Barnes & Noble, Blockbuster, Borders: The Killer B's Are Dying

Barnes & Noble (NYSE: BKS  ) , Blockbuster (OTC BB: BLOKA.PK), and Borders (NYSE: BGP  ) -- the Killer B's -- once were high-octane classic Peter Lynch stocks. Admired by consumers, supported by a raft of institutional investors, and demonstrating all the characteristics of a commercial juggernaut, the Killer B's were the stocks to buy in the 1990s. The problem is that none of them owned the core intellectual property that they were selling to consumers. And that IP has moved across technologies and onto devices that are more popular, more convenient, and less expensive.

And so today the Killer B's are dying.

Let's start with Blockbuster. In its last shareholder meeting the company failed to get approval for its reverse stock split and the combination of its A and B shares. Its stock is now trading around $0.12 per share. As I look through the assets of the firm, not only do I see it heading toward bankruptcy this year, but I believe it will be a Chapter 7 liquidation. Blockbuster simply got blown away by Netflix (Nasdaq: NFLX  ) and other Internet-centric technologies.

Borders isn't in much better shape. Over the past five years, the stock has fallen from around $25 to around $1.35. In its most recent filing, it disclosed more than $800 million in current liabilities (payables, accrued expenses, and short-term debt) that are only covered by liquid assets if the stated value of its inventory plays out. Alongside that, it reported a $64 million loss for the quarter. This is a business that is going out of business. The only thing that will stop it is a merger.

And that brings us to the Killer B No. 3: Barnes & Noble. While the company is certainly in a stronger position, and may yet find reason to merge with Borders, I see no reason for optimism. Bob Dylan sang what looks true to me about Barnes & Noble, "It's not dark yet, but it's getting there." Margins are narrowing, and there's no plausible argument to support the case for a widening market opportunity going forward. It's going to be tempting for the company's management to play the game as it's been played -- continuing its core retail business and dabbling in new technologies -- but that's not going to be enough. Either Barnes & Noble will find a way to make something truly remarkable out of its retail locations, or those locations will merely be bidding chips in future bankruptcy negotiations.

New technologies like the Kindle, the iPad, and Netflix have drawn all of the intellectual property treasures away from Blockbuster, Borders, and Barnes & Noble. The Killer B's are dying.

Not surprisingly, they have not been, are not, and will not be live recommendations in Motley Fool Stock Advisor, where we have outperformed the market 60% to 0% since 2002. I loved my consumer experiences with them, but their stocks look broken for good.

Fool co-founder Tom Gardner does not own shares of any companies mentioned. Netflix is a Motley Fool Stock Advisor selection. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 21, 2010, at 9:17 PM, foolindeed1 wrote:

    Barnes and Noble online store which includes eBooks is the fastest growing eBook store on the market. It is behind several major eBook offerings (HP is a one example). It's Nook is outselling Kindle . It's eBook store is on iPad, etc. The company's strategy is in digital and the less profitable stores will be closed. It is in a very unique position to take advantage of having both online and physical stores to complement and not to undercut each other. Current share price is severely undervalued.

  • Report this Comment On July 21, 2010, at 11:51 PM, TMFTomGardner wrote:

    foolindeed1, I wish I believed this. The problem with statements like "fastest growing" is that I could achieve that in any industry by selling one item tomorrow and five items the next day -- regardless of the fact that competitors might be selling millions of items.

    I'm actually hopeful that Barnes & Noble can succeed where it's sister company, Borders, and cousin company, Blockbuster, simply haven't been able to withstand the furious challenges from Internet-born companies.

    Odd as this sounds, I with Barnes & Noble restructured their stores to feel more like the Apple store. Okay, that sounds absurd, I know. But what if I felt that when I went for coffee and to page through a few books, I really felt like I was entering a technology zone. This would take a reformatting and rebranding. I would be excited to see them work toward this....while dramatically reducing their book inventories in the store.

    Suffice to say, I'm worried. I hope I'm wrong to be.

  • Report this Comment On July 22, 2010, at 11:00 AM, gambatteimasu wrote:

    TMFTomG,

    While I agree with you regarding the struggles that Borders faces, I believe that they will ulitmately be successful in extracting value from the franchise by restructuring and/or merger. Modest value probably, but value.

    They have further to go, and progress has been excruciatingly slow. But consider this: the debt level has come down substantially in a multi-year effort, short term financing has been secured, the plug has been pulled on Waldenbooks in favor of the superstore format, they have entered the e-reader market (while intelligently remaining device agnostic), and two extremely high net worth investors have taken big stakes -- one of them entering his position as recently as this spring.

    My inclination is to agree with the first of these investors, Pershing Square's Bill Ackman, who expressed earlier this year that he considers a Borders bankruptcy to be a "low probability" event. Time will tell who is right.

    One final point I must make with all due respect: Borders may never have been a pick in the Stock Advisor newsletter, but it *was* a pick in your Inside Value newsletter a couple of years ago when it was trading around $6 per share. I make this point as a satisfied subscriber to many of your newsletters, but feel it's important to remember.

    GLTA,

    gambatte imasu

    long Borders

  • Report this Comment On July 22, 2010, at 11:08 AM, TMFTomGardner wrote:

    Gambatte,

    Excellent points, and I had completely forgotten about the Inside Value team's selection of this stock. I think the point still stands that neither David or I would pick this sort of company -- faltering against major competition. But fair point on Inside Value.

    I read about Bill Ackman's comments. I have to say that they felt a little biased to me. I have no stake in Borders, but Mr. Ackman has an enormous stake. I think he has recently referred to himself as a "stuckholder" of Borders.

    I hope I'm wrong. I see no roads out but Chapter 11 or merger with Barnes & Noble at bankruptcy-like price. As I said, though, I hope I'm wrong...for the company AND for its Foolish shareholder, Gambatte. Thanks for the note and your thoughts.

  • Report this Comment On July 22, 2010, at 2:31 PM, gambatteimasu wrote:

    TMFTomG,

    Fair point about Mr. Ackman's bias. That has been a popular retort from Borders bears: "This guy is just talking his book!" But allow me to play devil's advocate on this point.

    I recall from one of your articles that you consider high insider ownership to be the *single* most important factor in ferreting out companies that are likely to outperform the market.

    I would argue in this specific case that the high ownership stake of Mr. Ackman and Bennett S. LeBow is perhaps the next best thing. Sure, it's not the same as the founder of an eponymous business owning a big stake of a public company. But as active investors Mr. Ackman and Mr. LeBow have not only the desire to see Borders turn itself around, but also the ability and inclination to influence the outcome.

    For instance, Mr. Ackman extended intermediate term financing to Borders in the form of a loan when the credit markets were frozen. He also picked the last two CEO's. And Mr. LeBow is now serving as Chairman of the BOD and has other powers as well. Maybe they didn't start the company, but this is much closer to that than having the largest stakes owned by Fidelity or T. Rowe Price.

    How can you love high insider ownership and then dismiss Mr. Ackman's comments as simply biased -- particularly when the message is along the lines of "bankruptcy is low probability?" As for the "stuckholder" comment, I have also heard that rumor but have been unable to verify. I'm also not sure it matters much; from what I understand, he first started acquiring shares around $12. "Stuckholder" may be both candid and accurate. As may "low probability of bankruptcy."

    In fairness and full disclosure, I have had very fortuitous timing with this investment. My initial shares were purchased at 0.$69, with a follow-up at $1.17 after Mr. Ackman's interview. So it is very easy for me to be patient as events unfold.

    My prediction, by the way, is that Borders will in fact merge with Barnes & Noble -- as Mr. Ackman proposed years ago. And my lowball number on the buyout price is $2.25 per share -- Bennett LeBow's entry price on May 20.

    Still, I acknowledge that this is for speculative money only -- and that BGP would not pass muster as a Stock Advisor pick. :)

    Cheers,

    gambatte imasu

  • Report this Comment On July 23, 2010, at 1:58 PM, TMFTomGardner wrote:

    Very compelling case. In general, my preferred form of high insider ownership is of the founder or 10+yr-leader form. I like to know that someone who is steering the ship has everything on the line -- a large portion of their net worth, their professional reputation, and their lifetime commitment to the industry (with the goal of total mastery). Here I'm referring to the Marcus family at Neiman Marcus. Or the Fischers at The Gap. Howard Schultz at Starbucks. Jeff Bezos at Amazon.

    These are people striving for total mastery through a complete focus on a single entity for life. That's my ideal scenario. I don't say it's always findable. But when I found Dolby and Ray Dolby, I raced to recommend the stock (obviously, with careful work on the accompanying commercial strategy and underlying financial strength).

    In the case of Messrs Ackman and LeBow, I don't knock them. And I hope they succeed. I much prefer the creative side of Schumpeter's philosophy of creative destruction. But I don't give them extra points for insider ownership. The money they'e put in is merely a portion of their overall asset base; they are not seeking to become the greatest book merchants in the world; they haven't been seeking that for years or decades; and they are unlikely to stay around any longer than it takes to wind this business down or sell it. They are acting as advocates for the business but purely for financial reasons. Nothing wrong with that. It's just, they don't get my extra points of love for high insider ownership.

    In the end, I still think that if Borders merges with Barnes & Noble...that combined entity will be in the same tough spot within 5 years. When you put an aging quarterback with an injured wide receiver, you haven't created a stronger team. (I couldn't come up with a bette analogy on the fly. That one was pretty weak!)

    Why don't we settle this with a coffee bet. Five years from now, I bet that the combined market cap of these two companies will be lower than it is today ($819 million today). Eh?

    Finally, I don't speak Japanese. But I now see you are doing your best. A very noble aim. I am, too.

    Foolishly, Tom Gardner

  • Report this Comment On July 23, 2010, at 8:23 PM, gambatteimasu wrote:

    Ha! Good stuff.

    For one thing, Schumpeter is one of my favorite dead economists.

    I'm also certain that you would greatly enjoy one of my all-time favorite books: "Mastery" by George Leonard. (If you don't already own it, used copies are available for just $2.75 at www.borders.com.)

    Regarding your proposed wager...what a fun idea! But let's keep it focused on Borders, the subject of our debate. (I agree with Mr. Ackman that Barnes & Noble represents a very poor risk/reward combination compared to Borders.)

    How about we say that you win if within two years, Borders fails or is bought out for less than Mr. LeBow's entry price of $2.25/share. That's roughly a 60% premium from current price of $1.41. And I win if share price or buyout price is greater than $2.25.

    And you get to pick the coffee merchant, presenting you with a dilemma: Stock Advisor (SBUX) or Rule Breakers (GMCR)?

    Happy Weekend,

    gambatte imasu

    still doing my best, like the good people at Borders

  • Report this Comment On July 23, 2010, at 8:52 PM, foolindeed1 wrote:

    Barnes and Noble doesn't need Borders and will never merge with it or buy it for even 2 cents. Why get more stores when you plan on client bunch of yours? Why get their ebook business I you have your own growing very fast? All this merge/buy of Borders is a wishful thinking of it's shareholders, Borders is as dead as dead could be, has been that for years. Living dead, that is.

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