Thursday, March 10, 2011

Barnes & Noble Bankruptcy Index: No one seems to be interested in buying B&N

This week our B&N bankruptcy index is moving permanently to Thursday and will be published from now on on Thursdays. 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 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 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:

3/2: $13.20
3/9: $11.81
Change: -10.5%

As you can see, B&N's stock continued to fall down last week with a decrease of 10.5% in the stock's price. Just for comparison, the S&P500 Index rose slightly during this period (+0.9%) and Amazon fell in 1.7%. It looks like the stock continues to fall because B&N has no luck in finding a buyer for the company, which implies they might be a good reason why they're not that attractive.

eChristian Investing offered this comment on the stock's free fall:

Even with top competitor Borders Group (BGP) filing for bankruptcy and closing 200 stores, it is going to be challenging for Barnes & Noble to execute a turnaround. Of course everyone loves a comeback story and if Barnes & Noble succeeds I’m sure it will be stocking that book in stores and on the Nook. However, for now the stock is desperately looking for a catalyst that will stop the free fall.

NakedValue explained on Seeking Alpha what investors might see that frightens them and makes them sell the stock:
  • The brick and mortar bookstore business model is dead (see: Borders (BGPIQ.PK))
  • Barnes & Noble's dividend cut is an ominous sign
  • It's cheaper to buy books online ( (AMZN))
  • Barnes & Noble is hopelessly behind the eReader curve (Kindle, iPad, Wal-Mart (WMT) eReaders)
NakedValue actually think B&N might be worth a look if you're an investor with an open mind, but apparently right now most investors aren't.

This week's grade for this parameter is also going down to: 6 (6.5)

2. What analysts say on B&N

On Reuters, one retail investment banker who declined to be named, explained that "The stock price isn't the draw or the deterrent. There's no strategic (bidder) out there that would want them. They could appeal to private equity, but there's been no rabid interest so far."

More from this article:

Barnes & Noble has said it will spend $150 million on Nook's development this fiscal year. And those costs will eat into profits for quite some time, analysts warned.

"The investments will continue for the foreseeable future. Combined with declines in physical books, that should continue to pressure earnings," said Credit Suisse analyst Gary Balter in a research note last week.

No other comments or analysis were found. This week's grade stays the same: 7 (7)

3. New strategy to regain sales in the brick and mortar stores

Phil Wahba and Jessica Hall wrote earlier this week on Reuters:

Barnes & Noble remains heavily reliant on traditional, bricks and mortar bookselling at its 705 superstores, the same business model that failed at Borders.So Barnes & Noble has bet its future on the Nook and its ability to generate e-book sales.

But that promises to be expensive against deep-pocketed rivals and Apple. It's an open question whether the stores, which face a longtime book sales decline, can generate enough cash to help fund the main prong of Barnes & Noble's growth strategy: the Nook and the e-books sales it generates.

"It's not only 'how do you compete with iPad 2' on the digital side, but does the bricks and mortar have enough legs to support the growth of the digital platform," said Morningstar analyst Peter Wahlstrom.

We couldn't say it any better. Bottom line: 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

Silence this week.. This week's grade for this parameter stays the same: 6 (6)

5. Steps B&N is taking
Nothing much here this week.
This week's grade stays the same: 6 (6)

6. Competitors
This parameter will mainly look into Borders and how its problems affect B&N.
This week there are no big news on this end and the grade stays the same. 5.5 (5.5)

7. Financial strength

Two weeks ago Barnes & Noble published the results for the third quarter
. This week we had no updates. This week's grade stays the same: 7 (7)

8. Strength of the digital business

The iPad2 was launched last week, but it is not a direct threat on the Nook (although we'll definitely have some readers buying the iPad 2 instead of the Nook, but I don't think there would be too many of these). Other than no updates and this week's grade stays the same: 8 (8)

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 (again, we don't believe more toys and extra room for the Nook is a winning strategy) with their brick and mortar stores. 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 this week is that things are are looking not too good for B&N with no dividends, no buyer at sight and no strategy for the brick and mortar stores. Still, it could all change if a buyer with the right ideas will appear. Right now this buyer is nowhere to be seen, but never say never.
. This week's grade stays the same: 6 (6)

This week's Barnes & Noble Bankruptcy Index: 61 points (61.5)

As you can see, this week's index is set at 61 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 and too close to the red alert zone. Way too close.. Still it looks like B&N is still not in immediate trouble. 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!