How Can Barnes & Noble Survive Losing the Nook?

Barnes & Noble (NYS: BKS) has been on the ropes over the past year. But in April things got interesting when two major investors entered the ring. An influx of capital, along with a potentially new direction for the business, has brought some life back to the bookseller's stock. Barnes & Noble is now in a stronger position to compete with (NAS: AMZN) , but how well is it set up for success?

Spin-off city
In April, hedge fund Jana Partners announced that it had purchased a 12% stake in Barnes & Noble. Then in early May, Microsoft (NAS: MSFT) tagged in to help the bookseller spin its digital and college businesses into a new company, which the software giant will hold an 17.6% stake in. In exchange for its support, Microsoft gets a Windows 8 Nook app. There isn't a time line for the spin-off yet, and there is no word of whether it will be a subsidiary or a stand-alone, but either way Microsoft stands to profit.

Signs of the spin-off have been popping up all year. In January, Barnes & Noble announced that it was looking into the value of separating the businesses. The company is anxious to expand the Nook's sales in the international market, while maintaining the strong foothold it has in the U.S. Right now, the Nook controls about 27% of the U.S. e-reader market, while the Kindle is holding down 60%.

Stacking the Nook up against the Kindle
While the gap is large, the Nook is the only other game in town. The Nook spin-off has the potential to be very lucrative. It has good brand recognition, and the e-reader market continues growing.

The increased adoption is helping Nook sales; in 2011, holiday revenue increased a whopping 70% over 2010. Digital content sales skyrocketed 113% over that same period. By spinning off the segment, Barnes & Noble can focus on growing the Nook, both in the U.S. and abroad.

To beat the Kindle, it needs to grow quickly. Amazon also benefited from the increase in e-book use. The online giant grew Kindle holiday sales 177% compared to 2010. On top of strong sales, the Kindle has excellent international exposure, especially in Europe.

Where it leaves Barnes & Noble
One side effect of the spin-off is that Barnes & Noble Retail is left on its own. That's a perilous segment with uninspiring growth prospects.

That's not to say there is no growth, though, as the company increased same-store sales by 2.8% last quarter. With Borders out of the way and Books-A-Million (NAS: BAMM) reporting a 9.5% drop in same-store sales, pretty soon Barnes & Noble might be the only bookstore around. Another benefit of the retail store model is that it's a direct source for Nooks. With Target (NYS: TGT) announcing that it will no longer carry Kindles, Barnes & Noble could get a leg up in brick-and-mortar distribution.

It's been a weird ride for Barnes & Noble this year, and while I was originally hesitant about the stock, I've come around. So many things are tipping in its favor that it's starting to look like a perfect retail storm. I'm convinced that if things keep going on without any major hiccups, Barnes & Noble has an excellent few years ahead of it.

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At the time this article was published Fool contributorAndrew Marderdoesn't own shares in any of the stocks mentioned in this article, nor does he own an e-reader. He likes and owns and reads paper books (aka books). The Motley Fool owns shares of and Microsoft. Motley Fool newsletter services have recommended buying shares of and Microsoft; writing puts on Barnes & Noble; and creating a bull call spread position in Microsoft.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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