Imagine this, you are running a business and one of your divisions is failing miserably. You think this business has a future and you get outside investors to prop it up. If the business continues to fail, do you keep pouring money in? This is the crossroads facing Barnes & Noble's (NYSE:BKS) NOOK business. Unfortunately for investors, neither the chairman nor the CEO seems to understand that this business is a lost cause.
Do they really believe this is a battle they can win?
With both the Chairman and CEO suggesting that Barnes & Noble needs to continue focusing on the NOOK business, investors should rightly question the wisdom of this decision. If you search for the top-selling tablets of 2013 , you'll find names like the Apple (NASDAQ:AAPL) iPad, the Samsung (NASDAQOTH:SSNLF) Galaxy Tab, the Amazon.com (NASDAQ:AMZN) Kindle Fire, the Google Nexus, and the Microsoft Surface among many others.
What you unfortunately won't find is many mentions of Barnes & Noble's NOOK products. One of the chief issues facing the company is the pricing and position of the tablets in respect to its peers. There is little doubt that Apple has positioned the iPad lineup as the "premium" option for tablet buyers. With the new iPad Air starting at $499 and the iPad Mini beginning at $299, Apple has clearly stated that it is not interested in the sub-$200 tablet market.
On the flip side, Amazon is more than willing to go price-to-price with almost anyone. From the Kindle Fire HDX 8.9" at $379 to the Kindle Fire HD 7" at $139, the company has the majority of the tablet market covered. Samsung also competes on price across the board with prices from $360 for the Galaxy Tab 3 to under $200 for several of the older models.
Barnes & Noble is priced to compete at the low end of the tablet market based on prices that top out at $149 . With the company's addition of Google Play and the hundreds of thousands of apps, this should be one of the best values in the marketplace today.
There is just one big problem
With NOOK device sales down more than 23 % in the first quarter of fiscal 2014, customers aren't getting the message that the NOOK is a great value. With digital content sales down nearly 16% on a year-over-year basis, not only are customers not buying the NOOK in droves, but they are also not using the devices to download content either.
With Apple reporting that the company's tablets generate 81 % of the world's tablet usage, and Amazon and Samsung fighting to strip away market share from the company, Barnes & Noble is left in the difficult position of a forgotten tablet player. Considering this market position, it's distressing that both the Chairman and CEO of Barnes & Noble see the NOOK business as critically important to the company's future.
With Amazon consistently reporting that the Kindle Fire is one of the most popular products on the site, and Apple reporting huge usage and sales through iTunes, Barnes & Noble is getting killed on both ends.
What they really should focus on
If the NOOK is an almost insurmountable challenge then what should Barnes & Noble do to turn its business around? The traditional retail business is clearly challenged with same-store sales down 9.1%. Even without strong sales last year, same-store sales would still have been down 2.9%.
With Amazon reporting better than 20% sales growth , it's tough to argue that the company isn't stealing business from Barnes & Noble. The company's college business is faring only slightly better with same-store sales down 1.2%.
One of the few positives in the last year was the company's improvement in its balance sheet. Last year, the company reported net long-term debt of over $280 million which compares a net cash position of $72 million this year. To be blunt, it appears that Barnes & Noble has cleaned up its balance sheet enough to be sold.
Some investors might actually believe that Barnes & Noble can survive on its own. The truth is, Amazon is killing the company's traditional business quarter-by-quarter. While Apple and Samsung battle for tablet supremacy, Amazon and Microsoft have their eyes set on moving up the ladder as well. In the tablet business, Barnes & Noble is less than an afterthought.
If the company hopes to have a future, it needs to put itself up for sale. Barnes & Noble isn't going to make it in the retail business longer term. Amazon will out price the company and with books, CDs, magazines, and movies moving toward digital distribution there will be less need for the traditional bookstore. The company's future is providing a quick retail fix to the large company without this retail exposure.
Investors might not like this conclusion, but it seems to be the only real possibility. If the company pours its resources into the flagging NOOK business, investors have seen this ending before...Borders.
Chad Henage owns shares of Apple and Microsoft. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, Google, 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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