Wednesday, June 22, 2011

Barnes & Noble Bankruptcy Index: Will John Malone still be interested in B&N following their 4Q loss?

After a break of couple of weeks, we're back with our B&N bankruptcy index, following the release yesterday of B&N's fourth quarter report.

Jeffrey Trachtenberg summed B&N's report on the WSJ: "Barnes & Noble Inc., the target of a takeover bid by Liberty Media Corp., saw its digital strategy pay off in its fiscal fourth quarter with healthy gains on the e-book and e-reader front, but investments in that business took a toll on the bottom line."

Still no word about the future of B&N's brick and mortar stores as B&N seems to be putting everything it got on the Nook and e-book sales, a risky bet that might be too risky for a brick and mortar company
. Bottom line: This week our B&N bankruptcy index stays in the 50-59 zone: Bankruptcy is a clear and present danger.

ust a short reminder - As Borders filed for bankruptcy couple of months ago, we started looking 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 (for consistency we look at results from Wed. 6/15 to Tue. 6/21):

6/15: $19.90
6/21: $18.94
Change: -4.82%

As you can see, B&N's stock lost 4.82%
last week. Just for comparison, Amazon gained 4.44% last week and the S&P500 Index went up 2.38%.

B&N's stock did well in the last couple of weeks and only fell sharply (about 6%) yesterday following the release of the 4Q report. We'll have to see how the market will digest this report and react to the relatively negative comments from analysts following the report.

This wee's grade is staying the same: 5 (5)

2. What analysts say on B&N
"Although store revenue fell, revenue from other sectors rose. Online revenue rose 54 percent to $217.3 million and college bookstore revenue rose 4 percent to $211.2 million.The revenue results show the diverging trends in book retail -- physical store sales fell while online sales rose. But the two aren't as separate as they may appear, said Simba Information senior trade analyst Michael Norris. "The physical stores are the cyclists shielding the team leader from the wind," he said. "There's no way on this planet that would have grown as much as it did without the bookstores performing as Nook showrooms for the past year." (Yahoo! Finance)

"The bookseller, which suspended its dividend this year to conserve cash, has been using its profits to invest in e-books and its Nook digital reading devices as sales of paper books falter. That helped attract interest from John Malone’s Liberty Media, which offered $17 a share for the bookseller last month. “They’re spending a huge amount of money developing a reader that people are afraid is going to go the way of the VHS tape or the CD,” Bill Kavaler, an analyst at Oscar Gruss & Son Inc. in New York, said in an interview. Kavaler recommends investors sell the shares." (Bloomberg)

"The company has had to ramp up spending on marketing on product development to stay competitive with Inc. (AMZN), whose Kindle is the top selling e-reader, according to Michael Souers, an analyst for Standard & Poor’s in New York. The Nook is “the only driver of long-term growth and they have to establish that niche,” said Souers, who recommends holding Barnes & Noble shares." (Bloomberg)

The market sentiment looks negative after the release of the fourth quarter report - analysts don't like the fact that B&N put all its eggs in the competitive e-book basket. Therefore our grade goes down by half a point: 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. This is also one the reasons their stores keep losing money - Sales at Barnes & Noble stores open at least one year fell by 2.9 percent in the fourth quarter, ended April 30.

Right now all they have is selling more toys and games - CEO Lynch predicted toys and games will become "a very sizeable business for us within a reasonably short time horizon." This doesn't seem to be a very viable strategy to me, as

For all of those at B&N and outside the company who think the brick and mortar stores don't matter so much, especially now when Liberty’s chairman, John Malone has indicated that his primary interest in Barnes & Noble is its Nook e-reader, I'd like to quote again here Michael Norris, an analyst of Simba Information, who said following yesterday's report:

"The physical stores are the cyclists shielding the team leader from the wind," he said. "There's no way on this planet that would have grown as much as it did without the bookstores performing as Nook showrooms for the past year." (Yahoo! Finance)

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

4. What B&N is saying about itself
Barnes & Noble said yesterday it is reviewing Liberty Media’s offer, the first bid disclosed publicly since the company put itself up for sale in August. B&N said that while the offer is being considered, earnings projections for fiscal 2012 won’t be announced.

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

5. Steps B&N is taking
No new steps were reported on the report. Apparently B&N won't do anything significant until it will be sold to John Malone if the bid will proceed as planned, even after the release of the 4Q results.

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

6. Competitors
According to Yahoo! Finance, B&N said yesterday results were hurt by Borders' liquidation sales at 200 of its stores. Longer term, however, Barnes & Noble expects to benefit from the store closings. CFO Joseph Lombardi said in areas where a Borders store has closed, nearby Barnes & Nobles are recording revenue increases in stores open at least one year.

Also, it is reported there that
"analysts have speculated over the possibility of some combination of Borders and Barnes & Noble as the industry consolidates. But Lombardi dispelled that idea. He said in a statement that over the past 5 years, before Borders filed for bankruptcy court protection, Barnes & Noble considered buying it "many times" but always came to the conclusion it wasn't interested. "We are still not interested," he said."

This week's grade stays the same:
5 (5)

7. Financial strength

Barnes & Noble released its fourth quarter report yesterday, and as the NYT wrote, it wasn’t pretty. "The company lost $59 million in the quarter, or $1.04 a share. Analysts on average had expected a smaller loss of 91 cents a share. Despite a rise in revenue, thanks to higher online and digital sales, Barnes & Noble was hurt by the liquidation of more than 200 Borders stores as part of that retailer’s bankruptcy. Sales at Barnes & Noble stores open at least one year fell by 2.9 percent in the quarter."

If you compare the results to last year's results, it doesn't look any better - B&N's net loss was $59.4 million, or $1.04 per share, for the three months ended April 30, 2011. A year ago B&N reported a net loss of $32 million, or 58 cents per share for the three months ended April 30, 2010.

This is not a good news from a financial strength perspective and therefore our grade goes does by half a point: 6 (6.5)

8. Strength of the digital business

Although store revenue fell in the fourth quarter, online revenue rose 54 percent to $217.3 million. CEO William Lynch said B&N estimates e-books added 1%-2% to its U.S. market share, bring its total to 26%-27%.

Barnes & Noble also said in its report that its Nook sales continued to improve. The company introduced a new $139 Nook last month in an effort to boost its share of the growing e-book market and also offers a NookColor for $249.

This week's grade goes up by half a point
: 8.5 (8)

9. Sense of urgency
It looks like B&N still think they have time and are not worried at all, especially after they received a proposal from Liberty Media to acquire the company. They might be right because after John Malone will buy the company he's the one who will need to handle these problems. Yet, the purchase hasn't been completed yet and even if Malone will purchase the company, I'm sure it is the best interest of B&N to ensure the company reaches its next phase of operations in the best condition possible.

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 even with the offer they have from Malone - their current strategy of putting all their bets on the digital front is very risky given the fact B&N is still mainly a brick and mortar company. Yesterday's report presents this risk and its results very clearly.

This week's grade for this parameter stays the same
: 5 (5)

This week's Barnes & Noble Bankruptcy Index: 55.5 points (56)

As you can see, this week's index is set at 55.5 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!