Wednesday, November 19, 1997


Barnes & Noble
(NYSE: BKS)
Phone: 213-633-3300
Website: http://www.barnesandnoble.com
Price (11/18/97): $26 1/2


HOW DID IT DOUBLE?

Once upon a time, there was a fast-growing bookseller named Barnes & Noble. Superstore after superstore, complete with more than 150,000 titles and a steaming hot serving of double latte, it grew to be a formidable giant. When an upstart online bookseller captured he investing public's fancy, Barnes took a page out of Amazon.com's (Nasdaq: AMZN) book and introduced its own website.

By flexing its muscles, it soon grew to be a presence both online and at the bricks-and-mortar bookshop near you -- and the stock doubled happily after.

BUSINESS DESCRIPTION

With more than a thousand locations, New York City's Barnes & Noble is the country's largest bookseller. Its superstore operations consist of 469 book superstores under the Barnes & Noble, Bookstop, and Bookstar tradenames. Its mall bookstores consist of 556 stores under the B. Dalton Bookseller, Doubleday Book Shops, and Scribner's Bookstore tradenames.

Like many retailers, the company has its strongest quarter over the holidays. This past September the stock split 2-for-1.

FINANCIAL FACTS

Income Statement
12-month sales: $2628.5 million
12-month income: $54.1 million
12-month EPS: $0.79
Profit Margin: 2.1%
Market Cap: $1770.7 million

Balance Sheet
Cash: $8.8 million
Current Assets: $876.0 million
Current Liabilities: $673.3 million
Long-term Debt: $282.5 million

Ratios
Price-to-earnings: 33.5
Price-to-sales: 0.7

HOW COULD YOU HAVE FOUND THIS DOUBLE?

The "World's largest bookseller" hasn't spun the planet off its axis with fiscal performance, but it has reported earnings in line with estimates. Sleepy, yawnable, turn-the-page stuff. Certainly not the kind of text that catapults a stock overnight. Yet the real reason for the double did not come from within. In spring, Amazon.com made its stock market debut.

Barnes and fellow print-peddling heavyweight Borders (NYSE: BGP) didn't want the new kid on the block to hog the spotlight. Both announced that they would be launching online sites later in the year. Barnes even teamed up with America Online to sell books through the world's largest online service.

While Amazon.com initially soared as a highly touted tech issue in May, it soon soured. Yet Amazon.com was not going to fade away. Once Barnes and Borders had their taste of the limelight, Amazon.com came back and struck exclusive deals with online service Prodigy and popular Internet search engines Yahoo! and Lycos.

Shares of Amazon.com tripled. Although Barnes and Borders failed to suppress investor excitement in the newest bookseller, the success ultimately trickled down to them. Because of Barnes' clout and offline presence it was an easy sell to parrot Amazon.com's moves. Amazon.com took Prodigy, Barnes would take CompuServe. Amazon.com took two of the three biggest search engines, Barnes took Lycos, the one that got away from Amazon.

Barnes was willing to do whatever Amazon.com did to succeed, from discounting books to forging alliances with the most popular sites on the Internet to link back to their online sites.

Through all this, the shares of Barnes climbed higher -- and why not? Today Amazon.com is selling at 20 times sales on the promise that online bookselling will revolutionize the way we will buy books. Meanwhile, Barnes is trading for less than one times trailing revenues. Barnes and Noble's trailing sales are more than 100 times that of Amazon.com's, yet Amazon.com's billion-dollar market cap is more than half that of Barnes.

WHERE TO FROM HERE?

Of course, Barnes as a whole will not grow sales at the same astronomical rate as Amazon.com. It is conceivable, though, that the company's online site will do quite well and grow at the same feverish pace as Amazon.com's. There is no reason to believe that both companies will not thrive -- Amazon.com as the pioneer, Barnes as the brick-and-mortar brand name.

The companies are beginning to realize that. For months they had been getting judicial with one another over marketing slogans. Amazon.com had billed itself as "Earth's Biggest Bookstore" on the premise that it stocks 2.5 million titles, many of which are out of print. The wired Barnes proclaims itself the "World's Largest Bookseller Online." Just recently, they made nice and decided to let the free markets decide the eventual victor.

This is not to say that it is all smiles at Barnes. Just last month the dozen analysts following the company lowered their earnings estimates. They maintained their attractive ratings on the company, despite the expected fiscal softness.

That is why owners of Barnes should keep a close eye on Amazon.com. Barnes has remained a Teflon stock, where no bad news sticks, simply because it cannot be priced any cheaper relative to Amazon.com's valuation. Absent Amazon.com tumbling, Barnes can be susceptible if it comes across unique problems at its own website or if the fundamentals at the offline stores deteriorate significantly enough to scare away the bullish analysts.

Yet, the combination of the steady superstore performance coupled with the glitz of the new website finds Barnes to be the better play in this humble writer's opinion. Not that either option is all that enticing. Paying more than 30 times earnings for a company growing steadily but in a sector with historically low profit margins is not without risk -- and like a mystery thriller, it will probably keep investors guessing along the way.

-Rick Aristotle Munarriz
(tmfedible@aol.com)


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