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For the past year, Barnes & Noble (NYSE: BKS ) has been rowing its little boat in unforgiving waters -- borne up and down on the waves, but pulled ever on by tireless effort. Unfortunately the little boat also had a full-grown elephant duct-taped to its side -- that didn't help. But now the company has cut the Nook free, and it's not even pausing to watch the gray trunk sink under as it presses ever forward.
OK, maybe it's not that dramatic.
The Nook fades away
But there's no denying that the biggest news to come out of Barnes & Noble's presentation Tuesday was the demise of the Nook. The business had been sucking cash out of the company, and last fiscal year, the Nook division brought in a $475 million EBITDA loss. That's a lot of money to lose out the door when you're competing with a behemoth like Amazon.com (NASDAQ: AMZN ) .
So Barnes & Noble -- kind of -- canned the Nook. In reality, it's going to continue to make Nook-branded readers, and it's going to work with a hardware manufacturer to make Nook tablets, but it's done making them itself. For the sake of investing, let's consider the Nook buried for now, and look at what -- if anything -- Barnes & Noble has to offer.
Bookstores and books
As it turns out, Barnes & Noble actually sells books. Over the same year that the Nook lost $475 million, the retail and college portions of Barnes & Noble generated a combined $485 million in EBITDA. That's not too bad. It's also cash that Barnes & Noble can now use to fight the physical battle against Amazon.
On the earnings call yesterday, management was hesitant to say just what it was going to do with all that new cash, but we can imagine. It could expand into smaller locations, as Best Buy (NYSE: BBY ) has done with its mobile locations. It could issue a dividend, which it hasn't done for a while. It could buy back shares, while they're depressed. The options are seemingly endless and all positive.
I'd love to see the money go right back into the business. Amazon is still the big dog in the kennel, but it may be losing out on physical book sales. CEO Jeff Bezos said last December's physical book sales growth was the lowest it had ever been, at 5%. Amazon is clearly making up for that slower growth with fantastic digital content sales, but the physical space is a good opportunity for a revived Barnes & Noble.
Moving into the next phase of life
Borders proved the point years ago, and Best Buy has recently replayed it, but it's pretty clear that the huge box-store model isn't as sustainable as everyone thought it would be. Barnes & Noble could make the same scale-back move that Best Buy is making. The electronics retailer is focusing on its strengths, such as mobile, by increasing the floor space devoted to its winners and opening small locations with just mobile offerings .
Barnes & Noble could make a similar move, countering Amazon's cheap shipping with small stores that focus on best-sellers, but that also offer free, quick ship-to-store facilities for non-best-selling titles. That would help the company increase its overall footprint, while keeping costs lower. If it were me, I'd consider shutting down a lot of the boxes and replacing them in the same communities with smaller locations.
Barnes & Noble finally feels as if it's back in charge of its own destiny. The Nook was dragging the business around, and no one could think about the future without bringing tablets into the mix. Hopefully, Barnes & Noble can now focus on what it still does well -- selling books.
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