Barnes & Noble's 2 Simple Steps to Revitalization

After years of dilly-dallying with the Nook, Barnes & Noble needs to face facts and realize where its strength still lies.

Mar 18, 2014 at 10:08AM

At first glance, it seems like Barnes & Noble (NYSE:BKS) is confused about its long-term strategy. A mixture of digital and physical books has led the company into convoluted pricing systems and too many places to spend its own cash. Its Nook reader has languished while everyone else seems to have had digital success, and the cost of its failure has put extra pressure on the brick-and-mortar side of the business.

Unfortunately, the picture looks the same on second glance as well. Barnes & Noble looks increasingly like a cardboard box full of Legos -- all the pieces are in there, but they're obscured by excess.

Source: Barnes & Noble.

Barnes & Noble's successful business
Finding the nougat core of Barnes & Noble's business is as easy as reading the company's annual SEC filing from a few years back. "Barnes & Noble is the nation's largest operator of bookstores." There it is, right in plain sight. Barnes & Noble has outlasted Borders, shown up Books-A-Million, and continued to successfully sell physical books even as the digital wave sweeps over it.

Let's talk about what the term "success" means, though. Right now, it doesn't mean growth, it means survival. Barnes & Noble has continued to earn money through its retail and college divisions, but those earnings are declining. In the company's last reported quarter, the combined earnings before tax from those two divisions fell 6%. Even with the fall, though, the kernel of strength is visible.

Clouding the issue is the Nook and its abysmal performance. That division has been losing money hand over fist as sales have fallen and the business has backed off its initial grand plans for the hardware. Barnes & Noble seemed to take a page from the Amazon business plan -- sell things, make things, sell new things, repeat -- without having the stomach for income denial that Amazon maintains. Barnes & Noble wants to make money like a traditional business but tried to do it while growing a new, digital-style business.

Is there still value in Barnes & Noble?
In the same way that success is specifically defined for Barnes & Noble, "value" also needs to have a clear and narrow definition. First of all, the value in Barnes & Noble is dependent on its ability to mitigate the damage done by the Nook. The company trimmed -- which is to say fired -- its engineering staff earlier this year. This week, it announced that it was going to shift its Microsoft focus from the Windows Phone to the as-of-yet-undefined Microsoft Consumer Reader.

The next step is that Barnes & Noble probably needs to cut back on its physical footprint. While Amazon isn't unbeatable on all fronts, it has ushered in the death of the big-box store for most retailers. Barnes & Noble's costs for sales and occupancy have slowly crept up, hitting 68.8% of revenue for the first 39 weeks of the current fiscal year. For the same period in fiscal 2010, those costs accounted for 67.2% of sales. 

In order to unlock the value in this business, Barnes & Noble needs to make two difficult cuts. It needs to cut the Nook free, perhaps by giving it over to Microsoft as a brand, which would allow it to focus on digital content sales. Second, Barnes & Noble needs to trim its space back to drive down the costs of brick-and-mortar sales. Big-box downsizing has been popular for years, but for some reason Barnes & Noble never got the memo.

The company has a long way to go if it wants to keep its head above water, but it can make it if it focuses on one thing -- staying alive. If you're lost in the middle of the ocean, you don't need to try to turn the random bits of debris around you into a boat -- you need to use your strength to swim. Barnes & Noble just needs to push off from the float and start churning toward shore.

Start investing today
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our special report "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of It also owns shares of Barnes & Noble and Microsoft. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers