Barnes & Noble Falls Apart at the Core

When Leonard Riggio put in his original bid for Barnes & Noble's (NYSE: BKS  ) retail operations, the market was ecstatic. But with that optimism came a wave of speculators, hoping to buy low and sell high overnight. Today, Riggio took his offer off the board, and shares of the bookseller plummeted in early trading. While the bookseller managed to beat expectations for revenue in the first quarter, the news from Riggio pulled shares down 15%.

Everything takes a hit
While revenue did come in higher than expected at $1.33 billion, the company still slid down in most areas. Overall revenue was down 9.9%, due to a share decline in year-over-year comparable-store sales. Including sales of the flagging Nook e-reader/tablet, comparable sales fell 9.1%. But even when the Nook sales were stripped out, the business still saw a 7.2% decline. The bottom line took a hit, too, with the company losing $1.56 per share this quarter, versus a $0.76 loss last year.

The decline in comparable-store sales is especially disheartening, as the company had an 8.8% decrease in the fourth quarter, and a 3.4% drop for all of fiscal 2013. The rate of decline seems to be accelerating. The picture seems even worse without the Nook. Last fiscal year, core book sales were basically flat. To move from that to a 7.2% drop is bad news for the company, no matter what the Nook does.

The future of Barnes & Noble
The business seems to have moved beyond the point of being able to manage a slow return to strength. Whereas a company like Best Buy has found ways to focus on the things that it's really doing well, Barnes & Noble has run out of things it does with any sort of proficiency. The solution now would be to completely rehaul the business, focusing on smaller stores, online sales, and content for a broader range of e-readers.

For a long time, I thought that the retail business had some strong bones, and that with a refocus on brick-and-mortar, the company could make a turn. That ship has sailed. The drop in foot traffic that has to accompany a 7.2% decline in core sales is indicative of a business that needs to be almost wholly rebranded.

The company also recommitted to the Nook today, saying that it would produce another before the holiday season. For investors, that can't be as uplifting as the company intended. Previous plans had been to have Nooks produced by a third party, who would take on the costs and significant technical challenges of designing a tablet for consumers. Now, it appears that Barnes & Noble is back on the hook for another round of innovation and production.

While the news that Riggio is out may have been the motivation for today's fall, the drop in the company's core business is the real bad news for long-term investors.

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