Wednesday, January 26, 2011

Barnes & Noble Bankruptcy Index: The best place to learn if and when B&N is going out of business

Borders, the nation’s second-largest book chain, is as it was written on yesterday's NYT editorial, "teetering on the brink of a bankruptcy filing." We assume that Border's bankruptcy is inevitable, but what about Barnes & Noble, the nation's largest book chain? Will they follow Borders and go into bankruptcy and if so, when?

We follow
closely the future of bookstores, both independent and big chains, as we see them as a viable part of the book industry and we also believe they can take an important part in making this industry more sustainable.

So we decided it's time to follow B&N even more closely in an effort to provide an estimate that is more than just a guestimation and is based on a number of parameters that together provide an indication on the state of B&N and how close or far they are from bankruptcy.

Therefore we're launching today a
B&N Bankruptcy Index that 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 good and bankruptcy is becoming a real 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.

Starting today, we'll provide you every Wednesday an update on each one of the parameters included in the B&N Bankruptcy Index and will analyze the trend. So here we go:

1. Confidence of the stock market in B&N

This parameter will look at the performance 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:

1/19: $16.81

1/25: $16.49

Change: -1.90%

As you can see, there wasn't much of a change in B&N's stock price over the last week, and actually it's doing OK so far this year (it started the year at a stock price of $15.42). Also
technical indicators for the stock are Bullish and S&P gives BKS a neutral 3 STARS (out of 5) hold rating. Therefore this week's grade for this parameter is: 8

2. What analysts say on B&N

Matt Fassler, B&N Analyst, Goldman Sachs
wasn't very optimistic on the Digital Book World (DBW) conference earlier this week: Across the board, even for B&N, losses have exceeded expectations. Economics of digital business for B&N look worse than they should. Historically the big box retail books business wasn’t a great business for the shareholders... For B&N going private wouldn’t solve any of their major issues. Expect to see a downsizing of the number of stores and store sizes as the continued growth of ebooks continues. A painful downsizing over the next few years but the industry will continue to exist.

Not very encouraging I have to say and therefore this week's grade for this parameter is: 6

3. New strategy to regain sales in the brick and mortar stores
Just like Borders, B&N still doesn't have a a clear and comprehensive strategy that will transform their brick and mortar stores from a liability back to an asset.

Adding more toys, games and other merchandise is OK and might generate more cash (although as Matt Fassler, B&N Analyst, Goldman Sachs noted on DBW,"repurposing square footage very hard to do") but in any case it is not a substitute for a real strategy that will address the weaknesses of the current business model and offer a new vision for the stores.

B&N knows very well their business environment is changing.
As Robert Wienstein mentioned last week on Seeking Alpha, B&n made a statement in its last annual report about "repositioning its business from a store-based model to a multichannel model.....". They definitely do a good job on the online channel (see parameter 8), but when it comes to the brick and mortar stores B&N still haven't come out with anything that looks like a winning strategy. Therefore this week's grade for this parameter is: 4.5

4. What B&N is saying about itself

This parameter will examine quotes and statements from B&N on its financial state, strategy and other related issues.
Here's a quote we found on the Washington Post's article from last week 'Borders struggles amid rapid changes in book sales': Even Barnes & Noble, which analysts say is better run than Borders, feels the stress of steering a business whose customers' bookmarks are increasingly digital. "Sometimes I want to shoot myself in the morning," joked Leonard Riggio, founder and chairman of Barnes and Noble.

Although a joke, it's still not encouraging to hear it from Riggio and it gives you a sense of how serious B&N's problems are. Therefore this week's grade is:

5. Steps B&N is taking
Last week
Publishers Weekly reported that B&N laid off about 45 to 50 positions in the buying group. Cuts included included merchandising VP Bob Wietrak and small press and vendor relations director Marcella Smith." Publishers didn't like it as PW reported - "Publishers were shook by the news with the larger publishers wondering who would oversee merchandising, while smaller presses questioned who would be looking out for their interests. The growth in digital is great, one publisher noted, but added "someone has to be in charge of getting books into the stores.""

tried to answer the question "What possessed B&N to not only fire such important employees, but to do it in such a cynical (or is it desperate) bad-publicity-be-damned style?" and explained that "It remains a mystery, but there is a general consensus that it has something to do with B&N being shaken by what’s happened to
Borders, and by how the big houses aren’t racing to save Borders, either. That would mean that B&N was eradicating some big salaries as part of a nascent streamlining program in case its fortunes suddenly turn, too."

We believe that even if it helps cash flow in the short run, this step does not look very beneficial in long-term view and above all reflects the lack of clear strategy at B&N when it comes to their brick and mortar stores. In all this step doesn't help stakeholders to regain confidence in the company. Therefore this week's grade of this parameter is:

6. Competitors

This parameter will mainly look into Borders and how its problems affect B&N. Let's start first with the positive side - As Karen Dionne wrote on
the Daily Finance earlier this week, if Borders' 600 retail outlets, which command roughly 10% of the bricks-and-mortar retail book market, were to close, analysts predict that B&N would pick up 18% of the Borders market, i.e. about 2% of the books retail business.

On the less positive side, when Borders gets into trouble, it doesn't reflect well on B&N, as both are experiencing serious problems and addressing similar changes in the book retail business, as the Washington Post's article described it:

Now, Borders confronts the limitless, more efficient supply chain of Amazon's online emporium. Borders, which helped a generation of readers learn the pleasure of diving into a book for hours at a stretch, now competes for the attention of readers who dip into a few pages on an iPad, open Facebook, read some more, then tweet random thoughts. Printed books don't need a power outlet or a data plan, yet for some people, their utility seems to be fading.

In all, Borders' struggling actually show that bankruptcy, which once was unthinkable when you talked about the big book chains, is now a possibility and even more than that also for B&N. Therefore our weekly grade for this parameter is: 6

7. Financial strength
B&N's latest financial report was published on November 2010 for its second quarter, which ended Oct. 30. The report included the following data:

Total sales (for the quarter) - $1.9 billion (including sales of Barnes & Noble College Booksellers)
EBITDA (for the quarter) -$46 million
Net loss (for the quarter) - $12.6 million, or $0.22 a share
Cash and cash equivalents - $30.16 million
Net working capital (Current assets - current liabilities) - $75.8 million
Current Ratio (
Current Assets / Current Liabilities) - 1.037
Debt Ratio (
Total Liabilities / Total Assets) - 0.795
Equity Ratio (
Shareholders' Equity / Total Assets) - 0.20

This is what we got until the next report will be published on February and it definitely could be worst. It looks like B&N still has the financial strength to survive. This parameter's grade is: 7.5

8. Strength of the ebook business

This maybe the part of the business B&N is most proud of with the thriving Nook and the growing sales at Not everyone share the same thoughts - Matt Fassler, B&N Analyst, Goldman Sachs noted on DBW that "economics of digital business for B&N look worse than they should."

B&N also suffered a setback earlier this week when it was reported that the company is phasing out the Nook 3G due to lack of demand.

More over, B&N still haven't found the way to translate its success to become a dominant player in the e-book market to support sales in its stores. If B&N wants to continue and be more than just a successful online business, it must find the way to do it. This week's grade is: 7.5

9. Sense of urgency
Maybe B&N think they still have time, especially now after they had successful holidays sales,but this is not the case of course and 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). Therefore this parameter will try to look into B&N's sense of urgency.

Right now it seems though can be closer than it looks and when one block falls, the others tend to fall very quickly afterwards. Every day that goes by without taking serious steps is increasing the chance for bankruptcy, with our without a new buyer.

The case of Borders is definitely unfortunate, but B&N can still avoid taking the same path. I'm not sure if these lessons alone will save B&N, but I'm certain that if B&N will avoid them, they are significantly increasing the chances that they will follow Borders. The week's grade is: 6

10. General feeling
This parameter will be an indication of our impression of all the materials read and analyzed for this index. Our feeling this week is not very good given how B&N is handling the situation so far, although we believe the alarming bells are not ringing yet. Therefore this week's grade is: 7

This week's Barnes & Noble Bankruptcy Index: 63.5 points

As you can see, this week's index is set at 63.5 points, which translates into the scale of 60-69: B&N doesn't look good and bankruptcy is becoming a real threat. Definitely not a good starting point, but we'll have to see in the next couple of weeks if we're going up or down to determine if B&N is heading towards a bankruptcy or getting away of it. See you next Wednesday.

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!