Is Something Brewing at Barnes & Noble?

| About: Barnes & (BKS)

Barnes & Noble's (NYSE:BKS) stock jumped 13.57% yesterday, closing at $9.96, which was very close to the day's high of $10.05. The bookstore chain's big day happened on trading volume around seven times average levels. While Motley Fool attributed the stock price jump to Staples' (NASDAQ:SPLS) decision to sell the bookstore chain's color Nook tablet e-reader, we think there could be more to the story.

While the news story is positive because it validates the color Nook, Staples thinks the color Nook is worthy of taking up valuable inventory and shelf space alongside the Amazon (NASDAQ:AMZN) Kindle, Motorola (NYSE:MMI) XOOM and Blackberry (RIMM) Playbook. In addition, Staples' 2,243 store footprint significantly expands the color Nook's exposure from Barnes & Noble's existing ~700 stores.

But Staples' decision to carry the color Nook is not a new story. On April 14, PC Magazine reported that Staples would start selling the color Nook for $249 nationwide on May 1.

There was also a news story about the Toronto-based maker of e-reader Kobo receiving $50 million of funding. The book reader sells internationally at local stores and through a partnership with Borders Group (BGP). While this story is somewhat positive for Barnes & Noble because of the financial interest in the inferior Kobo reader, this was unlikely to have driven the big stock price jump.

In addition to the big price move on above average stock trading volume, the company's options saw a significant jump in activity. The May $10 call option trading volume was 2.5x previous opening interest, May $11 call option trading volume was 4x previous opening interest and July $10 call option trading volume was 14x previous opening interest.

Between the unusual trading activity and the big price move, it could be reasonable to think that something else is brewing beneath the headlines. As we discussed in Why Barnes & Noble is Worth a Closer Look, there could be significant value in the bookstore chain despite weak secular trends. Among other things, the company's decline has been greatly exaggerated. Online competitors like were already threats to brick-and-mortar bookstores, but the growing popularity of e-readers has added an additional layer to the threat.

While these competitive pressures from Amazon and its Kindle cannot be ignored, the market may be underestimating Barnes & Noble. Sales per square foot declined from $244.33 in 2004 to $231.03 in 2010. While this is a bad trend, it's nowhere near the order of decline you would expect based on the doom and gloom headlines. Also, only a few months ago, Bill Ackman's Pershing Square offered to finance a $16 per share buyout of Barnes & Noble.

There is enough reason to believe that Barnes & Noble's big stock move could be the result of something bigger. If so, investors should be prepared for the possibility of follow-up headlines. If the Staples headline is really the sole reason for Barnes & Noble's big move, investors should avoid the stock because the price strength will not last. Not only was the Staples story old, the company is not likely to meaningfully change the prospects at the leading bookstore chain in the country.

Disclosure: I am long BKS.

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