2 Trainwrecks Investors Should Avoid

Barnes & Noble's (NYSE: BKS  ) first-quarter results gave investors no reason to revise their negative feelings about big bricks-and-mortar booksellers. Not to be outdone, Borders Group (NYSE: BGP  ) shared bad news of its own. Read 'em and weep.

A tale of ongoing loss (and losses)
In its fiscal first quarter, Barnes & Noble swung to a net loss of $62.5 million, or $1.12 per share; it reported a profit of $12.3 million, or $0.21 per share, this time last year. This quarter's loss included an $0.11 per share pre-tax expense related to the bookseller's current legal issues and brewing proxy battle with major shareholder Ron Burkle.

Barnes & Noble's sales increased 21%, to $1.4 billion, with same-store sales falling 0.9%. The shift to the Internet continued: The company's online sales increased 42%, while bricks-and-mortar sales fell 2%. Of course, online sales still only make up a small percentage of Barnes & Noble's total revenue, so party hats are premature.

Barnes & Noble also cut its annual guidance; it now expects a net loss between $0.25 and $0.65 per share. Even subtracting out legal costs related to its looming proxy contest, the company still expects earnings for the year to be anywhere between flat and $0.40 per share.

If you glance at Barnes & Noble's balance sheet, you might notice that its cash reserves have plunged by a precipitous 83% in just one year, to a mere $27 million. That dwindling cash is just one more reason why Barnes & Noble looks ever riskier for investors.

This may be a dystopian future
Despite all that bad news, Barnes & Noble is emphasizing its push into digital books as a positive. True, its Nook e-reader device has had a major head start over rival Borders' e-reader, which launched this summer. Barnes & Noble also recently boasted that it has about 20% market share in the nascent e-books space; it now says that e-book sales are still accelerating.

Still, that's meager consolation when the rest of Barnes & Noble's business, which still represents the lion's share of revenue, faces tough competition, a rotten economy, and flagging consumer confidence. Barnes & Noble and Borders will have to compete aggressively with the likes of Amazon.com (Nasdaq: AMZN  ) , Apple (Nasdaq: AAPL  ) , and Sony in the e-book space, while discounters such as Wal-Mart (NYSE: WMT  ) , Target (NYSE: TGT  ) , and Costco (Nasdaq: COST  ) undercut them with bargain-basement prices on hardcover best-sellers.

Trauma drama
As if Barnes & Noble's tidings weren't bad enough, Borders announced yesterday that CFO Mark Bierley, a 12-year Borders veteran, is leaving. Bierley's presumably headed for greener pastures at another company. Not long ago, the beleaguered bookseller lost its new CEO after a tenure of less than a year.

Barnes & Noble and Borders remain dangerous stock ideas that investors should avoid. Borders is particularly risky, but Barnes & Noble has plenty of problems of its own. The latter bookseller is already on the auction block, as Chairman Leonard Riggio tries to rally allies for his own bid on the company. Meanwhile, the brewing battle over e-books pits bricks-and-mortar booksellers against a staggering selection of formidable, technologically superior enemies.

In short, Fools, there are far safer and more stable spots to stash your investing dollars.

Do you see a happier ending than I do for shares of Borders and Barnes & Noble? Pen your thoughts in the comment box below.

Apple, Amazon.com, and Costco are Motley Fool Stock Advisor picks. Costco and Wal-Mart are Motley Fool Inside Value selections. The Fool owns shares of Costco and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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  • Report this Comment On August 26, 2010, at 8:19 AM, foolindeed1 wrote:

    BN's stores are still making money and are cash cows. All the loss comes from spending heavily on digital which is vital for the company's survival and future market share. Any "analyst" that cannot see two steps ahead should not play chess.

  • Report this Comment On August 26, 2010, at 9:11 AM, calpilot727 wrote:

    Funny, BGP was a big recommendation from Inside value in 2007.

  • Report this Comment On September 02, 2010, at 11:35 AM, LemonMeister wrote:

    Ron Burkle's poison pill reaches into other businesses. Ron Burkle was on KB Home Board of Directors when he built this Lemon. http://www.akbhomesucks.com he has never answered a single letter sent to him. B&N customers to expect the same customer service, rape and pillage your other investors for personal gain, say good bye to the cozy atmosphere you used to know at B&N. Google "KB Home Sucks" I'm not the only one abandoned by Burkle and KB Home. Burkle and Bollenbach led KB Home to it's lowest share price ever, this year. Lack of creativity and the good ol boy network lives. Just because your a Billionaire does not excuse your behavior, obviously the billions were made on the backs of the small guy. Ron and Stevie you’re both a disappointment not a savior of society. But only money matters. Bollenbach also led AIG into financial ruin on their Board, oh yea you and I are bailing him out here too.

    http://www.barnesandnobleinc.com/press_releases/2010_aug_25_...

    Finally someone else has seen these two in their true light.

    Google “ron burkle sucks”

    Google “stephen bollenbach sucks”

    I’m number 1-3 usually on Google for these 2 terms

    B&N Good luck in your attempt to stop these two. I have been writing about them for years at http://lemonade.akbhomsucks.com and http://www.akbhomesucks.com and on my new Radio show at http://blogtalkradio.com/kbhomesucks

    This would be another attempt to bring the GOB network some much needed co branded marketing, like Disney rooms at KB Home.

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