On Sunday, Barnes and Noble (BKS) chairman and major share holder, Leonard Riggio, announced that he is proposing to take the retail operations of Barnes and Nobles private. This news did not come as a huge surprise to most investors, but the effect of this news was surely not expected.
During pre-hours trading, BKS shares spiked 26.2% at one time to $16 and some change. Barnes and Nobles is a $809.3 million dollar company with EPS (TTM) of -1.17. In the past year, BKS has hit a high of $26.00 and a low of $10.45. BKS has 35.73 million shares in the public float, and 38.74% of those shares are sold short, creating a short ratio of 13.4. Compared to the 2.4 short ratio of its competitors, BKS is not a stock immersed in positive investor sentiment. (Data from Scottrade)
When Borders Bookstores filed for bankruptcy in early 2011, Barnes and Noble became the last remaining major bookstore retailers in the United States. Currently, Barnes and Noble's operates 689 retail stores down from 777 stores within the United States in May 2009. For Q2 FY2013, BKS reported $996 million in revenue from its retail division, 3% down from the same quarter a year ago, and the one year EPS growth rate for the past year is -7.89%. Compared with some of its competitors, such as Amazon (AMZN) and Apple (AAPL), BKS cannot keep up with its retail, nook, and software sales. Amazon reported $2.9 billion in revenue for Q4 FY2012 and Apple reported $3.7 billion revenue from content sales alone in the first quarter of 2013.
With the possible split in Barnes and Noble's Operations:
After Barnes and Noble announced that the Strategic Committee is considering an offer from Riggio, investors have jumped into BKS hoping that this strategic move will improve the efficiency and profit margins of the remaining BKS (minus the retail division). If this split comes into fruition, BKS will focus its operations and revenue streams around the Nook e-reader, a direct competitor with the Amazon Kindle and Apple iPad.
In my opinion, taking the retail division private is a wise move as the demand for physical books and media has been in the decline and will soon fall into oblivion. However, I do not maintain positive sentiments for BKS's future, even with news that came out on Sunday. BKS has announced that on February 28, 2013, the company will release Q3 earnings and it has recently forecasted that 2013 Nook sales EBITDA will generate a greater loss in revenue than it did in 2012. Previously, the company had predicted that sales for 2013 would be approximate to that of 2012, but new data comes new expectations. Furthermore, an IHS iSuppli report demonstrated that the demand for e-readers is quickly decreasing as consumers are preferring to purchase multi-functional tablets such as the APPL iPad and the GOOG Nexus. According to the report, e-reader shipments have decreased by 36% in 2012 and will continue to fall by 27% in 2013.
The issue with Barnes and Noble is that the Nook has been heavily invested in towards the formation of a hardware product designated primarily for the reading of electronic books with other applications on the side. When compared to the power and versatility of other tablet hardware products, the Nook cannot compete in capturing consumer demand as consumers have realized that they can achieve the same enjoyment and quality in reading e-books with the iPad as the Nook, but at the same time they can play games, check their emails, text, watch movies, and use other applications that they cannot do on the Nook. Basically, I believe that BKS has set itself up for destruction, and it has veered off in the wrong direction early on, and it may be too late to come back in the race.
Looking at the multi-year trend line of BKS, it is clear that BKS shares have been on a downtrend and I expect this trend to continue until it hits single digit numbers. However, there could be a possibility of a short lived, positive correction catalyzed by news relating with the Riggio buy-out. As the shares of BKS have spiked, this is an excellent opportunity to sell BKS short as investor sentiment will turn quickly, realizing that BKS probably cannot be saved.
This week BKS will release Q3 earnings data and forward guidance numbers, and I expect that the market will react negatively to the news as earnings will be low and guidance will be dismal. Thus, the peak seen today in BKS shares will fall back to the same $13 dollar levels, if not lower. However, BKS is currently heavily shorted with 38.74% of the float held as loaned positions, and the spike today could actually be partly attributed to a short squeeze as cautious short squeezers went to cover out of fear. The bottom line is that BKS shares will not run an uptrend but conversely, shares will continue to fall in the long run.
Disclosure: I am short BKS.