WSJ: Investors Are Freaking Out About Barnes & Noble

[Fbone]

Originally Posted by markbot

the obvious buyer/partner for the nook is google. google is about to do their own tablets (they are buying motorola mobility). they could make the nook their 7" tablet or a flavor of their 7" tablet lineup. they could have a 10" tablet which they could integrate with content from B&N. B&N could be a show room for some google tablet products. google has their own online book store which they could cobrand with B&N. that makes some sense. google could integrate the nook into its overall mobile strategy better and they have deeper pockets to compete. google is a tech company, B&N isn't. but B&N has that relationship with the customer and a brand that is valuable and physical stores. it could become a fruitful relationship. tablets are strategically important for google so they may be able to pay the most for the nook.

but google will be thinking that they could buy the nook for $700M+, or whatever the price is, or they could just try to build that business themselves or integrate it with the overall tablet strategy. u can buy a lot of advertising with $700M.

those are some thoughts.

Interesting. Google certainly has the cash. Off hand I can't think of another company with the cash and experience that may want to take over B&N. Except a venture capital firm or Warren Buffet.

It's been very difficult for ereader companies to earn a profit. I am not sure any of them actually have.

[markbot]

Originally Posted by Fbone

Interesting. Google certainly has the cash. Off hand I can't think of another company with the cash and experience that may want to take over B&N. Except a venture capital firm or Warren Buffet.

It's been very difficult for ereader companies to earn a profit. I am not sure any of them actually have.

Well, Google would only be interested in the Nook part of the business, with a commercial agreement for integration with stores, etc.

Liberty Capital, a John Malone company, was thinking of buying out B&N but they settled for a convertible preferred I believe. So Liberty gets a nice dividend and are in the money on the options at like $17.

My reading is that if you really believe in the Nook and the ability to save the stores, then B&N is worth well more than $17. But I think they will ultimately come up short, and will thus be worth close to nothing in the end. This is why I think selling the Nook now, but with a partnership with Google, makes some sense since u retain the benefits of the Nook business, the upside and integration with the stores yet limit the downside (possible failure of Nook and the high cost of the business).

[Fbone]

Originally Posted by fjtorres

What I don't quite get is how, at 29% of the ebook market and $1.5 billion a year in sales, Nook could *not* be standalone profitable. At that scale, development and customer support costs should be practically noise and while hardware margins are clearly thin the content margins are plenty healthy. So, where the losses?
The only three ways I can see Nook as a money-losing proposition at this point is if:
- Their Nook hardware costs are way higher than Amazon's
- Their customers are getting their ebooks from places *other* than their ebookstore
- Their back-end/overhead is eating them up alive

Considering their aggressive hardware pricing over the last 18 months it would be the height of folly to be *forcing* a race to the bottom on hardware prices if either of those three were true, no?

Nook owners are purchasing content elsewhere plus the discerning shopper looks for "cheap reads." B&N has public domain and other free offerings, Friday's free book promo, and Overdrive library lending. All at no cost. Plus, all the non-Agency discounting. And the thousands of 99 cent books. The fewer people purchasing the $9.99+ titles the less money earned.

When you think about it $3 profit on a $10 ebook isn't much unless you're selling millions of them. And I am talking several hundred million books a year. We know they aren't doing those kinds of numbers. They may be doing better on newspaper and mag subscriptions as these are recurring purchases. A $20/month NYT sub probably nets them more than an ebook.

Hardware costs are eating them alive. They had to discount the NST from $139 to $99 to $79 (limited time) to $75 (limited time). Perhaps, earning $40 more a Nook would have made a big difference. And we don't know R&D, manufacturing costs, shipping, retailer markup, returns, etc.

The same is true with Amazon. Their 3rd quarter results very disappointing. Yes, they eeked out a small profit but warned they may lose money during the 4th quarter ... as much as $200 million. How costly was releasing 3 devices and the rest of their digital division? Enough to possibly wipe out all profit from the rest of the company during the busiest time of the year. Fortunately, Amazon has $450 million earned so far this year and can stand the temporary loss.

[Tony1988]

I think its a good idea actually to branch Nook off. As much as I like going to Bookstores ereaders and tablets are killing those businesses and its time for BN to change with the times.

No one should cry over this. Everyone who has an ereader are what helped (if not the main reason) killed the bigbox bookstores IMO. Smaller bookstores will take over for the customers who dont want an ereader and still want to buy the lastest hardcover releases.

It was a short but fun ride. Time to say goodbye now to these types of bookstores.

[SensualPoet]

Originally Posted by fjtorres

That *is* how it is sold in the partner outlets, no?
And it appears to be the way Amazon bookkeeps Kindle.

As a rule, retailers' overhead covers the cost of stocking and selling a product, unless they're receiving co-marketting or rebate funding. It makes sense to treat Nook as a separate product if it is to be a self-sustaining business at some point.

No, what B&N execs stated on their earnings call recently was that in-store costs like building kiosks were being born by B&N consumer retail, ie. not charged to the Nook division.

Third party retailers like Best Buy charge for space in their flyers, any premium space in stores (like end-caps) and certainly if they were to build a Nook kiosk (like Comcast was doing: 100% of that cost is born by vendor, not the Best Buy).

To the extent B&N consumer retailer has dedicated staff manning those kiosks, as well as other associated costs (floor space for example) -- not to mention any special incentives for the sales staff -- those are "hidden" subsidy costs that don't get charged back to Nook in the same way the identical practise in third party would. It just means the true cost of the Nook to B&N corporate is probably higher than what's been stated (in very general terms I might add) to date.

[Dimwit]

The Nook isn't the problem no matter how you swing it. B&N MUST have the Nook. Whether as an inhouse device or spun off to its own division, the thing that will separate the majors from the wannabees is the availability of an edevice. This is what is going to affect the Kobo, it may be the only other device than the Kindle left available if B&N goes down.

What the drag for B&N is right now is that they have too many B&M locations in bad areas. They have to shrink or the economy has to pickup to make those viable. Until that happens, cash flow is too tight.

[fjtorres]

Originally Posted by Dimwit

What the drag for B&N is right now is that they have too many B&M locations in bad areas. They have to shrink or the economy has to pickup to make those viable. Until that happens, cash flow is too tight.

Location is a part of B&N's overhead problem but the fact that they are diversifying their catalog beyond books points to the *size* of the locations as a bigger problem; they are simply not selling enough books to justify the size of the stores. Revenue per square foot is down and dropping further.

B&N needs revenue and if Nook isn't doing it fast enough...

[JJoyce]

Ok, it's been a while since I've been here, and reading this thread has reminded me of why that is.

This is possibly the most inane, delusional and just "out there" rambling I've possibly read in the last three months.

For those self proclaimed amateur financial wizards out there pulling a fantastic chicken little act, it's worth noting that investors AREN'T "freaking out" and it certainly has nothing to do with Lynch's statement regarding exploring options with the nook side of the business.

In fact, the announcement that B&N was exploring splitting off the nook side of the business was regarded positively and had a stabling effect on the market. Earlier that morning, B&N had issued a guidance statement in which they announced they were adjusting earnings downward, based on a few factors.

Understandably, the market didn't like that too much. So Lynch gets sent out to let investors know that the digital side is doing very well and therefore B&N is looking at its options for capitalizing on that success.

You people might want to stop your slavering over "the impending bankruptcy" of B&N to rejoin the rest of the world in reality.

The reality of it is that B&N has absolutely no intention of selling off the digital division, nor are they shopping it around. What that statement means is that B&N is looking in to the possibility of a spin-off for the digital/nook division, which has a lot of potential upsides in terms of favorable restructuring of debt and regulatory benefits such as potentially giving B&N the ability to offer ebooks without being required to collect sales tax due to physical presence (which is a huge advantage amazon has at present).

Bottom line...do you due diligence before leaping along with the other lemmings. There's a reason for the buy and strong buys outnumbering the sells.

[Tony1988]

Originally Posted by JJoyce

Ok, it's been a while since I've been here, and reading this thread has reminded me of why that is.

This is possibly the most inane, delusional and just "out there" rambling I've possibly read in the last three months.

For those self proclaimed amateur financial wizards out there pulling a fantastic chicken little act, it's worth noting that investors AREN'T "freaking out" and it certainly has nothing to do with Lynch's statement regarding exploring options with the nook side of the business.

In fact, the announcement that B&N was exploring splitting off the nook side of the business was regarded positively and had a stabling effect on the market. Earlier that morning, B&N had issued a guidance statement in which they announced they were adjusting earnings downward, based on a few factors.

Understandably, the market didn't like that too much. So Lynch gets sent out to let investors know that the digital side is doing very well and therefore B&N is looking at its options for capitalizing on that success.

You people might want to stop your slavering over "the impending bankruptcy" of B&N to rejoin the rest of the world in reality.

The reality of it is that B&N has absolutely no intention of selling off the digital division, nor are they shopping it around. What that statement means is that B&N is looking in to the possibility of a spin-off for the digital/nook division, which has a lot of potential upsides in terms of favorable restructuring of debt and regulatory benefits such as potentially giving B&N the ability to offer ebooks without being required to collect sales tax due to physical presence (which is a huge advantage amazon has at present).

Bottom line...do you due diligence before leaping along with the other lemmings. There's a reason for the buy and strong buys outnumbering the sells.

I think most of us understand that. They want to branch Nook off into its own which IMO is a good thing.

Still though BN itself most likely will either fold or downsize bigtime in the future.

[Xanthe]

The majority of the discussion has been about how the brick-and-mortar store is going to survive, whether or not the Nook is spun off into a separate division. That is neither inane nor delusional.

[kennyc]

Originally Posted by Xanthe

The majority of the discussion has been about how the brick-and-mortar store is going to survive, whether or not the Nook is spun off into a separate division. That is neither inane nor delusional.

[HarryT]

Does the WSJ really say "Investors are freaking out"? That doesn't sound like the sort of language that Wall Street Journal is prone to using.

[Kali Yuga]

Originally Posted by JJoyce

This is possibly the most inane, delusional and just "out there" rambling I've possibly read in the last three months.

Did you happen to make similar statements about Borders any time in the year or two before they went belly up?

Originally Posted by JJoyce

For those self proclaimed amateur financial wizards out there pulling a fantastic chicken little act, it's worth noting that investors AREN'T "freaking out" and it certainly has nothing to do with Lynch's statement regarding exploring options with the nook side of the business.

For most of December, their stock price was around $15. Now it's closer to $11 -- and staying there. I believe it hasn't been this low since... 1994?

Yeah, that's a "freak out."

(By the way, the title of the thread was is the exact title from a WSJ blog entry, which was posted at 9AM when the stock was down 29%.)

Originally Posted by JJoyce

Understandably, the market didn't like that too much. So Lynch gets sent out to let investors know that the digital side is doing very well and therefore B&N is looking at its options for capitalizing on that success.

Wow, you're pretty good at spin. Do you do this for a living?

Now, I'm definitely not doing equity research for JP Morgan -- and wouldn't be posting my opinions on an ebook forum if I was. That said, B&N does not have a rosy future.

They've lost almost $100 million since Q2 2009, and posted losses 8 out of the past 10 quarters; during that same time period, Amazon posted $2.33 billion in net income, and had no negative quarters. They're revising earnings down for 2012; they were unable to find a buyer earlier this year; Liberty openly admitted that investing in B&N was a "flyer." B&N certainly did not announce they're selling the Nook division next week, but breaking it out as a separate business does make that an easier option.

Plus, some of us have seen this before. B&N's in-store sales will likely pop up a bit for Q4 2011 -- because Borders disappeared earlier this year. However, as digital sales increase, the physical stores will lose sales and be harder to sustain. Their online division has never matched Amazon, nor has the Nook.

Now, in many respects B&N is much better off than Borders. Despite the proxy wars last year, they have a much more stable management; debt hasn't skyrocketed; they learned from their massive mistakes in developing online sales.

Still, their core business -- brick and mortar stores -- is slowly sinking, and it is fairly likely that it will take most of B&N down with it. (It's not going to end up much different than the music biz, and where can buy CD's now? Best Buy, Walmart and online.) I wouldn't be surprised in the slightest if they announce store closures in January or February.

Thus B&N will likely survive in some form, but it is already a shadow of its former self -- long gone are the days when they struck terror into the entire industry with a proposed merger with Ingram.

Originally Posted by JJoyce

Bottom line...do you due diligence before leaping along with the other lemmings. There's a reason for the buy and strong buys outnumbering the sells.

What is this, a Yahoo stock message board?

[BillSmithBooks]

While B&N may be okay-ish now, I think it's pretty clear that the brick and mortar business is in deep trouble...it may take 5 years or so for the coming collapse, but the signs are all there:

1) Massive cutbacks in inventory. My local B&N appears to be carrying about half of what it did 2-3 years ago.

Lots of push to shoppers on non-book items, like the Nook, games, etc...thinks that take up a lot of room with very low product density. After all, Build-a-Bear and other non-book crud was what was going to save Borders, right?

The current B&N reminds me a LOT of Borders a couple of years ago just in terms of how the stores "feel": selection, display, general attitude.

2) Many stores that are far too large for their market (if this were not so, the stores would be full of merchandise instead of having half-empty shelves, minimal backlist and huge sections devoted to the Nook and other non-core business items, huge open areas on the floor where shelves used to be, etc.)

3) The Nook is a fickle bet...Amazon has made it clear that they are willing to do whatever it takes to be cheaper, to have better pricing. B&N is using up a ton of money on engineering and manufacturing a device with an extraordinarily short life-cycle. I almost think they would be better off pushing the Apps more (PC, Mac, Android) and working with other tablet manufacturers to get the Nook app on their devices.

4) The advantage of bricks-and-mortar B&N is discoverability...you can just wander into a store and find something you never knew existed but once you see it, you just have to have it.

Online retailing does not replicate that experience at all.

Yet, by cutting back on inventory, by telling shoppers, "We can special order it and have it in a week...or you can get it right now on Nook," they are pushing people away from the chain's one remaining strength.

B&N is, in effect, telling customers, "Don't bother coming to our stores, just buy online."

But the problem with that approach is that they are a clear 2nd-class player online. Much as I dislike some of Amazon's policies, they are clearly dominant and there is nothing I've seen to suggest that B&N is going to be able to distinguish themselves enough to be anything more than a much smaller rival to Amazon.

I think B&N needs to give serious consideration to reviving the small bookstore concept, like B Dalton/Waldenbooks: much lower rents and overhead, not nearly as many titles need to give the impression of a "full store." I don't see how the big box stores in many markets can survive as ebooks take 10%, then 20%, then 30%+ of the market -- sure, the right stores in the right locations will continue to thrive, but a lot of the existing B&N stores are going to be in real trouble.

[fjtorres]

Don't think there is any disputing that B&N reported good news, bad news, and disturbing news on Friday:

Good - Nook sales were, year to year, 70% better. Total Nook business for the year $1.5billion.

Bad - They expected (and needed) even better Nook sales. Nook STR has a sales shortfall. This translates into: lots of Nook STRs clogging the pipeline.

Disturbing - They announced they were looking to "separate" Nook from the rest of B&N. What makes that bland announcemennt disturbing is that it came wrapped in the same package as the other two announcements.

If B&N had said the exact same thing two months ago, right after Indigo announce they had *quietly* sold Kobo off, nobody would have "freaked out"; it would have been seen as a company taking stock of its business in a changing competitive environment and evaluating the worth of it assets and how to best deliver stockholder value.
(Sort-of like when Hulu got an un-solicited buyout offer and then essentially put themselve up for auction before turning down *all* deals because they were all too high. )
The B&N stock price would've likely gotten a nice boost.

Not now.
Making the announcement in the teeth of the other two facts simply says B&N is running out of money. They have a cash crunch coming and inventory issues.
That isn't spin; it is fact. They said so themselves. The numbers speak for themselves.

As the WIRED article points out, they're looking at a swing of (possibly) as much as a hundred million.
They can cover it: nobody is saying B&N is headed for chapter 7.
But they *can't* both cover their looming losses *and* grow Nook internationally at the same time.

B&N simply needs more money and just selling Sterling alone isn't going to cut it.
Closing stores and laying off people won't do it.
The options are to pro-actively monetize Nook or file for Chapter 11 and watch a court do it for them.

The Nook long term may or not be bright as a supernova.
The storefront long term may or not be dismal.

But the issue at hand is the short-term: how to survive 2012.

The stock market saw this and kneejerked the stock by what? 20%?
Think of it as a risk penalty: B&N stock just became a lot riskier to hold.
And that is why they issued those three announcements together; without the first two, they wouldn't *need* to do the third.

The sky isn't falling.
But it sure as heck isn't bright and sunny either. More like overcast with gale force winds coming.