Barnes & Noble: Not An Investment (or Even a Good Speculation)

Good numbers on durable goods orders and housing were enough for investors to recover from their macro hangover -- at least for today, as the S&P 500 (SNPINDEX: ^GSPC  ) , and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) rose 1% and 0.7%, respectively.

Consistent with those gains, the CBOE Volatility Index (VIX) (VOLATILITYINDICES: ^VIX  ) , Wall Street's "fear index," fell 8.2%, to close below 20. (The VIX is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.)

Getting down to fundamentals on Barnes & Noble
We've spent a lot of time discussing macro factors over the past week -- why not spend a bit of time on an old-fashioned fundamental story?

Investors rerated shares of bookseller Barnes & Noble (NYSE: BKS  ) down today, and they took the gloves off in the process -- the stock was off 17% at the close. That haircut was not without justification, as the company announced dismal results for its fiscal fourth quarter ended April 27. Here are some of the lowlights of the quarter:

  • Same-store sales fell 8.8% year on year.
  • Revenues in the Nook division -- Barnes & Noble's "shoot-for-the-moon" e-book/ e-reader business -- fell by just over a third (34%). Within the segment, flagging device sales dragged down digital content sales, which dropped 9%. The value in this division appears to be evaporating at an alarming rate -- which doesn't bode well for the possibility of a sale, or the price at which any sale would be concluded.
  • Those misses contributed to a $2.11 per share loss -- almost exactly twice the year-ago loss of $1.06 per share.

It's easy to be an expert in hindsight, but the idea that Barnes & Noble was going to successfully compete with Amazon and Apple in the digital arena would seem to require an enormous leap of faith.

As far as its bricks-and-mortar stores are concerned, Barnes & Noble is a business in decline, perhaps even terminal decline. There may be a size at which the company can produce steady profits, but it's hard to say quite where that "sweet spot" lies (assuming it even exists.) For investors, it's not impossible to make money speculating on businesses in that situation, but it requires timing, luck, and constant vigilance. There are certainly easier ways for investors to eke out a return.

Besides, with the company's enterprise value (i.e. market capitalization plus net debt) equal to 12.5 times the estimate for next 12 months' earnings before interest, taxes, depreciation, and amortization -- and that's after today's share price drop -- Barnes & Noble's stock doesn't even qualify as a deep value.

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