Barnes & Noble (NYSE: BKS) is getting a lot of attention these days, particularly for a stock whose market capitalization now languishes below the $1 billion mark and is worth less than Noodles & Co. (NASDAQ: NDLS), the fledgling fast food franchise that went public only months ago.
There are some good reasons for that attention. First, and most significantly, are the company’s financial results. It’s bad enough that Barnes & Noble reported a wider fiscal first quarter loss than anticipated, of $87 million or $1.56 a share, double the loss announced in the same quarter a year ago.
Worse, the company is still struggling to compete in the digital age. Its management remains committed to selling the Nook e-reader/tabloid devices in order to keep selling digital content – books, magazines, and a host of other features – that likely is more profitable than printed matter. (Barnes & Noble doesn’t break out the profitability of the Nook hardware business or that of sales of digital content, but some analysts calculate margins on the latter could be as high as 50 percent.)
Yet the day that Barnes & Noble announced its dismal earnings was also the day the company’s website was trumpeting the opportunity for its customers to snap up the Nook Simple Touch GlowLight for a mere $99, $20 less than they would have paid last week and the second price cut in under a year. Sales of Nook devices have fallen off a cliff as it has become increasingly clear that e-readers are commodity devices, simply a way to persuade customers to buy higher-margin content.
One of the problems confronting Barnes & Noble right now, however, is the fact that Nook owners are locked into buying content from publishers via Barnes & Noble. Still unanswered is what might happen to their digital content if Barnes & Noble follows Borders into oblivion. That could curb future growth in sales of both the devices and the content.
Then there is Leonard Riggio’s puzzling behavior. Riggio, the company’s founder, chairman and largest shareholder, announced this week that he won’t be pursuing a bid to buy the company’s bricks and mortar bookstores. He dressed up the news in a lot of verbiage keyed to customer service – “I believe it is in the company’s best interests to focus on the business at hand” – and left the market to speculate as to the real reason for the transaction’s failure to move forward. Was he daunted by the controversy swirling around Michael Dell’s (NASDAQ: DELL) buyout offer for the company that he had founded, or by the difficulty that Richard Schulze had in assembling financing for the acquisition of the company that he had once led, Best Buy (NYSE:BBY)? Or did potential financiers simply not see the upside potential in a standalone bricks and mortar book retailing business in the digital age?
Regardless of his reasons, Riggio’s rhetoric rings rather hollow. “Right now our priority should be to serve the more than 10 million customers who own Nook devices, to concentrate on building our Retail business, and to accelerate the sale of Nook products in our stores, and in the marketplace,” he went on to say in his brief statement. Really? This is the same guy who, only a few months ago, turned up his nose at the Nook business and said he’d be happy to take over only the traditional stores.
Nor did the conference call following the release of those depressing earnings provide much insight into what might pass for strategic thinking at Barnes & Noble these days. On the one hand, Michael Huseby, the company’s president, says management and the board will entertain offers or suggestions for Nook; on the other hand, he said Barnes & Noble needs to be a player in the device market if wants to continue being involved in selling content.
Confused by all this? If so, you’ve got plenty of company – and that’s the biggest problem that Barnes & Noble has to grapple with. Investors can cope with a big earnings “miss,” and even outsize losses. Just talk to Amazon’s (NASDAQ: AMZN) rabid fans. What they can’t tolerate is confusion and uncertainty, known on the street as a lack of “visibility.” With Barnes & Noble these days, the visibility is about what it might have been in one of London’s most notorious pea-souper fogs, the kind that caused people to fall off sidewalks and break their legs or walk out in front of oncoming traffic.
Is Barnes & Noble really going to outsource production of the Nook? Huseby didn’t seem to have a clear answer, instead blaming ousted CEO William Lynch for crummy forecasting of consumer demand for the devices. Can the company exist as a single entity, as the new approach suggests, or, as Riggio first argued earlier this year, might it fare better as two separate businesses? Above all, how does the company plan to transform the obvious demand for digital content into profits for Barnes & Noble shareholders?
So far, the lack of detailed information on all of these questions is demoralizing. Stock market investors, when they buy shares in a company, are betting on future expectations and the potential for growth, not just for a share of what the company has already achieved. That’s why Apple’s (NASDAQ: AAPL) stock price has come under so much pressure in the last 18 months, in spite of the mountain of cash sitting on its books. If management seems confused and unable to agree on where that potential lies – a key ingredient that needs to be in place before we can start discussing what the best strategy is to realize that potential – then there is little hope that long-term investors are going to stick around and tough it out.
