Barnes & Noble (NYSE: BKS ) has put together a strong e-commerce platform and a
popular e-reader, the Nook, that has allowed it to avoid the fate of many
brick-and-mortar booksellers. Thanks to growth from its e-book division and the
relative popularity of the low-cost Nook, B&N narrowed its losses and saw
revenue jump 20% in fiscal 2011 over the previous year. Too bad Barnes & Noble
is now giving up on the Nook. Recent reports say the company will spin off
production of the tablet. That reeks of desperation and is likely the end of
both the Nook reader and Barnes & Noble as we know it. When Borders went bust
last year, it looked like a classic case study of a company that was unable to
evolve. Just some of the blunders included outsourcing its e-commerce site to
Amazon (NASDAQ: AMZN ) and the lackluster efforts with its own e-reader tablet.
Those certainly were key factors. But they all reflected the fact that the
traditional book business is eroding quickly and that its simply becoming too
costly to support a large chain of brick-and-mortar stores . B&N had a leg up on
Borders, but it appears to be going the same way now that the Nook is on the
outs. Another telltale sign is that Barnes & Noble has become focused on
financial engineering. In addition to the Nook news, it looks like the company
plans to sell off its Sterling Publishing business, which focuses mostly on
nonfiction titles. This was part of a $115 million acquisition back in 2003.
However, its unclear how much money a sale would get. The publishing business is
under tremendous pressure because of soft demand in the U.S. and the low price
points of e-books. Even though the Nook is growing quickly at 70% during the
holiday season it still might not get a premium valuation. The business
continues to be a source of losses because of the huge necessary investments.
Consider that Barnes & Noble projects pretax earnings of only $150 million to
$180 million for fiscal 2012, and only last month the projections were for $210
million to $250 million. And with the continued success of Apple s (NASDAQ: AAPL
) iPad as well as Amazons dirt-cheap Kindle Fire tablet, it could be tough for
the Nook to remain a sustainable business, even with its higher-horsepower Nook
tablet . So this really might be the end game for Barnes & Noble. The strategy
seems to be to monetize the assets, then perhaps go private. From there, the
company can starve investments in its stores and try to harvest the cash flows
until the inevitable day comes when the retail business simply goes away. Tom
Taulli runs the InvestorPlace blog IPOPlaybook , a site dedicated to the hottest
news and rumors about initial public offerings. He also is the author of "All
About Short Selling" and "All About Commodities." Follow him on Twitter at
@ttaulli . As of this writing, he did not own a position in any of the
aforementioned securities.
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