Will Barnes & Noble’s 1,000 Textbook Stores Save the Company?

Barnes & Noble has been a bad bet over the last couple years, but will its expansion into textbooks change its bad fortunes?

May 16, 2014 at 9:36AM

Barnes & Noble (NYSE:BKS) is going through a major identify change, as the market for selling books at large company-owned stores continues to dwindle, which has much to do with the rise of Amazon.com (NASDAQ:AMZN). In the process, Barnes & Noble has unsuccessfully attempted to sell tablets, and now it sees the sale of college textbooks as a classic secular business that can drive long-term value for shareholders. Unfortunately, Barnes & Noble will likely fail in this business as well, as the rise of companies like Chegg (NYSE:CHGG) will challenge this concept.

Barnes & Noble: Failing in its core businesses
In Barnes & Noble's last quarter, it announced that 26% of its workforce in the Nook unit had been cut and that in the e-book category, its market share had fallen from 26% to 20%, year over year. Overall, this created a revenue loss of 9%. And while competitor Amazon has grown far beyond books and is now the largest U.S. e-commerce company, its continued dominance in this category is very much to blame for Barnes & Noble's failure in e-books, tablets, and its existing revenue losses.

Specifically, Amazon owns 30% of the total book-retailing business, accounts for 55% of the e-book market, and its Kindle tablet is the company's best-selling product. Moreover, with new initiatives such as selling physical books followed by significantly discounted e-books of the same title, many think Barnes & Noble's options are running low.

A new initiative for Barnes & Noble
Therefore, Barnes & Noble is hoping to capitalize on a different and more consistent market in textbooks. In particular, Barnes & Noble is planning to grow its college bookstores.

Currently, the company owns 696 such stores, and it wants to increase that number to more than 1,000 within the next five years. Clearly, this goal includes negotiating with large universities and trying to convince such schools to abandon a model that includes independent store owners.

Aside from selling textbooks, Barnes & Noble also rents its books for less than 45% of the original price. Considering the high price of textbooks, and the fact that textbooks are a necessity of education, this is a valuable market, and one where Barnes & Noble could have success.

Is Barnes & Noble still one step behind?
However, just as innovation has damned all other segments of Barnes & Noble's business, the same can be said within its new-found focus on textbooks. Chegg rents both physical and eTextbooks online, avoiding the high costs of physical locations. This model allows Chegg to rent its books for 20% to 70% cheaper than its peers, which is the core problem for Barnes & Noble.

Chegg reported earnings earlier this month that highlighted some strong trends for the company. While its revenue grew 22%, year over year, the company's digital revenue, which makes up nearly 25% of total sales, increased 66% over the prior year, likely stealing share from Barnes & Noble.

Physical textbooks are still a large market, making up more than 90% of industry-wide sales, but e-book rentals are growing fast. The sheer price advantage of Chegg -- not needing brick-and-mortar retail locations similar to Amazon -- gives it an advantage against Barnes & Noble, much like Amazon when it entered the book business.

Final thoughts
According to Chegg, 40% of students are aware of its services due to heavy marketing, and with its cost benefit, it's hard to imagine a scenario where large universities agree to Barnes & Noble's plan. Sure, Barnes & Noble may have some initial success, but the company seems to be missing the concept that today's student is becoming increasingly digital and less interested in high-priced textbook rentals.

With that said, Chegg's stock is down about 75% from its IPO, trading at a market cap of just under $450 million and 1.5 times sales. This is a growth business and what appears to be a solid long-term investment opportunity. Moreover, Amazon may be more focused on infrastructure and logistical investments, but there may be reason to believe that Chegg is on its radar.

Amazon acquired the social media site Goodreads.com last year, and Chegg's large presence in textbook renting, combined with its stock loss, might make Chegg an intriguing partner or acquisition by the e-commerce giant. If not, maybe Barnes & Noble shows interest, because at this point, it doesn't seem as though the company has too many strong options.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com 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.

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