Waiting For Barnes & Noble's Turnaround? Buy Amazon For Now

| About: Barnes & (BKS)

Barnes & Noble (NYSE:BKS), with over 700 retail book selling outlets, recently announced that it would no longer carry books published by Amazon.com at its retail stores. What can one say to such a strategy? "What?" "Are they nuts?" "What a bunch of whiners." "Can't take the competition, huh?" "Are you going to take your ball and bat and run home?"

Reminds me of when my pal Lefty and I put ants in Junior Walker's baseball mitt back in the summer of 1967. Junior ran home with his ball, but we soon found another in the preacher's backyard, where we had landed it the week before. No big deal. We were still in the game.

And why would anyone want to buy the stock of a company that is admitting defeat in the face of competition?

I am an avid reader and book collector and a long time Barnes & Noble customer. On holidays, their stores are always on my list of stopovers. This morning I am rethinking my next vacation plans. I wonder if any other Barnes & Noble customers think the way I do.

I also happen to be among the self-published authors that are grateful for the opportunity Amazon.com (NASDAQ:AMZN) has provided through its subsidiary company Createspace.com, an opportunity that I personally might not otherwise have if I had to play the publishing, agent-chasing, and rejection game of traditional publishing. It has provided me with a steady stream of income to bolster my retirement savings.

Therefore, I find great social value in Amazon, as it has not only turned a profit for its shareholders, but has put money into the pockets of thousands of unknown writers, musicians, and artists that had little opportunity and visibility prior to their arrival on the scene at the turn of the 21st Century. For artists today, the internet landscape is what the homesteading and land acts were to 19th and 20th century adventurers who set out to make their fortunes on the vast western prairies of our great nation.

Yes, technology has definitely changed the landscape of book-selling world. It has in fact rendered thousands of old time book sellers obsolete and sitting with inventories of thousands of unsalable books. Some that adapted to the internet early in the game have survived. Others have closed up shop. So it goes.

The book industry for years operated like any other cartel model, attempting to garner a steady stream of high margin profits through control of the process. This required a highly compartmentalized industry, with each player in the value chain contributing to the final product. Everybody made money. This no longer holds true. Amazon.com beautifully and painfully disrupted the model and has nearly crushed the cartel. The question that Barnes & Noble is now left with is simple: How do we survive?

This question has recently been asked by other corporations in other industries; Eastman Kodak (EK), Research in Motion (RIMM) and Xerox (NYSE:XRX) come to mind. Kodak recently went belly-up. Research in Motion is rethinking its strategy, and Xerox is hanging on by the seat of its pants. The common thread with each of these dinosaurs is complacency in the face of rapid change, and a lack of vision.

That being said, the question still remains: What should Barnes & Noble do to survive? One thing I am quite confident of is that if it continues on its current path, it will fail as an enterprise. The fact that it is shutting out Amazon.com-produced books from its bookstore pipeline shows an unwillingness to adapt, and portends an arrogance often associated with the demise of great corporations.

I am not a business consultant; however I have often contemplated 21st-century booksellers' dilemma, as I personally would like to see a bookstore on every corner, instead of, say, a McDonald's. Perhaps they might consider resizing the mega-stores in favor of quaint, smaller shops that charge a membership fee for the mere privilege of browsing through the books. I would gladly pay such a fee. Consider a small Barnes & Noble store tucked into a small American city that has 500 regular customers paying $10 per month for the membership. $5,000 per month would go a long way towards overhead.

This model could be adapted in many ways. I have often thought that one day I might consider purchasing an old Victorian mansion and turning it into a private library, the walls lined with rare books, documents, and maps, a place where folks could come to read, discuss and be intellectually stimulated. No cell phones allowed - maybe collected at the front door, or perhaps only used in private phone booths lining a hallway, with etiquette demanding strict observance of house rules. There would be a substantial membership fee, of course, in order to maintain a high level of service. A company like Barnes & Noble could play an integral part of such an operation by providing a wall of newly released books to round out the old, and see to it that book signings occurred on a regular basis.

It is my belief that someday, reading physical books in such private libraries will be as popular with book enthusiasts as viewing antique cars is with motorists that frequent antique car shows. Such private libraries will become not only a status symbol for the educated, but a place to socialize in a fast-paced world dominated by electronic communication, Facebook friendships, and social isolation.

This Utopian view does not answer Barnes & Noble's immediate cash flow problems, and certainly will not fix what is wrong with its business model. This view is merely a challenge to a once great company that they had better start thinking outside the (big) box (store) - or it will not survive the 21st century.

I find it interesting that Barnes & Noble has lately been calling itself a "content, commerce, and technology company." This is nice to say, but may be difficult to deliver, as it arrived late at the internet dance with a worn-out pair of shoes. Amazon.com has been biting chunks out of Barnes & Noble's business model for the past ten years, and will continue to do so as it ramps up to take over the lucrative textbook industry with smart phones and e-reader technologies.

I currently do not find Barnes & Noble's stock an appealing investment. With a negative cash flow and negative earnings, prudent investors may wish to sit on the sidelines and watch for signs of a turnaround. I am also highly leery of a company that carries $500 million in goodwill, which represents a whopping 17% of its stated asset value. Contrast that number to Amazon.com, which carries goodwill valued at around 7% of assets. Goodwill does not produce cash flow. It is dead weight on a balance sheet, unless it is related to highly valuable patents and other intellectual property.

I am not confident that Barnes & Noble can pull off a turnaround, given the IMF prediction of 1.8% GDP growth in the U.S. for 2012, our current high-levels of unemployment, which reduces discretionary income of would-be book buyers, and the carrying costs associated with owning mega-retail space.

Solution for investors: Buy Amazon.com instead.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours.