Bloomberg News

Bookstores Not Dead Yet as Riggio Bets on Barnes & Noble

July 10, 2013

Barnes & Noble Breakup Breakthrough Seen Unlocking 44%

Customers browse books at a Barnes & Noble Inc. store in Emeryville, California. Photographer: David Paul Morris/Bloomberg

If bookstores are doomed in the Age of Amazon.com, would anyone want to buy Barnes & Noble Inc. (BKS)’s brick-and-mortar business?

That question has loomed large ever since the company’s founder, Leonard Riggio, 72, announced earlier this year that if Barnes & Noble hived off its digital Nook business, he would be happy to buy the rest of the company. Riggio, who built the chain into a mom-and-pop-eating leviathan, has never explained exactly why he wants the business, yet analysts including David Strasser of Janney Montgomery Scott LLC say predictions of the bookstore’s demise are greatly overstated. The retail division’s profits are actually growing, which can’t be said for the digital Nook division.

“It’s not anywhere near the end of Barnes & Noble the bookstore,” said Strasser, who is based in New York and recommends holding the shares. “There is clearly room in the industry for a national book chain.”

Riggio has yet to make a formal offer. Still, the breakup of Barnes & Noble became more likely July 8 with the resignation of William Lynch as chief executive officer and a management reshuffle that put Riggio in charge as an executive chairman. Riggio declined through a spokeswoman to be interviewed for this story.

“With no plans to hire a CEO in the near term, and Len Riggio once again in control, this management restructuring could bring the company closer to a more formal breakup,” Strasser wrote yesterday in a note to clients.

The shares declined 6.3 percent to $17.44 at the close in New York.

Obscured Profits

Last year, New York-based Barnes & Noble created a subsidiary housing its Nook and college bookstore units with an eye toward spinning it off. Then in February, Riggio, the company’s largest shareholder, said he planned to make an offer for the 675 stores and website.

During the past few quarters, sales of Nook tablets and e-readers plunged amid stiff competition from Apple Inc.’s iPad and Amazon.com Inc.’s line of Kindles. The deterioration of the Nook business grabbed most of the headlines, obscuring the fact that Barnes & Noble’s retail unit became more profitable.

In the fiscal year ended April 27, the retail business, which includes the website, generated earnings before interest, taxes, depreciation and amortization of $374.2 million. That was a 16 percent increase even as sales declined 5.9 percent to $4.57 billion. Meanwhile, Nook had a loss by the same measure of $475.4 million on sales of $776.2 million.

Erotic Series

People still like going to Barnes & Noble to hang out. Angelica Epps, who works at Bloomingdale’s and Yankee Stadium, visits the 54th Street and 3rd Avenue store in Manhattan for several hours almost every day after work. Since the winter, she has read about eight books there, including the erotic series, “Fifty Shades of Grey.”

While Epps doesn’t usually buy the books, she often purchases something else -- perhaps a coffee or pastry at the in-store Starbucks Corp. cafe or a card.

“The Starbucks is a plus, everyone is very nice and polite,” she said, while browsing yesterday. “I love this store, that’s why I keep coming. I wouldn’t if the staff wasn’t friendly, if I didn’t feel welcome.”

Epps may read more than she buys. However, many people who frequent Barnes & Noble leave with a book, especially cook books and ones for children. While sales of e-books have exploded, they still make up only 20 percent of the market and those gains are slowing. Last year, e-book sales rose 44 percent to $3.04 billion after more than doubling the previous year, according to the Association of American Publishers.

Book Gifts

“Print books still have value,” said Michael Norris, an analyst for Simba Information Inc., a Stamford, Connecticut-based research consultant. “People still buy millions of them to give as gifts. That tells me print isn’t as unhealthy as people think.”

Norris also pointed out that the rapid growth of tablets doesn’t translate into the same gains for e-books. According to Simba’s data, half of iPad owners and 25 percent of Kindle Fire users didn’t read an e-book last year.

The liquidation of Borders Group Inc. in 2011 put Barnes & Noble in an enviable position. As the last national bookstore chain, the publishing industry has a vested interest in keeping it in business. Otherwise, Amazon.com would have even more leverage in negotiating with publishers.

Landlords across the U.S. also covet Barnes & Noble locations because they draw foot traffic. That’s allowed the company to rework leases and move into better locations.

Older Titles

Publishers also need Barnes & Noble’s stores to sell their backlist, or older titles, that make up about half the business because e-books and the Web are primarily a venue for new releases, Strasser said. Book tours, of which Barnes & Noble is a key cog, are essential for promoting new releases too.

Barnes & Noble won’t close many locations because 95 percent are profitable. Over the past year, it reduced its store count by 16, or 2 percent, and said it will shutter about the same amount in each of the next few years.

Barnes & Noble has customized its stores for local tastes and generates word-of-mouth by enmeshing itself in the community. Each store helps area schools raise money and hosts events such as storytelling hours and poetry readings.

Still, the chain will need to keep changing to remain relevant over the long haul. While the company won’t discuss its plans, it’s already refashioning itself as a family destination. It’s broadened out and increased its assortment, replacing products such as CDs and DVDs with more toys, games and gifts and is devoting more square footage to play areas.

Julie James, who declined to say where she works, was in the kids’ section yesterday at the 54th and 3rd store looking for books for her 8-year-old daughter. James would rather browse the racks than shop for books online.

“I like to look through the books,” she said. “When it’s for my daughter, I like to look in it to see if it’s something she’d be interested. She’s picky.”

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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