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Barnes & Noble's Black Friday Bombshell

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Barnes & Noble (NYSE: BKS  ) is no best-seller after having released fiscal second-quarter earnings. This is a sad story, indeed. Given Black Friday's approach, this is a week during which we think about retail -- and, as investors, retail stocks -- the most, and Barnes & Noble isn't adding holiday cheer.

Black Friday is a holiday quarter highlight each and every year, but investors might wonder how badly Barnes & Noble will struggle on that red-letter shopping day... and beyond.

Losing the plot
The big-box bookstore has outlasted Borders, but it's been harder pressed to thrive in the bookselling business as time goes on. Barnes & Noble did manage to cut its quarterly expenses in order to increase its profit. The retailer's second-quarter net income spiked to $13.2 million, or $0.15 per share, after having reported a negligible increase in net income and a loss of $0.07 per share this time last year.

However, investors can read nastiness in Barnes & Noble's revenue. Its retail segment revenue, which doesn't include the Nook, fell 7.5% to $921 million, and same-store sales dropped 3.7%. The tidings reflect a negative trifecta: store closures and deteriorating Internet sales, not to mention a drop in actual human beings in the stores.

In an interesting aside that says a lot about the bookselling business's reliance on best-sellers, this quarter didn't include the temporary boost of last year's Fifty Shades of Grey trilogy. That adds a little extra whipping to the numbers.

Not that long ago, Barnes & Noble had managed to outdo and survive Borders by jumping swiftly and competently into an area that (NASDAQ: AMZN  ) had sparked with its Kindle: e-readers and e-books. The Nook was a real contender as Borders struggled with its financials and staggered into the e-reader market by offering the Kobo e-reader device. (Once Borders went belly-up, Kobo went solo.)

The Nook was going strong for a while, shining like a crown jewel in Barnes & Noble's challenged brick-and-mortar business. Today, Barnes & Noble's traction is deteriorating in its physical bookstores and in the Nook business. Its digital content sales have fallen 21%, and its market share in e-books has fallen to about 20% from 27% a year ago.

Earlier this year, one investing thesis hinged high hopes on Barnes & Noble's future, at least in terms of the Nook. Recall the thrill at the concept that Microsoft could purchase the Nook business in full; it already owns a stake.

Of course, there's a small problem for long-term investors. In that case, Barnes & Noble would have very little left in its core business, so a bull thesis was of the super-speculative, lottery-ticket nature. Still, that possibility hasn't come to pass yet. And obviously, the Nook is looking worse for the wear at this point.

War and peace of mind
Many investors mock an Amazon investment, talking about its ridiculous valuations and lack of profitability. Granted, Amazon's bottom line is a risk to be aware of, but sales volume actually is astronomically impressive.

Last year, Amazon generated sales growth of 27% to $61 billion. Amazon is no one-trick pony. It can push e-books and e-readers, physical books, and even help authors cut out the middleman of traditional publishing because its diversification is, in a word, epic. It's Tolstoy-esque.

In fiscal 2012, Barnes & Noble's sales fell 4% to $6.8 million. Barnes & Noble is a one-trick pony (with a few decorations like trinkets and odds and ends). It's the equivalent to War and Peace CliffsNotes, but not even as compelling a purchase. (War and Peace is a classic, but not the easiest great book to read.)

Barnes & Noble's Black Friday story illustrates plenty of reasons for investors to avoid the stock. Maybe I'm adding a surprising plot twist, but despite Amazon shares' pricy reputation, investors should contemplate its addition to their holiday stock watch list. It's one of the truly great disruptive, visionary companies.

Is a buy right now? Maybe not, depending on whether individual investors feel nervous about buying high-quality stocks for the distant future, and riding years of ups and downs. Cheaper prices on the stock will likely be had, too; over the course of Amazon's history, investors and analysts have had a history of flipping out about its margins and profitability concerns, resulting in occasional stock beat-downs. After the holidays, as with late gift-shopping, investors may get a deal.

Amazon is most definitely a hold for those already lucky enough to own it -- and willing to ride some stock price roller-coaster rides over the long haul.

Barnes & Noble is an example of an opposite type of stock: a Black Friday dud for those window-shopping for retail stocks and, given the uncertainty, hardly any bargain. Its fundamental business is a sad story that will likely not have a happy ending.

Shopping for stock superstars
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to avoid shares of companies like struggling Barnes & Noble and to buy shares in solid businesses like, and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

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Related Tickers

9/29/2016 4:02 PM
BKS $10.99 Up +0.08 +0.73%
Barnes and Noble CAPS Rating: *
AMZN $829.05 Up +0.33 +0.04% CAPS Rating: ****