Monday, September 12, 2011

Is Books-A-Million going to follow Borders into bankruptcy?

Last month it was announced that Books-A-Million agreed to acquire lease interest in 14 of Borders stores for $934,209. Yet last week GalleyCat reported that Books-A-Million will close four outlets. Add to it 11 percent decrease in sales in the last quarter and you start wondering not only if Books-A-Million made the right decision buying Borders' stores, but also if they're actually able to stay in business or will follow Borders into bankruptcy.

I looked into it and found five signs that Books-A-Million, now the second-largest bookseller might be heading into trouble:

1. Sales are shrinking - Last month the company reported on its second quarter results:  

"Net sales for the 13-week period ended July 30, 2011 decreased 11.4% to $106.4 million from net sales of $120.0 million in the year-earlier period. Comparable store sales for the second quarter declined 12.9% compared with the 13-week period in the prior year. Net loss for the second quarter was $2.9 million, or $0.18 per diluted share, compared with net income of $1.9 million, or $0.12 per diluted share, in the year-earlier period.

For the 26-week period ended July 30, 2011, net sales decreased 11.2% to $210.4 million from net sales of $237.0 million in the year-earlier period. Comparable store sales declined 13.1% compared with the same period in the prior year." 

Why? Commenting on the results, Clyde B. Anderson, Chairman, President and Chief Executive Officer, said, "Results for the quarter reflect a continuation of the trends that have been affecting our business since the beginning of the year. A soft publishing lineup, the effect of e-book migration and the impact of Border's liquidation all contributed to the decline in comparable store sales. In this environment we have been focused on further developing the growth categories in our stores in preparation for the second half of the year while our balance sheet remains strong."

What are exactly the "growth categories" they focus on further developing? It's not clear. Somehow I find this explanation as well as action plan not very reassuring to say the least.

2. Cash reserves are down by almost 40% - Although CEO Anderson said "balance sheet remains strong", you see that cash is down by 38% compared to the end of January 2011. The company has now only 4.8 million in cash and almost 95% of its assets are in its inventory ($192.3 million out of total current assets of $203.7 million) - again, not very relaxing given the fast changes the book business is experiencing. 

3. The stock market does not believe in Books-A-Million - If you had $300 on January 1, 2011 and decided to invest $100 in Amazon, $100 in Barnes and Noble and $100 in Books--Million, your investments would generate you the following return as of yesterday:

1/3/2011 9/9/2011    Return
Amazon 184.22 211.39 14.75%
B&N 15.42 11.38 -26.20%
Books-A-Million 5.86 2.6 -55.63%

The company in its latest annual report explains that "recent market volatility has exerted downward pressure on our stock price, which may make it more difficult for us to raise additional capital in the future."

4. No clear strategy for the brick and mortar stores - Books-A-Million presently operates 232 stores in 23 states and the District of Columbia. Just like with B&N it's not clear what's company's strategy to transform these stores back into an asset. The vast majority of the company's revenues come from bookstores and therefore lack of clear strategy is creating a risk and puts in question the company's ability to increase its sales.

5. No e-reader - Just like Borders, Books-A-Million didn't develop an e-reader of its own and sells B&N's Nook. It means the company is more limited in growing its digital sales and is very much depended on B&N and their success to keep developing the Nook. Bottom line: Books-A-Million does not have the same digital cushion B&N has.

I hope I'm wrong, but Books-A-Million seems to be vulnerable now. If they won't be able to find the right strategy for their brick and mortar business they can be very soon in the same position  Borders found itself not too long ago.

Raz @ Eco-Libris

Eco-Libris: Plant trees for your books!