Thursday, March 31, 2011

Barnes & Noble Bankruptcy Index: The stock is finally going up but B&N continues to go down

Unfortunately we still don't have any good news. This week our B&N bankruptcy index is showing bankruptcy is getting closer even though it made some gains at the stock market. 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:

3/23: $9.10
3/30: $9.75
Change: +7.1%

As you can see, B&N's stock finally stopped falling down and went up 7.1%. Just for comparison, Amazon went up 8.5% last week and the S&P500 Index also gained 2.4%.

Still, some analysts like NakedValue suggested investors to wait for a better opportunity, which means he doesn't think we saw the bottom yet:

Not much has gone right for Barnes & Noble (BKS) shareholders recently so maybe we should celebrate the recent strong move in the stock price. But while I believe there is upside to the stock price at these levels, I would urge others to wait for a better opportunity to initiate or add to their positions.

Here's a technical analysis published yesterday by ABR-Seven Summits Research:

Barnes and Noble (NYSE:BKS) closed Tuesday's bullish trading session at $9.72. In the past year, the stock has hit a 52-week low of $8.75 and 52-week high of $24.47. Barnes and Noble stock has been showing support around $9.27 and resistance in the $10.11 range. Technical indicators for the stock are Bearish and S&P gives BKS a neutral 3 STARS (out of 5) hold rating.

For a hedged play on this stock, look at the Oct '11 $9.00 covered call for a net debit in the $8.12 area. That is also the break-even stock price for this trade. This covered call has a duration of 206 days, provides 16.46% downside protection and an assigned return rate of 10.84% for an annualized return rate of 19.20% (for comparison purposes only). Barnes and Noble does not pay dividends at this time.

So even though B&N has a relatively strong week on the market, we're still cautious and wait for another week to see if the stock keeps going up or falls down again. This week's grade for this parameter stays the same: 4.5 (4.5)

2. What analysts say on B&N

Morgan Stanley analyst Scott Devitt raised his price target on Amazon from $205 to $225 — one of the highest targets on Wall Street for the stock, which has jumped more than 10% in value over the past two weeks, but remains below its all-time peak above the $191 mark from mid-January.

“We believe the market is underestimating the positive share shift from specialty retail to Amazon,” Devitt wrote in his report. In particular, he predicted that traditional retailers in both the books and electronics segments are likely to continue losing sales to the company.

Troubles at book sellers Borders Group Inc., which filed for bankruptcy protection last month and is closing 200 underperforming stores, and Barnes & Noble Inc. present a $6.7 billion opportunity for Amazon in this business, he wrote.

(MarketWatch, March 30)

As you can see, the negative sentiment is continuing this week, and therefore our grade is going down by half a point: 5.5 (6)

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
No updates here. This week's grade for this parameter stays the same: 6 (6)

5. Steps B&N is taking
As part of its effort to expand the offerings on its Nook Color e-reader, B&N also announced its April More In Store content, which will allow customers to connect to free in-store WiFi service and access exclusive essays, short stories and more. 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 the main news was on Borders' plan to hand out $8.3 million in bonuses, which I believe makes many customers (and employees) angry and disappointed. I think this week's news is providing an opportunity for B&N to show they're different and treat their stakeholders better than Borders, but they still need to act first and show they take advantage of this opportunity, so in the meantime, our grade stays the same: 5 (5)

7. Financial strength

Couple of weeks ago Barnes & Noble published the results for the third quarter. One interesting detail I learned this week from NakedValue was that B&N has a "flexible lease schedule, unlike Borders which was largely driven to bankruptcy because more than 70% of their store leases expired after 2017."

Other than that we don't have any updates this week and our grade stays the same: 7 (7)

8. Strength of the digital business

Barnes & Noble announced it is expanding Nook Color content with more books, magazines and children's books.

“With more than two million digital titles to browse, download and enjoy in seconds, NOOK Color customers repeatedly tell us how much they appreciate the ability to virtually turn the page on their favorite monthly, dive into a bestseller, and bring story time to life for their children – all using one device. And as always, Barnes & Noble will keep making NOOK Color better with new titles and featured enhancements for the best-in-class reading,” said Jamie Iannone, President of Digital Products for Barnes & Noble, in a written statement.

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 still not looking too good for B&N.
This week's grade stays the same: 5.5 (5.5)

This week's Barnes & Noble Bankruptcy Index: 57 points (57.5)

As you can see, this week's index is set at 57 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!

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