|
|
 | | | |
- close
- close
- close
- close
Suggest other news sources for this topic
WIKI ANALYSIS
Barnes & Noble (NYSE:BKS) is the largest bookseller in terms of sales revenue in the United States. As of the end of FY 2010, the company operated 1357 stores and an online retailer Barnes & Noble.com. Of the 1357 stores, 720 were Barnes & Noble book and music superstores and the 637 Barnes & Noble College Bookstores.[1] Its core business model relies on building local bookstores with comprehensive selection, attractive discounts and membership discount programs, and a community-gathering-place environment (e.g., the inclusion of a Starbucks cafe in each Barnes & Noble store).[2]
Barnes & Noble has been suffering from diminishing margins as sales in the company's retail store struggle -- company-wide operating margin fell from 2.8% to 1.3% in FY2010.[3] Declining operating margins were mainly caused by higher discounts offered to compete with lower-priced online booksellers, one of the main negative pressures the print industry is facing right now due to a number of negative industry trends. [4]
Compounding this digital effect is the onslaught from e-commerce companies such as Amazon.com (AMZN) and retail superstores such as Wal-Mart and Costco Wholesale (COST), which have the ability to significantly undercut brick and mortar retailers' prices on books, CDs, DVDs and other offerings. Though BKS has a website, 89% of their sales come from their B&N locations, and this pricing pressure from both online booksellers and retail giants has squeezed margins.[3] In addition, the advent of digital media devices to facilitate book reading, such as the Kindle 2 produced by Amazon and the iPad, also threaten the market share of print book retailers, as digital devices offer more portability (the Kindle 2 already has more than 200,000 books available) and price competition. In fact, BKS closed Q1 2009 with a 4% decrease in sales revenue,[5] whereas Amazon.com (AMZN) saw its 1Q 2009 sales revenue for books, CDs, music, and DVDs jump by more than 7%, largely due to the popularity of its Kindle 2 device and Kindle books.[6]
Company Overview
Barnes & Noble is the largest national general trade book publisher and retailer in terms of sales revenue. In 2008, the company's share of the consumer book market was approximately 16.2%.[2]
Business Segments
Although the company does not give specific breakdowns of its business segments, it sells products in these general categories:[2]
- Books: Barnes & Noble stores offer a comprehensive selection of titles of trade and mass market books, ranging from 60,000 to 200,000 titles per store. Bestsellers represent 3-5% of all BKS sales.
- Music/DVDs: Many Barnes & Noble stores have music/DVD departments, which range in size from 1,300 to 6,000 square feet and typically stock over 30,000 titles. The company’s DVD selection is focused on foreign films, documentaries and episodic TV shows.
- Periodicals: Stores sell popular magazines and journals
- Children's Books
- Cafe: Each Barnes & Noble store features a cafe, operated by its partner Starbucks (SBUX).
Business Operations
Barnes & Noble run four main business operations:
- Barnes & Noble Stores (89% of net sales): The company generates a majority of its revenue through its 720 Barnes and Noble stores which are located in all 50 states in the United States. These stores range from 10,000 to 60,000 sq. ft. in area depending on market size. The stores operate under a "community store" concept and provide more than just books to the public. Each is equip with a Starbucks cafe, children's, music/DVD, and magainze sections. In addition, each store has a calendar of events of which activities include author appearances and children’s activities.[2]
- Barnes & Noble College Bookstores (n/a): College stores were acquired in FY2010 and have not been reported in any annual data.
- Barnes & Noble.com (9% of net sales): Customers can buy books directly from the company through the website, which receives 365 million visits annually.
- Other (1% of net sales): This section primarily includes all the sales of the Sterling Publishing, a wholly-owned subsidiary of Barnes & Noble. In July 2009, the company announced that it was consolidating its publishing functions and eliminating jobs as a result of weaker sales due to the recession.[7]
Discount Pricing
Barnes & Noble offers discount pricing to compete with online discount retailers such as Amazon.com (AMZN) and EBay (EBAY) and large discount retailers such as Wal-Mart (WMT) and Costco Wholesale (COST). For hardcover bestsellers, the comopany offers discounts at 30% off suggested retail prices, and 20% discount off of select Children's books and computer reference books. The Barnes & Noble membership, for an annual fee of $25, offers greater discounts on all bestsellers and other merchandise for sale in Barnes & Noble stores.[8]
Sale of Stake in Calendar Club
In an effort to cut under-performing segments of its business to compensate for pressures from decreasing profitability and the the recession, in early 2009, Barnes & Noble sold its 74% stake in Calendar Club, a maker and retailer of specialty calendar products, games, puzzles, and music, for after-tax proceeds of $9.7 million. In 2008, Calendar Club contributed $113 million to the company's total sales, but contributed negligibly to the company's earnings per share.[9]
Acquisition of Barnes & Noble College Booksellers
On September, 2009, BKS finished the acquisition of Barnes & Noble College Booksellers ("College"), finally reuniting the Barnes & Noble brand. College is a leading contract operator of college bookstores in the United States, operating more than 600 college bookstores and serving nearly 4 million students and a quarter of a million faculty members. Acquiring College gives BKS a predictable and growing revenue stream because the company makes money by selling textbooks, course related materials, emblematic apparel and gifts, trade books, school and dorm supplies, and convenience and café items. BKS acquired College for $514 million, which was previously owned by BKS Chairman Leonard Riggio.
Business Growth
FY 2008 (ended Jan 31, 2009)[3]
- At the end of FY2008, BKS operated 778 stores, a net decrease of 20 stores when compared to the 798 stores open at the end of FY2007. However, due to the fact that new stores opened were on average larger in area, BKS's retail square footage increased 2.2% to 18.9 million sq.ft. in FY2008.
- In FY2008, total sales was $5.12 billion, a decrease of 3.1% from $5.29 billion in FY2007.
- Comparable store sales decreased 5.4% in FY2008 for Barnes & Noble stores that have been opened one year or more, and comparable sales for Barnes & Noble.com decrease 1.3%. Sales per retail square footage decreased to $271.0 in FY2008, a 5.2% decrease from last year.
- Net income decreased 44.1% from FY2007, totaling $75.9 million, or 1.5% of net sales revenue.
- Operating profit margin decreased 100 bps from FY2007, totaling $143 million, or 2.8% of net sales revenue.
Q2 2010 (ended October 31, 2009)[10]
On September 30, 2009, the company announced a change to its fiscal year calendar as a result of the Barnes & Noble College Booksellers acquisition. The Company’s 2010 fiscal year now encompasses the period from May 3, 2009 to May 1, 2010. Q2 of FY2010 is the period from August 2, 2009 to October 31, 2009, which previously would have been Q3 of FY2009.[11]
- Barnes & Noble's net income decreased year-over-year, from -$18.2 million in Q3 2008 to -$23.9 million in Q2 2010 as a result of recessionary pressures from the economics downturn.
- Net sales was $1.16 billion in Q2 2010, up 4.3% from net sales of the prior-year quarter. The company attributes the gain in sales to a 9.4% increase in Barnes & Noble.com sales. This increase was offset by a 2% decrease in Barnes & Noble stores, which fell as a result of a 3.2% decline in comparable store sales. In addition, B. Dalton sales decreased $3.6 million or 26.7%.
- Total sales include Barnes & Noble College Bookstore ("College") sales of $65 million for the period September 30, 2009 to October 31, 2009. College comparable store sales decrease 0.2% during this period.
- SG&A expenses increased 3.4% during the quarter. In addition, cost of sales and occupancy increased $41.5 million or 5.3% from the quarter a year ago.
- At the end of the quarter, the company operated 725 Barnes & Noble stores, 636 Barnes & Noble College Bookstores and 50 B. Dalton stores. During the quarter, four Barnes & Noble stores were opened and three were closed.
Q3 2010 (ended January 30, 2010)[12]
On September 30, 2009, the company announced a change to its fiscal year calendar as a result of the Barnes & Noble College Booksellers acquisition. The Company’s 2010 fiscal year now encompasses the period from May 3, 2009 to May 1, 2010. Q3 of FY2010 is the period from November 1, 2009 to January 30, 2010, which previously would have been Q4 of FY2009.[11]
- Barnes & Noble's net income decreased by 1% from $81.2 million in Q4 2008 to $80.4 million in Q3 2010 as a result of recessionary pressures from the economics downturn. The decrease in net income was a result of higher operating expenses and lower sales.
- Net sales was $2.2 billion in Q3 2010, up 33% from net sales of the prior-year quarter. The company attributes the gain in sales to College Bookstore's $566 million in sales -- this was the first full quarter of College's financial results since the acquisition. Higher sales was also attributed to the 32% increase in Barnes & Noble.com sales, which rose to $210 million. The increase in sales was offset by a 4.7% decline in Barnes & Noble store sales, which fell to $1.4 billion as a result of a 5.5% decrease in comparable store sales.
- Comparable store sales fell 5.5% for Barnes & Noble stores and fell 1.3% for College stores (however during the "back-to-school rush" period (five week period ending February 6, 2010), comparable store sales only fell 0.2%).
- SG&A expenses increased 23% during the quarter. In addition, cost of sales and occupancy increased $550 million or 41% from the quarter a year ago. The drastic increase in expenses can be attributed to the acquisition of College stores.
- At the end of the quarter, the company operated 719 Barnes & Noble stores, 639 Barnes & Noble College Bookstores. During the quarter, three Barnes & Noble stores were opened and nine were closed; three College stores were opened; and the company closed the remaining 46 B. Dalton stores.
Q4 2010 (ended May 1, 2010)[13]
- Net sales increased 19% to $1.3 billion. Barnes & Noble.com sales increased 51% to $141 million due to the sales of ebooks. This was offset by a 3.1% decline in comparable Barnes & Noble store sales.
- The company reported a net loss of $32 million a decline from the net loss of $2 million in the previous year's quarter. Higher sales were offset by a 23% increase in operating costs.
- At the end of the quarter, the company operated 720 Barnes & Noble stores and 637 College bookstores.
Trends and Forces
The eBook Revolution
The electronic book (eBook) revolution has arrived. Electronic readers (eReaders) offer portability and storage, language attributes, low cost for book purchases, access to millions of free books, and a smaller carbon footprint compared to print books among other benefits. As a result, eBook demand has skyrocketed, with revenue in the industry reaching $398 million in 2009 and expected sales to be $2.5 billion by 2013.[14] The eBook revolution has spurred companies like Barnes & Noble and Amazon to develop their own eReaders. The two top eReaders in the market by sales are Barnes & Noble's Nook and Amazon's Kindle 2.
The Nook offers more than a million titles, of which 500,000 are public domain books from Google Books. The device comes with 2GB of memory (which can hold 1,500 eBoooks, has an expandable microSD slot for additionally memory, an LCD color touchscreen, free lending of certain eBooks for up to 14 days and is ePub format compatible (meaning that books bought from other stores would be compatible with the device. The Nook comes in two versions, the Wi-Fi Only and 3G + Wi-Fi, which are differentiated by internet connectivity.[15]
The Kindle 2 offers 600,000 books for purchase and more than a million free titles and many. The device has 3G connectivity, a built in keyboard, a PDF reader, and text-to-speech capabilities.[16]
Because both companies sell book titles for $9.99, the sale of eReaders is the primary competitive business and has resulted in price wars between the two companies. In the summer of 2010, Barnes & Noble reduced the price of its Wi-Fi Only and 3G + Wi-Fi Nook devices by $50 to $149 and $199 respectively. In retaliation, Amazon reduced the price of the Kindle 2 by $60 to $189.[17] It is extremely risky for Barnes & Noble to engage in price wars with online retailers like Amazon because Barnes & Noble only generates its revenue from one source, selling books, whereas Amazon sells all kinds of items and its revenue isn't depended on the sale of its eReaders. If Barnes & Noble decreases the price of its eReaders to the point where margins are too low, the company will see negative impacts on its bottom line.
The Nook and Kindle 2 aren't the only eReaders on the market -- the two devices face competition from Apple's iPad. Although the iPad isn't just an eReader, it does have its own ebook store called iBooks, which is very similar to what Barnes & Noble and Amazon have. The iBooks store sells books from publishers like Penguin, HarperCollins, Simon & Schuster, Macmillan, and Hachette. iBooks prices are slightly higher than those of its competitors (selling at $15 per book), but the price is expected to fall once more iPads are distributed. In addition, Apple is using ePub, meaning that e-books from other stores might work on the iPad.[18] The iPad plays a role in the Nook vs. Kindle 2 face-off by stealing market share from both competitors.
From Traditional to the Digital Market
Much of the slowdown in the sales revenue of the print retailers may be attributed to the increasing popularity and convenience of online retailers, especially Amazon.com. Many online retailers are also a part of the CD and DVD retail segment, where Barnes & Noble has limited its exposure so as not to suffer from lagging sales of CDs due to digital media devices mp3s), another edge for online retailers. To compete in the e-commerce sphere, Barnes & Noble established its own online retailing [website]. The company's online site has generated the most growth as online sales in Q2, Q3, and Q4 2010 increased by 9.4%, 32%, and 51% respectively. During the same periods, sales at retail stores fell 2%, 4.7%, and 3% respectively. Barnes and Noble says that in the 12 months since the company launched the Barnes and Noble ebookstore, the company's share of the digital market already exceeds its share of the retail book market. The company doesn't expect that growth of the online segment will halter, estimating that online sales will grow by 75% in FY 2011 to $1 billion.[13]
Dependence on Bestsellers to Drive Traffic
Bestsellers account for between 3% and 5% of total sales at Barnes & Noble,[2] and that percentage has been on the rise, especially with the release of books like the Harry Potter series. For example, the Barnes & Noble's sales were up 17.9% after the release of Harry Potter and the Deathly Hallows, the seventh book (and possibly final book) of the popular series.[19] The popularity of bestsellers is important, because the release of a popular title drives traffic to bookstores. Due to widespread availability of popular titles from both online retailers like Amazon.com and mass merchants like Wal-Mart, Barnes & Noble must discount bestsellers up to 40% off the publishers’ suggested retail price in order to be competitively priced to consumers. Because of the popularity of bestsellers, particularly around the holiday season, Barnes & Noble can produce strong same store sales numbers, but the heavy discounts negatively impact profit margins .
Competition
The retail book market is slow to change and is at this point closed off from new superstore entrants. Barnes & Nobles looks to use its strong position as the leading U.S. bookseller to capitalize on its contracts with Starbucks for in-store cafes to maintain and grow its market share. BKS competes on two fronts, with other physical retailers and with internet booksellers. [20]
Traditional Book Retailers
Barnes & Noble competes with other companies who share its model of having massive book superstores with thousands of titles.
- Borders Group (BGP): Borders is the second largest book retailer in the U.S. and the largest mall-based bookseller in the country. The company operates 511 domestic superstores, 475 "Waldenbooks" mall-based locations, and the UK based Paperchase. [21] Barnes & Noble could take market share away from Borders as mall-based retail slows down in favor of one-stop shopping at retail megastores like Wal-Mart. Another advantage that Barnes & Noble has over Borders is that their online store is much more established.
- Books-A-Million (BAMM): Books-A-Million is a book retailer primarily in the southeastern US and is the third-largest book retailing chain in the country. It operates 220 stores in 19 states and Washington, DC. The company has modeled its stores after Barnes & Noble, promoting its larger Books A MIllion stores as an inviting community gathering location while placing smaller square-footage stores in malls.
Online Booksellers
Amazon.com is the largest online competition for Barnes & Noble. Formerly partnered with Borders, Amazon offers the convenience of never having to leave your home to buy a book. Additionally, without some of the overhead inherent for B&M stores, Amazon.com can offer low prices or free shipping, leading to further price competition. Amazon also competes with Barnes & Noble's Nook in the eReader market with the Kindle 2.
Retail Megastores
Wal-Mart and Target are the main retail megastores, which sell everything from books to clothes to groceries. Despite not being a core sales segment of their business, these larger stores have had an impact on the sale of books by making best sellers more widely available. This puts pressure on traditional book retailers like Barnes & Noble to cut prices on bestsellers to retain store traffic, leading to diminished margins.
References
- ↑ BKS 2008 10-K, Part 1, pg. 3, 7-8
- ↑ 2.0 2.1 2.2 2.3 2.4 BKS 2008 10-K, Part 1, pg. 3
- ↑ 3.0 3.1 3.2 BKS 2008 10-K, Exhibit 13, pg. F-1
- ↑ MSN Money "Will Barnes & Noble win the book wars?" 16 April 2008
- ↑ Yahoo Finance "Barnes & Noble posts $2.7M 1Q loss as sales drop" 21 May 2009
- ↑ Reuters "Amazon beats Q1 sales, profit estimates, shares up" 23 April 2009
- ↑ Yahoo Finance "Barnes & Noble consolidates publishing functions" 17 July 2009
- ↑ BKS 2008 10-K, Part 1, pg. 5
- ↑ Trading Markets "Barnes & Noble sells interest in Calendar Club" 27 Feb 2009
- ↑ BKS Q2 2010 Report
- ↑ 11.0 11.1 BKS Press Release "Barnes & Noble Provides Business Update and Guidance for Fiscal 2010 Second Quarter and Full Year" 8 Oct 2009
- ↑ BKS Q3 2010 Report
- ↑ 13.0 13.1 BKS Q4 2009 Report
- ↑ ZD Net "Kindle vs. Nook: The price war is on; E-reader shipments to surge?" 21 June 2010
- ↑ Barnes & Noble "Nook"
- ↑ Amazon "Kindle 2"
- ↑ ZD Net "Amazon's Kindle in crosshairs: Barnes & Noble cuts nook prices as e-reader war heats up" 21 June 2010
- ↑ Gizmodo "Apple iPad eBook App is called 'iBooks'" 27 January 2010
- ↑ Internet Retailer "BN.com’s sales up 17.9% in Q2—thanks mostly to Harry Potter" 23 Aug 2007
- ↑ BKS 2008 10-K, Part 1, pg. 11
- ↑ BGP 2009 10-K pg. 1
| |||||||
