Please, Barnes & Noble, Do the Right Thing

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With so much news surrounding the future of the Nook, it's a wonder that anyone noticed when Barnes & Noble (NYSE: BKS  ) mentioned its physical stores the other day. According to two separate interviews, the company is planning on closing around a third of its stores over the next 10 years, while still fully committed to the idea of brick-and-mortar stores. That's a combination that adds up to great news for investors, who need something to happen with the Nook as soon as possible.

But the Nook is a costly venture. Last quarter, the company lost $51 million before tax due to the Nook. That loss was balanced out by the $28 million that came from the retail operation, along with the $88 million that it made in its college bookstores . If that retail figure is going to rise, it probably won't do so by making paper books bought from normal stores fashionable again. Instead, the company is going to have to cut costs, by saying goodbye to loss-making stores.

The danger of store closings
The list of companies that have been committed to the retail model, shut underperforming stores, and subsequently disappeared off the face of the earth is a long list indeed. The most recent example is Dish Network's Blockbuster chain, which is well on the way to the bottom. In the most recent announcement, Dish said that 300 U.S. stores would be closing, which represents about 40% of the total footprint. That cut comes in the wake of Blockbuster's UK arm going into administration, which is akin to restructuring through bankruptcy in the U.S. If Barnes & Noble wants to avoid losing its footprint altogether, it needs to be careful with the closures.

But there is room for cutting. Across the company's close to 700 stores, comparable sales fell 3% last quarter. That's an indication that some, but not all, of the stores are failing to live up to their expectations. Adding to that picture, comparable sales actually increased about 2% if you strip out the underperformance of the Nook from the quarter . Once the weaker stores are closed, the company should be able to generate more income through the higher-performing locations. Now the caveat: Unless the company gets its act together, the extra income from retail is just going to get swallowed by the Nook division.

The clear answer
I don't know how many times investors can see this or say it, but here's one more go: The Nook needs to be spun off, posthaste. Right now, Barnes & Noble is running two companies. One of them sells books and makes money. One of them makes e-readers and loses money. The Nook is an excellent product, and it probably has a bright future, but right now it's just sucking up resources.

Here's my thought. Right now, the amalgam of Barnes & Noble's books and Nooks competes with Amazon (NASDAQ: AMZN  ) . That's the thing we all talk about when we talk about how doomed Barnes & Noble is. But if it split into two companies, the books one would be in the clear. Now, this is where the investor of 2005 says, "Oh, dear me. Is it not clear that Amazon is putting Barnes & Noble out of business? How can you say that a stand-alone bookstore would be better off? If anything it would be worse!"

False. Amazon is not a bookstore, and I'm not joking. Go visit Amazon and see what you get. I get watches, TurboTax, paper shredders, and a tablet. Yes, the company sells books, but it's not a bookstore -- it's a company that used to be a bookstore. Now, a retail-only Barnes & Noble would be the only pure player in the game and the only store around that sold books.

Look at what Barnes & Noble has done over the past few years while it was supposedly getting mangled by Amazon. Through the recession, comparable sales fell as they did at many good companies, but since then, it has increased retail comps. One of the biggest reasons the company has been able to do this has been the failure of Borders. On Main Street, USA, Barnes & Noble is the only meaningful offering for books. That's a magnificent moat that investors always overlook because Amazon happens to sell books. Who cares?

Amazon competes with almost everyone, but because it started as a bookstore we focus on how it's putting Barnes & Noble out of business. The Nook does compete with the Kindle, and that's a battle that Barnes & Noble is losing. But it doesn't have to. Instead, it can lose the whole business. Spin it off, figure out a real marketing plan, and fight Amazon. Do it all, but please leave the books out of it.

None of this is to say that investors can ignore Amazon. That's a quick path to financial ruin. We'll tell you what's driving the company's growth and fill you in on reasons to buy and reasons to sell Amazon in our new premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.

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  • Report this Comment On January 29, 2013, at 10:32 PM, meshonn827 wrote:

    As far as books go, Amazon, has the Kindle Fire. Which is JUNK. They make money on it because they can sell it cheaper than a nook, because it's JUNK. I have two nooks that I've never had a problem w. My daughter got a kindle fire for her b-day that has already been replaced several times (w/much aggravation). And bookstores that sell actual books are hard to find these days, so Barnes and Noble hang in there.

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