Thursday, April 28, 2011

Barnes & Noble Bankruptcy Index: The Nook Color has new features and apps, but what about the stores?

This week was about the the new features B&N introduced to its Nook Color e-reader designed to make the device more competitive with the iPad and other tablets. What about new design for B&N's stores? Nada, at least for now. Given that B&N is still mostly a store-based retailer, it's not much of a surprise this week our B&N bankruptcy index goes down by half a point.

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:

4/20: $10.66
4/27: $9.90
Change: -7.1%

As you can see, B&N's stock fell 7.1% last week
. Just for comparison, Amazon lost 0.9% last week and the S&P500 Index gained 1.3%.

Alyce Lomax was unfavorable to say the least about B&N stock on The Motley Fool with headline saying simply -Run From This Stock! And she explains:

Although Barnes & Noble has been able to pull off sales increases over recent years, its gross profit has dropped to 25.6% in the last 12 months, down from highs as great as 37% in recent years. Same-store sales have falle
n several years running, and the company failed to turn a profit last year. For the trailing 12 months, Barnes & Noble has reported a disheartening $0.81 loss per share. The recessionary climate hasn't made things easy for booksellers, and its falling profit margins suggest that Barnes & Noble's had to offer deep discounts to keep customers coming back.

What about the Nook and
the latest improvements? She's not convinced it can really change the big grimy picture: "The rise of e-books to challenge traditional paper tomes makes matters even worse...This heated competition explains Barnes & Noble's Nook Color enhancements, but such admirable efforts don't guarantee marketplace success."

If you listen to
Jim Cramer, he also recommends to be cautious about B&N's stock: The book store chain operator has a great management team, Cramer said. Even so, it's been very tough for them to compete against He would be cautious with BKS.

As we can see the stock
didn't continue to rise as it did last week (jumping 15.5%), which shows that it was more likely a more of a one-week event and not a permanent trend. Therefore, our week's grade for this parameter is going down by half a point: 4.5 (5)

2. What analysts say on B&N

Alyce Lomax wrote on The Motley Fool:

Granted, Barnes & Noble has more than a few positive attributes. It's enjoyed a decent success with its Nook e-reader, and the company recently added several innovative features to its Nook Color, including an app store and the ability to access Yahoo! Mail and Gmail accounts. It's also reportedly looked into taking over a few abandoned Borders stores for its own shops. Still, while B&N may be doing better than Borders, "relatively strong" isn't the same as "strong."

Still, we don't see a significant change in the market sentiment and therefore o
ur 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.

First, I want to mention something quite revolutionary that will happen at one of B&N bookstores. This is an update from Forbes:

Yesterday, I received this press release from Loud Crow Interactive:

On Monday, May 2, renowned writer and illustrator Sandra Boynton will become the world’s first author to sign an eBook app for the general public. This historic signing will take place at 7:00 PM at Barnes & Noble’s Upper East Side store, located at 150 E 86th Street at Lexington Avenue, in New York City.

Julie Bosman reported on Sunday on the New York Times on an upcoming campaign of B&N: "The first commercial in the campaign will run on Monday, and a longer 60-second spot will run during “American Idol” on Thursday. Print ads will run in The New York Times and USA Today. On the company’s Facebook page, users will be invited to share their feelings about reading."

Why we put it under brick and mortar bookstores' strategy? Because of the following comment we found on the article:

There are no Barnes & Noble stores in the ads, a nod to the transformation that is under way in the publishing industry. As e-books have taken off, foot traffic in brick-and-mortar stores has decreased, a sure sign that more consumers are doing their book-shopping from home. (Or wherever they and their e-readers happen to be at the moment.)

The fact that there are no B&N stores (unlike a campaign from last year, where Last year, "where initial campaign to introduce the Nook Color opened on a picture of a Barnes & Noble store, the camera zooming through the entrance and landing on a Nook Color, while Sarah Jessica Parker narrated the voice-over"), only shows me that while the Nook is on the top of the to-do list of B&N, the stores are at the bottom of the list, if at all.

The fact that B&N work so hard and put their cash into only improving their digital business' positioning while completely ignoring their brick and mortar stores (as we can see clearly in their new ad campaign), is an indication for us they still don't see the launch of a new strategy as a high priority and therefore this week's grade goes down in half a point: 3.5 (4)

4. What B&N is saying about itself
“We really wanted to reach out to all the readers and get the message out about how wonderful reading is. The world changes, technology changes, but people love to read, and we’re giving them the best way to read.” Sasha Norkin, the vice president for digital and channel marketing for talking on the new ad campaign.

Our grade for this parameter stays the same: 6 (6)

5. Steps B&N is taking It was a relatively busy week with the new improvements in the Nook Color and the upcoming ad campaign. These are good steps, but still insufficient when you look at the big B&N picture and the challenges the company is facing. This week's grade stays the same: 6 (6)

6. Competitors
This parameter will mainly look in
to Borders and how its problems affect B&N. This week Borders, according to Bloomberg, "won approval of an amended executive bonus plan after a judge sought changes to resolve objections from an arm of the U.S. government that oversees bankruptcies. " Our grade stays the same: 5 (5)

7. Financial strength
On February 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
On Monday B&N announced it "Expands Award-Winning NOOK Color™ Reading Experience with the Most Requested Tablet Features", or in other words (the WSJ's words..) Barnes & Noble Upgrades Nook to Challenge Tablets.

WSJ adds:

The bookseller hopes the software upgrade will make the Nook Color, which has a touchscreen and runs Google Inc.'s Android software, an alternative for consumers who want features like email and games like Rovio's "Angry Birds." Barnes & Noble is also adding the ability to play Adobe Systems Inc.'s Flash video on its Web browser. Priced at $249 apiece, Nook Color is hundreds of dollars less than competitors that include Apple Inc.'s iPad 2, Motorola Mobility Inc.'s Xoom and the Research In Motion Ltd. PlayBook.

And don't forget the Apps! "Users now will be able to purchase and download apps from the Barnes & Noble website, though initially the selection is limited compared with the wider Android store."
Revenues from the Apps? Well, B&N will get 30% of the sale price and the remainder will go to the developer.

The idea was to meet consumers' demand - "Consumers said they wanted tablet-like features," said Jamie Iannone, president of the bookstore chain's digital products division.

Some analysts say it's not Apple Barnes & Noble look at, but Amazon -
"I don't think they're responding to the iPad as much as they're trying to beat Amazon to the same punch," said Forrester Research analyst James McQuivey.

He's also providing interesting data: "McQuivey estimates Barnes & Noble has sold 400,000 Nook Colors since the device's October launch and said the device's sales could reach 3 million units by year-end. The black and white Nook was introduced in late 2009 and has sold about 2 million units, according McQuivey."

Ina Fried adds another interesting angle on AllThingsD about the implications on the B&N-Amazon competition:

In addition to boosting the Nook Color’s attractiveness against the current e-reader and tablet competition, the move to open up to developers could serve the company well if Amazon makes a move to offer an Android tablet of its own, something many expect it to do. Amazon has already opened an Android app store, has music and video services that work on Android and also last week launched a version of its Kindle reader software that is optimized for tablets running the Honeycomb version of Android. Amazon has declined to comment on any tablet plans.

Bottom line, this is a positive step and our grade this week goes up in half a point: 7.5 (7)

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 points (56.5)

As you can see, this week's index is set at 56 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!