Sunday, April 17, 2011

Barnes & Noble Bankruptcy Index: B&N has no reply to the new $114 Kindle

Last week wasn't too active, but B&N finished it looking at a new cheaper version of the Kindle (only $114) entering the market and threatening to make Amazon's leadership in the ebook market stronger than ever. This is bad news for B&N and therefore this week our B&N bankruptcy index is going down.

ust 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:

4/6: $9.58
4/13: $9.23
Change: -3.7%

As you can see, B&N's stock continued to fall last week (-3.7% - to be able to compare on week to week basis, we looked at the price of the stock on Wednesday, as we do every Thursday). Just for comparison, Amazon fell 0.3% last week and the S&P500 Index also lost 1.6%.

It doesn't look like anything significant happened last week on the stock market and therefore this week's grade for this parameter stays the same: 4.5 (4.5)

2. What analysts say on B&N

JP Mangalindan wondered on Forbes Tech Why Barnes & Noble should go from bookstore to Nookstore and wrote:

The road ahead for Barnes & Noble will prove tough. Few brick and mortar companies have successfully negotiated the choppy waters to safe digital harbors. But Barnes & Noble, unlike Borders, has one bright spot going for it. That bright spot, in fact, might one day be Barnes & Noble, period. And that bright spot is, of course, the Nook ereader and ebook business.

And concludes:

Regardless of the path executives take, the Barnes & Noble of the future (if there is one, of course) will probably look nothing like it does today. The company could even choose to drop the name altogether and let Nook become the consumer-facing brand. Just a few short years ago, Barnes & Noble was imposing its will on the book business, muscling out an ill-prepared competition.

Barnes & Noble has already gotten one thing right in having an ereader ready to help it do battle with Amazon. But as far as successfully transforming itself into a digital company? Well, that's just Chapter One.

JP Mangalindan also quotes Forrester research analyst James McQuivey, who believes B&N "has a better than 50% chance of making the switch to digital if it becomes even more aggressive about its Nook hardware, software, ebook and accessory business." McQuivey adds:

"Barnes & Noble didn't get into this market very early, but when they got into this, they got into this very smart. They went in with with both feet, quickly got a device on the market as opposed to picking someone to partner up with like Borders did, and when the firestorm in 2010 hit, they already had their device ready to go. Borders did not."

There's no change in the market's sentiment and therefore our grade stays the same: 5.5 (5.5)

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. Forrester research analyst James McQuivey had an interesting advice for B&N on Forbes Tech:

he also believes Barnes & Noble needs to do more -- much more. In a conservative scenario, the company would shutter at least 30%, or 211, of its 705 retail locations, within the next three to five years. "If it were me? I'd cut deeper, faster – like two to four years," he says, suggesting a boutique model where B&N reduces store capacity by 50% through a combination of store

This week's grade stays the same: 4 (4)

4. What B&N is saying about itself
It's not directly said on B&N, but it certainly relates to the future of B&N. Barnes & Noble executive Marc Parrish, who spoke Wednesday morning at GigaOm’s Structure Big Data conference in NYC, shared this forecast with the audience:

“The book business is changing more radically now, and quicker, than movies or music or newspapers have, because we’re doing it in a matter of months,” he said. “In next 24 months is when this business will totally shift.”

This week's grade for this parameter stays the same: 6 (6)

5. Steps B&N is taking
Nothing happened this week (only few development on the digital front, which you can find more details on under parameter 8 - the strength of the digital business). 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 Borders, according to Bloomberg, "needs to change its executive bonus plan, a judge said, after a lawyer for creditors said the bankrupt book seller wants to pay key managers to stay while it considers a sale or reorganization." Our grade stays the same: 5 (5)

7. Financial strength

Couple of weeks ago Barnes & Noble published the results for the third quarter. We don't have any updates for this week and our grade stays the same: 7 (7)

8. Strength of the digital business

While Amazon released "a $114 version of its Kindle electronic-book reader that requires customers to view ads in exchange for getting the lower price," all B&N had to offer was the update that Staples will start selling NOOK Color in stores and online as of May 1.

Amazon's step got positive feedback from analysts, as you can read here: “Overall, we view the move favorably, given the potential for incremental unit sales with limited negative impact on margins, and added market share protection for the e-reader leader,” wrote Lazard analyst Colin Sebastian.

JP Mangalindan also commented about B&N's state following Amazon's move: "They had better move fast -- Amazon doesn't intend to provide much breathing room to its ereader competition. Jeff Bezos' company just released a sponsored Kindle at a $25 discount, trying to further solidify its hold on readers' wallets. And sales of Apple's (AAPL) iPad, which also serves as an ereader, are surging."

Amazon's move and B&N lack of response is limiting its ability to reach a greater share in the book market and therefore this week's grade goes down in half a point: 7.5 (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 that things are still not looking too good for B&N hasn't changed this week and
this parameter's grade stays the same: 5.5 (5.5)

This week's Barnes & Noble Bankruptcy Index: 56.5 points (57)

As you can see, this week's index is set at 56.5 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!

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