The Barnes & Noble Conflict

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. 

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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 October 19, 2013, at 7:15 AM, gWood777 wrote:

    Barnes and Noble will turn around like Starbucks…the company has a unique brand and Len Riggio (as Howard Schultz did at Starbucks) revitalize the stores. The ABA report in the spring that sales at independent bookstores rose about 8% y-o-y in 2012 and Bowker reports 90% of Americans who have bought eBooks continue to buy traditional books as well. The battle between e-readers is over and pads and laptops won. In April, the Book Industry Study Group announced that multi-function tablets were the preferred e-reading devices, exceeding the use of dedicated e-readers. B&N did announce the other day a utility for checking ePUB (a much preferable open source format) files.

    B&N retail stores to generate e-book sales for B&N as Amazon goes after Walmart. With Len Riggio back at the helm, expect to see some low-performing stores closed and communities fighting to get new stores opened.

  • Report this Comment On October 19, 2013, at 3:23 PM, Popnfresh100 wrote:

    Barnes and Noble was not founded in 1986- that's not even remotely close.

    The Barnes family began selling books in Wheaton, IL in the late 1800's.

    The New York flagship Barnes and Noble bookstore was founded in the 1920's.

    Leonard Riggio began operating a chain of college bookstores in the 1960's and acquired the Barnes and Noble location and name in the 1970's.

    1986 was the year B&N acquired B. Dalton. Maybe that's why you're confused.

    Sorry, I didn't bother with the rest of the article. The opening line was too glaringly misinformed.

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