering of the stock so he can buy the company himself at a discount and make it private?

Elaine Bloom said...

I think Leonard Riggio wants to buy the company back and is not deliberately affecting the lowering of the stock but is glad it's going lower and won't do anything to prop it up.

Barnes & Noble and Borders are very different. Borders was in bad shape for years, long before ebooks became popular. Barnes & Noble is working hard to get the Nook to be a small tablet computer so they are thinking ahead.

atomicliving said...

Do you think a brick and mortar book store can really compete in computers/tech waters with the big fish of MSN, APPLE, and Amazon (ebooks/kindle)?

A year ago when they reduced their amount of books to bring in more toys and games and continued with music/movie section (which is greatly losing money) I wasn't sure if they were putting out too many feelers. Now, I wonder if with the Nook they may not be putting all their eggs in one basket. And, of course, what if they drop that basket?
It is an interesting time for retail in general. Other than service industry (cafe society) it seems things easily made digital and convenient at home and less expensive in production (no shipping or actual printing) is leading to vastly changing the face of the American Retail system. What do you think?