You had probably never heard of Barnes & Noble (NYSE:BKS) in 1986, when the company was founded. It didn't take long for Barnes & Noble to grow into a household name. However, as it's often said, the best things are built slowly. It's also often said that timing is everything.

Barnes & Noble grew quickly. When you look at the big picture, its timing was nothing short of awful. This isn't the company's fault. It simply fell victim to industry trends, where the ever-expanding digital market and online competition has severely limited the company's potential. The question now is whether there is any hope going forward.  

A different kind of company slowly emerging
The majority of Barnes & Noble's revenue comes from its retail and college segments. Barnes & Noble has clearly suffered from Amazon.com's (NASDAQ:AMZN) great success, whether it be in regards to book sales or the Kindle. However, Barnes & Noble pointed out on its most recent 10-Q that it has benefited from reduced competition from other physical retailers, whether they be book stores like Borders, or retailers that sell physical books. While this is true, those retailers selling physical books are failing for a reason -- reduced demand for physical books.

There will likely always be demand for physical books, but it's not going to be at the scale seen in the past. The trend towards digital is upon us and it's not going to reverse itself. Also, as the Nook continues to lose money, the Kindle continues to impress. For instance, on Amazon.com, the Kindle Paperwhite has received 17,388 customer reviews, and the overall rating is 4.5 of 5 -- extremely high compared to similar products.

The Kindle Paperwhite's features include a glare-free screen, a built-in light to reduce eye strain, more than one million titles at $4.99 or less, more than 1.7 million titles at $9.99 or less, built-in WiFi, cloud storage, an eight-week battery life, and the ability to hold up to 1,100 books at once. Furthermore, Amazon has $7.46 billion in cash (that's with a "b"), whereas Barnes & Noble has $80.05 million in cash. This is like Pee Wee Herman attempting to battle Darth Vader -- while blindfolded, gagged, and minus one leg. In other words, the Nook shouldn't stand a chance over the long haul. 

Barnes & Noble is trying to integrate its retail, college, and nook operations while reducing its retail store count and increasing its college store count. You can probably see where this is going.

While nobody knows the future, the most logical prediction would be for Barnes & Noble to eventually shed the Nook, significantly reduce its retail store count in order to swing to profitability, and focus more on its college operations. This, of course, would lead to reduced revenue and a smaller company. This is likely the reason why Barnes & Noble is still fighting in all areas. For instance, it currently plans on staying in the e-book market and entering 10 new international markets by the end of fiscal year 2014. This game plan does offer some potential thanks to a high-quality device being sold at low prices, but it's not likely to drive enough sales to fend off the competition.

In the physical world
In the physical world, Barnes & Noble doesn't have much competition. Its biggest competitor, Books-A-Million is suffering the same fate as other physical book retailers, which is declining demand. In the second quarter, Books-A-Million's revenue declined 8.9% year over year, with comps dropping 11.1%, and e-commerce revenue plummeting 15.4%. The company cited difficult comparisons to the year-ago quarter due to the popularity of Fifty Shades of Grey and The Hunger Games trilogy. While these were factors, if two popular titles can drive sales down that fast, then the company lacks diversification.

Consider the revenue trends for these three companies over the past five years:

BKS Revenue TTM Chart

BKS Revenue TTM data by YCharts

In most cases, companies in the same industry will trade at least relatively close together on the top line. However, Amazon's management has been wise enough to not only change with industry trends, but ahead of them. Amazon has become a trailblazing company. Others simply follow, doing their best to follow Amazon's footsteps. But if they follow in those footsteps, Amazon kicks dirt in their faces, blinding their ability to follow accurately. 

Foolish Takeaway
Barnes & Noble's best chance at sustainable success is to become a leaner company. However, it doesn't seem to be willing to give up the fight on the top line just yet. Therefore, at the current time, the downside risk looks to outweigh the upside potential. If you're looking for the opposite scenario, Foolish investors should consider Amazon. 

 

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.