The Slow Agonizing Death of Barnes & Noble
Barnes & Noble (NYSE: BKS) is increasingly like a villain or hero in a bad action movie. It is simply taking too long to die.
The bookstore operator keeps hanging on as other retailers die like flies around it. The most recognizable of the “category killers,” Toys R’ Us finally bit the dust in March. Brookstone; a mall icon of the 1980s age of ridiculous consumption, plans to shut down its mall stores.
Strangely enough, Brookstone might survive because it is selling 35 airport stores, The Washington Post reported. Brookstone sold high-end unusual items such as quirky gadgets and new technology in the malls.
Consequently, it was among the first retailers to get “Amazoned.” That is customers saw merchandise at Brookstone; but ordered it from “the Everything Store” instead of buying at the mall.
Category killers like Toys R’ Us and Barnes & Noble tried to make money by offering a high volume of items at steep discounts. The idea was to be the cheapest place in town to be toys or books. Obviously, Toys R’ Us was incapable of competing with Amazon; which can lower its prices in a flash.
Brookstone Dies but Barnes & Noble lives
Strangely enough, another early Amazon (NASDAQ: AMZN) victim Barnes & Noble is still hanging on.
Barnes & Noble currently operates around 630 stores in the United States down from 633 in 2017, Statista reported. This number is less than 100 under Barnes & Noble’s all-time high footprint of 726 stores back in 2008.
The bookstore keeps operating despite some serious losses. It reported a -$21.07 million net income loss and a -$25.54 million operating loss for 2nd Quarter 2018.
Nor is it making that much money, Barnes & Noble reported revenues of $786 million for 2nd Quarter 2018. That revenue was down by 4.2% when compared with 2017.
Why is Barnes & Noble Surviving?
This begs the question why is Barnes & Noble surviving. An obvious reason for the company’s survival is its high profit. Barnes & Noble reported a gross profit of $229 million for 2nd Quarter 2018 which is pretty high for a retailer.
Another is the nature of its business; Barnes & Noble’s operating costs are actually pretty low. Books do not spoil; they do not require refrigeration, or a special environment.
More importantly, the required attention from employees is minimal, all you need is somebody to stick the books on the shelf and dust them. Nor is that much security needed, the low cost of books, means no fancy security systems or special cases are needed.
This keeps labor and operating costs pretty low. It allows Barnes & Noble to generate just income to pay the rent, pay a few employees, and keep the doors open.
How the Retail Apocalypse Benefits Barnes & Noble
Strangely, the retail apocalypse is helping Barnes & Noble by killing off other chains. This leads to hundreds of empty stores, which gives landlords a strong incentive to keep chains like Barnes & Noble in business.
When stores like Toys R Us, close Barnes and Nobles is in a position to cut deals for their locations. The management can force landlords to renegotiate leases by threatening to move out. Management companies and landlords afraid of losing money, will reduce rents, or make other concessions to the remaining tenants.
Beyond, the potential of cheaper rent, Barnes & Noble becomes more of a destination because it is one of the few stores left. That makes it easier to attract foot traffic and to make partnerships with other retailers.
Why Amazon Should Buy Barnes & Noble
The most logical future for Barnes & Noble would be for Amazon to buy it. Owning Barnes & Noble would make a lot of sense for Amazon.
Such an acquisition would give Amazon 630 locations across the US to use as pickup and drop-off locations for merchandise and returns. Logically, local Barnes and Noble stores can function as neighborhood fulfillment centers for same-day delivery.
Other uses would be to add an Amazon GO automated convenience or a Whole Foods 360 small grocery store to Barnes & Noble locations. One logical profit center to add Barnes & Noble would be a café or deli operated by Whole Foods.
Buying Barnes & Noble would present difficulties with the Federal Trade Commission (FTC) for Amazon. Unfortunately, the bureaucrats at that agency would view Amazon buying Barnes & Noble as a “book monopoly.”
Most likely, Amazon would have to divest itself of a large portion of Barnes & Noble’s footprint to please the FTC. Apparently, the FTC would rather see Barnes & Noble die than survive as a part of a cutting-edge retailer.
Can Barnes & Noble Survive without Amazon?
Make take is that Barnes & Noble can survive without Amazon – if its management gets creative. The best strategy would be to convert as many locations into partnerships with other businesses as possible.
Since Barnes & Noble, already operates Starbucks (NYSE: SBUX) in its stores this not much of a stretch. Obviously, the best partner would be Amazon, but there are others Barnes & Noble can work with.
An interesting match would be a high-end grocer like Trader Joe’s or the Kroger (NYSE: KR) subsidiary Mariano’s. Other candidates are Trader Joe’s sister store Lidl (which has entered the US market) and the German-discount grocer Aldi.
Outside the grocery business, eateries like Five Guys and the Panera Bread Company to mind. Another fascinating team up would be Nordstrom (NYSE: JWN) which is developing Nordstrom Local stores that combine merchandise pickups with stylists, personal, shoppers and a lounge in Los Angeles.
Stay Away from Barnes & Noble Stock
There is one certainty about Barnes & Noble; investors should stay away from its stock. Given the recent revenue losses this company has no future without a drastic reorganization.
The situation is made worse by the 15¢ dividend paid on July 27, 2018. All the dividend proves is Barnes & Management’s irresponsibility. They tried to inflate the stock price by paying money that should be used to shore up the company out to investors.
It will be a miracle if that dividend survives another year. Barnes & Noble is a horrendous dividend stock, because the company lacks the resources to pay a 10.17% dividend yield.
For example Barnes & Noble reported a “free cash flow” of -$88.71 million and an “operating cash flow” of -$71.04 million on its operations for 2nd Quarter 2018. Therefore, the management got the dividend money by raiding operations and other cash.
The presence of a dividend at Barnes & Noble is a good reason not to buy this stock. Those who buy BKS for the dividend, will up with no dividend and a worthless stock.
Incredibly, Barnes & Noble was probably overpriced at $6.02 a share on August 10, 2018. My prediction is that this stock will collapse soon. Hopefully, some smart retail brain will take over the company and save this bookstore chain.
