Run From This Stock!

Now that Borders Group has entered a new chapter of its existence -- namely, Chapter 11 -- it might be tempting to feel bullish about its surviving superstore rival, Barnes & Noble (NYSE: BKS  ) . However, despite its major rival's recent hobbling, B&N's story still might not have a happy ending.

Granted, Barnes & Noble has more than a few positive attributes. It's enjoyed a decent success with its Nook e-reader, and the company recently added several innovative features to its Nook Color, including an app store and the ability to access Yahoo! Mail and Gmail accounts. It's also reportedly looked into taking over a few abandoned Borders stores for its own shops. Still, while B&N may be doing better than Borders, "relatively strong" isn't the same as "strong."

Although Barnes & Noble has been able to pull off sales increases over recent years, its gross profit has dropped to 25.6% in the last 12 months, down from highs as great as 37% in recent years. Same-store sales have fallen several years running, and the company failed to turn a profit last year. For the trailing 12 months, Barnes & Noble has reported a disheartening $0.81 loss per share. The recessionary climate hasn't made things easy for booksellers, and its falling profit margins suggest that Barnes & Noble's had to offer deep discounts to keep customers coming back.

The rise of e-books to challenge traditional paper tomes makes matters even worse. Amazon.com's (Nasdaq: AMZN  ) Kindle has dominated that space, and Amazon was already a formidable competitor in old-fashioned books. Apple's (Nasdaq: AAPL  ) iPad and other tablets, not to mention mobile phone applications, could also divert e-book revenues away from Barnes & Noble.

This heated competition explains Barnes & Noble's Nook Color enhancements, but such admirable efforts don't guarantee marketplace success. The Nook currently has about a quarter of the e-book market, while the Kindle gets most of the rest.

Last summer, I earmarked both Borders and Barnes & Noble as stocks to avoid, even though Borders faced the most imminent danger. Barnes & Noble's shares have fallen about more than 50% in a 12-month period, but they're still no bargain, given the company's struggles with profitability and the difficult competitive landscape.

Can Barnes & Noble succeed where Borders faltered? Can its Nook enhancements help it steal much-needed market share from Amazon's Kindle? Let's hear your thoughts on the superstore book business in the comments box below.

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Alyce Lomax does not own shares of any of the companies mentioned. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (4)

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 April 27, 2011, at 2:43 PM, sepaton wrote:

    Alyce, you people at fool.com really have some weak reporting and research. Readers have gotten the fact that fool.com hates Barnes & Noble and loves Amazon... got it... no need for more biased reporting on the subject.

    But that's no reason to get stories completely wrong (see Cindy Johnson's post on April 19th on BN). And in the past week Cindy makes no effort to correct herself.

    Now you post your's completely focusing on the BN stores story and diminish the momentum building around Nook & Nook Color. You think it's necessary to write about same store sales falling at BN? That's nothing new given what is happening with eBooks. Then you go on to say how they posted a disheartening $0.81 loss per share... No kidding Alyce they're investing heavily in their digital business just as you saw with Amazon's earnings this week. They were not as good as expected for the same reason yet no mention of that in your post.

    While I can't site your article as completely wrong as is the case with Cindy's, instead you focus all information on the negative and at the same time down play potential positives.

    I'm going to venture a guess that if one was to look at the BN book stores stand alone with no digital investments, they would be turning an $80-$100 million annual profit even in the current book retailing environment. Not bad for a $600M market cap company without even considersation for the explosive upside potential that exists in the BN Digital business.

  • Report this Comment On April 28, 2011, at 11:12 AM, David369 wrote:

    Let me see. AMZN stock is up about 140% in the last 3 years while BN is down about 60%. If BN has "explosive upside potential" someone better light the fuse quick otherwise they will be a penny stock in a year or so at this rate.

  • Report this Comment On April 29, 2011, at 12:32 AM, Millsteen wrote:

    B&N, excellent brand and nice stores but they are a victim of a changing world and technology. They deserve credit for trying to embrace the changes but history shows us that horse and buggy companies did not become the new car manufacturers just because they were in the transportation business. When Amazon first appeared on the scene, B&N reacted quickly by launching an online bookstore. They spent a lot of money but couldn't compete with Amazon's technology, marketing and vision.Their launch of the Nook is another noble step but they are at a serious disadvantage to the big tech companies. B&N is a gnat to Apple and a fly to Amazon's Kindle. B&N's only chance is to probably close down 2/3 of their stores and eventually get out of the bricks and mortar business altogether and hope that they can carve out a small ebook business with the Nook.

  • Report this Comment On May 22, 2011, at 9:01 PM, sepaton wrote:

    Hey Alyce!

    Nice call on your recomendation to "run from this stock"... Luckily I didn't listen to you or any of the other fools... Cindy... Rick... Brian... Who have all been writing poorly researched blogs about BKS for the past 6-weeks. Fool.com is a joke and obviously there is no editing going on making this site down right wreckless.

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