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In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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Can Barnes & Noble be saved??

The future of ailing bookstore operator Barnes & Noble (NYSE: BKS) might be brighter than many think. Strangely enough, the luxury department store Nordstrom (NYSE: JWN) has come up with a business plan that might save B&N from Amazon (NASDAQ: AMZN).

The high-end retailer has opened a 3,000-square-foot store it calls Nordstrom Local in on LA’s Melrose Place, The Los Angeles Times reported. The interesting thing about local is that it has very little merchandise, instead, it serves a customer service outlet for merchandise customers order from Nordstrom’s website.

The store even lacks racks, LA Times reporter Ronald D. White observed.

For example, Local has dressing rooms for clothing and a customer-service counter where shoppers can pick up orders or return merchandise. There’s also a “bar” where customers can get refreshments and a few other amenities.

The Brilliance of Nordstrom Local

The brilliant thing about Nordstrom Local is that it lets the department-store capitalize on all the empty locations created by the retail apocalypse at a very low cost.

Labor costs will be low, and there is no expense of shipping vast amounts of merchandise to a new store or setting up all the expensive displays and departments a regular department store requires. More importantly, Nordstrom Local can go anywhere on a small-town main street, a strip mall, a big city downtown, or an empty space at the local mall.

This allows Nordstrom to move into growing urban neighborhoods in big cities like Brooklyn or Denver’s Highlands. It also lets Nordstrom, invade retail-starved small towns like Canon City or Salida, Colorado, and gasp working classes neighborhoods.

A Nordstrom Local can move into a spot vacated by Radio Shack, Rite Aid, Aéropostale, Staples, Toys R’ Us, or a dozen other dying retailers. It allows Nordstrom to fill the void left by the mass die-off of department stores like Sears (NASDAQ: SHLD) and The Bon-Ton Stores (NYSE: BONT) without the expense of opening a 154,000-square-foot department store.

How Cloning Nordstrom Local can save Barnes & Noble

Adopting the Nordstrom Local template might help Barnes & Noble survive and thrive in the age of Amazon.

If Barnes & Nobles were to turn its 632 U.S. stores; many of which already have coffee shops, into something like Nordstrom Local it would be on the cutting edge of retail. A model might be a few shelves of popular books, and displays for products that can be ordered online and shipped to customers’ homes.

A truly smart move would be for Barnes & Noble to team up with Amazon and offer returns and pick up of merchandise from that brand. Another would be to team up with Nordstrom and put a Local into B&N locations.

The smartest move of all would be for Amazon or Nordstrom to acquire Barnes & Noble and convert its stores into local retail outlets. This would head off Walmart’s aggressive push into same-day delivery and online ordering.

One has to wonder why Jeff Bezos bought Whole Foods instead of B&N because Barnes and Noble’s stock is cheap right now. After all, Amazon has been experimenting with brick and mortar bookstores that look a great deal like Barnes & Noble locations.

Barnes & Noble had a stock price of $7.30 a share on 16 October 2017. That created a market capitalization of $530.19 million and an enterprise value of $598.68 million on the same day.

Is Barnes & Noble Making Money

Barnes & Noble certainly needs to do something right now, because it is in deep dark trouble. Revenues at the bookstore have been dropping steadily for some time.

Barnes & Noble reported revenues of $5.017 billion in July 2015, that number fell to $4.099 billion in July 2016, and $3.834 billion in July 2017. From that figure, it looks as if B&N is not capable of generating enough sells to cover its’ expenses.

This is reflected by Barnes & Noble’s net income which was $25.66 million on 31 July 2017. That figure is actually an improvement over the $3.99 million loss, the bookstore reported in July 2016. It is also close to the $30.17 million in income Barnes & Noble achieved in July 2015.

Despite that Barnes & Noble is having a hard time keeping its’ cash. It reported a negative free cash flow of -$7.883 million on July 31, 2017. Barnes & Noble also reported $11.98 million in cash and short-term investments and $130.44 million in cash from operations on July 31, 2017.

Barnes & Noble is Out of Cash

These numbers make it clear that Barnes & Noble is not generating enough cash to sustain its’ operations. One has to wonder if the publishing industry is subsidizing Barnes & Noble with vendor credit.

An easy way to do that would be to supply books to B&K and simply not collect the bills for them. This might give Barnes & Noble just enough revenue to pay the bills and stay open. The problem with that is the publishers themselves will run out of money sooner or later.

A danger here is that the publishers will stop shipping books to Barnes & Noble or worse demand payment for their products. That might lead to a debacle like the one at Sears where CEO Eddie Lampert is suing vendors that will not ship his stores merchandise the company cannot pay for or sell.

An obvious development is that Barnes & Noble will have to stop paying the dividend. Its’ shareholders received a 15¢ payout on October 5. Another would be that Barnes & Noble will have to sell assets to raise cash.

Barnes & Noble is Doomed

Those assets might be far valuable than people think. Many Barnes & Noble stores would make ideal locations for Amazon Bookstores, TJX (NYSE: TJX) Home Sense or Home Goods, or for Nordstrom Local outlets. They would also be great locations for a smaller Whole Foods 360 store, perhaps something that would combine groceries, books, and Amazon customer service.

Nordstrom has demonstrated that retailers like Barnes & Noble might have more value than many people think. Unfortunately, that value is not presently being exploited in any sort of meaningful way. Barnes & Noble is doomed without an acquisition or a radical change in business plan.