Who Would Buy Barnes & Noble?

On this episode of Market Foolery, host Chris Hill and Motley Fool contributor Seth Jayson talk about some of the market's biggest stories. Barnes & Noble (BKS) popped some 20% after announcing it's going up for sale -- a premium that can't possibly make the bookseller any more appealing to prospective buyers. Constellation Brands (STZ -0.85%) (STZ.B) recently dipped its toe into the cannabis market through Canopy Growth (CGC -1.58%). Now it's dipping its whole foot, upping its investment another $4 billion. Why doesn't the company just focus on selling more alcohol? And with earnings season right around the corner, Seth shares what he'll be watching in next week's round of reports. Tune in to find out more.

A full transcript follows the video.

This video was recorded on Oct. 4, 2018. 

Chris Hill: It's Thursday, Oct. 4. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, Seth Jayson. Thanks for being here! 

Seth Jayson: You're welcome!

Hill: Sorry to pull you away from lunch!

Jayson: We had a time mix-up.

Hill: There was a mix-up. You were mid-meal. I was like, "Oh, did I forget to tell you the time to come to the studio?"

Jayson: Yeah, I was shoving a chimichanga and refried beans, reheated, into my craw.

Hill: We've got some earnings news. We have to start with the stock of the day. Miraculously, the stock of the day is Barnes & Noble. Shares of Barnes & Noble up more than 20% today on the news that the bookseller is looking to sell itself. They're basically putting together a select committee to evaluate offers.

Jayson: Shouldn't they have done this a while ago?

Hill: Well, they tried to do it a couple of different times. They tried back in 2011. They tried in 2013.

Jayson: No one wanted it? Imagine that!

Hill: There were people interested. I think it was not at a price that the company was willing to sell itself at. 

Jayson: I'm looking at it this morning, wondering what the price should be. Usually, there's something here, some kind of an asset that maybe your cigar-butt picker-uppers would be interested in. But you look at this... there's no real estate here. There's leased stores. There's some inventory and stuff. I looked at this, I cannot for the life of me figure out why anybody would pay more money for this. 

Now, the hope, I guess, if you're buying this, is that you can somehow fix what's going on. Bookstores actually aren't dead. Smaller bookstores are doing well. One of the reasons, I think, is that Amazon is terrible at books, ironically, because they started with books. They stole their name from a bookstore in Minneapolis. Amazon was a bookstore.

Hill: Also a river. 

Jayson: The bookstore business that works right now is small neighborhood independent bookstores. Barnes & Noble, of course, came along and clobbered a lot of them. It'd be great if the original owners who got killed by Barnes & Noble, business-wise, were the ones getting revenge now.

A couple of years ago, Barnes & Noble was maybe thinking about going this route. But really, what they've got is mall and strip-mall bookstore-type properties, the big same old, same old. I think that's just tough in today's market. The sad thing is, I like going to Barnes & Noble with my kiddo, because when we need book recommendations, we can get them there, as opposed to Amazon. On Amazon, literally, the last time I tried to find children's books for my kid, I got inundated with, like, Rush Limbaugh's children's-book series. Swear to God! Thanks a lot, Amazon, for nothing!

Hill: I thought you were going to say you were getting stuff like A Gentleman in Moscow, very well-regarded adult books, novels.

Jayson: I mean, I'm stunned by how worthless Amazon is for finding books. So I go to the bookstores. And unlike maybe a lot of Americans, when the very good staff at the Barnes & Noble up at Tysons Corner help us find books, we buy them there. We don't go home and order them to try to save a few pennies. I believe in paying the people who helped you out.

But I think for Barnes & Noble to work, from a buyer standpoint, if somebody buys the company, I don't know where they go. I think you have to try that small format. Maybe you need to somehow right-size the store base? But I don't know how you do that. The one in Tysons Corner here in the D.C. area looks like it does fine. It's always full. But we're in an area where that mall is always full. As we know, across America, malls are empty a lot more than they used to be.

Hill: That was the case for a long time with Barnes & Noble. They had certain locations, I forget the exact address in New York City, but there was one featured behemoth of a location in New York City that was printing money, essentially.

Jayson: I remember it.

Hill: For a long time, that was the story with Barnes & Noble. Like, "Gosh, if they could just look to get more efficient with their locations, not expand everywhere, as you said, right size the business." And instead, they went down the road of trying to compete with E-readers. They had the whole investment in Nooks.

Jayson: I guess you had to try that.

Hill: I was going to say, it wasn't a bad idea. They just couldn't pull it off.

Jayson: You knew it wasn't working years ago, years ago, and lost money for a long time. Then they spun out the educational bookstore part, which also hadn't been doing well. It's really tough. I think it's tough to do in those big stores, when people are not driving to the mall or to the strip mall for books anymore. In the newer urban areas where people are buying books, they want to walk past it. That means a small bookstore. Maybe there's room for a national chain opening small bookstores, who could probably do a better job of it. Maybe they should buy this. Starbucks, right? They already have a relationship with them there. What if Starbucks said, "We're going to open a chain of these small bookstores." Maybe they could do a better job because they're in these places in small locations.

Hill: They are. Although, as a Starbucks shareholder -- 

Jayson: You don't want them doing that?

Hill: I don't think I want them doing that.

Jayson: It'd be risky.

Hill: I feel like there are better ways for them to invest their money.

Jayson: I think there are. I'm just pointing out, I think that's the only strategy that's going to work, and I don't know if it works at the 20% premium price that Barnes & Noble is commanding today, right?

Hill: That's really the thing that's amazing to me! Looking at Barnes & Noble's market cap this morning --

Jayson: It was like $400 million yesterday.

Hill: Today, it's closing in on $500 million.

Jayson: [laughs] I guess Amazon burps a $100 million market cap difference every five minutes, probably, right?

Hill: I think that's right. I looked at this, and I thought, "Gosh, if the stock wasn't taking off, I could see it." There is a price at which Barnes & Noble makes sense as an acquisition for some company. The fact that it's 20% higher, I think, reduces the likelihood that they find a buyer.

Jayson: Yeah, it's tough to figure out. What's that name really worth? Do people really care? What is the expertise worth? There aren't a lot of hard assets underlying this, at least as far as I can see. If somebody else knows what those hard assets are, please let me know. They sure didn't jump off the balance sheet at me.

Hill: Drop us an email, [email protected].

Jayson: Title it "Seth Is an Idiot." It'll go in the bins with all the other "Seth Is an Idiot" emails.

Hill: [laughs] Exactly, how do we separate it? Constellation Brands up about 5% today. This is the parent company of a bunch of wine brands, liquor brands, probably best known as the parent of Corona.

Jayson: You know who likes drinking? It seems like everybody.

Hill: Yeah, a lot of people, myself included. Second quarter results came in higher than expected. That's boosting the stock today. I'm curious what you think of this quarter. One of the things that's getting the headlines for Constellation Brands is, they made that recent investment in Canopy Growth. They're looking into cannabis. 

Jayson: One of the pot stock extraordinaires, which doesn't actually have much business yet because they're waiting for the recreational market to open up in Canada, and then hoping in the U.S. They have some medical marijuana sales right now. I think Canopy is an $11 billion company with $60 million sales or something.

Hill: That was the thing that Constellation highlighted. They said, "Oh, and by the way, we have over $1 billion in unrealized gains from our investment in Canopy."

Jayson: They bought some stock and they need to mark it up. Here's $1 billion in fake earnings, unless they were selling into this. They're not selling into this mania, are they? They're going to put $4 billion more into the business! They're going to buy $4 billion more! 

As I understand Canopy, and I am a newcomer to Canopy, I think the story they're selling, and I say they're selling a story because I think that's what their main product is right now, is that they want to be the Constellation of pot. They're issuing a press release every couple of days for a long time now. You look at some of these companies they were buying? They don't do much. Then, you look at the people behind some of these companies? They look kind of suspicious. [laughs] So, I'm sort of going, is that a little pot company you bought down there in Chile, or this one up here in Canada, really such a great business? But everybody seems to think it's going to be, and this is going to be the Constellation of pot, we're going to have all these different pot brands. Constellation wants in on that.

The crazy thing to me is that you would take $4 billion, if you're Constellation, and put that in here. You've already got a pretty good stake in this company if, by some chance, it turns out to be big and important. You own a pretty big chunk already. Constellation, you look at their margins, they can sell anything to anybody. They have people drinking Corona, for crying out loud.

Hill: [laughs] Not a fan of Corona?

Jayson: Oh, God, no! What, it's the Coors of Mexico? Or is it the Natty Boh? I'm not sure what it is.

Hill: Not sure.

Jayson: But people drink it. So, obviously, they can sell anything to anybody. If it's booze, they do a good job. They get great cash flow out of this. Buy your own shares, for crying out loud! You do a great job! I don't know why you need something as speculative as marijuana, especially with an investment that is a tenth of your current market cap or something like that.

Hill: That was the thing that makes the Canopy investment all the more puzzling. When you look at this latest quarter from Constellation Brands, beers sales on the rise, shipments on the rise. Same for wine and spirits.

Jayson: And they're selling higher margin stuff. Corona's expensive! It's basically water, and it's expensive!

Hill: I don't know why they're not sticking to their knitting on this one, because they're doing a good job.

Jayson: It's not exciting!

Hill: Well, to your point, they already had the investment in Canopy Growth. I'm not sure why they felt so confident in it that they felt the need to increase it to the degree that they did.

Jayson: With some borrowed money.

Hill: I'm sure it'll all work out.

Jayson: I'm sure if it works out fine, everyone will say, "See? You idiots there didn't know anything." And if it doesn't work out fine, nobody will remember that we lightly poo-pooed it. Constellation, just sell the booze. Everyone likes drinking!

Hill: Well, there's certainly enough of it. Here's the good thing as investors. Like you, I'm not an investor in cannabis. I am, however, very curious to see how all of this plays out. I think that's going to be one of the more interesting things to watch over the next 12 months as we're now two weeks away from the legalization kicking in in Canada. We have four more states --

Jayson: Don't try and call Canada. 

Hill: [laughs] Four more states in here in the U.S. have various levels of legalization on the ballot in the midterm elections. So, now we're going to see. It's not just Canopy Growth. All of these companies have been pushing the story, pushing the trend, and it has largely worked out for them. Now, to use a tired cliche, this is where the rubber meets the road. We're going to see who speeds ahead and who ends up as roadkill.

Jayson: The thing is, with booze and with drinking, I used to brew beer. Beer is actually kind of tough to make, especially in the quantities you might want to drink it. Same thing with spirits. Pot is really easy to grow. 

Hill: Right. It's a weed!

Jayson: And I don't say that because I'm growing pot. I say that because I ride my bike through Iowa quite often, and on the small roads, you're still seeing ditchweed from the '40s. You're seeing hemp from the '40s. It is impossible not to grow pot. So I don't understand why the marijuana industry doesn't just become really fragmented. Everyone likes small brands now, right? If there's brands, why would it be big brands? Wouldn't be a bunch of small artisanal -- nobody can see my finger quotes in the podcast -- artisanal brands? And then, the underlying product is just an agricultural commodity. If you're growing pot, you want to grow it in Iowa, you will have no problem getting the costs down a long way.

Hill: As I said before, our email address is [email protected]. Question from Lance Price, who asks, "I always enjoy Market Foolery and Motley Fool Money. Will there be any podcast listener meetups in Denver?" Yes, there will be!

Jayson: But everyone's going to be so stoned that you won't get any questions answered. 

Hill: I guess we'll see. It's going to be Tuesday, Oct. 23. If you are in the Denver area, email us, [email protected], and we will send you all of the details for our listener meetup. That's Tuesday, Oct. 23, in Denver.

Jayson: There really is one!

Hill: There really is one!

Jayson: I don't think those guys will be stoned, actually. Just, my last experience in Colorado, I was out there to run Pikes Peak marathon. The hotel room was across the parking lot from a marijuana store. And the parking lot was so full all day that it really scared me.

Hill: Did you partake to help yourself with the run, either before or after? 

Jayson: No, that is not something I'm interested in. 

Hill: I bet someone did. I bet at least one runner was like, "I'm in pain and I'm going to reduce the pain."

Jayson: There were plenty of people partaking downtown, I'll tell you that much.

Hill: Earnings season begins next week with, as is the case, the big banks kicking off. I'm curious as we head into the final earnings season of 2018, what if anything you're watching, whether it's a company or an industry or anything.

Jayson: I'm interested to see how much making America great again is going to have an effect on a lot of the companies out there. They're paying a lot more for steel manufacturers, more for aluminum. They've got tariffs. I'm interested to see when that finally starts to hit home. I mean, you read a lot of stories now in the various newspapers of smaller businesses that are struggling. I want to see how that's going to flow through companies like Titan International, the tiremaker. Rubber is expensive, steel is expensive, agriculture is getting pummeled because of tariffs and trade wars. How much steel and aluminum do you think there is in a tractor? In a tractor tire or wheel set, there's a lot. So, what is this going to do to some of these companies? I'm going to be looking for that.

Hill: Retail, does that interest you at all? Maybe it's just me, but on the holiday season, I'm getting the popcorn. I can't wait to see who's doing what.

Jayson: Yeah, we won't know much about that for another few months, until we see what's happening. Apparently, Americans are big on buying everything right now. I'm guessing that you'll see the usual headlines. 

I'm going to make an easy prediction, which is that Amazon is going to come out with some kind of wacky news release about drone this or weird delivery that or something. You know, the kind of thing they always do right around the Christmas shopping season in order to get free press. We're going to see one of those.

Hill: I think we're going to see one of those in terms of the second headquarter announcement. Don't you?

Jayson: You think they'll tip it for that?

Hill: They have maintained all along, it will come before the end of the year. I don't know why.

Jayson: Oh, maybe that'll be the way they get the buzz. 

Hill: Certainly, when you look at the betting odds --

Jayson: Where are we?

Hill: The last time I checked, which was a few weeks ago, Northern Virginia was literally the betting favorite. There are a few approved locations in Northern Virginia, and one of them is, I'm going to say, two-tenths of a mile from where we're sitting right now. 

Jayson: Which one is that? 

Hill: It's over by the Hoffman. Over by the movie theater.

Jayson: That's big enough for them?

Hill: Yeah.

Jayson: Really?

Hill: Yeah.

Jayson: I thought that campus was bigger than that. That's my drive to work.

Hill: Well... [laughs]

Jayson: One of the things that I would like about Amazon is, they say they want people to be able to bicycle there. If they move there and actually get some bike lanes through? I live only 10 miles from this location, and I can't bike here because the roads are awful and there's absolutely no way to get in here on a bike. If they could do that, I would be so excited!

Hill: You'll be singing their praises.

Jayson: I would!

Hill: You'd forgive them for the book thing you said earlier. 

Jayson: I'll forgive Jeff Bezos for his haircut. Anything.

Hill: [laughs] How dare you?

Jayson: How dare I?

Hill: How dare you begrudge any person's haircut?

Jayson: I know. I'm on my way to where Jeff's hair is. You can see it. You can see it now, on the podcast.

Hill: [laughs] You can go to our YouTube channel and see. Thanks for being here!

Jayson: You're welcome!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you next week!