Is This Stock Already a Dinosaur?

Companies have two choices: innovate or die. Blockbuster chose to stick with its in-store rental system and ignored the effect digital media was having on its business. Eventually the rental platform at Netflix (Nasdaq: NFLX  ) crushed Blockbuster, causing the bricks-and-mortar retailer to succumb to bankruptcy.

I can't help but think I'm seeing a future dinosaur when I take a closer look at Barnes & Noble (NYSE: BKS  ) . I see some distinct similarities between these two companies and we know how often history likes to repeat itself in the market.

A struggling business
We could talk to no end about how digital access to information is crippling publishers, but I think these two facts make a stronger statement:

  • Barnes & Noble's same-store sales were down 0.9% in the first quarter.
  • Amazon.com (Nasdaq: AMZN  ) reported in October that its 1,000 best-selling titles were selling better in digital form than in paperback.

You may not think that a 0.9% same-store sales decrease is anything to worry about, but when at least 90% of its business is still in paperback, it's a concerning and continuing downward trend.

We also need to remember that Amazon.com is the leading e-reader provider in the industry, so when the leading company reports that its best-selling titles are not moving as well in paperback as they are in digital form, you need to take notice.

Too little, too late
Barnes & Noble answered critics with the introduction of its e-reader, the Nook, in November 2009. Without question it has been successful in generating sales, but it has been largely unsuccessful in taking market share from its competitors, Amazon and Apple (Nasdaq: AAPL  ) .

Think about it this way: Amazon had a two-year head start on Barnes & Noble, releasing the Kindle in late 2007. One analyst estimates that by 2012 the Kindle will account for $5.3 billion in revenue at Amazon. Compare this to Barnes & Noble, which generated just $145 million in sales from its online division during the past quarter.

Apple, on the other hand, introduced the iPad five months after the Nook debuted, but since Apple has a strong track record of innovative products and a seemingly endless advertising budget, the iPad been able to fly out of the gate quicker than Barnes & Noble's device.

Is now a bad time to mention that the perpetually "late to the party" Borders (NYSE: BGP  ) recently released an e-reader?

The pie grows smaller
Long story short, Barnes & Noble is going to have a hard time grinding away at Amazon's market share, competing against Apple's history and budget, and successfully separating itself from other bricks-and-mortar bookstores that are slow to innovate. I'm not sure it has enough time or cash to catch up with the competition. What about you? Let me know in the comments box below.

Related Foolishness:

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name UltraLong.Amazon.com, Apple and Netflix are Motley Fool Stock Advisor recommendations. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 22, 2010, at 10:57 PM, Popnfresh100 wrote:

    Barnes and Noble's Nook hasn't stolen any market share from Kindle?

    Um, no, Nook has already stolen 20-30% of the market from Kindle, which has gone from 80% to 50% of the market. Don't trust the estimates? See for yourself...

    http://preview.tinyurl.com/24327f2

    Don't trust google trends? Try Forester research, which estimates 1 million nooks and 5 million kindles in circulation. This was BEFORE the now sold-out nookColor was released and after Amazon's two-year head start and successful Kindle 3 release.

    Barnes and Nobles internal estimates are modest- they only claim 20% of the market. But BKS historical revenue is 5 Billion. Even if they only claim 10% of the $1 billion e-book market that more than offsets a 0.9% loss of previous revenues.

    I never bought real books but I love e-books, and spend pIenty on them. And I'll NEVER buy a Kindle, or even accept one as a gift.

  • Report this Comment On November 22, 2010, at 11:20 PM, IraLA wrote:

    Had Ron Burkle gotten his way, B&N wouldn't be in this pickle.

    http://wereport.com

  • Report this Comment On November 23, 2010, at 3:00 AM, TMFUltraLong wrote:

    Popnfresh100,

    Trust me, I agree with you in preferring hard copies as opposed to e-readers for my personal tastes. My beef is just how outmatched the Nook is regarding its main competitors. Amazon has 2 years on the Nook and basically cornered the vast majority of the market. If you start at nothing it clearly looks good when you start exponentially gaining ground. For the Nook I think it's just about hit it's max capacity for market share. Apple & Amazon both have considerably stronger cash flow to promote their product... I just don't see how the Nook will be able to compete.

    UltraLong

  • Report this Comment On November 23, 2010, at 3:57 AM, TMFUltraLong wrote:

    truthinstupid,

    There are always going to be hard cover readers that are going to wander Barnes & Noble for that next book. That number will never go to zero but it has been dwindling. If we're going to assume that e-readers are on the rise as popnfresh pointed out earlier, then we're going to have to come to the assumption that the amount of in-store patrons is likely on the decline.

    I'm not the type of guy who's going to spend my time wandering around a book store for my next read... nothing wrong with doing that at all, just not my cup of tea.

    I go back to innovate or die... B&N is trying, but it just might be too late.

    UltraLong

  • Report this Comment On November 23, 2010, at 7:31 AM, foolindeed1 wrote:

    Fool's site has been forever pounding on B&N and singing praises to Amazon and Apple so just ignore them. For all these years I haven't seen even one article that would at least try to be fair and balanced towards B&N's efforts on this site.

  • Report this Comment On November 23, 2010, at 8:23 AM, dragonLZ wrote:

    I am always amazed at how many people I find at B&N's stores (which, I understand, has nothing to do with B&N's profitability / survival).

    p.s.

    UL, I don't mean to always criticize, but I think you are (again) just following the crowd. I really didn't expect an article like this from you. How old is this B&N dinosaur story?

    A couple of months ago, I read an article just like this one that was from another TMF analyst (I think it was one of the ladies). I think even the same dinosaur analogy was used (she also included BGP in with B&N as a slow-dying book-store company).

    Or take for example Griffin's pitch for B&N.

    http://caps.fool.com/Pitch/BKS/5264668/brick-and-mortar-busi...

    Not much different than your article (it's just that your article came a month after Griffin's pitch???)

    p.s.2

    Your posts/calls like the ones on oil companies and China make you Ultra Long and Ultra Great. Not these "safe" ones.

    Good Luck!

  • Report this Comment On November 23, 2010, at 9:24 AM, discoverybg31 wrote:

    Just an FYI, I bought my e-book reader (a Sony) at a Borders months before the Kindle came out. Borders has been in the e-book business longer than anyone, as they co-branded the Sony e-bookstore. They aren't late to this party. They started it.

  • Report this Comment On November 23, 2010, at 12:21 PM, dragonLZ wrote:

    truthisntstupid, it's not true that you buy books online without knowing anything about it except its title.

    Go on Amazon.com and any book you click on, you can "pick" inside the book. You can see table of contests / chapters, a lot of actual pages (they actually let you read the book, in like-PDF format for an hour or so). Then you can see dozens (or hundreds) of reviews (good ones and bad ones) from other people who read that same book... I think it's great.

    I love to go to B&N (and read books for free while I have my coffee), but just two days ago, I ordered 3 books from Amazon.com.

  • Report this Comment On November 23, 2010, at 12:21 PM, dragonLZ wrote:

    Not "pick" inside the book, but PEEK... (sorry)...

  • Report this Comment On November 23, 2010, at 6:45 PM, wsjreader wrote:

    Wow, how out of the loop can a person be? There is article after article after article about nookcolor, whose capabilities is something between an e-reader and an ipad. B&N now has an e-reader for which children's book publishers have created e-books, because it's color -- and the child can choose to read the book or to have it read aloud to them by the ereader! B&N is carrying toys in their brick and mortar stores to bring parents into the store, so it is a well thought out, coordinated strategy. How can you miss all this?

    As for the leader, Amazon FOLLOWED B&N on so many things: apps for reading the ebooks they purchased on other devices, lending books, and being able to purchase the ereader in a bricks and mortar store. It's hard to believe you are investigating this story as well as you are able to! Why is that?????

  • Report this Comment On November 24, 2010, at 12:44 AM, TMFUltraLong wrote:

    wsjreader,

    If Amazon followed B&N on so many things, then perhaps you can explain why the revenue figures indicate B&N being late to the game? NookColor will add to revenues, I just don't think they can surpass the supposed 20% of the e-reader market that they currently hold. 2.8B in revenues vs. perhaps 400-500M is just a blaring difference.

    B&N is trying to transition to a digital platform, but with 90% of its business still in the brick & mortar locations and those same-store sales diving every quarter, I just don't see what you're excited about from an investment perspective. I mean I can understand if you're angry with me bashing one of your favorite hangouts because hey..I'd be mad too. But from an investment perspective they're an upside-down turtle.

    TMFUltraLong

  • Report this Comment On November 29, 2010, at 10:13 AM, wsjreader wrote:

    Regarding the isolated statistic of "same store sales" that gets trumpeted in headlines, I think you have to be a little more savvy than that when interpreting reports. Pay attention to their strategy: they have free wifi in their bricks and mortar stores, and, and offer content via wifi in-store, in order to encourage people to order from bn.com. They are INTEGRATING their online and in-store efforts. Now, looking at sales overall: "B&N online sales through BN.com were up 53%, while store sales were down 0.9% compared with last year (for comparables)." We don't really know how much of that large increase in BN.com was ordered while people were IN the store, or as a result of being in the store, where they could read books free through wifi for up to an hour or whatever their limit is.

    As for comparing the amazon.com vs bn.com to netflix vs blockbuster, there are some important and relevant differences. The genius of amazon.com is to make money on whatever gets bought: they are an e-tailer, not just or mainly bookseller. They sell clothing and diapers, they sell windmills and solar panels, they sell vacuum cleaners and tools. Heck, you can even buy a nook through amazon.com. Barnes and Noble is more focused, and the question was, how well are they going to respond to amazon.com's attempt to be something close to a monopoly when they first came out with the kindle? They did all the right things, and forced amazon.com to make kindle books available on many platforms. Boom. That, to me, was the deciding factor. Second, Barnes and Noble figured out how to create a niche that differentiated themselves -- using the integrated strategy I mentioned above. Those are the main lines of my thinking. Hope anyone who's read this far found it worth it!

  • Report this Comment On November 29, 2010, at 3:38 PM, dragonLZ wrote:

    truthisntstupid, I was at a B&N store yesterday.

    Books I bought at amazon.com for $11 and $12 are $21 and $22 at B&N.

    I don't know what are the prices at bn.com, but I don't think I will ever again buy a book at B&N store.

    (I'm not a B&N hater - I love their stores. I'm just trying to help).

  • Report this Comment On January 06, 2011, at 2:10 PM, wsjreader wrote:

    UPDATE on January 6th. I can't say it much better than it has already been said, here: From http://www.investorplace.com/27345/retails-holiday-winners-a...

    "Barnes & Noble (NYSE:BKS) — The bookseller saw comparable-store sales jump almost 10%, and called its bookstore holiday sales the strongest in over a decade. The company also showed it may be managing the transition to digital sales quite well: It said isold virtually its entire inventory of Nookcolor and E-Ink devices during the holiday season, while sales at Barnes & Noble.com soared 67% to $228.5 million."

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1377600, ~/Articles/ArticleHandler.aspx, 11/28/2014 1:24:47 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement