Barnes & Noble Quits Manufacturing Color Tablets - Should You Quit As Well?

Jun.29.13 | About: Barnes & (BKS)

Barnes & Noble (NYSE: BKS) reported significant losses in various aspects of its financials in the fourth quarter and full year 2013. The NOOK segment, in particular, took the hardest blow with revenues remarkably declining while reporting notable losses at the same time.

In order to minimize losses, CEO William Lynch ultimately decided to move towards a partner-centric model for its color tablets. The tablet lines of the company will be soon co-branded with third-party manufacturers of consumer electronics products, which is yet to be announced. Thus, it will soon stop manufacturing color tablets.

This plan is expected to reduce the overhead cost, and therefore minimize the loss in the NOOK segment. The company, however, will still keep on designing and innovating its reading platforms and eReading devices.

Major Highlights of the Fourth Quarter and Full Year Report

Barnes & Noble has three major segments. They are the retail segment, the college segment, and the NOOK segment. Among the three, only the NOOK segment was losing during the fourth quarter. The other segments reported positive EBITDA at $51 million and $4 million for the retail and the college segments, respectively. Despite that, total company EBITDA was pulled down to losses at $122 million due to the $177 million losses in the NOOK segment.

For the full fiscal year 2013, the company reported earnings at only $10 million. NOOK's total losses of $474 million for the entire year were offset by earnings in the retail and in the college segments at $347 million and $111 million, respectively. However, the total EDITDA was down 94% compared to the $177 million total EBITDA in 2012.

Revenues for the quarter were also down for both the retail and the NOOK segments at -10% and -34%, respectively. Only the college segment grew by 10.7% for the quarter. The scenario is the same for the full year, with retail sales declining by 6% while revenue for the NOOK segment shrank by 17%; the college segment gained slightly by only 1%.

The latest quarter result was generally disappointing. Gains and earnings were overpowered by declines and losses. This ignited massive selloff in the stock market as many shareholders fled. This pulled the shares down 17% from $18.82 to $15.61 per share in a single day on June 25. But despite that, shares of Barnes & Noble still grew 7.5% this year.

Should You Flee as Well?

With so many figures in red, investors can't help but feel petrified. Should you run, as well? Perhaps, not yet; majority of the analyst firms are recommending a 'hold.' There is still hope for the company. The environment right now may seem bleak, but there is light at the end of the tunnel.

Keep in mind that the main reason why CEO William Lynch decided to throw in the towel on color tablet manufacturing is to minimize the losses. A significant portion of the company's losses was attributed to inventory-related charges in the NOOK segment, amounting to $222 million for the full year. During the fourth quarter, it reported EBITDA losses at $177 million; this includes $133 million of inventory charges.

If Barnes & Noble delegates the manufacturing of color tablets to third-party companies, it will get rid of the inventory charges in the NOOK segment. This is expected to improve the profitability of the company by the end of the year, or by 2014.

There are also other aspects of the financials where the company posted good performance. It significantly reduced its debt to $77 million, down from $270 million a year ago. Meanwhile, its cash position at the end of the fiscal year is $160.5 million. The retail segment is doing good, as well, and this is expected to drive the success of the company. The EBITDA is up 16% year-on-year.

While Barnes & Noble is giving up on the manufacturing of color tablets, it will continue to build eReader devices. The co-marketing strategy will allow the company to still enjoy the high margin sales of its software via the NOOK app.

Another one good reason to hold on to Barnes & Noble is the possible boost in shares if Microsoft (NASDAQ: MSFT) will push through its intention to buy the NOOK business, in which it has about 17% stake. On May 2013, when reports were out that Microsoft was thinking of buying the NOOK segment for about a billion dollars, Barnes & Noble shares soared 24%. If this will materialize, shares will further jump.

With more focused operation, and with the tablet manufacturing already out of its wings, Barnes & Noble should improve ahead. With this in mind, perhaps it is not time yet to flee from Barnes & Noble. Its planned withdrawal from the arena of color tablet manufacturing is a strategic move that will make the company better and more competitive in the years ahead.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.