Market Mad House

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

The Death Spiral

The Strange World of Barnes & Noble

It’s a very strange time for Barnes & Noble (NYSE: BKS). Even though the retailer has been closing locations right and left, its biggest and most merciless competitor, Inc. (NASDAQ: AMZN), just validated its business model by opening a brick-and-mortar bookstore of its own.

To add to the strangeness, Barnes & Noble is making some weird moves of its own, such as inviting adults in to play with crayons, hosting 3D printing days and selling a wide variety of items that have nothing to do with books. The idea here is to prove that Barnes & Noble and brick-and-mortar bookstores are still relevant in today’s world.


Like other category killers such as Bed, Bath & Beyond (NASDAQ: BBY) and Toys R Us, Barnes & Noble is struggling to simply survive in today’s retail environment. To do that, the company has to provide both deep discounts and a really fun shopping experience to customers.

Barnes & Noble Has Some Advantages

Okay, Barnes & Noble does have a few advantages here that category killers like Toys R Us lack. These include:

  • A largely upper middle class clientele with more disposable income. Unlike Toys R Us, it is not chasing middle and working class customers with shrinking incomes.


  • Not competing directly with deep discounters like Walmart Stores Inc. (NYSE: WMT) and Dollar General (NYSE: DG) like Bed, Bath & Beyond does. Yes, Walmart sells books, but its selection is miniscule compared to Barnes & Noble. Serious book shoppers simply do not go to Walmart for books.


  • Urban locations and an urban-themed chain in an increasingly urban country.



  • Loyal customers.


  • A fun shopping experience that lures in customers. People go to Barnes & Noble for other reasons, such as to drink coffee, hang out, or meet the author. One problem that chains like Walmart and Toys R Us face is that they are not fun places to shop. The customer experience they provide often gives people an excuse to shop online.


  • The disappearance of rivals such as Borders, which gives it a clear playing field.


  • Lots of excellent retail locations. This includes very impressive stores, some of which sit on prime street corners in major cities.

Barnes and Noble1

Barnes & Noble’s Problems

Despite those attributes, Barnes & Noble has a host of problems, many of them financial. These problems seem to outweigh its strengths and threaten its survival. Some of the biggest problems that Barnes & Noble faces include:

  • Shrinking revenue: In July 2012 Barnes & Noble reported a TTM revenue of $7.164 billion; by July 2013 that number had shrank to $6.71 billion, by July 2014 that number had fallen to $6.288 billion and by July 2015 it had sunk to $6.051 billion. This is bad because it indicates that Barnes & Noble’s business is shrinking if not disappearing before its eyes.


  • Basically, the company has not yet figured out how to reverse its revenue losses despite store closings and spinning off Barnes & Noble Education (NYSE: BNED), a strategy reminiscent of Eddie Lampert’s maneuvers over at Sears Holdings (NASDAQ: SHLD).


  • Limited income: On July 31, 2015, Barnes & Noble reported a net income of $30.17 million, which was its best figure in a long time. As recently as July 2013 it reported a net income of -$205 million. Its income is rising—in July 2014 it reported a figure of $11.31—but it is still very low for its revenue stream.


  • A profit margin of -2.86%.


  • Negative cash flow: Barnes & Noble reported a free cash flow figure of -$24.21 million on July 31, 2015, better than the -$172.16 million it reported in July 2014 but nothing to write home about.


  • Cash and short-term investments of just $37.19 million on July 31, 2015, which means this chain could quickly run out of money and go into the death spiral. The death spiral occurs when a retailer’s revenues are simply too low to cover its operating expenses. For a textbook example of such a tragedy, see Sears.


  • Inability to match’s vast selection and deep discounting. One problem here is that books can be shipped at the cheapest rate through the United States Postal Service, media mail or book rate. That makes it very easy for Amazon to peddle books at low prices. Another danger is that there are vast numbers of independent dealers such as myself peddling used books through Amazon and eBay, often at very low prices. This puts Barnes & Noble in an impossible situation; it simply cannot match either the prices or selection of its biggest competitor.


  • Shrinking retail foot traffic. This really hurts Barnes & Noble because a lot of its business is drop-in customers that come in to sit down or take a break from their shopping. If those people are sitting at home in front of the computer, they are not likely to drop in at Barnes & Noble.


  • Disappearance of traditional bookstores has convinced many consumers that the only place to shop for books is online.


  • Failure of its digital book brand, Nook, which lost $34.9 million in the first quarter of 2015, according to Bloomberg Business. Amazon’s Kindle has won the e-book wars.


Why Barnes & Noble Is a Takeover Target

Barnes & Noble is a company on very shaky ground, much like Rite Aid, and it is looking more and more like a takeover target. What makes Barnes & Noble a takeover target is that it is very cheap.

This is a company that generated $6.05 billion in revenue that was trading at $13.46 a share at the close of business on November 6, 2015. That gave Barnes & Noble a market capitalization ($989.32 million) that was lower than its enterprise value ($1.027 billion). If that does not sound like a takeover target, I do not know what does.

Okay, so who would take over Barnes & Noble? The most likely candidate would be a hedge fund or private equity investor trying to get its hands on some of the assets, such as Nook and its 647 stores. Barnes & Noble’s brand is also a valuable commodity, particularly online.

Would Buy Barnes & Noble?

An intriguing possibility is that would buy Barnes & Noble. Amazon is getting into the brick-and-mortar book business with locations that look a lot like Barnes & Nobles. The Barnes & Noble brand would be an asset to Amazon.

Amazon certainly has the cash for such an acquisition. The Everything Store reported holding $14.43 billion in cash and short-term investments on September 30, 2015.


Jeff Bezos is also a book lover who has a history of buying historic institutions to preserve them. He bought The Washington Post two years ago to save it. “Saving” Barnes & Noble would give Bezos a lot of good publicity among bibliophiles, although it would lead to entanglements with the Federal Trade Commission (FTC). The FTC would probably demand Amazon spin off Nook in order to avoid antitrust laws.

One strong possibility here is that Barnes & Noble will either spin off Nook into a separate company or sell it to a company such as Alibaba Holdings (NYSE: BABA). That would make it easier for Amazon to buy up Barnes & Noble or some of its locations.

No matter what happens, Barnes & Noble is unlikely to survive as a separate company. It will either collapse completely or get taken over in the near future.

Disclosure: Your blogger conducts book sales through and makes some money from them.