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SeekingAlpha  Sep 14  Comment 
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It has been just over a full year since Barnes & Noble, Inc. (NYSE: BKS) finalized its spinoff of Barnes & Noble Education Inc (NYSE: BNED). On Thursday, shares of Barnes & Noble were trading lower by more than 3 percent while Barnes & Noble...


Barnes & Noble (NYSE:BKS) is the largest bookseller in terms of sales revenue in the United States.The company operates 1357 stores and an online retailer Barnes & Noble.com. Of the 1357 stores, 720 are Barnes & Noble book and music superstores and 637 are 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]

To mitigate the company's slower retail book sales, Barnes & Noble has put a large amount of resources into the developing eBook market. As the demand for portable and low-cost books increases, the market for eBooks and eReaders will grow as well. Barnes & Noble's Nook offers wireless connectivity and access to millions of books. The company does face intense competition in the relatively young market, primarily from Amazon's Kindle 2, which has many of the same features as the Nook. The two companies have been engaged in price wars over the eReaders, something that is risky for Barnes & Noble. The two competitors also face competition from non-exclusive eReadres such as Apple's iPad.

Company Overview

Barnes & Noble is the largest national general trade book publisher and retailer in terms of sales revenue. In 2010, the company's share of the consumer book market was approximately 16%.[2]

Business Segments[2]

Although the company does not give specific breakdowns of its business segments, it sells products in these general categories:

  • 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[5]

Barnes & Noble run four main business operations:

  • Barnes & Noble Stores (74.4% 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.
  • Barnes & Noble College Bookstores (14.4% of net sales): College stores were acquired in FY2010 and have not been reported in any annual data.
  • Barnes & Noble.com (9.9% 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.

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.[6]

Acquisition of Barnes & Noble College Booksellers

In September, 2009, Barnes & Noble 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 the company 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. Barnes & Noble acquired College for $514 million, which was previously owned by the company's Chairman Leonard Riggio.

Business Growth

FY 2010 (ended May 1, 2010)[3]

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.[7]

  • Barnes & Noble's net income for FY 2010 was $36.7 million, a decrease of 52% from the previous year. The company faced higher costs due to the acquisition of Barnes & Noble College. Additionally, the company's comparable store sales fell at its retail stores, which was offset slightly by higher online sales due to the Nook e-reader.
  • Barnes & Noble total sales increased 13.4% or $688 million, to $5.8 billion. The company benefited from $837 million in sales from the newly acquired College stores. During the year, sales at Barnes & Noble stores fell by 4.5% due to the weak economic environment as consumers bought fewer books. However, this was offset by a 24% increase in online sales due to the Nook e-reader and e-book sales.
  • Comparable store sales for Barnes & Noble stores and Barnes & Noble College stores fell 4.8% and 0.3% respectively. Comparable store sales from Barnes & Noble.com increased 24% due to the sale of e-readers and e-books.
  • Barnes & Noble closed 52 net stores during the year. The company opened 19 stores during the year -- 8 of which were Barnes & Noble stores and 11 Barnes & Noble College stores. Additionally, the company closed 71 stores, including 18 Barnes & Noble stores, 6 College stores, and its remaining 47 B. Dalton stores.
  • At the end of the year, Barnes & Noble operated 1,357 stores compared to the 777 it operated at the end of the previous fiscal year. The company's acquisition of Barnes & Noble College added 637 stores to its operations.

Q2 2010 (ended October 31, 2009)[8]

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.[7]

  • 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)[9]

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.[7]

  • 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)[10]

  • 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

Barnes & Noble Putting Itself Up For Sale

At the beginning of August 2010, the company announced that it was putting itself up for sale. The board enlisted Lazard as its financial adviser and Morris, Nichols, Arsht & Tunnell as its legal adviser. Company founder and top shareholder Leonard Riggio is considering bidding for the company as part of a larger investor group. There has also been some speculation that billionaire investor Ron Burkle is interested in the company. Others have noted the possibility of a merger with the company brick and mortar rival Borders Group (BGP). Regardless of whoever buys the company, the future ahead for Barnes & Noble is going to be a tough battle with other e-reader providers such as Amazon.com (AMZN) and Apple (AAPL).[11][12]

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.[13] According to the Association of American Publishers, in the first half of 2010 e-books made up 8.5% of trade book sales, compared to just 2.9% in 2009.[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. Amazon has taken a step at decreasing the effect of the iPad by launching the Kindle app, which allows users to read Kindle books on the iPad. Consumers can sync the iPad to their Kindle for free.[19]

Borders Group (BGP) also entered by eReader market with the Kobo. The Kobo is the simplest of all the eReaders because it offers just black & white text/pictures and does not have internet capabilities. It makes up for the lack of these features by having a low price -- the Kobo retails for $149 but comes with a $20 gift certificate.[20] The company hopes that its low price will attract marketshare away from the more expensive devices.

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.[10]

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.[21] 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 .


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. Barnes & Nobles competes on two fronts, with other physical retailers and with internet booksellers.

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, 175 "Waldenbooks" mall-based locations, and the UK based Paperchase. [22] 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.


  1. BKS 2010 10-K pg. 4
  2. 2.0 2.1 2.2 2.3 BKS 2010 10-K "Genera" pg. 3-4]
  3. 3.0 3.1 BKS 2010 10-K, Exhibit 13, pg. F-1
  4. MarketWatch "Get ready for the bookstore massacre: E-books are the future and Amazon dominates" 17 August 2010
  5. BKS 2010 10-K "Segmetns" pg. 5-19
  6. BKS 2010 10-K "Discount Pricing" pg. 7
  7. 7.0 7.1 7.2 BKS Press Release "Barnes & Noble Provides Business Update and Guidance for Fiscal 2010 Second Quarter and Full Year" 8 Oct 2009
  8. BKS Q2 2010 Report
  9. BKS Q3 2010 Report
  10. 10.0 10.1 BKS Q4 2009 Report
  11. New York Times "Biggest U.S. Book Chain Up for Sale" 3 August 3010
  12. Yahoo Finance! "Biggest U.S. Book Chain Up for Sale" 3 August 2010
  13. ZD Net "Kindle vs. Nook: The price war is on; E-reader shipments to surge?" 21 June 2010
  14. New York Times "Quick Change in Strategy for a Bookseller" 11 August 2010
  15. Barnes & Noble "Nook"
  16. Amazon "Kindle 2"
  17. ZD Net "Amazon's Kindle in crosshairs: Barnes & Noble cuts nook prices as e-reader war heats up" 21 June 2010
  18. Gizmodo "Apple iPad eBook App is called 'iBooks'" 27 January 2010
  19. Amazon.com "Kindle for iPad"
  20. Crunchgear "Borders’ Kobo e-reader now comes with $20 gift certificate; iPhone, iPad App now available" 22 June 2010
  21. Internet Retailer "BN.com’s sales up 17.9% in Q2—thanks mostly to Harry Potter" 23 Aug 2007
  22. BGP 2009 10-K pg. 1
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