Thursday, April 21, 2011

Barnes & Noble Bankruptcy Index: B&N stock is rising, but no one really knows why

This week B&N's stock rose in 15%, but we're not sure if there's a good reason for it. In the meantime, competition on the digital front is getting fierce with new features and money going into competing e-readers. In all, this week our B&N bankruptcy index stays the same as last week.

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:

4/13: $9.23
4/20: $10.66
Change: +15.5%

As you can see, B&N's stock jumped 15.5% last week. Just for comparison, Amazon rose 0.87% last week and the S&P500 Index also gained 1.21%.

What happened? Cindy Johnson offered this explanation on The Motley Fool:
Office supply retailer Staples will start selling Barnes & Noble's Nook Color Android-based e-book reader on May 1 in its stores and online for $249. Staples is the world's largest office products company and the second largest e-commerce retailer, with annual sales of $25 billion and 90,000 associates in 26 countries.

But Johnson is a bit skeptic in the explanation that she's offering, mentioning that "the Nook is already available at Best Buy, Amazon, and of course, B&N."

NakedValue also suspects it's something else, although he (or she) is not sure what is it exactly, noting that it might be something bigger:

There is enough reason to believe that Barnes & Noble's big stock move could be the result of something bigger. If so, investors should be prepared for the possibility of follow-up headlines. If the Staples headline is really the sole reason for Barnes & Noble's big move, investors should avoid the stock because the price strength will not last. Not only was the Staples story old, the company is not likely to meaningfully change the prospects at the leading bookstore chain in the country.

Today NakedValue offers another option to be considered:
Barnes & Noble (BKS) may be the stock market's cheapest technology stock with a price/sales of 0.08 and a PEG ratio of 0.59. Sure, the company has a dominant presence as a brick and mortar bookstore chain but the company's surprisingly successful Nook e-reader/tablet gives it tremendous upside potential. JP Morgan estimates that there will be 47.9 million tablets sold in 2011 and 79.6 million sold in 2012. As the market's lowest cost tablet, the color Nook could be worth billions to the right acquirer.

So the bottom line is that no one really knows for sure what happened and why the stock jumped so high in just a couple of days. Therefore we stay cautious and wait until next week to see if this trend is continuing or not. In the meantime, our week's grade for this parameter is going up by half a point: 5 (4.5)

2. What analysts say on B&N

No updates this week. 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.

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

4. What B&N is saying about itself
No updates this week and our grade for this parameter stays the same: 6 (6)

5. Steps B&N is taking
Nothing happened this week. 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, "is seeking at least $50 million in additional financing as sales trail expectations and publishers demand cash in advance, said two people who have seen the chain’s plans to reorganize. The retailer may risk liquidation without further investment, easier terms from vendors or a buyer, said the people, who declined to be identified because the process isn’t public. Borders already has a $505 million debtor-in-possession loan from lenders led by GE Capital. Those creditors are helping to fund operations in bankruptcy and have priority over others. "

According to Bloomberg "
Annual sales may drop to $1.5 billion, according to court papers, less than half what the chain generated two years ago."

Is it good news for B&N? I'm not sure. It implies of course that B&N can benefit from having a bigger market share, but it also shows the depth of the troubles the brick and mortar bookstores are in and this is still, to remind you, B&N main source of revenues.

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

It looks like the competitors are wasting no time in adding new features and raising money.

Amazon's Kindle Will Offer E-Books From Libraries - As the Wall Street Journal reported "Amazon said Wednesday that it will launch the public-library feature—which gives the Kindle the same library-borrowing abilities as competing e-reading devices such as Barnes & Noble Inc.'s Nook and Sony Corp.'s Reader—later this year. "We think customers are going to love this new library feature," said a spokeswoman for the Seattle-based retailer."

The Wall Street Journal also reported on Tuesday that Kobo closed a $50 million funding round:

“It’s about international expansion,” said Todd Humphrey, Kobo’s executive vice president of business development. He said the company will also use the funding to grow its base in the U.S. and Canada and to improve its product. Overall, Kobo said it has 3.2 million users.

The company said the $50 million investment was led by an institutional investor that it declined to name, and that existing investors–which include Indigo Books and Music and Cheung Kong Holdings–also participated in the funding round.

These steps, following the release of the $114 Kindle are adding to the major threats on the estimated 25% market share of the Nook and hence on B&N digital business. Our grade this week goes down in half a point: 7 (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
this parameter's grade stays the same: 5.5 (5.5)

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

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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