Barnes & Noble's Earnings Call from a Borders Investor's Perspective

Here is what a Borders (BGP) investor cares about in Thursday's Barnes and Noble (BKS) earnings call.

Steve Riggio CEO: "Good morning. While our sales were less than we expected, it still remains that the book business is a relatively stable one which we’ve said time and again. We believe our comp sales, while slightly negative, held up well compared to most of the retail sector.."

If the book business is "stable". Then it logically follows that to increase share and earnings, physical growth is necessary. What better way to grow than to eliminate 12% of the market via an acquisition?

Charles Grom – J.P. Morgan: "And then just in terms of the speculation out there about Borders, I was wondering if you guys wanted to go on record and make a comment just to kind of clear the air, I’m sure it’s on everybody’s mind at this point."

Steve Riggio: "We’ve put together a team of senior management people and financial advisors to study the feasibility of a transaction with Borders. We’ll provide no further comments about any discussions we may or may not have."

Regarding "Members":
Steve Riggio: "We don’t think it’s necessary. We think it’s more profitable to build business with a strong member base of highly motivated individuals that pay our annual membership fee and we continue to test and we’re learning quite a bit. Understand we have about seven years of history in this mailing hundreds of millions of emails and coupons of all different types."

He continued: "So we have tremendously sophisticated analysis about what works, what doesn’t, what drives traffic profitably, what drives traffic unprofitably. So it’s not something that we will completely back away from testing because it is a good thing to do. But we believe that the path forward is to focus on the everyday discount that the card offers and it makes a lot of sense to us, that’s what the numbers are saying"

Remember, Borders has over 1.75 million members in its "Borders Rewards" program. There is tremendous value to this for BKS. Aside from eliminating the only real competitor in the "big box" bookseller, transferring almost 2 million customers to your most fastest growing entity, "membership", is paramount.

Sales at Barnes & Noble.com were $99.6 million for the quarter, a 7.2% comparable sales increase and gross margins there improved 80 basis points this quarter. I have to believe the average online customer spends more than $45 dollars a year. My guess would be at least twice that, but let's just go with that. I also could not find how many BKS online "members" there are, if anyone knows, please let me know. That being said, if that is all it spends, BKS would double its online presence immediately.

Let's then add the $25 annual fee for fun and now we have another $43.5 million flowing to BKS.

The whole of Borders right now is only valued at $403 million, yet its upcoming site alone must have a value of 30% of that.

Riggio may want to do this now if for no other reason, a revitalized Borders will add severe headwinds to his business. Based on results from its new concept to date, that is happening...

Disclosure: Long BGP

Comments

[najdorf:]

I don't pretend to know whether BKS should buy BGP, but your analysis is inadequate.

First of all, you compare a BKS pay membership to the BGP free membership. Of course more people sign up for the free option, but if their Borders turns into a B&N and they get asked to pay a fee, what percentage of BGP customers will keep that membership? You completely ignore this issue. Also, some significant percentage of current Border's Rewards members already hold Barnes & Noble cards, but you don't even attempt to estimate this percentage.

On the online issue: Amazon has already won this contest, so your analysis is moot unless a BGP/BKS combo has some secret plan to topple the market leader (they don't). Furthermore, making up guesses at to how many people shop at Barnesandnoble.com and what they spend doesn't count as analysis. Finally, the Borders site that doesn't yet exist has a value of zero ($0) because it is a

conceptualized website
of a nearly bankrupt company
that has failed to move units online in the past
that gave up and partnered with Amazon

is not a valuable commodity just because the CEO has said "Wouldn't it be nice if we could sell more books online?"

If BGP has any value, it resides in the opportunity for BKS to convert some of their leased store sites into more profitable B&N stores with their superior inventory management, cost control, etc. For instance, Borders has a great location in Concord, NH, where Barnes and Noble has nothing.

2008 May 25 10:55 AM

[thebman:]

I agree with najdorf, besides, wouldn't it affect the bottom line to have stores (BGP & BKS) right next to each other? I've been hearing of the website deal since last summer. Also they sould consider Next Genaration - Long Term (my coined) - I've noticed quite a few publishing going digital these days.

2008 May 25 01:25 PM

[andrewh10:]

Obviously Todd is talking his book because of his BGP position which surprises me to see him involved in such a speculative trade. I would tend to think that Bill Ackerman at Pershing Square Capital Management, L.P. is still very confident in Riggio and the underlying business model. BKS could gobble up BGP here or wait for their deteriorating financial condition to worsen a bit but that does increase the possibility of another firm competing for the goods. Eventually his positions will turn into one holding at the right price. BKS seems very attractively priced at these levels, I would not even be shocked if they get taken private. His stake speaks volumes BKS - 6,540,451 09/17/07 10.10 and BGP - 10,597,880 03/31/08 18.04

2008 May 25 10:38 PM

[andrewh10:]

Obviously Todd is talking his book because of his BGP position which surprises me to see him involved in such a speculative trade. I would tend to think that Bill Ackerman at Pershing Square Capital Management, L.P. is still very confident in Riggio and the underlying business model. BKS could gobble up BGP here or wait for their deteriorating financial condition to worsen a bit but that does increase the possibility of another firm competing for the goods. Eventually his positions will turn into one holding at the right price. BKS seems very attractively priced at these levels, I would not even be shocked if they get taken private. His stake speaks volumes BKS - 6,540,451 09/17/07 10.10 and BGP - 10,597,880 03/31/08 18.04

2008 May 25 10:38 PM

[secmaven:]

Riggio bought hundreds of thousands of shares to support BKS the last two times the stock price went below 30 in 2008. Let's see what he does this time around. An acquisition of BGP would presumably be stock for stock so if a deal is planned, my guess is that he will tap his margin account once again. If no deal is planned BKS stock will decline for the reasons the funds are selling. The market for print books is shrinking by the month and one only has to consider what happened to Tower Records to know what is happening to the rest of the stuff BKS sells through its expensive real estate. Adding hundreds of additional lease obligations to the liability section of its off the books balance sheet will hasten the impending bankruptcy. I know BKS has a dot com operation that competes with Amazon. But since Amazon has taken years to turn even a modest profit is the BKS division adding anything to the bottom line yet? Not much sector analysis in its financial statements.

2008 May 26 12:02 PM