How Many Strikes Does Barnes & Noble Get?

Things just keep getting worse for Barnes & Noble (NYSE: BKS  ) .

Shares of BKS are trading down more than 6% this morning, following a press release from the company yesterday after the market close. In the release, the beleaguered bookseller warned investors that it expects to see an EBITDA loss at the NOOK business in fiscal 2013 that exceeds the segment's $262 million loss recorded in fiscal 2012. When all is said and done in 2013, the company also expects NOOK revenue this year to come in at less than $3 billion.

Strike that. Reverse it...
The statement represents a stark contrast from comments made last quarter by CEO William Lynch, when he expressed confidence in the NOOK by stating, "we are maintaining our previous projection that the NOOK business will scale in fiscal year 2013, reducing losses from last year [...]."  

To its credit, Barnes & Noble did issue a separate press release just last month to say that retail sales of the tablets had fallen short of expectations during the holiday season. Even then, however, they still saw NOOK revenue meeting the $3 billion mark in 2013, and stated, "We are examining the root cause of the December shortfall in sales, and will adjust our strategies accordingly going forward."

Unfortunately for investors, it looks like those adjustments aren't doing much good.

Hope dashed
Last year, investors' hopes ran high, and shares of BKS rose more than 50% in a single day, after Microsoft (NASDAQ: MSFT  ) decided to invest $300 million for a 17.6% stake in the NOOK business. This valued the segment at $1.7 billion at the time -- more than twice Barnes & Noble's current market capitalization of $810 million. In addition, the agreement included another $180 million in revenue-sharing payments over three years, and $125 million to help finance international expansion over five years.

Interestingly, according to Barnes & Noble's January press release, its retail segment revenues fell 10.9% from the year-ago period for the nine weeks ending December 29, largely thanks to an 8.2% decline in comparable store sales. Meanwhile, core comparable store sales -- which exclude sales of NOOK products -- actually exceeded expectations in the holiday quarter, by decreasing only 3.1%. While the much-heralded Nook segment initially appeared to simply delay the inevitable then, now, it's actually harming Barnes & Noble's business at an ever-increasing clip.

With around $471 million in cash and equivalents on its balance sheet at the end of last quarter, and a manageable debt to equity ratio of 0.28, it's unlikely that Barnes & Noble will be adding the dreaded "Q" after its ticker anytime in the very near future. At this rate, however, barring a miraculous turn of events, or an additional unlikely investment from Mr. Softy, it looks like Barnes & Noble shareholders are in for more pain before things start to improve. 

When all is said and done, Wednesday's news was a huge blow for those holding out hope that Barnes & Noble just might be able to effectively compete in the tablet war with deep-pocketed, long-term oriented competitors like Amazon.com, which has plenty of determination (and cash flow) to continue selling millions of its Kindle devices at near cost, to profit later from future high-margin digital product sales.

I'm sorry, Barnes & Noble, but I'm not convinced that's a fight you can win.

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  • Report this Comment On February 14, 2013, at 11:04 PM, shadowgal wrote:

    If anyone believes Barnes and Noble will close "only" 20 stores a year, I might have some beach front property in Arizona to sell you. I'd be surprised if they have even 300 stores left standing in 5 years. If that. They might be able to compete as an online book company selling e-content but as the author suggested, they can't successfully compete in the tablet market.

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