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Barnes and Noble (NYSE:BKS), which has been suffering because of a decline in sales of physical books, has now entered the tablet market ahead of the all-important holiday season. Sales in the tablet market are expected to double this year, according to Gartner. BKS faces tough competition from Amazon's (NASDAQ:AMZN) recently launched Kindle Fire series, Google's (NASDAQ:GOOG) Nexus 7 and Apple's (NASDAQ:AAPL) iPad. The tablets are an attempt to drive up revenue from digital content like books, magazines and movies. This is quite similar to Amazon's strategy. We advise against investing in BKS due to the lack of a long-term competitive advantage, even after the launch of the new tablets and retail partnerships in the U.K.

BKS currently has 30% of the e-book market in the U.S. AMZN has 22% of the tablet market in the U.S. The points below describe in detail why BKS does not have a competitive advantage over its peers:

  • The price tags for NOOK HD tablets range from $199-to-$299. Amazon's latest offerings ranged from ad supported e-books priced at $69, to a 4G LTE iteration one for $499. The 7-inch tablet from Amazon is priced at $159, while the 7-inch Nook HD has a price tag of $199. Google's Nexus 7 carries a price of $199 as well. Amazon stuck to its razor thin hardware margins strategy when making the latest tablet offerings. The iPad's prices are more than twice those of BKS' tablets, but it remains the most popular tablet with regards to sales (70% of all tablets sold according to HIS iSuppli).
  • BKS is also starting a new download and streaming service for Nook this fall. Amazon, with its Prime service, has a clear edge in providing such a service because of the size of its current library, as well as the potential to spend more in this regard. As most consumer-buying decisions will involve what services they get, Nook has a long way to go before it can challenge Amazon (on services), though it may provide better hardware and features (like accommodating multiple users on one Nook tablet and parental control) than AMZN. BKS' video service is expected to offer content from Sony Pictures, HBO, Warner Bros. (NYSE:TWX) and Viacom (NASDAQ:VIA). Amazon already has contracts with nearly all of these providers and many others like Epix.
  • Results for Q1 FY2013 showed flat revenue YoY in the Nook segment, as device sales (low prices and production issues for GlowLight tablet) almost completely offset the digital content sales increase of 46%. This is the segment that the company is focusing on for growth. EBITDA loss from this segment had increased by $6 million to $57 million due to price markdowns for Nooks, as well as investment in the Nook business. Revenue was almost flat for college bookstores as well, with an increase in the EBITDA loss of $2 million. Retail was the only segment that had a positive EBITDA increase. Comparable bookstores sales were up 4.6% (or 7.6% if Nook products are excluded). Sales for BN.com, which comes in the retail segment, declined.

The points that go in favor of BKS are:

  • BKS Nooks will be available at Target (NYSE:TGT) and Wal-Mart (NYSE:WMT), as well as Best Buy (NYSE:BBY). TGT and WMT had refused to carry AMZN's kindles, which works in favor of BKS. The Nook tablet will be shipped in October and will be in stores in November.
  • Recently, the company entered into several partnerships with retailers in the U.K. to carry its Nook tablets, although not the latest models. Sainsbury stores (around 270 stores) will start carrying the Nook Simple Touch (£79) and the Simple Touch GlowLight (£109) before Christmas. The starting price of these readers is £79, and they are available for online preorders as well. Other U.K. stores that will start selling the aforementioned products include Waitrose (a supermarket chain), 600 electrical retail stores, and 2 websites that come under Dixons Retail, John Lewis, Blackwell's, and Foyles and Argos. Overall, the company intends to make these products available in 2,000 retail outlets in the U.K.
  • The company says it is producing enough new Nook Tablets to ensure that there are no lost sales due to a shortage in the holiday season. The Nook tablets are expected to be hot products in the holiday season.

Valuation:

BKS' shares were up 6% in yesterday's trading. The stock has been up 11% in the last month. The short ratio for BKS is a high 11.6 days. Analysts expect an eps of -$0.8/share for FY2013.

For AMZN, investors need to wait for a better entry point because it is trading at valuations that are too high when compared with its bottom line.

We advise against buying BKS, despite the recent initiatives taken by the company. The stock might trade up for a little while, based on expectations of sales from its U.K. partnerships, but the low prices of the new Nook tablets suggest that the company is relying on content sales to expand margins. There is tough competition in the market with regards to content, and it is unlikely that BKS will be able to get any competitive edge here. In addition, it is difficult to see how the Nook's business can pull BKS out of trouble when a majority of the company's revenue is coming from the retail segment (76% in Q12013).

Source: No Turnaround For Barnes And Noble: The Content Market Is Too Competitive