CEO Gaffe of the Week: Barnes & Noble

Last year, I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!

This week, we'll turn our attention to retailer Barnes & Noble (NYSE: BKS  ) and its now-former CEO, William Lynch.

The dunce cap
It's been an ugly past couple of years for book and e-reader retailer Barnes & Noble. We found out this week that it's about to get even uglier.

Barnes & Noble has been struggling for years as the content medium has shifted drastically from print to digital platforms. With such a large brick-and-mortar presence around the U.S., its stores have struggled to keep up with faster-growing online platforms like Amazon.com (NASDAQ: AMZN  ) and even eBay to some extent. Although Barnes & Noble does have a direct-to-consumer online department, the brand name, convenience, and, in many cases, the lower price that Amazon and eBay can offer consumers pushes them to purchase hardback books online from the comfort of their own home.

Source: Seth Miller, Flickr.

Barnes & Noble found a temporary solution to this problem with its digital e-readers, but even they haven't sold as well as the company would have anticipated. The problem is that a slew of new competitors -- including Apple (NASDAQ: AAPL  ) with its Internet-capable iPad, Google  (NASDAQ: GOOGL  )  with its Nexus tablet, and Amazon with the Kindle Fire -- have hit the e-reader market and are significantly more hip than B&N and have a lot more cash to throw at marketing, as well as research and development. Seriously, what did you think was going to happen with Apple, Google, and Amazon boasting $137 billion, $50 billion, and $8 billion in cash compared to B&N with its paltry $160 million in cash as of last quarter? Not to mention that Apple, Google, and Amazon are predominantly digital companies while B&N is almost entirely brick-and-mortar-based.

B&N has received some help from Microsoft (NASDAQ: MSFT  ) , which invested $300 million, about an 18% stake, in B&N's Nook business. However, that investment looks like it could ultimately be a black hole for Microsoft. B&N decided to discontinue making its color Nooks two weeks ago after their sales plummeted 34% in the fourth quarter, leaving Microsoft in a tough position: Either eat the $300 million, or pony up possibly more than $1 billion to buy its remaining Nook tablet business when it already makes its own tablets (Surface) and would be forced to compete against the aforementioned digital big boys.

To the corner, Mr. Lynch
But it gets worse.

Not only did B&N make the announcement that it was discontinuing its Nook tablets, but it also this week announced the sudden resignation of three-year-tenured CEO William Lynch. I would personally like to throw Lynch under the bus for two reasons.

First off, how about resigning without giving a reason at the biggest crossroads in the company's history. Good job! Completely discreet – don't think anyone noticed. Unless, of course, you look at B&N's press release highlighting these following organizational changes that have me cross-eyed:

[Barnes & Noble] also announced the following organizational changes: Michael P. Huseby has been appointed Chief Executive Officer of NOOK Media LLC and President of Barnes & Noble, Max J. Roberts, Chief Executive Officer of Barnes & Noble College will continue to lead the digital education strategy and report to Mr. Huseby, as will the Executive Management team of NOOK Media. Mr. Huseby and Mitchell Klipper, Chief Executive Officer of the Barnes & Noble Retail Group, will report directly to Leonard Riggio, Executive Chairman of Barnes & Noble, 

The Company also announced that Allen Lindstrom, Vice President and the Company's Corporate Controller, has been promoted to Chief Financial Officer of Barnes & Noble, He will report to Mr. Huseby. Kanuj Malhotra, Vice President of Corporate Development, has been promoted to Chief Financial Officer of NOOK Media LLC. 

Source: J.E. Theriot, Flickr.

I just imagine someone asking "Who's in charge?" and about five people pointing at one another in the boardroom.

Second, despite being the mastermind behind the e-reader, as Foolish colleague Rick Munarriz points out, Lynch didn't have much of a choice with its Nook readers but to run the business at a loss. Instead of differentiating his product, he relied solely on price to take on Amazon's Kindle. I can't really recall any company in recent memory outside of Best Buy that's had any success in taking on Amazon.com directly when based on price. It's been like watching Goliath beat David into the ground, repeatedly.

I certainly agree with my Foolish colleague Alyce Lomax that B&N looks riskier than ever as an investment. It would be wise for the company to consider any strategic alternatives (should it have any in place), but which company in its right mind is going to step up to buy a brick-and-mortar business that's in a slow but steady decline? Not any company or private-equity firm with half the notion to really dig into B&N's business fundamentals!

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. As we're learning from Barnes & Noble's exploits, only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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 July 12, 2013, at 11:17 PM, lisa787 wrote:

    Correct me if I'm wrong, but the assertion that Barnes & Noble is in steady decline as a retail business is not correct. The Nook losses were eating into what otherwise were modest retail profits, if you look at the numbers. That's why Leonard Riggio wants to buy the retail stores sans Nook business.

    Second, regarding the CEO leaving without a reason - comon, give me a break. You actually need it spelled out for you? His strategy didn't work - collapsed is more like it - so he's out. What's the company supposed to say? "Our CEO screwed up royally so by mutual agreement, he's out on his ass." I feel a little badly for him, it's always easy in retrospect to say that this was destined to fail. The Nook happened to get good reviews as a piece of hardware. If they had never done the Nook and retail had declined (which it hasn't), everyone would've said, "They should've built a tablet."

  • Report this Comment On July 12, 2013, at 11:22 PM, lisa787 wrote:

    If I could, one more point. There is a serious integrity issue with the Motley Fool owning stock in, and recommending, Amazon, Apple, Google - all of which are mentioned in this article, and the fact that Amazon is listed in the "3 Companies Ready to Rule Retail."

    I'm confused. Is this site about real reporting or considered opinions, or a stealth advertising / advocacy site?

  • Report this Comment On July 13, 2013, at 3:03 PM, ThadMcIlroy wrote:

    Whatever makes you think that he resigned voluntarily?

  • Report this Comment On July 15, 2013, at 1:21 AM, Risky88 wrote:

    I can't wait to see this company go under

    they deserve it

    royally

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