From Seeking Alpha:
Barnes & Noble rode strong growth in non-books to its best comp decline in several quarters.
The book business continues to erode.
Management’s failure to properly manage capital will leave this company in a vulnerable state if the broader economy turns negative.
I am staying far away from this company in spite of its cheap valuation. Shares of Barnes & Noble continue to languish below $7 and well below the $9 per share takeout price that was offered by Sandell Asset Management in 2017.
. . . .
Books remain weak, falling 3% during the quarter, but non-book sales actually grew 1.9% y/y, driven largely by a double-digit comp growth in toys.
. . . .
Inventory was down just 2.7% y/y, roughly in line with the company’s sales decline of 2.5%. In reality, management should be driving to bring inventory down faster than sales declines. This is not revolutionary advice or even a unique take, but the difference between companies like Foot Locker and Barnes & Noble is a key focus on improving capital efficiency when sales slide to ensure a strong balance sheet. Barnes & Noble is nowhere near aggressive enough here.
Likewise, the company has actually seen its Q2 days payable outstanding come down over the past three years. Stretching payables outstanding is a low effort way to increase cash flow, and given Barnes & Noble’s importance in the book industry, I doubt the company would face much pushback. This could free up as much as $20-30 million, allowing the company some additional capital flexibility.
In addition, Barnes & Noble continues to show a disgusting neglect for the long-term by paying out a quarterly dividend. This amounts to $44 million over the last 12 months – far more than the company’s free cash flow, which has caused it to continually increase its debt. The only way for Barnes & Noble to weather an economic downturn at this point would be to be debt free; yet, the company instead chooses to borrow from its future. In fact, were the company to simply cut the dividend to zero, it could easily be debt free in the next three years. Instead, management will put the survival of the business at risk.
. . . .
I doubt the company, as it remains today controlled by Len Riggio, will be able to attract a capable turnaround specialist. Barnes & Noble like RadioShack before it continues to ignore capital management, which puts its core business at risk of becoming worthless.
Link to the rest at Seeking Alpha
I’m thinking that there’s a vanishingly small chance B&N can survive, but if it does, it won’t do so as a bookstore. But I doubt Riggio, etc. are interested in salvaging any of it.
>Stretching payables outstanding is a low effort way to increase cash flow, and given Barnes & Noble’s importance in the book industry, I doubt the company would face much pushback.
Umm. Or they may see it as a sign that B&N is circling the drain, and not want to get caught out when the music finally stops.
My own view, unpopular in many quarters I know, is that the sooner B&N disappears altogether the better off the overall book trade will be. As several people above have already observed, B&N is now little more than an artifact from a long gone but not forgotten past. Many still cling to it, and most who do are publishers, waiting for the resurrection.
The resurrection isn’t coming. Move on. Whatever is next, move on.
Not only are the publishers’ hopes misplaced, but fiction publishers are also in the same situation. They are on the way out, too.
But, all hope is not lost for them. I saw a new manual typewriter for sale yesterday.
Side note. They have been produced all along. Missionaries and the military go where there isn’t electricity.
And the Guardian will then report on the rebirth of paper fiction as it paddles upriver with them.
“Barnes & Noble Needs A Turnaround Expert”
Wrong, again.
They need a closing expert – and they have one currently milking it for every last drop as he rides it down in flames – no wait, flames suggest there’s still fuel or oils to burn and those were already used/sold off – running that dead horse right into the ground, beating it all the way …
Too late!
The phrase “Rearranging the deck chairs on the Titanic.” Comes to mind.
People continue to yearn for 1985 and the good old days of B&M bookstores. Authors dream of their book face out at the front of the stores, and literary fiction fans think the creeps propositioning them in the stores actually wanted to talk about literature.
Those days are gone, and will not be coming back. The full brutality of the disruption hasn’t yet hit. People who initially cheered it may come to have second thoughts.
And all the stuff about what B&N needs? Riggio and the six funds who own 90% of the company don’t care what people think they need. They are on a different path.
“The full brutality of the disruption hasn’t yet hit. People who initially cheered it may come to have second thoughts.”
Not likely. Most of us indie authors would never be in the position we’re in without it. Unless I missed your meaning, which is entirely possible.
The situation many independents enjoy now can easily change as the disruption rolls on. Supply will continue to increase from new entrants and backlists. Nothing ever leaves the digital shelves. So current authors will have more and more competition. The number of available books will never level off. It will always increase.
A critical factor in the old market was the relatively stable supply. Books came onto the shelves, stayed for a few months, then left. Those days are gone forever.
Authors are already complaining about the loss of revenue they have seen over the last two years. That should continue. Total sales can easily increase, while average author revenue decreases.
The strongest players will be authors who are financially secure from some non-book income. They can handle the decreases in revenue. The people who found they could support themselves as full-time writers will be in the weakest position as supply just keeps eating away at their incomes. We might even see folks who consider themselves professionals once again deriding the hobbyists and warning of the race to the bottom.
It’s supply, supply, supply. The other important factors are supply, supply, and supply. There are no barriers to entry, nothing leaves the market, and backlists will be managed as fully depreciated opportunities. Backlist managers sitting in front of multiple screens will play their portfolios like a stock trader. That’s power.
The market will be a great place for the part-timer, but brutal for the guy who wants to make his living writing. We have just moved through phase one. People like it. Phase two is now stomping towards us.
Great analysis. I agree with all that’s there, but I think there is another factor.
It is not entirely true that nothing leaves the digital market. Tastes change continually. Consequently, some content effectively leaves the market because no one buys it and there is always an appetite for new stuff. The pool of actively exchanged content changes by the minute.
Digital certainly changes the dynamics in the ways you describe. The real beneficiaries are duffers like myself who purposely avoid new things and revel in the backlists. My handle, DJ, is taken from one of my favorite books, which was first published in 1621.
I agree. We have no experience in this kind of market. The goods can be available, but not purchased for years. So, we have to distinguish between availability and rate of sales.
What percentage of all available books will sell more than 100 in a single year? Ten? One? What is the percentage now? I don’t know. Eyeball hours are unlikely to increase, so they are distributed over a larger and larger range.
A vital constraint (shelf space) has been removed, and we will just have to watch consumer behavior.
Could not agree more!
At least two other factors add to the strangeness of this new market. Size doesn’t matter, or matters very little. A ten page pamphlet and a ten-thousand page encyclopedia cost nearly the same to store and distribute digitally. Second, shipping costs are not tied to distance. Sending a digital volume to the other side of the room and to the other side of the world costs about the same.
Think about this: the population of the UK is ~60M. ~360M Chinese have learned English. The potential market for digital English books is several times larger in China than it is in England and on the scale of the US-Canada market.
Hollywood has been exploiting this fact for several years now. Most recently it showed up in the box office for VENOM which was a minor success in the US and various international markets but exploded in the Chinese box office, pushing it into major success territory.
This has led to pandering and tokenism but that’s a different subject.
Key point here is that Global English is a real and distinct market from the US and Commonwealth markets, something Amazon knew and exploited from Kindle’s day two but B&N never bothered with.
Do you suppose they could also use more revenue?
There are several hidden assumptions behind that claim.
1- A turnaround specialist would find ways to boost revenue and save B&N.
2- Existing management is incapable of finding those ways.
3- It matters if those ways are found.
4- Those ways exist.
The last two are critical but the last one is a moot point if one thinks the world will go on fine without B&N.
2A – Existing management would allow it to happen.
Given you analysis and the articles claims it appears that B&N is currently being used to give loan money to entities , the shareholders , who have no obligation to repay the money, while passing the money through another entity, B & N, who has no ability and will never have the ability to repay the money. If this is standard business practice the US is is deep trouble. Also what sort of incentives are there to lend money to a dieing company with no recovery plan. ?
There is no need to worry about the banks. They know exactly what is happening and wouldn’t be there unless they saw a profit. The details of the loan terms will tell the story. This is all part of the game, and has nothing to do with keeping bookstores open, nurturing literature, or recruiting a turn around specialist. The US bankers are the definition of self-interest.
I suspect the publishers will take the hit, but they are in a terrible field position, and can’t stop playing.
That B&N is is dying is a given. How it is dying is now just a macabre slow motion car crash.
The incentive is liquidation.
B&N has some intrinsic value in the form of its logistics infrastructure, their publishing house, and brand equity, among other components. It may be a zombie but it’s not a corpse.
Their debt is still less than their value, which is reflected in their stock. That is what the OP dreams of, that instead of taking value out of the company via loan-funded dividends, the company could be turned around into a (modestly) profitable business serving the interests of publishing instead of the interests of the current stockholders.
Riggio and co are not typical of US corporate management but they aren’t exactly unprecedented. There is even a much more blatant case of milking a public company into bankruptcy: Adelphia:
https://en.m.wikipedia.org/wiki/Adelphia_Communications_Corporation
But the value of the stock depends on the quarterly dividends and the belief, assumed in the article, that management is interested in keeping B&N alive. Both of those things could evaporate overnight.
How much value the banks can recover from the corpse of B &N is still I think an odd way to make a loan. I realise banks socialise risk and , it’s not my country, but its not a sign of a healthy economy.
The value of the stock right now depends on the value of the corpse but the pieces are almost certainly worth more. The logistics for moving books can just as easily move other merchandise. Notice that it is books that are sinking B&N; the other merchandise is holding its own.
After the juice is squeezed out of B&N there will still be residual value for the vultures.
How much value the banks can recover from the corpse of B &N is still I think an odd way to make a loan.
In a healthy economy, due diligence requires every loan consider the potential value of the corpse. It’s normal. The people lending the money don’t care if we approve of where they see value, or what some other country does. In a healthy economy, all value is recognized by someone.
And the value of the stock doesn’t depend on anything management wants. They don’t matter. There are only six owners of the company. They determine direction, not some management.