Another Lawsuit Highlights Trouble for Barnes & Noble

The competitive pressure on Barnes & Noble has been exasperated by the companies financial reporting manipulation.

Mar 19, 2014 at 4:15PM


Source: Wikimedia Commons

Should lack of integrity by management curtail an investment in a company's stock? Barnes & Noble (NYSE: BKS) recently received another class action lawsuit case; this time related to the manipulation of financial statements. The hardship Barnes & Noble has faced in recent years makes it a dangerous investment, especially as it has incurred negative operating margins for the past three fiscal years. However should the retailer turn itself around it could make a fantastic investment so, naturally, Foolish investors would be wise to look closely at the troubled book retailer. Of particular interest for investors is this latest lawsuit and the company's competitive position. 

Recent lawsuit & SEC
Recently, Levi & Korsinsky LLP, a law firm with expertise in prosecuting securities litigation involving financial fraud announced a class action lawsuit against Barnes & Noble. The case alleges that Barnes and Noble misrepresented and/or failed to disclose that Nook e-reader sales had drastically declined, Nook manufacturing ceased to continue, and inventory realting to the Nook was overstated by $133 million.

This recent lawsuit is in addition to a Securities and Exchange Commission (SEC) investigation into Barnes & Noble begun on October 16, 2013. The SEC claimed they were looking into an allegation by a former employee that expenses between Nook and Retail segments were improperly allocated.


Fraud triangle
Financial fraud by companies typically have three characteristics, which are incentives or pressures, opportunity through poor internal controls, and rationalization to get through a difficult time. Each of these factors exist within Barnes and Noble. It has publicly stated the existence of poor material internal controls. The pressure from competition has certainly made recent years difficult for Barnes & Noble. Barnes & Noble's "Executive Performance Plan" and "2009 restated incentive plan" might provide a clearer picture of why management would prolonge bad results and delay its public filings.

Sales decline by segment
The Nook segment has raised the majority of concern. The most recent quarterly statement filed in December 2013 displayed segmented sales.


26 weeks ended


October, 2012

October, 2013

 % Change


B&N Retail





B&N College

















Source: Barnes & Noble SEC Filings

The Nook featured segment sales fell 35% from the prior year in the 26-week period. The decrease of retail and college segments are also concerning. How will the company report results in future periods if the slide continues?

Barnes & Noble's sales have been sliding due to the competitive landscape-particularly competitition from the likes of (NASDAQ: AMZN). Amazons' easy to use platform has driven many customers away from stores such as Barnes & Noble. Interestingly, while Barnes and Noble's NOOK and retail segments decreased 35% and 10%, Amazon's North American electronics and general merchandise increased 29%. There seems to be no slowing down of this trend.

Barnes & Noble's earnings have also taken a hit in recent years. The competitive pressure from Amazon has hurt the company's margins. Barnes and Noble had an operating profit margin of 5% back in 2005, but has suffered operating losses over the past 3 years. The company is clearly having a hard time keeping it's head above water.

Foolish investment
The declining performance and potential of future accounting shenanigans cannot be ignored. Given the volume of lawsuits Barnes & Noble is currently involved in, it appears unlikely that the culture will change. This lack of confidence, mixed with a business model that has been squeezed by innovative competitors makes Barnes & Noble a poor investment choice for even the most venturesome investors.


christian sgrignoli has no position in any stocks mentioned. The Motley Fool owns shares of 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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers