unstoppable march towards digitization, with countless physical bookstores, large and small, going bankrupt since the 1990s. However, the last remaining national bookstore chain, Barnes & Noble (BKS) , continues to find ways to survive, and even strive, long after its competitors have disappeared.
Barnes & Noble, the "Last Bookstore"
Barnes & Noble is the biggest retail bookseller in the U.S., operating 663 stores in 50 states in America and occupying two-thirds of the country's retail bookstores. It also operates 696 college bookstores serving more than 4.6 million students and faculty members across the country.
Since the 1990s, there has been a series of mergers and bankruptcies in America’s retail bookstores. Barnes & Noble kept innovating, and it had managed to persist through difficult market conditions to be the last remaining national bookstore chain.
The Trend of E-books
The first e-book was likely 2004’s Sony (SNE) Librie. Sony released Sony Reader in 2006; Amazon (AMZN) launched the first Kindle in 2007. Barnes & Noble eventually launched NOOK in 2009. The growth of the market, though, truly started to take off with Apple’s (AAPL) iPad in 2010. Other companies, like Kobo Inc., PocketBook, Kbuuk, etc., joined the trend marching to an e-book era. Over the years, e-book makers are updating their e-book reader versions as well as improving user experience from all perspectives.
So What's So Special About Barnes & Noble?
Barnes & Noble’s advantage, oddly enough, may actually be that it still owns physical stores. The NOOK Department means a share of stake in e-book market, but that hasn’t resulted in the company abandoning its brick-and-mortar locations. When Barnes & Noble released NOOK in 2009, following Amazon's Kindle 2 and Sony's Sony Reader Touch, the markets were generally skeptical of the strategy, with some worrying digitization could ultimately turn physical stores into cafes with digital readers.
But Barnes & Noble is still hanging on. After the initial launch of the NOOK Reader in 2009, it released NOOK Color in 2010, and, this month on June 5, Barnes & Noble reached a deal with Samsung Electronic Co. (SSNLF) to create a new color tablet labeled with the book chain's NOOK label.
Now Barnes & Noble seems like a pioneer, potentially finding a strategy that combines e-books with physical bookstores to create a unique business model that serves a wide variety of customer.
Its online retailer segment is well organized and actively operated. And its many large stores feature cafes, showrooms, recreational spaces, and regularly hold special events to attract customers. Promotions or discounts aside, the frequent book signing events offer something online book selling can’t match.
But other bookstores can host signing events or build cafés and tearooms. The biggest distinction between Barnes & Noble and the dearly departed Borders remains the willingness by the former to embrace change and the e-book. By keeping a foot in each arena, Barnes & Noble may have cut a path that could carry it into the future where so many of its competitors have faded away.
So, Does Its E-book Reader Strategy Work?
It’s not all good news for Barnes & Noble, the NOOK e-reader still struggles in competing with the likes of Amazon's Kindle and Apple's iPad.
One of the company's biggest investors, Liberty Media (LMCA) slashed its stake on April 4, which dragged Barnes and Noble stock down 14 percent. Liberty Media's concern was the bleak sales of NOOK, which fell 50 percent in Q3 2013. The company seems to see the sales of the NOOK as a significant failure, and it's even been the subject of ridicule.
But the company still has faith in its e-book strategy and hopefully sales of e-books will go up after the deal with Samsung. Under the deal, the company will buy one million Samsung co-branded color tablets over the next 15 months, and sell them in both its physical and online stores beginning in August. It will be a new version of Samsung Galaxy Tablet 4 featuring NOOK reading and shopping software.
The deal with Samsung could indeed be a smart one for Barnes & Noble. Due to capital-heavy nature of the investment in the NOOK, Barnes & Noble has been in a financial drain in the recent years. That’s why turning to a third-party manufacturer for its NOOK tablet is not out of nowhere.
Barnes & Noble announced plans to cut about 190 employees from its NOOK Department at the start of the fiscal year. Also, in the Samsung deal announcement, the company stated that the NOOK Segment is cut costs by moving away its expensive Palo Alto technology campus.
Given their ongoing competing with Apple’s iPad and Amazon’s Kindle, Barnes & Noble probably made the right decision. It means the company is still in the game, but remains there while cutting costs and the risks associated with manufacturing and development.
A Good Thing to Have Two Arrows in Your Quiver
The primary selling point for Barnes & Noble appears to be the way its offline bookstores complement their online counterparts, with the physical book sales complementing e-book sales.
The company isn’t just keeping its options open to produce multiple revenue streams, it’s actively working to compliment the one strategy with the other. Anyone visiting a physical Barnes & Noble can use the free wi-fi the company. What’s more, if you bring your NOOK, you can read any title for up to an hour a day provided you’re at a Barnes & Noble location. This, in addition to marketing in-store events like signings and “NOOK nights,” a sort of high-tech book club where visitors can access things like author interviews with their NOOK device, Barnes & Noble appears to have firmly bucked the perception that their online offerings would have to work against its physical-store sales.
Instead, Barnes & Noble may have found a strategy where each element compliments the other, and that might be the secret that has allowed this brick-and-mortar bookseller to survive and even strive in this digitalization age.
Barnes & Noble is a member of Equities.com's Small-Cap Stars, a list of small-cap companies found to have strong fundamentals for their industry based on a complex statistical regression to isolate those factors that were most predictive of success in the past.
The company features a low market value to debt ratio to the company's equity. A higher D/E ratio indicates that the company has leverage, which can be good when deployed strategically. However, in a low-margin industry like retail, it’s a solid sign that Barnes & Noble’s stock is currently at a steep discount to its debt ratio.
The company has shown real growth, gaining nearly 40 percent since it was included in the Small-Cap Stars at the beginning of the year. And this is despite a nearly 30% swoon over the two months from mid-March to mid-May. On the whole, the company’s stock shows volatility, but it’s on the rise, getting a big bump recently after an article appearing in Barron’s claimed the stock could easily double.
Barnes & Noble will report fiscal 2014 fourth quarter and year-end earnings results on Wednesday, June 25th before the market opens. If the earnings are better than Q3, it should mean another pop for the company’s already soaring stock.
Editor's Note: A previous version of the article did not clarify the free Nook strategy as satire.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer