August 18, 2008
Is it time to throw the book at another company? It is. Every week I recommend a stock that investors should consider dumping from their portfolios. Every week I also nominate three stocks to take its place.
Who gets tossed into the virtual dumpster this week? Come on down, Barnes & Noble (NYSE: BKS ) .
I have nothing against books. My wife is the English department chair at her school. However, it's hard to picture a superstore chain like B&N being more relevant in the future.
The way we consume content is changing dramatically, and one only needs to look at something like the emptying bidding floor for rival Borders Group (NYSE: BGP ) to realize that even bookworms aren't coming around to save this tired niche.
Let's go over some of the more B&N-specific reasons for this diss.
- There isn't a lot of optimism heading into Thursday's quarterly report. Analysts have been talking down the company's profit-squeezing prospects over the next two years lately.
- The retailer's fiscal first-quarter report was a dud. Sales rose just 1% to $1.2 billion during the period, weighed down by a 1.5% dip in comps at the store level.
- Cyberspace isn't exactly the company's friend. Online sales rose just 7% in its latest quarter, far slower than the spurts seen at other Web-based booksellers.
- Back in May, the company lowered its sales forecast for the year. It now expects negative comps during the fiscal year. It is keeping its earnings per share range intact -- at $1.70 to $1.90 a share -- but that is really the trickery of an aggressive share buyback program.
- Speaking of stock repurchases, B&N is lousy at it. The company snapped up 6.5 million shares at an average price of $30.57 this past quarter. The stock is trading lower today, so it's not very good at calling a bottom or supporting its own share price.
- Barnes & Noble charges for Wi-Fi access at its wireless-ready stores. With a ton of local places offering free wireless connectivity, why is B&N pricing itself out of a captive audience?
- The Internet, shrinking laptops, smartphones, and new e-book devices like the Kindle and Sony's (NYSE: SNE ) Reader will make bookstores even less relevant as the middlemen in literary transactions. In other words, even if Borders continues to retreat, it doesn't give B&N a chance to advance.
As I have every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.
- GameStop (NYSE: GME ) -- Barnes & Noble actually spun off the video game retailer six years ago. Big mistake. As B&N has languished, GameStop has been the epicenter of shopping buzz. It has blown past Wall Street guesstimates in each of the past six quarters, while B&N has topped analyst profit expectations just once over the past three quarters. Gee, B&N surely could have used a racehorse with healthy gains, monster comps growth, and Wall Street stomping potential to prove itself to be a diversified retailer.
- Amazon.com (Nasdaq: AMZN ) -- The future continues to brighten for Amazon's Kindle. Citi analyst Mark Mahaney sees the Kindle as a $1 billion business for Amazon by 2010. As more bookmakers, magazine publishers, and newspaper companies rely less on physical distribution, chains like Barnes & Noble will become less important in the literary consumption process. B&N may be the category killer, but if you don't see it as the next Blockbuster (NYSE: BBI ) then history hasn't taught you very well.
- Google (Nasdaq: GOOG ) -- The world's leading search engine has led the way in digitizing the classics. On the more contemporary front, Google Book Search allows bookworms to seek out more modern reads, but online purchases of the physical book go through the company's comparison shopping engine. That is bad news for B&N. It can't afford to be the lowest priced player online, because it cannibalizes its stores. That's the rub, because the superstore presence is keeping online pricing in check (creating the relatively anemic 7% year-over-year growth online).
Save for the holidays, when is the last time that you've had to wait in line at a Barnes & Noble bookstore (assuming there is more than just a cash register or two open)? With the digital delivery of books sidestepping the superstore, Amazon doing a banner job of delivering actual books to your home without having to tax your gas tank, and even something as simple as the evolution of K-cup home coffee brewers making the once cozy B&N java houses less necessary, isn't it time for you to turn the page on the chain?
Other headlines out of the weekly dumpster: