Barnes & Noble's Biggest Shareholder Makes a Beeline for the Door

Last week, Barnes & Noble (NYSE: BKS  )  founder and chairman Leonard Riggio sold off a sizable chunk of his holding in the company, dropping 3.7 million shares. Although he reported that the sale was simply part of his long-term financial plan, the market was none too happy. Barnes & Noble shares fell 12% on Thursday, erasing about two months' worth of gains. It has yet to recover.

Riggio's total ownership is down to around 20%, and he's still the biggest shareholder, but it now seems clear that he has no plans to take the business back. The drop in Riggio's holding follows Liberty Media's (NASDAQ: LMCA  ) April purge of its Barnes & Noble position. Combined, the two sales have changed the potential future for Barnes & Noble. It's basically the plot from Back to the Future, but with books.

Where will Barnes & Noble go now?
At the beginning of 2013, Riggio announced that he was interested in buying Barnes & Noble's retail business. He was eventually talked out of the offer, saying that the interests of the company were best served by things continuing as they had for all of business-time. That gave the company a chance to refocus on its strategy of thinking about making the Nook the focus of its business without really committing one way or the other.

Riggio and Liberty CEO John Malone made a perfect investing pair for Barnes & Noble. Riggio loved the retail side, while Malone was excited about the Nook division. It certainly says something about Barnes & Noble's future that both men have now made a move away from the company.

The lack of broader investor interest isn't just a side effect of Riggio and Malone moving on. Comparable-store sales at Barnes & Noble have fallen, revenue is down, and the Nook is rotting on the shelves. On the plus side, margins have increased as the company sheds its many layers of failure.

Even though Riggio has cut his stake, his remaining interest seems to be the one moderately successful part of Barnes & Noble's business. Comparable retail sales not counting the Nook only fell slightly in the company's last quarter -- down 0.4%.

Strength -- kind of -- in retail
When you think about unique selling points at Barnes & Noble, you should probably think about the fact that it's the only national book chain left of any meaningful size. Sure, there's Books-A-Million, but it has 250 stores to Barnes & Noble's 660 locations.

With sales starting to flatline and margins actually on the rise, it looks like Barnes & Noble might be on to something -- selling books in stores. I know it sounds crazy, but this might be the one thing that Barnes & Noble consistently does pretty well. Over the last three quarters, retail revenue has fallen, but EBITDA margin grew ever so slightly.

Barnes & Noble closed 15 locations in the first three quarters of the year, while opening just three. By shutting underperforming stores, Barnes & Noble has been able to consolidate some of its strength. That's a good first step, but the company has to do more. With over 600 mainly big-box-style stores, Barnes & Noble needs to trim its footprint.

I think Barnes & Noble has a lot of strength simply by being the dominant nationwide bookstore. What it doesn't have is a trim operating strategy. It needs to cut down its square footage, have a clear direction with the Nook, and embrace an omnichannel plan that can get books into shoppers' hands faster and for less. If it can do those things, then the company should be able to get back on top.

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