Thursday, February 17, 2011

Barnes & Noble Bankruptcy Index: Will B&N follow Borders?

Usually our weekly B&N bankruptcy index is published Wednesday, but since yesterday Borders filed for bankruptcy protection, we delayed it in one day to better digest the sad, although expected news, and see how they reflect on this week's index.

Just 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 3 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 Wednesday, 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 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:

2/8: $17.11

2/16: $18.77

Change: +9.7%

As you can see, B&N's stock did very well the in the past week. They did much better comparing to both the S&P500 Index (+0.89%) and Amazon (+1.94%). In other words, the markets believe B&N will benefit from Borders' bankruptcy and will get stronger in the post-Borders' bankruptcy era (see for example Alyce Lomax on the Motley Fool).
This week's grade for this parameter is: 9 (8.5)

2. What analysts say on B&N

As mentioned above analysts believe that the bankruptcy of Borders will have a positive impact on B&N: "Although the impact of Borders’s bankruptcy won’t be as great on Barnes & Noble as it would have been five years ago, “the majority of book sales are still physical books,” Michael Souers, an analyst at Standard & Poor’s in New York, said in an interview. “Overall, it’s a benefit for Barnes & Noble.” (Bloomberg)

On the New York Times Michael Souers looked at the bigger picture and was a little less optimistic: “The book retailing industry is very challenging right now. We’ve had significant transformation. Bookstores have gradually been losing their prominence, and the U.S. market is oversaturated in terms of the number of retail stores. So that trend will likely continue as e-books gain more prevalence in the market.”

In all there are no big news from the analysts - it's still about gains in the short-term and structural problems are a threat in the long-term. Therefore this week's grade stays the same: 7 (7)

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

4. What B&N is saying about itself

We haven't find any updates here so this week's week's grade for this parameter stays the same: 6 (6)

5. Steps B&N is taking
This week Barnes and Noble's main action (or at least the one that got most media attention) was to post an open letter to Amazon affiliates, seeking to lure them to the retailer's fold. As PC Magazine reported, B&N's letter to the affiliates was posted online on Monday in response to Amazon's threats to cut off its affiliates in states that charge sales tax (i.e. Texas).

This week's grade is: 6 (6)

6. Competitors
This parameter will mainly look into Borders and how its problems affect B&N.
This week Borders filed for bankruptcy and announced it will close in the next couple of weeks about 200 stores nationwide. Unlike most analysts, we feel that Borders' bankruptcy can do more harm than good to B&N, but it's really premature and we'll have to wait at least couple more weeks to know more. Our weekly grade for this parameter is: 6 (6)

7. Financial strength
B&N's latest financial report was published on November 2010 for its second quarter, which ended Oct. 30. Yesterday B&N announced the company will report fiscal 2011 third quarter earnings results next Tuesday, February 22nd. So there's no change here from last week and therefore this parameter's grade stays the same: 7.5 (7.5)

8. Strength of the ebook business

No news on this front (maybe we should call it e-front?), although almost every article on Borders reminded the Nook and B&N's online presence as important factors that helps B&N to avoid bankruptcy ("The largest U.S. bookstore chain, Barnes & Noble, has had success with its and online store, allowing it to stay in contention with online book pioneer" - Yahoo! News). This week's grade is: 7.5 (7.5)

9. Sense of urgency
Maybe B&N think they still have time 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. No news on this front this week and this parameter's grade stays the same: 6 (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, after the bankruptcy of Borders is that B&N still doesn't see it as a wake-up call. This week's grade is: 6.5 (6.5)

This week's Barnes & Noble Bankruptcy Index: 65 points (64.5)

As you can see, this week's index is set at 65 points, which translates into the scale of 60-69: B&N
doesn't look too good and bankruptcy is becoming a more realistic threat. Definitely not a good place to be at, but it could definitely get worst as you can learn from the situation at Borders, although we definitely hope it won't! In the meantime, it looks like B&N is still not in immediate trouble. We'll have more information about it next Wednesday after they will publish their quarterly report. 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!