Barnes & Noble's End Could be Near

Bookseller Barnes & Noble (NYSE: BKS  ) reported yet another terrible quarter on Tuesday. The company lost money, revenue fell, and comparable store sales declined. Even worse, the company's founder and chairman announced that he would abandon his efforts to purchase the firm's retail operation.

Barnes & Noble shares are now down more than 30% in the last three months. At these depressed levels, is it worth an investment?

Barnes & Noble's streak of disappointment continues

For two quarters now, Barnes & Noble has been losing money. In June, it reported an EBITDA loss of $122 million, and then followed that up with an EBITDA loss of nearly $9 million on Tuesday.

At the same time, revenue and comparable store sales have been in decline. Consolidated revenue dropped 8.5% last quarter, after falling 7.4% in the quarter before that. Comparable store sales fell 8.8% in the fourth quarter of last year, and 9.1% in the most recent quarter.

Barnes & Noble has blamed its failings mostly on two factors. The first is the continued struggle of its NOOK division. The NOOK cost Barnes & Noble $177 million in the fourth quarter of last year, and $55 million in the most recent quarter.

There's been some evidence to suggest that Barnes & Noble was planning to exit the NOOK business altogether. It recently put out a software update that allowed NOOK devices to access the Google Play Android app store, and has been aggressively discounting NOOK hardware.

But Barnes & Noble reaffirmed its commitment to the NOOK on Tuesday, announcing that it intends to release new NOOK products later this year.

The second issue for the bookseller has been, quite literally, a lack of good books. The Hunger Games and 50 Shades of Grey amounted to a windfall for the bookseller last year, one that has not been repeated.

WIll Microsoft buy NOOK?

Barnes & Noble now has a market cap of about $870 million. That's less than the rumored $1 billion that Microsoft (NASDAQ: MSFT  ) was reportedly going to offer for the NOOK business earlier this year. In April 2012, the Windows-maker invested $300 million into NOOK for a 17.6% stake. Last May, TechCrunch reported that Microsoft considered offering $1 billion for the rest of the division.

It would make sense. After investing $300 million, another $1 billion is not a significant amount of money. Particularly for Microsoft, given that it's sitting on almost $80 billion in cash.

Strategically, Microsoft could benefit from owning NOOK. It wouldn't need the NOOK hardware, but it could definitely use NOOK's online book store. Both Google and Apple sell digital books as part of their respective mobile ecosystems. By buying the NOOK business, and incorporating it into Windows 8, Microsoft would put the Windows ecosystem on equal footing with Google and Apple.

If Microsoft did pay $1 billion for NOOK, shares of Barnes & Noble would surge. Yet, the TechCrunch report was back in May, a quarter ago. With no definitive proof of a forthcoming offer, playing that angle could be risky.

Amazon is doubling down on hardware

And if Microsoft doesn't buy the division, the future of the NOOK seems particularly bleak.

Amazon's (NASDAQ: AMZN  ) Kindle lineup has outsold the NOOK, and investors shouldn't expect that to change. Various reports in recent months have indicated that Amazon is preparing to double down on its hardware strategy, expanding the Kindle lineup and getting into new devices.

As I've written before, investors should expect the Internet retailer to announce new Kindle and Kindle Fires next month, as well a streaming media player, a video game console, and (potentially) a smartphone. Without seeing these new devices, it's difficult to judge their likelihood of success. However, it's clear that Amazon remains very committed to its hardware ecosystem.

And that doesn't bode well for Barnes & Noble's NOOK. Competing with the $130 billion Internet behemoth is tough for any company; but for Barnes & Noble it's especially difficult, as Amazon can afford to heavily advertise its Kindles and sell them at cost.

Is there value in the retail operation?

Putting aside the money-losing NOOK division, is there any value in just the retail book stores? Although profitability has declined, the division is still making money: last quarter, Barnes & Noble's retail operation generated $65 million in EBITDA.

It is, however, a business in decline. While paper books may stick around for years, it seems inevitable that, at some point in the future, digital books will replace them. And even if paper books are still common in the years to come, will a large public bookstore chain still have a place in the market? With Amazon Prime's two-day shipping, loyal customers can get paper books delivered within 48 hours.

At the same time, the fact that the retailer's operation is so dependent on megahits like 50 Shades of Grey is distressing. These are popular books like that can be bought at a variety of stores -- Target, Wal-Mart, even Kroger. Barnes & Noble's competitive advantage is that it stocks a deep library of titles; if that's not an asset, then the business has existential problems.

Moreover, it's not a particularly good sign that Barnes & Noble's chairman is backing out on his plan to buy the retail operation. There might have been a thousand reasons why he changed his mind, but as an insider it suggests that he may see some disturbing trends taking shape.

Investing in Barnes & Noble

It's possible that Microsoft comes in and saves the day. If Barnes & Noble can sell the unprofitable NOOK division to Microsoft -- and score a cool $1 billion in the process -- shares should appreciate significantly.

But if that doesn't happen, Barnes & Noble could continue to plummet. The NOOK business, in its present state, is already struggling to survive against Amazon. With Amazon expanding its hardware business, that task should only get more difficult.

As for the retail operation, it's making money but faces questions of long-term viability. With the company's chairman abandoning his quest to purchase the operation, the situation appears dire.

For now, Barnes & Noble remains an extremely speculative investment.

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