Barnes & Noble Divides $300 Million in Half

December 8, 2014 by Thad McIlroy

The December 4th announcement of Microsoft’s retreat from Barnes & Noble is well documented. Barnes & Noble demonstrated how to turn $300 million into $125 million (OK, less than half). The company’s shares had a brief dip but then recovered.

© Barnes & Noble

© Barnes & Noble

Barnes & Noble (stock symbol BKS) is trading today for about $22, giving the company a market value of $1.3 billion. This is good news for investors: a year ago the stock was worth a third less, in the $14 range. Despite the price increases company founder and CEO Len Riggio has been selling shares. In mid-July 2013 he controlled 30% of the company. By mid-July of this year it was 20%. He sold 2 million shares a year ago. At the time he said that he didn’t have “any intentions of selling more shares” adding “I intend to be a big owner for a long time.” (He hadn’t sold any shares since 2001.) In April of this year the company announced that Riggio had sold an additional 3.7 million shares (bringing his holdings to “approximately 20 percent” of the company’s shares).

“After this sale I remain the Company’s largest shareholder, a position I feel very good about. I love this company and I believe in its future as I do in all of the wonderful people who work here.” Mr. Riggio added that his sale is part of his long-term financial and estate planning and that he has no plans to sell more stock this calendar year (emphasis mine).

A Barnes & Noble spokeswoman told the New York Post that in December when Riggio said he didn’t have “any intentions of selling more shares” it had meant merely that he “had no plans at the time to sell more stock, meaning immediately.” OK, we misunderstood.

Things have not been going well for Barnes & Noble. It occurred to me today that with Borders long gone Barnes & Noble’s retail division has no meaningful competitors. There are two small chains, Books-a-Million and Hastings. However between them they’re worth about $50 million, less than 5% of Barnes & Noble’s market value.

On the other hand the college stores have five big competitors. First there’s other store operators. Follett manages 950 college stores, a third more than Barnes & Noble’s 700. Nebraska Book Company/Neebo operates 200 stores. Its textbook wholesale business supports “more than 2,000 college-related stores.” Nebraska has about $400 million in annual revenue (a quarter of Barnes & Noble’s college sales). Sales are shrinking slightly; the company generates small losses.

College’s largest competitor is college stores themselves. Lots of them are still managed independently. Barnes & Noble estimates that 55% of college bookstores in the United States are operated by their parent educational institutions. This is little changed from the 56% mentioned in the company’s 2011 annual report.

Barnes & Noble’s 2014 annual report notes that “textbooks [including used and rental] continue to be a core mainstay of the B&N College business,” and so the company has two other significant college competitors, Amazon and Chegg. Amazon of course doesn’t reveal what kind of volume it generates from used textbooks. Chegg reached just over $200 million in used textbook rental revenue in 2013. Barnes & Noble sources its used textbooks from MBS Textbook Exchange, a $500 million company primarily owned by Len Riggio.

(I won’t delve into digital textbooks here, ostensibly the future of the textbook industry. Instead check out this 2014 presentation, Student Attitudes Toward Higher Education. Start with slides 11 & 12, the first one titled “Students Prefer Print.”)

The reason I’m focusing on the college stores is that they were, inexplicably, spun off as part of the same company as the NOOK division. This was part of the Microsoft’s well-documented investment in Barnes & Noble in April 2012. In the New York Times report it stated that “the deal values the e-reader business at $1.7 billion.” Well that wasn’t entirely true. The college business was tossed into the pot.

® Barnes & Noble College Booksellers

® Barnes & Noble College Booksellers

The companies did their earnest best to try to explain the odd brew. The joint press release intoned: “The inclusion of Barnes & Noble’s College business is an important component of Newco’s strategic vision… Barnes & Noble’s industry leading NOOK Study software will provide students and educators the preeminent technology platform for the distribution and management of digital education materials in the market.” In April of this year NOOK Study was replaced by Yuzu, “a next-generation digital education platform that enhances the everyday learning experience and makes college the rewarding journey it’s meant to be.” While looking at Barnes & Noble’s Q2 FY 2015 results Publisher’s Marketplace described the “continuing folly of building Yuzu — which cost another $6.3 million in the current quarter.” (It cost $22 million in the last fiscal year.) The app earns 2 out of 5 stars on Microsoft’s app store, and the same on Apple’s iTunes store.

In the last full financial year report comparable college store sales declined 3.1% (with a slight overall sales decline). The first quarter of this fiscal year showed flat sales and a $45 million loss (up $15 million from last year). The latest quarter offered a slight improvement, while the year-to-date comps declined 0.2%.

What to say? The college business generates cash but slight and intermittent profits. The business is shrinking slightly and the market is highly competitive.

Barnes & Noble remains a core element in the book marketing ecosystem. We need Barnes & Noble. The NOOK undertaking has become folly, and so College stores are going to have to carry the added weight.

December 23, 2014: Barnes & Noble Buys Pearson’s Stake in Nook E-Reader Unit: …for about $28 million, $13.8 million in cash, the rest in stock. The deal is structured the same way as the Microsoft buy-back.

It’s two years since Pearson paid $89.5 million for its investment, three times as much. That investment valued the division at $1.79 billion. Apply the repurchase math to the entire division and it’s worth $560 million today. So why is BKS (Barnes & Noble’s stock ticker symbol) trading at a market cap of $1.4 billion?

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