Is Barnes & Noble Making Money?

When rummaging around in the stock market junk heap one occasionally finds some very interesting curiosities. Case in point; bookseller Barnes & Noble (NYSE: BKS), which is still hanging on despite the collapse of the traditional book business.

Barnes & Noble is still out there operating bookstores and it is cheap right now. Its shares were trading at $5.60 on 18 April 2018. Yet there is still some value at Barnes & Noble in the form of 633 stores at the end of 2017.

Barnes & Noble’s footprint is shrinking but not as fast as is commonly thought. It operated 640 stores at the end of 2016, and 633 at the end of 2017, Statista reported. That is down from the peak 726 stores in 2008, but hardly the massive die-off most of us would expect.

A fascinating conclusion that can be made here is that Barnes & Noble’s business is more stable than is commonly believed. There is a possibility that store closings might plateau and the store might keep operating for a few more years or even decades.

Barnes & Noble’s Business is Unsustainable

That survival would only be possible if Barnes & Noble was making money which it is not. Barnes & Noble reported a loss of -$63.54 million and an operating loss of -$34.87 million for 1st Quarter 2018.

The company is also facing declining revenues, year to year revenues fell by 5.31% in 1st Quarter 2018, -7.85% in 4th Quarter 2017, -6.63% in 3rd quarter 2017 and -6.33 in 2nd Quarter 2017, Stockrow data indicates. Barnes & Noble’s revenues fell by a total of 26.153% in 2017.

Three more years of such revenue losses and Barnes & Noble will be out of business if not find a savior of some sort. Barnes & Noble reported revenues of $3.895 billion for 2017, down from $4.163 billion in 2016 and $6.069 billion in 2015.

The revenue figures tell us that Barnes & Noble’s business is unstainable. If the revenue shrinkage continues the chain will be gone in two to three years.

Does Barnes & Noble have any Money?

Disturbingly, dying retailers like Barnes & Noble have a destructive means of sustaining themselves; borrowing.

Credit is so cheap with today’s interest rates that they can simply borrow to finance operations. That often leads to a vicious cycle in which the chain borrows to pay the bills; then borrows some more to pay the loans, until it finds itself buried under a mountain of unstainable debt and simply collapses. This is what happened at department store operators like the Bon-Ton Stores (BONTQ). Bon-Ton went bankrupt and got delisted from exchanges because it was no longer able pay debts.

This does not appear to be the case at Barnes & Nobles it had $1.933 billion in liabilities on January 27, 2018. That was matched by $64.9 million in debt which is good. Instead, Barnes & Noble has dodged the debt bullet, probably because it can get vendor credit from the publishing industries.

How Long Barnes & Noble Survive?

Publishers can supply Barnes & Noble with books and defer payment until they sell. This business is risky because publishers can pull the plug at any time but it allows Barnes & Noble to stay in operation for now.

One reason why publishers do this is so that readers can see books and order them through Amazon (NASDAQ: AMZN) or Kindle. That means Barnes & Noble is operating an advertising medium for the publishing industry rather than a retail store which is sick.

Such a business model is destructive because Barnes & Noble still has expenses; such as rent, utilities, salaries, etc. It is also clear that Barnes & Noble has a hard time covering those expenses it reported a free cash flow of $194.19 million on 27 January 2018. That came from an operating flow of $214.63 million on the same day.

Can Barnes & Noble Generate more Cash?

The only way for Barnes & Noble to survive would be to generate more cash – but how> It is obvious Barnes & Noble cannot make much more money selling books, and you can only sell so many lattes at Starbucks.

An obvious solution would be to start moving other businesses into the stores. Fast food, especially quality fast operations like Shake Shack (NYSE: SHAK), QBODA, or Panera Bread Company (which is being bought by Krispe Kreme) would be a natural fit. So would Nordstrom’s (NYSE: JWN) Nordstrom Local locations which are small stores where people can pick-up Nordstrom merchandise and banks.

A fascinating idea would be to make a deal with Amazon (NASDAQ: AMZN) and put Amazon lockers and Whole Foods 360 or Amazon Go locations in Barnes & Noble locations. Whole Foods 360 is a small grocery store similar to an Aldi Whole Foods tested in Los Angeles. Whole Foods would be a good fit because it can operate cafes in Barnes & Noble stores.

Other uses would be to turn Barnes & Noble into a place where people can pick up and drop off Amazon merchandise. A very smart; and controversial move, for Amazon right now would be to buy Barnes & Noble. Since Amazon will need brick & mortar locations for its expansion why not Barnes & Noble’s 633 locations?

The idea is to reduce Barnes & Noble’s footprint to cut operating expenses, but make use of all the retail space it owns. If an Amazon deal was not available, what about adding a small box discount grocer like Trader Joe’s or Aldi to Barnes & Noble? Another solution would be leasing half of Barnes & Noble’s space.

Something will have to be done and fast if this chain is to survive. My prediction is that Barnes & Noble will collapse within the next two years.

The brand might survive but as a very different company. Investors should stay away because there is little chance of a rescue for Barnes & Noble, this bookseller is doomed.