Barnes & Noble Finally Splits Off Nook

After years of trying to figure out what to do with Nook, Barnes & Noble has finally decided that it's time for real change.

Jun 25, 2014 at 1:04PM

It's surprising, but Barnes & Noble (NYSE:BKS) is actually a lot like my neighbor Francis. Francis has had a myriad of car parts strewn across his lawn for -- this is just an estimate, mind you -- 45 years. Every time you talk to Francis, he talks about how he's "fixin' 'er up." The thing is, he finally did fix 'er up. Now he's got a semifunctional 1977 Plymouth Volare -- and Barnes & Noble has the green light to spin off the Nook.

After more than a year of back and forth, falling sales, and cash destruction, Barnes & Noble's board got its act together and cleaned up its lawn, voting today to "take the steps necessary to complete the separation by the end of the first quarter of next calendar year." I feel the same way about both the car and the Nook -- shocked yet happy.

The Nook as the anchor dragging on the seabed
Let's start out at the top. Barnes & Noble's biggest asset is that it sells physical books in a physical store all across the U.S. and no one else does that. It's effectively the only name in the game. How does the Nook play into that strength? It doesn't.

Barnes & Noble jumped with both feet into the tablet world, but it just got steamrolled by better businesses and better products. As a result, the Nook had a 35% drop in revenue over the 2014 fiscal year. Comparable-store sales were 2.7 percentage points worse with the Nook's failure included.

Apparently, the Barnes & Noble board finally had enough and decided to get rid of the Nook once and for all. It's certainly not a new idea, as the Nook has been weighing on the business for years. Last year, founder Leo Riggio offered to buy the physical retail business, effectively splitting the Nook by leaving it behind. In August, the company finally rejected the idea.

Where the Nook goes from here
The Nook is not a cleanly defined portion of the business, in many ways. For starters, the Nook isn't wholly owned by Barnes & Noble. Over the last two years, Pearson and Microsoft have invested heavily in the division, with Microsoft owning 18% of the Nook. That means that Barnes & Noble won't be the sole voice in the Nook's separation.

The process is just now getting under way, so investors have a long time to wait until this breakup is finalized. Even so, the stock has surged on the Nook news, up around 9% by midday. The board has said that the Nook will become its own publicly traded business, which means that hopefully investors won't have to tread the tedious waters of a sale to an acquirer.

Instead, Barnes & Noble should have a straightforward path to get Nook to the market, and then it can buckle down and focus on its stronger businesses. Over the last quarter, for instance, comparable core retail sales -- sales excluding the Nook -- only fell 1.9%. Barnes & Noble has an excellent potential business, but the parts are still strewn across the yard. I can't wait to see if it can pull it all together, and it looks like now I won't have to wait long.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool 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.

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