With Company Split, Barnes & Noble Giving It The Old College Try

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Summary

BKS will spin-off its college division as a stand-alone publicly traded company in August as BKS focuses on retail division.

Despite poor year-end earnings report, college sales, profits increased and core sales expected to grow 1% in FY16.

After BKS share prices fall from near 5-year high once split is complete, both companies could be potential buys for long-term growth.

Barnes & Noble (NYSE: BKS) has been hammered by Amazon (NASDAQ: AMZN) in terms of competitiveness. Revenues are falling, stores are closing, and the Nook, meant to be the company's answer to the Kindle, has performed poorly compared to other tablet makers.

Yet despite all of this, the stock is performing at or near 5-year highs, thanks largely to the restructuring efforts of Michael Huseby, who made the decision to spin off the company's Nook division while focusing for book signings and holding events that drive up foot traffic and increase same-store sales across its outlets, which has helped stem the bleeding somewhat. The next phase of the plan is set to go into effect at the end of August, which will see the college bookstore wing of B&N become its own publicly traded company, called Barnes & Noble Education (tickering as BNED), as the company shifts its main focus to retail. While this will put a dent in the value of regular B&N stock, as analysts predict, the new company could be worth investing in once it goes public, while retail may become a value pickup. Here's why:

College sales are the strongest branch

According to B&N's yearly report released on June 25, the college division, which is comprised of on-campus bookstores that sell textbooks and other apparel, made up over 40% of sales last year. Gross sales came in at $1.77 billion, up $24 million from last year, returning gross profits of $444 million, a $7 million improvement. By comparison, the retail division saw a $187 million decline in sales and a roughly $27 million loss during that period.

The college division also has a sort of a captive market compared to B&N's other divisions. With over 724 bookstores, nearly 24% of students are in the market, students who might have no choice but to purchase their textbooks or school apparel from the on-campus bookstore rather than through Amazon or other online textbook services. Due to the urgency many students have in purchasing their textbooks for class, it means B&N has a rare advantage over a company like Amazon that the retail division might not have, which for now is a stable customer base and a market that will grow as long as enrollment figures continue to increase.

In terms of costs, B&N saves money by signing multi-year agreements with universities to use campus space rather than renting the space formally, while the university gets a cut of each sale made at the bookstore. With universities in constant need of funding, this creates a partnership that both parties benefit from, making this new venture a potential growth opportunity.

Retail can get back to core products

Despite an earnings report showing down revenues and sales, they were narrower compared to the year prior. Q4 losses of $19.4 million were better than the $36.7 million from the previous fiscal year, even though revenue declined 10%. However, core bookstore sales were up 0.5% for the year despite initial predictions of a loss, resulting in a revised prediction for 1% growth in FY 2016, proving that the book business has at least stabilized. So despite the poor revenue reports, the forecasts aren't as bleak as some might believe, and with the renewed emphasis of generating foot traffic through in-store events and improved e-commerce platforms, B&N's retail division could see some growth even without the college division helping it along.

Old and new companies might be buys at different times for different reasons

Given that the share price for B&N stock is expected to decrease upon the August split, and given that it's at 5 year highs despite yet another earnings miss, it might make the company a sell for the next two months, yet the retail division could become a post-split discount buy thanks to the growth of core business within that division. The new Barnes & Noble Education company will inherit the B&N division that's been fairly consistent due to the market it operates in that largely protects it from major competition like Amazon, so there is more potential for steady, long-term growth backed by the knowledge that many of the agreements with universities are multi-year and won't be as subject to major shocks. The opening price has not been determined yet, but it could be one IPO that matches expectations rather than falling short of them.

Disclosure: I/we 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.

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