Barnes & Noble Is A Sell

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Barnes & Noble (NYSE:BKS) reported a higher net loss for the quarter ending July 31st. Total revenue declined by almost 9% to $1.33 billion from $1.45 billion in the same quarter of the previous year. This was in line with analysts' estimates of $1.32 billion for the quarter. Revenue declined by 10% to $1 billion at retail stores but grew by 5% to $226 million at college bookstores. Revenues from Nook dropped 39% to $143 million. Same-store sales, a key metric, which is revenues at stores open for at least one year declined by just over 9%. If you exclude the Nook, the figure works out to 7.2%. This is an important measure because it leaves out the volatility that can be caused by opening and closing stores during the year.

The net loss for the quarter amounted to $87 million ($1.56 per share) compared with $39.8 million ($0.76 per share) for the previous year. Excluding non-cash items such as a valuation allowance against deferred tax assets, the loss was $0.86 per share against the analysts' consensus estimate of $0.81 per share. The company has reaffirmed its guidance for the full year and continues to expect revenues to decline at stores open for at least one year by a percentage in the high single digits and to remain flat in the college stores. Shares lost $2.06 to finish at $14.61 after dropping as low as $13.81 during the trading session. The 52-week high and low for the stock was $23.71 and $11.17 respectively.

Michael Huseby, president of Barnes & Noble and CEO of the Nook business, commented that the Nook business has reported some positive developments with sales of 10 million devices and a market share of 22% in the e-book market but conceded that there have been missteps. The mistakes have included unduly optimistic forecasts for demand during the two previous holiday seasons. Providing an update on the earlier company announcement that the company would explore manufacturing the device with a third party manufacturer, he said that design and development for both black-and-white and color Nook devices continues with at least one new Nook to be launched in the holiday season. The company continues to work with third party manufacturers for components such as chips and screens.

Other developments

In another negative development, Leonard Riggio, the company chairman and its largest shareholder, announced that he was dropping his bid to buy the retail business. He had earlier shown interest in buying the bookstores but has now told the SEC that he thinks that "it is in the company's best interests to focus on the business at hand."

Problems with the Nook

The company has been floundering for months because of the disappointing performance of the Nook e-reader and tablet related products in terms of sales. Like the other traditional bookstores, Barnes & Noble has been struggling to come to terms with the challenges of digital media and the competition of its giant rival Amazon (NASDAQ:AMZN). Former CEO William Lynch, during his three-year tenure, had made the Nook the centerpiece of his strategy but quit last month after sales did not take off despite major product upgrades. The company is now clearly at a loss about the business, which has supposedly been up for sale since January 2012 without any successful outcome. In June 2013, the company announced that it would seek a partner for this business but the latest announcement indicates that it is backtracking and will continue its own design and development. The company was also forced to discount its products in an effort to spark sales and the latest has been the reduction in price of Nook SimpleTouch from $119.00 to $99.00.

What the analysts say

Analysts on Wall Street criticized company management on the conference call that followed the announcement of the results. They called the top management slow and ineffective, highlighting the Nook as evidence, and asked for compensation for long suffering investors. David Derman, an equity analyst with Chesapeake Partners, said that the decisions of the board of directors "sound more reactive than proactive," and demanded to know what steps were being taken to add value to shareholders. Analysts were especially angry that the company had decided to increase its focus on the Nook to the detriment of its successful bookstore businesses. Rick Schottenfeld, an analyst with Coyote Capital, pointed out that management had been saying for more than one year that they had been working on enhanced shareholder value and asked when shareholders could expect some relief from the Nook problems. He then asked management to explain why it made sense to keep the various business units under the same corporate umbrella.

The bottom line

It is difficult to understand why the company is emphasizing Nook when there is much stronger competition from devices made by Amazon and Apple's (NASDAQ:AAPL) iPad. The top ten selling items for Amazon in the last quarter were Kindles, Kindle Fire HDs, accessories and digital content. The Kindle Store now offers millions of titles including more than 350,000 exclusives that are not available anywhere else. I believe that Barnes & Noble is past the point where any kind of recovery, however slow, is possible without some drastic restructuring. The company has simply run out of ideas especially where it has had previous strengths. Though the consensus of analysts is a target price of around $18.00 against the current price of $14.61, I would consider this unduly optimistic and recommend that you sell your stock.

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.