Thursday, May 5, 2011

Barnes & Noble Bankruptcy Index: B&N has plans for a new e-book reader, but apparently not for the stores

This week was about the the new plan of B&N to introduce a new e-reader later on this month, which might be according to the WSJ "a more powerful combination tablet and e-reader". And 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 we're not too impressed with this step (unlike the stock market, where the stock rose in 17%) and this week our B&N bankruptcy index stays the same

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:

4/27: $9.90
5/4: $12.01
Change: +16.9%

As you can see, B&N's stock rose sharply almost 17% last week
. Just for comparison, Amazon went up 1.7% last week and the S&P500 Index lost 0.6%.

Most of this happened yesterday due to the news that B&N "plans to make an announcement on the launch of a new electronic book reader on May 24th, according to a regulatory filing released after the close of trading on Wednesday." (Reuters, May 4)

Since it looks like the stock jumped only because of this update, it doesn't really represent any significant change and we'll have to see if this rally will continue next week before we'll make any changes in our estimations of this parameter. Therefore, our
week's grade stays the same: 4.5 (4.5)

2. What analysts say on B&N

Arunava De wrote on The Motley Fool:

"It is evident that Barnes & Noble means business when it comes to stabilizing its position in the e-reader market. It is willing to take a fall in net income to get a footing in the battle of book retailers. This aggressive strategy seems to make sense, especially as the physical component of the business becomes less attractive.

In a world where the consumer is on a constant lookout for better shopping and consumption experiences, launching a full frontal attack with better services will probably get results. The only problem here is that with falling earnings, investors are probably going to be apprehensive about B&N’s stock. But if the company can turn the tide, there might just be good profits on the way. But be careful: first, a lot of things have to go right."

We don't see a significant change in the market 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.

Still, nada. B&N plans a new e-reader but doesn't seem to plan any new strategy for its brick and mortar stores, at least that's what we can tell from the information the company makes available. Unfortunately I believe there are no secret plans waiting to be disclosed in the right moment - there are just no plans at the moment.

This week's grade stays the same: 3.5 (3.5)

4. What B&N is saying about itself
We didn't find any quotes this week. Our grade for this parameter stays the same: 6 (6)

5. Steps B&N is taking
Two things happened last week - B&N
announced that "it has entered into an amendment that will extend its existing $1 billion revolving credit agreement on more favorable terms" and also disclosed that it plans to unveil a new electronic book reader later this month. The first step is aimed to enhance the company's financial flexibility and the second one to improve its competitiveness on the digital front.

In all these are positive steps, but we're not sure yet how they'll impact B&N's efforts to get back on the track (again - no step is taken to improve sales at the stores, which are the more vulnerable part in B&N operations at the moment). 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. Last Friday, according to Bloomberg, "reported a loss of $24.3 million for the month ended March 26, according to court papers...The current report shows revenue of $165.2 million for the month ended March 26 and total assets of $942.2 million. Cash and equivalents are $80.9 million, the company reported." Our grade stays the same: 5 (5)

7. Financial strength

On February Barnes & Noble published the results for the third quarter
. On Monday B&N announced it "has entered into an amendment that will extend its existing $1 billion revolving credit agreement on more favorable terms. "

Here are more details from their press release:

The amended $1 billion revolving credit facility takes advantage of conditions in the financial markets that are more favorable than when the original facility was established. The amended facility has lower interest costs, greater financial flexibility and increases overall borrowing capacity throughout the year...

“Amending our revolving credit facility enables us to lower our anticipated cost of capital and enhance our financial flexibility as we continue to transform the company and execute our strategic plan,” said Joseph Lombardi, chief financial officer of Barnes & Noble, Inc. “We appreciate the strong level of support we received from our lenders.”

This should be helpful, but we don't find this step too significant overall and therefore our grade stays the same: 7 (7)

8. Strength of the digital business

B&N will unveil a new electronic book reader later this month, according to a regulatory filing released after the close of trading yesterday.

WSJ adds that "One possibility is Barnes & Noble will release a more powerful combination tablet and e-reader, perhaps running a more advanced software like Google Inc.'s Honeycomb software. Honeycomb is a version of the Android operating system Google created specifically for tablets."

This is a positive step and our grade this week goes up in half a point: 8 (7.5)

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 actually we feel that somehow the company is a bit lost when it comes to find how to generate more sales in its brick and mortar stores. Therefore
this parameter's grade goes down by half a point: 5 (5.5)

This week's Barnes & Noble Bankruptcy Index: 56 points (56)

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!