If you need a book right now, you have a limited set of options. Buying it online is out, as it doesn't fulfill the "right now" requirement. A used or local bookstore would be a great bet if the book is popular, but if it's not -- and sometimes even if it is -- you're probably out of luck. I'll put in a plug for the local library, but let's say you want to own the book. What are you left with -- Barnes & Noble (NYSE:BKS).
Barnes & Noble runs over 650 retail locations and another 700 college locations across America. There is probably one near where you live or work, and if you want a book right now, it's probably where you'll have to go. That's not to say that Amazon.com (NASDAQ:AMZN) is a non-factor, but it still lacks the immediacy of Barnes & Noble. That's not everything, of course, but it's a starting point for a discussion about why Barnes & Noble is a stock I'm happy to hold onto.
Looking beyond the footprint
Having a lot of locations and being the number one brick and mortar book chain goes a certain distance, but if history has taught us anything, it's that bookstores aren't guaranteed a future just because they exist. The failure of Borders is the prime example of a business that rested on its laurels and was punished for doing so.
I hold onto Barnes & Noble because I think that it's more than just a large system for distribution. It's also a business that can make mistakes and not go out of business because its fundamental operations are strong. Even with the failure of the Nook and the rise of Amazon, Barnes & Noble has managed to survive and thrive.
In its last fiscal year, the retailer produced a free cash flow of $185 million. That didn't come out of nowhere, and over the previous two years the company actually lost cash. Barnes & Noble is a good company because it failed and managed to come back.
Investing in resiliency
We've established that Barnes & Noble has a competitive advantage and that its management has figured out how to navigate a failure, but what about the future of the company? Amazon is selling an estimated $5.25 billion in books annually, giving Barnes & Noble's $6.4 billion a run for its money. Amazon's revenue is likely to continue increasing as the company generates more e-books, more e-readers, and develops faster shipping. In order to believe that Barnes & Noble isn't a company that was good but that it is still good, we need to know what it's doing to fight for that market share.
First, it's given up on the Nook. The company is ditching the cash sucking Nook division in a spin-off that should be complete by spring 2015. The end of the Nook at Barnes & Noble is recognition that Amazon and other device manufacturers simply do it better and cheaper. By jettisoning the struggling business, Barnes & Noble frees itself up to focus on its core businesses -- which actually has some competitive advantage.
In dropping the Nook, Barnes & Noble can make more out of its retail locations by focusing within them. The Nook took up valuable real estate inside retail stores, and did nothing to help Barnes & Noble stem the drop in comparable sales that it has experienced recently. Comparable sales fell 5.1% in the most recent quarter, but if Nook sales are excluded, comparable sales were only down %0.4.
Finally, Barnes & Noble is still running its secretly awesome college store division, which often acts as a counterbalance to the rest of the business. Over the last three years, the division has pulled in a steady $1.7 billion, accounting for around a quarter of the retailer's annual revenue. That business continues to grow its footprint while shifting its business model -- from sales to rentals -- as the market demands.
Why I own Barnes & Noble stock
I own Barnes & Noble because it does what great companies do, it learns from its failures, and it plans for a future that focuses on its core strengths. Barnes & Noble is a business, that I like, selling products that I enjoy owning. While the distribution model is in constant flux, the demand for books is never going to disappear, and that gives me comfort.
In the end, I want to own businesses that I believe in and understand. Barnes & Noble is one of those businesses, and I'm happy to count myself among its shareholders.