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Don’t Close the Book on Barnes & Noble

By Diane Alter - Sep 3, 2013 at 9:20PM

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Despite falling 20% on a 1.56% loss in Q2, Barnes & Noble may still provide a happy ending for shareholders

There comes a time when you must choose between turning the page and closing the book. Barnes & Noble (BKS) investors should choose the former, as the bookseller may very well have a fairly tale ending for those who stick around.

As Barron's recently reported, profits from Barnes & Noble bookstores could be used to handsomely reward shareholders with a sizable dividend and/or share buyback. Moreover, new management is on an unwavering mission to stop the losses that have been plaguing the company.

To be sure, management has lots to do as it tries to rewrite Barnes & Noble's next chapter. The bookseller reported yet another dismal earnings report in late August. Also disappointing was the announcement that chairman and top shareholder Leonard Riggio backed down on previous plans to buy the company's 674 bookstores dotted across the U.S. But several analysts say that may be a blessing in disguise for shareholders, as it was highly likely Riggio would have bought the stores at a deep discount. Nonetheless, Barnes & Noble shares got battered following the news, tumbled 20%, and left many speculating about Barnes & Noble future and fate.

The company's fiscal Q1 financial results showed an $87 million loss in the latest quarter, double the amount of losses logged in the same period a year ago. Sales slipped 8.5%, and revenue linked to the ailing Nook e-reader division, a separate segment of the company, tumbled 20%. Additionally, sales of Nook devices and software plummeted 23.1%. Meanwhile, revenue in its traditional retail division dropped 9.9%.

Nook has been a big concern for Barnes & Noble. Indeed, the company split the Nook business into separate company from its bookstores in January 2012 and hung up a "For Sale" sign on the business. But with no bidders, the company said that after mulling the idea for 18 months, it decided not to detach its retail stores from its Nook e-reader and e-books operation.

Losing market share in the e-books market place

Barnes & Noble also noted its presence in the e-books market place is dwindling. The company estimated its share of the U.S. digital books market is roughly a still-commanding 22%, but down from the 27% it claimed last October.

Competition is heating up in the area as more and more consumers switch to e-books. According to a Harris Interactive poll, 28% of Americans now use an e-reader, up from 15% in the summer of 2011. Behemoths such as Amazon (AMZN -0.99%) and Apple (AAPL -0.29%) are vying to be the leader in this explosive arena.

Data shows that 3% of Amazon's 10 million unique users shop for a Kindle device every month. In just two short years after introducing the Kindle, Amazon customers bought more e-books than all print (hardcover and softbacks combined) books. For every 100 hardcover and paperbacks sold on the site, customers downloaded 114 e-books (excluding free e-books). Worldwide shipments for Amazon tablets totaled 1.5 million in the second quarter of this year, a 1.8% market share. Amazon presently sits at the No. 3 spot for tablet sales.

That said, the leader in the space is Apple's iPad. In Q2 of 2013, Apple shipped 14.6 million iPads, giving the tech giant a 71.2% market share. Samsung was a very distant second, having shipped 7.3 million tablets, good for a 7.8% global market share, according to research from Canalys.

Apple successfully debuted the iPad in 2010 after Microsoft failed for a decade to launch Bill Gates' Tablet PC project. Others were quick to try to copy Apple's hardware. However, to date, they have only nibbled at Apple's dominance. And the iPad mini, released in November 2012, is set to outsell the iPad this year.

Barnes & Noble maintains that its new color e-readers won't directly compete with the iPad, but didn't elaborate.You see, the company believes there are plenty of people who don't want or need all the bells and whistles of an iPad and will be very content with a no-frills color Nook e-reader.

Keep reading

With nearly two-thirds of the country's bricks-and-mortar retail space, Barnes & Noble is the dominant book retailer in the U.S. Its stores are projected to produce some $300 million in earnings and $200 million of free cash flow in the current fiscal quarter. Based on a modest multiple of four on this year's estimated pre-tax flow, shares could be worth at least $19.

Barnes & Noble has a solid balance sheet that boasts net cash of $73 million. The company's cumulative market value is slightly more than $1 billion. Maxim Group analyst John Tinker, who recently reiterated his Buy rating on shares, has a $30 price target.

That why shareholders shouldn't give up on Barnes & Noble yet. Just like a good book that's opened with expectations and closed with profits, Barnes & Noble could also pleasantly surprise. 

Diane Alter has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. 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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