This week our B&N bankruptcy index is one day late (usually it's published on Wednesdays) due to our need to digest B&N's quarterly report that was published earlier this week, as well as its share's slide in more than 20% in just couple of days. With this hectic week, Borders' bankruptcy looks like old news already..Just a short reminder - As Borders filed for bankruptcy, we look at Barnes & Noble, the nation's largest book chain to see if they will follow Borders and also go into bankruptcy and if so, when exactly.
To do it more analytically we launched few weeks ago a new B&N Bankruptcy Index, which is based on 10 parameters, which receive a grade between 1-10 (1 - worst grade, 10 - best grade). Hence we receive a 0-100 point index scale, which we divide into several ranges as follows:
90-100: B&N is in an excellent shape. Couldn't be better!
80-89: B&N is doing great. Bankruptcy is no longer a real threat.
70-79: B&N could do better and has to be cautious of bankruptcy.
60-69: B&N doesn't look too good and bankruptcy is becoming a more realistic threat.
50-59: Bankruptcy is a clear and present danger.
49 and less: Red alert! Bankruptcy is just around the corner and is likely to happen within a short time frame.
We will check the B&N Bankruptcy Index every Wednesday, updating each one of the parameters included in the index and will analyze the trend. You can follow the weekly changes in the index from the day it was launched on the Barnes and Noble Bankruptcy Index page on our website.
So here's our update for this week (in brackets is last week's grade):
1. Confidence of the stock market in B&N
This parameter will look at the performance of the B&N stock (symbol: BKS) in the last week. The performance of B&N's stock is an indication of the confidence the market has in the ability of B&N to maintain a viable business.
So let's look at last week's figures:
2/16: $18.77
2/23: $14.70
Change: -21.7%
As you can see, B&N's stock had a very bad week. Just for comparison, the S&P500 Index fell during this period in 2.2% and Amazon fell in 5.3%. This is a BIG change - the stock lost 20% of its value in about one week and most of it happened after B&N announced this week it suspends its dividend to preserve its shrinking cash reserves to invest in the digital side of its business.
Tim Beyers explained the situation on The Motley Fool:
Yesterday, Foolish colleague Matt Koppenheffer compared B&N to Ice-T racing madly through the woods in the B-movie Surviving the Game. To me, the scene feels a lot more like the Colonial fleet trying to escape the Cylons in the Scyfy Channel's excellent reimagining of Battlestar Galactica.
Now what: The competition is just as tough. Google (Nasdaq: GOOG) has created a store for any device in a move somewhat reminiscent of Amazon.com's (Nasdaq: AMZN) strategy to spread its Kindle store far and wide. Barnes & Noble was never going to have an easy time in that environment. It certainly hasn't so far. In the closing episode of Galactica (spoiler alert!), the relative handful of survivors left from the original 50,000 colonists spread across a new planet stuck in a prehistoric age. Their aim? Start over from scratch, or die trying. Barnes & Noble's fate may prove to be no better.
Bottom line: Although some analysts were satisfied with B&N's step to suspend its dividends, the market doesn't like it at all and shows very little faith in the company this week. Therefore this week's grade for this parameter is going down to: 7 (9)
2. What analysts say on B&N
As mentioned, analysts supported the suspension of the dividends. Morningstar analyst Pete Wahlstrom said that, had the company not done so, investors would be asking, "if digital is so important, why are you shipping $57 million out the door annually ... instead of investing that cash?"(New York Times)
Here's another view that was presented this week - "While Barnes & Noble has a brighter future than Borders, the chain has “a long road ahead” before it becomes highly profitable. They aren’t out of the woods either. It still remains to be seen how competitive Barnes & Noble will be with e-books.” Michael Souers, an analyst for Standard & Poor’s in New York. He recommends holding B&N shares. (Bloomberg)
Last but not least, Goldman Sachs analyst Matthew Fassler upgraded Barnes & Noble to neutral from sell ahead of the filing, though he tempered expectations as the benefits are "likely baked into the Street's thinking."
In all there are no big news from the analysts, who stay somewhat cautious and wait to see what the long road ahead will bring with it - bankruptcy or sustainable growth. This week's grade stays the same: 7 (7)
Morningstar analyst Peter Wahlstrom said that the Borders bankruptcy filing does little to change the fundamental challenges to Barnes & Noble’s business model. Attracting consumers by being the low-price provider in a commodity game is a strategy that the company ceded to Amazon.com years ago, so Barnes & Noble needs to have a differentiated product offering or shopping experience to stay relevant. Walhlstrom added that "the bulk of Nooks are being sold through stores where kiosks and support staff put the device front and center."
According to Forbes, B&N has also made some stride with educational toys and games, but stresses that it does not want to go out of its wheelhouse in an effort to draw in shoppers who wouldn’t normally enter its stores.
Bottom line: Just like Borders, B&N still doesn't have yet a clear and comprehensive strategy that will transform their brick and mortar stores from a liability back to an asset, even though "B&N continues to voice confidence in its own stores, describing them as critical to its digital future." (WSJ) This week showed us that B&N still thinks mainly on its digital strategy, forgetting for a minute that it's Barnes & Noble and not just bn.com. This week's grade stays the same: 4 (4)
4. What B&N is saying about itself
"We intend for Barnes & Noble to be a leader in the exploding market for digital content," CEO William Lynch said on a call with analysts, estimating that his company now commands 25% of the U.S. e-books market. As David Lazarus writes on the Los Angeles Times "that's all well and good, but it doesn't exactly bode well for the chain's brick-and-mortar stores." We couldn't say it better. This week's grade for this parameter stays the same: 6 (6)
5. Steps B&N is taking
1. Giving hints that it will look to possibly taking over locations left vacant by Borders -Thumbs down.
6. Competitors
This parameter will mainly look into Borders and how its problems affect B&N. This week TheStreet.com reports that B&N said during its conference call with Wall Street that it may open some stores in the locations being vacated by Borders. "CEO William Lynch said select Borders stores set to shutter "appear attractive to us," and he is hoping landlords may be willing to cut deals on rental costs. This raised questions from analysts about why Barnes & Noble would want to invest more in brick-and-mortar locations. Lynch said Barnes & Noble stores are still profitable and that most of Nook sales occur in stores."
I also don't see the logic here and really don't understand why B&N would put money into new stores instead of investing 110% of its efforts in strengthening the existing ones, and therefore our weekly grade for this parameter is going down in half a point: 5.5 (6)
7. Financial strength
Barnes & Noble published on Tuesday the results for the third quarter. It was a mixed report with both good and bad news.
Here are the good news:
1. Revenue jumped 7% to $2.3 billion.
2. Comparable-store sales, a key retail indicator, grew 7.3% at the superstores.
Here are the bad news:
1. The company suspended its dividend to preserve its shrinking cash reserves - Barnes & Noble previously offered an annual dividend of $1 a share.
2. B&N reported disappointing holiday quarter results - For the third quarter ended Jan. 29, the bookseller posted a profit of $60.6 million, or $1 a share, down from $80.4 million, or $1.38 a share, in the year-earlier period. Total net losses in the first three quarters of the current fiscal year have totaled $14.5 million.
3. Comparable-store sales at the college bookstore division fell 2.2%, with the retailer citing inclement weather as a key reason. That business accounts for just under a quarter of the company's sales.
4. Noting the situation at Borders, Barnes & Noble said it wouldn't issue any sales or earning guidance for the remainder of fiscal 2011.
5. Barnes & Noble reported it had $26.5 million in cash and cash equivalents on hand as of January 29, down from $40.2 million a year earlier. But Chief Financial Officer Joseph Lombardi told analysts the company has "ample financial capacity" to operate and develop its e-books business.
In all, the results were rather disappointing and therefore parameter's grade goes down in half a point: 7 (7.5)
8. Strength of the ebook business
As the Wall Street Journal reported this week, B&N has staked much of its future on its Nook e-reader line, so it was no surprise to hear its CEO William Lynch saying during a conference call to discuss earnings last week that "we intend for Barnes & Noble to be a leader in the exploding market for digital content." He added that "we now represent 25% of the e-book market in the U.S., larger than our share in physical books. We sell twice as many e-books as all formats of physical books combined on BN.com."
He announced that B&N canceled its quarterly dividend to free up $60 million for its digital strategies and other potential opportunities. Good news for BN.com, but is it good news for B&N at all? I am not sure at all..
Stronger emphasis on the digital business adds half a point to this week's grade is: 8 (7.5)
9. Sense of urgency
From the reports on the announcements of B&N this week on and following its quarterly report, it looks like B&N still think they have time and are not worried at all, or at least not worried enough to begin doing something with their brick and mortar stores. We believe this is not the case of course and if we can learn something from the Borders' case, it's how fast things go bad when your reach a certain tipping point of financial distress or distrust of your stakeholders (consumers or publishers for example). Therefore this week's grade goes down in half a point: 5.5 (6)
10. General feeling
This parameter will be an indication of our impression of all the materials read and analyzed for this index. Our feeling this week, after B&N's quarterly report is not too good. I also learned we're not the only one feeling this way when I saw Barnes & Noble in the list of the Next 17 Big Companies That Are Heading Toward Bankruptcy on Business Insider, where B&N's financial distress risk was assessed as 8.23%. This week's grade is going down in half a point: 6 (6.5)
This week's Barnes & Noble Bankruptcy Index: 62 points (65)
As you can see, this week's index is set at 62 points, which translates into the scale of 60-69: B&N doesn't look too good and bankruptcy is becoming a more realistic threat. Definitely not a good place to be at and too close to the red alert zone. Too close. In the meantime, it looks like B&N is still not in immediate trouble. See you next Wednesday.
To view the weekly changes in the index visit Barnes and Noble Bankruptcy Index on our website.
You can find more resources on the future of bookstores on our website at www.ecolibris.net/bookstores_future.asp
Yours,
Raz @ Eco-Libris
Eco-Libris: Working to green the book industry!
