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

Barnes & Noble surged after news broke that it was letting go of its NOOK segment's employees. Is this train of thought rational or is the company ready to go under?

Feb 13, 2014 at 12:30PM

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.

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of and Barnes & Noble. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers