It could just be too little too late.
Barnes & Noble’s said this week that it would separate its bricks-and-mortar bookselling business from its Nook division, the costly attempt to compete with Amazon.com as a vendor of e-books and e-reading devices. The e-reader business, along with the college bookstore operations, will be spun off as NOOK Media by the end of March 2015.
The idea has been hovering for a long time. In rejecting it less than a year ago, Barnes & Noble execs said some kind of split had been pondered for 18 months by that point. Certainly, the company’s chairman, Leonard Riggio, had publicly voiced his interest in taking private the traditional bookstore division, leaving investors with the proceeds of that transaction and the Nook business.
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Instead, last summer Barnes & Noble did an about-face and opted to focus on managing both divisions, trying to boost profits and cut costs by, among other things, outsourcing production of the Nook devices.
Now, Riggio – Barnes & Noble’s single largest shareholder – and the rest of the company’s board have done another 180-degree turn. This dithering could have cost investors dearly, as rivals have kept nibbling away at Nook’s market share and the division’s losses have continued to mount.
Of course, Nook did manage to grab some market share from Amazon, the first mover in the e-reader space. When Barnes & Noble’s device arrived on the scene, the Kindle was pretty much the only game in town, and so the Nook was an alternative for anyone who didn’t want to be sucked into Amazon’s sphere of influence.
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But while Amazon’s market share has been eroded – it only owns slightly more than half the market today (depending on who’s doing the counting, and whether they include tablet devices as well as e-readers) compared to 100 percent back in early 2008 – the Kindle still dominates the landscape. The Nook is clearly now an “also ran.” As recently as 2012, when the company was contemplating that spinoff, its market share hovered around 25 percent to 30 percent. Today, some sources suggest the figure may be closer to 13 percent.
The financial picture for the Nook business has steadily deteriorated, too. Back in the fourth quarter of 2011, Nook generated revenues of $183 million. In the fourth quarter of 2012, those were $164 million. By the fourth quarter of last year, $112.1 million. And in the just-reported fourth quarter of the 2014 fiscal year, a measly $87.1 million.
Sure, losses narrowed – the company lost a “mere” $56 million on its Nook business, compared to a $181.9 million loss in the same quarter a year ago, but the bulk of those year-ago losses were the result of a goodwill impairment charge.
So while CEO Michael Huseby argues that the company is “in a better position to begin in earnest” the process of separating Nook Media from the rest of Barnes & Noble, the reality seems to be that the delays have made Nook a less valuable asset. Can it actually realize value from any kind of transaction? Microsoft and publisher Pearson own stakes in the business, but do they want the headaches of trying to own the business, as opposed to maintaining a toehold in it?
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A spinoff, with shareholders ending up holding two pieces of paper in place of one, at least gives the investors the choice of which kind of underdog to back: a traditional book retailer in an era in which digital sales of new releases beat out sales of new hardcover books as long ago as 2012 or a secondary player in the e-book/tablet universe? It’s the devil and the deep blue sea all over again.
A year ago, analysts were arguing that splitting up the company made sense because it would make it easier for a buyer to step up and make a bid. Divided, they argued, the company would be worth 44 percent more than it was then. Intriguingly, Barnes & Noble’s stock already is trading 30 percent higher than it was last August, when Huseby and Riggio called off the first division of the spoils. How much more upside is left?
Some of the stock’s recent gain has to be attributed to sheer relief at moving past the uncertainty: hiring lawyers and bankers is a signal that the company finally, truly intends to act. On the other hand, once the excitement dies down, it will be time to return to fundamentals, and those aren’t terribly encouraging. In its financial results, Barnes & Noble revealed that it expects single-digit declines in sales at both its retail bookstores and its college bookstores.
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The retail bookstores are a more straightforward sale – whether to Riggio or to a private equity group – than was the far more troubled Borders, but these aren’t the kind of fundamentals that are likely to tempt a bidder to pay a lavish premium over and above a stock price that has already posted big gains in recent months.
The Nook, as a device, isn’t dead. Barnes & Noble bookstores are open for business, and may benefit from the feud between Amazon and Big Five publisher Hachette. That in turn has sparked a boycott movement led by high-profile Hachette authors like Stephen Colbert and James Patterson. The latter may have argued mostly in favor of independent booksellers, but the reality is that Barnes & Noble will see a boon in sales.
Barron’s has done a complex, speculative sum-of-the-parts analysis suggesting that the stock could be worth a lot more than it is now. And to the extent that spinning off Nook frees up the attention of Barnes & Noble executives, allowing them to focus on reviving sales and reigniting growth in their core bricks-and-mortar business, shareholders could see some further benefit.
None of that, however, means that Barnes & Noble is a growth business. Indeed, the odd spectacle of a projected decline in same-store sales and a rising stock price suggests to me that what is taking shape now may be a trap for unwary investors hoping that here, at last, is the turnaround they’ve been praying for.
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