Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



After Skyrocketing, Is Barnes & Noble Ready For A Death Spiral?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

It's official, folks! On Monday, Feb. 10, 2014, Barnes & Noble (NYSE: BKS  ) announced that it was letting go of its entire staff who were associated with the company's NOOK e-reader. The device was originally created in an effort to move away from a brick-and-mortar business model as competitors like Amazon (NASDAQ: AMZN  ) slowly ate away at Barnes & Nobles' traditional business model. 

However, in the face of rising competition and while dealing with mounting losses in trying to fend off the Kindle and the Apple iPad, the company seems to have finally thrown in the towel. In response to the news, the bookstore's shares rose by nearly 9%, which signals that shareholders who were once enthusiastic about the device are now thankful to be rid of it. What does this really mean for the business? Is this the beginning of a resurgence for the world's largest bookstore, or is it a sign of its demise?

Once a rising star, the NOOK became a burden too heavy to bear
Between 2010 and 2012, Barnes & Noble saw its revenue rise 23% from $5.8 billion to $7.1 billion. Roughly $828.1 million (or 64%) of this revenue growth came from the company's NOOK segment. Over that three-year time-frame, the company's e-reader saw its sales rise from $105.4 million to a whopping $933.5 million.

By 2013, however, the NOOK segment began to fall back significantly, as evidenced by its 16% drop in revenue to $780.4 million which brought the company's revenue for the year to $6.8 billion. For the year, the segment reported an operating loss of $511.8 million. The primary reason behind the company's falloff in sales and wider operating loss chalks up to increased competition.

While Amazon has yet to release official sales figures for its Kindle, Morgan Stanley estimated that in 2013, the device and any of its associated products and services would make up 11% of Amazon's revenue and 23% of its operating income. Using these figures, we can estimate that total revenue from the Kindle would have come out to $8.2 billion, while operating income from the device would amount to $171.4 million.

What does this mean for Barnes & Noble moving forward?
Unfortunately, the decision to cut off the NOOK segment will likely mean that Barnes & Noble will see less revenue, but there is some upside. Had the company not been burdened with the device in 2013, it would have had fundamentals that were significantly stronger than what it reported.

Instead of the $6.8 billion in revenue that the company reported and its operating loss of $220 million, the company would have reported sales of $6 billion and operating income of $291.8 million. The 5% operating margin that would have been earned by Barnes & Noble isn't great, but it's far better than the -3% margin reported by management.

Moving forward, Barnes & Noble will be able to focus more on its brick-and-mortar business, but the real question that remains is what the long-term impact of this decision will be. With its own e-reader seemingly out of the game, will the company be able to hold off the rise of e-books or will it collapse like Borders did? The answer might surprise you.

Despite Morgan Stanley's forecast that Amazon will have sales of $10.7 billion in 2014 (inclusive of all Kindle products and services), the picture for physical books doesn't look dismal. In 2012 alone, an estimated 557 million hardback books were published, up 6% from the prior year. This suggests that the advent of the e-reader may have more to do with getting those who previously didn't read to dive into the world of literature, or it may imply that individuals who read e-books also take up their physical counterparts. Either way, it doesn't look like the book industry will die just yet.

Foolish takeaway
Considering the data from Barnes & Noble's NOOK segment as well as the continued success of physical books, it doesn't look like the company or its shareholders have anything to fear yet. If anything, management's decision to axe the program might allow it to innovate in other ways that can create long-term shareholder value.

Ultimately, anyone who does decide to jump into the company's shares should consider that a change in consumer sentiment away from physical books to digital content could be drastic and could have adverse consequences for the business. However, as we saw after news broke of the company's decision to go NOOK-free, the payoff for having a long-term, Foolish outlook on the company could mean more money in your pocket.

The Motley Fool's Top Stock for 2014
Right now, the future looks brighter for Barnes & Noble, but is the company the best to own for 2014, or is there something better for investors to snatch up?  There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

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 February 13, 2014, at 6:12 PM, DPRoberts wrote:

    It's not "official" at all. If you read any other article about BKS this week, you'll see that Business Insider originally stated on Monday that Barnes & Noble did layoff its entire Nook staff. However, that was corrected within a few hours - fewer than 100 people were laid off. Business Insider corrected its article, and everyone else has noticed & followed suit. While the layoffs are significant & no doubt signal a change in Nook, the program has NOT yet been axed - as everyone else has already pointed out.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2838392, ~/Articles/ArticleHandler.aspx, 8/31/2015 6:55:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Daniel Jones

Dan is a Select Freelance writer for The Motley Fool. He focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics!

Today's Market

updated 2 days ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
AAPL $113.29 Up +0.37 +0.33%
Apple CAPS Rating: ****
AMZN $518.01 Down -0.36 -0.07% CAPS Rating: ***
BKS $15.67 Down -0.02 -0.13%
Barnes & Noble CAPS Rating: *
MS $34.05 Down -0.25 -0.73%
Morgan Stanley CAPS Rating: ***